10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

þ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended March 31, 2005

OR

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                      to                     

Commission file number 1-12214

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)

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

Securities registered pursuant to Section 12(b) of the Act:

	Name of each exchange
Title of each class	on which registered
Common Shares, $.01 par value	American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None.

     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 þ No o

     Indicate by check mark if disclosures of delinquent filers pursuant to Item 405 of Regulation SK (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No þ

     As of September 30, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, the approximate aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant was $40,938,000 (based upon the last closing price for shares of the registrant’s common stock as reported by the American Stock Exchange as of that date). Shares of common stock held by each officer, director, and holder of 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

     There were approximately 10,134,000 shares of common stock outstanding as of June 14, 2005.

     Certain information required in Part III hereto is incorporated by reference to the Proxy Statement (“Proxy Statement”) for the Registrant’s 2005 Annual Meeting of Shareholders to be filed with the Securities Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K. Portions of the Registrant’s Annual Report to Shareholders for the year ended March 31, 2005 (“Annual Report”) are incorporated into Part II as set forth herein and only such portions of the Annual Report as are specifically incorporated by reference are thereby made a part of this Annual Report on Form 10-K.

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TABLE OF CONTENTS

PART I
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7a. Quantitative and Qualitative Disclosures about Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9A. Controls and Procedures
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management
	Item 13. Certain Relationships and Related Transactions
	Item 14. Principal Accountant Fees and Services
PART IV
	Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
Exhibit Index
Exhibit 13.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 99.11

PART I

Item 1. Business

     CHAD Therapeutics, Inc. (“CHAD” or the “Company”) was organized in August 1982 to develop, produce and market respiratory care devices designed to improve the efficiency of oxygen delivery systems for both home and hospital treatment of patients who require supplemental oxygen. The Company introduced its first respiratory care device in the market in June of 1983 and has introduced additional respiratory care devices in subsequent years.

Pulmonary Disease and Oxygen Therapy

     The Company was organized to pursue the development and marketing of devices that improve the efficiency of systems used to administer oxygen to patients requiring supplemental oxygen. These are primarily patients suffering from chronic obstructive pulmonary diseases.

     Chronic obstructive pulmonary diseases (COPD) are progressive, debilitating conditions that affect millions of Americans, severely limiting their activities and shortening their lives. Such conditions, which include chronic bronchitis, emphysema and severe asthma, decrease the capacity of the lungs to oxygenate the blood. To make up for this deficiency, it is common medical practice to administer supplemental oxygen, usually on a 24 hours per day basis in an amount sufficient to increase blood oxygenation to near normal levels.

     According to the National Heart, Lung and Blood Institute of the National Institutes of Health (NIH) COPD represents the fourth leading cause of death in the United States and is predicted to be the third largest cause of death by 2020.

     The American Lung Association reported that in 2002 there were 12.1 million Americans suffering from COPD. This report also notes that in 2004 the annual cost to the nation for COPD in health care and indirect costs was estimated to be $37.2 billion.

     Although precise data are not available, various individual and institutional sources and reports estimate that there are more than one (1) million homecare patients receiving supplementary administration of oxygen. Medicare, which accounts for about 60% of home oxygen dealers’ revenues, spent approximately $1.8 billion in 2002 for home oxygen, according to a report by the Centers for Medicare and Medicaid Services Office of Actuary. This represented a 13% increase over the previous year, according to the report.

     Chronic obstructive pulmonary diseases are also prevalent in other countries, particularly in some European nations and the Far East, where the incidence is higher than in the United States. We believe the potential international market for home oxygen is expected to grow to 150% of the U.S. market over the next five to ten years.

     The primary oxygen supply for home patients are concentrators that concentrate oxygen from the ambient air (85-90%), reservoirs containing liquid oxygen (10-15%) and cylinders containing compressed gaseous oxygen (less than one percent (1%)).

     Standard oxygen delivery systems are characteristically inefficient, permitting over 67% of the oxygen supply delivered to the patient to be wasted, primarily because the oxygen is administered steadily to the patient, even while he is exhaling. Since the normal breathing cycle consists of an exhalation period that is approximately twice as long as the inhalation period, at least two-thirds (2/3) of the oxygen from this continuous flow system is wasted. Furthermore, it is generally accepted that the oxygen breathed in during the first one-third (1/3) of the inhalation period provides most of the

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oxygenation benefit to the patient.

     Currently, Medicare provides a prospective flat fee monthly payment for home oxygen services based solely on the patient’s prescribed oxygen requirement and disregards modality, the type of system in use. Consequently, with the incentive to operate efficiently, inexpensive concentrators have grown in popularity because of their low cost and less frequent servicing requirements. At the same time, interest in oxygen conserving devices which can extend the life of oxygen supplies and reduce service calls by dealers has heightened. There is also a separate fixed allowance from Medicare for patients who need to be mobile and therefore require portable oxygen systems.

     In November 2003 Congress enacted the Medicare Improvement and Modernization Act, which had and will continue to impact reimbursement for home oxygen over the next several years. The new legislation will result in continued pressure on homecare providers to reduce the cost of providing home oxygen services.

     While these cost pressures have intensified, mobility has increased in importance as the treatment of pulmonary patients has moved away from hospitals and into home care. Also, the American Long Association indicates that to reduce and control symptoms, pulmonary patients should live a healthy lifestyle that includes excercise F. Maintaining quality of life and compliance with prescribed exercise programs require that the patient be as mobile as possible and thus increase the demand for portable oxygen equipment.

CHAD’s Products

     Recognizing the need for more efficient oxygen delivery systems, the Company has pursued, since its inception, the development and marketing of devices that are designed to conserve oxygen. The benefits of such improvements include substantial cost savings for the homecare provider, as well as increased mobility for ambulatory patients who require portable oxygen supplies. These devices extend the life of oxygen supplies and make possible more compact and longer lasting portable systems, thereby improving the quality of life for home oxygen patients.

     OXYMIZER^® and OXYMIZER Pendant Oxygen-Conserving Devices. In June 1983 the Company began marketing its first product, the OXYMIZER disposable oxygen-conserving device, a unique, patented, disposable device developed to provide up to four to one (4:1) savings of oxygen as compared to continuous flow when used with any oxygen supply source.

     The OXYMIZER device contains a collapsible reservoir, which captures incoming oxygen delivered during expiration and prevents its waste. The oxygen captured in this reservoir is then inhaled by the patient during the first instant of his next inspiration. Thus the OXYMIZER device both conserves oxygen and provides the patient with an extra rich supply of oxygen at the beginning of the inhalation period when it can be most effectively utilized.

     Extensive clinical testing and trials over the past 22 years have repeatedly demonstrated that patients using the OXYMIZER device are able to achieve equivalent blood oxygenation levels while using significantly less oxygen. There have been more than 32 clinical evaluations from institutions worldwide that have confirmed the efficacy and oxygen savings of the OXYMIZER devices.

     The greater efficiency provided by these devices over standard oxygen delivery systems also permits home health care patients to achieve greater mobility by enabling them to use smaller portable cylinders or by obtaining two (2) to four (4) times the life from standard sized portable cylinders.

     For home oxygen dealers, the disposable OXYMIZER devices afford the cost advantages of oxygen conservation without capital investment in expensive equipment. In addition, the OXYMIZER

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devices can be utilized to achieve higher flow setting equivalencies for standard oxygen concentrators.

     In hospitals, the OXYMIZER devices are used for maintenance of certain patients requiring higher flow levels of oxygen without having to resort to uncomfortable oxygen masks.

     The Company is pursuing a marketing strategy that emphasizes the cost savings, efficiencies and level of patient comfort associated with the use of the OXYMIZER devices. See “Marketing” and “Competition.”

     The OXYMIZER Pendant device is similar to the OXYMIZER device except that its reservoir is located in a “pendant” that hangs over the patient’s chest rather than under the nose. The OXYMIZER Pendant has a more traditional appearance than the OXYMIZER. The Company began marketing the OXYMIZER Pendant in August 1984.

     OXYMATIC^® Electronic Oxygen Conservers. The Company began marketing the OXYMATIC conserver in March 1986. This product is a small electronic device designed for use with portable oxygen systems. The OXYMATIC conserver electronically senses the optimal moment in the breathing cycle for delivery of oxygen and at that moment, releases a very brief pulse of oxygen to the patient. The OXYMATIC conserver concentrates the administration of oxygen during the first one-third (1/3) of the inhalation phase, when oxygen is most efficiently utilized. There have been at least 12 controlled clinical trials and studies of patient groups using the OXYMATIC conserver, all of which have confirmed its efficacy and efficiency.

     In June 1993 the Company introduced a different version of the OXYMATIC conserver, the OXYMATIC — 2400. This model incorporates substantial improvements and additional features, including an alarm system, which are designed to allow it to be used 24 hours a day with both primary and portable oxygen sources. The OXYMATIC — 2400 conserver affords the same oxygen savings ratios as the original OXYMATIC conserver.

     In July 2000 the Company introduced the first of the OXYMATIC 400 series of conservers. Additional models were added to this line in January and March of 2001. This new line of conservers was designed to capitalize on the proven reliability and efficiency of the Company’s previous models. In addition, features and options were added to create state-of-the-art conservers that would give homecare providers a wide choice of products to service their patients’ individual needs and preferences. These new conservers include a built-in regulator, expanded flow rates and provide average savings of five to one (5:1) over continuous flow oxygen.

     In November 2001 the Company introduced the SEQUOIA OXYMATIC line of conservers. These conservers utilize the same electronic features as the OXYMATIC 400 series conservers but do not contain a built-in regulator.

     The Company received clearance from the Food and Drug Administration (FDA) to market the LOTUS Electronic Oxygen Conserver in October 2004. The Company plans to begin shipping in July 2005. The LOTUS weighs less than one (1) pound and will be offered with or without a breath-sensing alarm. It will also offer additional liter flow settings and an extended battery life of up to four (4) months of normal usage on two (2) AA-size batteries.

     CYPRESS OXYPneumatic^® Conservers. In July 2002 the Company began marketing the CYPRESS pneumatic conserver, which allowed the Company to compete in the pneumatic segment of the conserver market for the first time. This device incorporates no electronic parts, thus eliminating the need for batteries. It is lightweight, small and allows the use of a standard, single-lumen cannula, unlike many other pneumatic conservers that require special cannulas. The CYPRESS conserver provides flow rates from one (1) to six (6) liters per minute and oxygen savings greater than three to one (3:1) over

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continuous flow oxygen.

     Sales of OXYMATIC electronic and CYPRESS OXYPneumatic conservers accounted for approximately 73%, 77% and 74% of the Company’s sales in 2005, 2004 and 2003, respectively.

     The OXYMATIC electronic and CYPRESS pneumatic conservers extend the time the contents of the cylinders will last over continuous flow oxygen. They provide ambulatory patients with greater mobility and less weight. The Company believes these systems offer a superior alternative to commonly used liquid oxygen systems for mobile patients and are more cost effective for homecare dealers to supply.

     SAGE Oxygen Therapeutic Device In May 2004 the Company received clearance from the FDA to market its new SAGE Oxygen Therapeutic Device. The SAGE device is the first in a planned family of oxygen therapeutic devices that use the Company’s proprietary technologies to sense a patient’s movements and automatically adjust the rate of oxygen delivery to reduce the risk of desaturation as activity increases. The SAGE device combines the industry’s first truly dynamic, patented delivery technology with the proven oxygen sensor technology in the Company’s OXYMATIC 400 series conserver. As a result, the device addresses the common problem of oxygen desaturation, which causes a patient to feel weak and out of breath when activity increases, yet it still maximizes patient ambulatory capability.

     OXYCOIL^® Coiled Oxygen Tubing. In January 1986 the Company began marketing the OXYCOIL coiled oxygen tubing, a device which replaces the standard supply tubing for the OXYMIZER devices, the OXYMATIC conserver or conventional nasal cannulas. The OXYCOIL tubing is a convenience and safety device that can be used with any oxygen system to help keep the supply tubing out of the patient’s way, thus minimizing the tripping and tangling problems associated with standard supply tubing.

     TOTAL O₂^® Delivery System. In January 1998, the Company began marketing the TOTAL O₂ Delivery System. This 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. The TOTAL O₂ Delivery System was designed to provide homecare dealers with a more cost effective means to provide home oxygen services while at the same time providing the patients with a higher quality of service. This can be accomplished as the homecare dealer will no longer be required to make regular monthly service calls to deliver full portable cylinders, and the patient will no longer be dependent on the dealer for those deliveries to obtain full cylinders.

     Initial sales of the TOTAL O₂ system have been adversely affected by several factors, including the overall home oxygen market climate and homecare providers’ reluctance to invest in the higher cost of the TOTAL O₂ system to achieve the lower monthly operating costs it affords. Recent changes in home oxygen reimbursement appears to be causing homecare providers to examine their operating costs more carefully, which should have a positive impact on sales of the TOTAL O₂ system. No assurances can currently be given regarding the level of success the Company may achieve with the TOTAL O₂ system. See Outlook: Issues & Risks — New Product in the Company’s Annual Report to Shareholders.

     The technology for each of the devices described above has been licensed from the inventors thereof, with the exception of the CYPRESS OXYPneumatic conserver, which belongs to the Company. The Company has acquired exclusive licenses to manufacture and market the OXYMIZER devices, the OXYMATIC conservers, the OXYCOIL tubing and the TOTAL O₂ system. See “Licensing and Related Agreements.”

     Other Products. The Company also offers a variety of ancillary products that support the principal oxygen conserving products. These include oxygen cylinders of various sizes and compositions,

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regulators, cannulas and connecting tubing and assorted carrying bags. In addition, with a field sales force of manufacturer’s representatives and direct sales representatives covering the entire United States (see “Marketing”), the Company will utilize this team as part of a strategy to market and sell additional products that are targeted for the Company’s current customer base, the homecare provider.

Products Under Development

     It is the Company’s objective to continuously improve and add to its oxygen conserving and related products. During the fiscal years ended March 31, 2004 and 2003, the Company entered into contracts with outside vendors to develop products in the home oxygen market and sleep disorder market. Development efforts continue on these products. No assurance can be given that any products developed pursuant to these contracts will be successfully marketed or that the Company will ever derive significant revenues or earnings from the sale of such products.

Research and Development

     For the year ended March 31, 2005, the Company expended approximately $1,473,000 on research and development and has expended approximately $9,092,000 since its inception in August of 1982. The Company operates in an industry that is subject to rapid technological change, and its ability to compete successfully depends upon, among other things, its ability to stay abreast or ahead of new technological developments. Accordingly, the Company expects to expend increasing amounts for the development or acquisition of new products or the improvement of existing products. In the next fiscal year the Company expects to spend approximately $1,512,000 on several projects. The Company conducts research and development internally and also utilizes the services of outside firms and consultants for its research and development activities.

Licensing and Related Agreements

     The Company has entered into license agreements (the “Inventor’s License Agreements”) with Brian L. Tiep, M.D., Robert E. Phillips and Ben A. Otsap, the inventors of the OXYMIZER device (the “Inventors”), with respect to that device and each of the additional oxygen conserving devices developed by them.

     Pursuant to the Inventor’s License Agreements, the Inventors grant to the Company an exclusive license (with the right to grant sublicenses) to manufacture, use and sell such device. Through September 2003, the Inventor’s License Agreements provided that the Company pay royalties to the Inventors on the net proceeds of sales of the device covered by the agreement at the rate of six percent (6%) on amounts up to ten (10) million dollars and three percent (3%) on amounts of ten (10) million dollars or more. The Inventor’s License Agreements also provided that the Company pays minimum advance royalties for each license year in the amount of $10,000. The advance payments are to be applied toward royalties payable for the corresponding license year. As of September 2003, no further royalty payments are due. The Company is obligated to prosecute and defend, at its own expense, any infringement suits related to manufacture or sale of each device covered by any such agreement.

     Each Inventors License Agreement continues until the expiration of the last to expire of any patent covering the related device or, if no patent is issued, for 17 years. The Inventors may terminate the Inventor’s License Agreements at an earlier date if the Company is in arrears for 60 days on any royalty payment or if the Company defaults in performing any other term of the agreement and fails to cure such default within 60 days.

     The Company has also entered into a license agreement (the “Carleton License Agreement”) with the Life Support Division of Carleton (formerly Litton Life Support) for the TOTAL O₂ Delivery System. Pursuant to the Carleton License Agreement, the Licensor grants to the Company an exclusive

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license (with the right to grant sublicenses) to manufacture, use and sell such device in the health care market. The Carleton License Agreement provides that the Company pay royalties to the Licensor on the net proceeds of sales of the device covered by the agreement at the rate of seven percent (7%) and requires minimum annual royalties of $100,000, $300,000 and $500,000 in 1999, 2000 and subsequent years, respectively. The Carleton License Agreement continues until the expiration of the last to expire of any patent covering the related device or until the Company ceases use of the licensed technology. The Licensors may terminate the Carleton License Agreement at an earlier date if the Company is in arrears for 30 days on any royalty payment or if the Company defaults in performing any other material obligation of the agreement and fails to cure such default within 30 days.

     The Company has also entered into a license a agreement (the “Phillips and Otsap License Agreement”) with Robert E. Phillips and Ben A. Otsap for the SAGE Oxygen Therapeutic Device. Pursuant to the Phillips and Otsap Agreement, the Licensor grants to the Company an exclusive license (with the right to grant sublicenses) to manufacture, use and sell such devices in the health care market. The Phillips and Otsap License Agreement provides that the Company pay royalties to the Licensor on the net proceeds of sales of the device covered by the agreement at the rate of three percent (3%) for unit sales up to 1,499 units, four percent (4%) for unit sales from 1,500 to 1,999 units per month, five percent (5%) for unit sales from 2,000 to 2,499 units per month and six percent (6%) for unit sales of 2,500 or more per month. The agreement also requires minimum annual royalties of $15,000 in the first year after FDA clearance is received to market the product and $30,000 per annum thereafter. The Phillips and Otsap License Agreement continues until the expiration of the last to expire of any patent covering the related devise or until the Company ceases use of the licensed technology. The Licensors may terminate the Phillips and Otsap License Agreement at an earlier date if the Company is in arrears for six (6) days on any royalty payment or if the Company defaults in performing any other material obligation of the agreement and fails to cure such default within 30 days.

Manufacturing and Sources of Supply

     The Company tests and packages its products in its own facility and performs some manufacturing operations on certain products. Some manufacturing processes are conducted by other firms and the Company expects to continue using outside firms for certain manufacturing processes for the foreseeable future. All outside manufacturing is conducted under the supervision and control of the Company and with tooling provided by the Company.

     Pursuant to a written agreement, the Company purchases finished units of the OXYMIZER devices from a supplier in Hong Kong. The Company believes that other injection molding facilities would be available in the event of a termination of this arrangement.

     Production of the OXYMATIC 300 series, 2400 and 400 series conservers, the LOTUS, the CYPRESS pneumatic conservers, and the SAGE Oxygen Therapeutic Device are being handled internally with only a portion of the electronic assembly for electronic conservers being subcontracted outside the Company. The Company is currently subcontracting with two (2) electronic assembly facilities and believes that other facilities would be available in the event of an interruption of supply from the existing facilities.

     Production of the TOTAL O₂ system is being handled internally with a number of subassemblies being subcontracted outside the Company. The Company believes that there are alternate sources of supply for these subassemblies, including internal manufacturing as production quantities increase.

     The Company is not aware of any shortages of materials necessary for the manufacture of its products. The Company provides customers the right to return merchandise for credit and requires payment within a time frame consistent with industry standards. The Company provides warranties for certain of its products based on industry standards and accrues for the estimated expenses associated with

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those warranties based on the best information available, primarily historical claims experience.

Marketing

     The Company’s products are designed to reduce the cost of health care while maintaining or enhancing the therapeutic benefits to the patient and improving the user’s quality of life. The Company’s marketing efforts have focused primarily on providing home oxygen suppliers with products that they can utilize to increase their revenues and provide a better quality of care at less cost.

     Homecare dealers have reportedly increased their revenues by assembling small portable systems incorporating the Company’s OXYMATIC electronic conserver or CYPRESS pneumatic conserver as a vehicle to attract new and additional patients to their business. The Company believes these lightweight, long-lasting, portable systems have both high professional and patient acceptance, which allows the supplier promoting these products to attract new and additional customers. The Company has been advised that medical professionals who frequently refer patients to specific home oxygen suppliers find that these systems assist patients in more easily complying with prescribed exercise programs and help them to achieve the therapeutic benefits of maintaining a lifestyle as normal as possible. Patients, most of whom are free to select their oxygen supplier, are reportedly receptive to changing suppliers in order to obtain equipment that will allow them to travel and maintain their quality of life.

     A large portion of home oxygen patients are covered by Medicare or other government programs. Since June 1989 home oxygen suppliers have been reimbursed on a fixed monthly fee basis by Medicare. The monthly reimbursement amount does not vary with either the type of oxygen delivery equipment provided or the amount of oxygen supplied. Since monthly per patient revenues are fixed, home oxygen suppliers can only increase their per patient profitability by reducing costs. The Company’s oxygen conserving products and TOTAL O₂ Delivery System allow these suppliers to decrease their costs while providing their patients with improved therapeutic benefits and quality of life.

     While the home respiratory care dealer remains the primary focus of the Company’s marketing efforts, this focus has been augmented by a major effort to increase professional awareness. Promotional programs target respiratory care physicians, nurses and therapists.

     The Company markets its products directly to home oxygen suppliers throughout the U.S. The Company currently has a Vice President of Sales & Marketing, two (2) Regional Vice Presidents of Sales, a Director of Strategic Sales and Marketing, a manager of sales administration, an art and media manager, a marketing manager, a customer relations manager and five (5) in-house sales and customer service representatives who are in regular and frequent proactive telephone sales contact with customers and potential customers. In addition, the Company has a field sales force of direct sales representatives and independent manufacturer’s sales representatives to handle direct selling to customers. This field sales force is currently comprised of seven (7) direct sales representatives and 31 manufacturer’s sales representatives with coverage throughout the United States. The Company also utilizes direct mail, trade show attendance, trade advertising and a web site to promote the benefits of its products to homecare dealers. Additionally, the Company actively seeks to increase professional awareness of its products through professional advertising and participation in professional meetings.

     Home oxygen therapy markets outside the United States are, in most cases, at a much earlier stage of development. In many countries, these patients are cared for in institutional settings. As the trend develops to move patients into homecare, opportunities for the Company’s products should increase. Sales of conservers in Canada and Japan have become an important part of the Company’s business. Based on industry market research projections, the Company expects the international market to increase to 150% of the U.S. potential over the next five (5) to ten (10) years.

     The Company has entered into exclusive distributorship agreements in Germany, Japan,

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Australia and several other countries. The Company also has non-exclusive distributors in many other countries.

     Sales outside of the United States subject the Company to certain risks, including those involving political and economic factors, interruption of shipments of products, currency fluctuations and devaluations, and governmental restrictions and regulations.

Customers, Backlog and Orders

     The Company presently has an active list of over 4,000 dealer and hospital customers. Based upon information developed from various lists the Company believes that there are approximately 7,000 to 8,000 home oxygen dealers and 3,000 general hospitals in the United States that are potential customers or customer sources for the Company. Of these 7,000 to 8,000 homecare providers, approximately 48% are represented by three (3) major national chain accounts. One (1) national chain customer accounted for 36%, 27%, and 24% of net sales during 2005, 2004, and 2003, respectively, and one (1) other chain accounted for 11%, 14% and 11% of sales in 2005, 2004, and 2003, respectively.

Financial Information Relating to Foreign and
Domestic Operations and Export Sales
(in 000’s)

	2005		2004		2003
Sales
United States	$	22,912	$	20,498	$	18,639
Canada		306		303		307
Japan		405		238		207
Germany		11		44		46
All other countries		653		458		342
Total	$	24,287	$	21,541	$	19,541

     All identifiable assets are located in the United States.

     At March 31, 2005, the Company had no backlog of orders for any of its products. The Company presently endeavors to maintain sufficient inventory to ship all of its products immediately upon receipt of orders. The Company believes that maintaining such levels of inventory is necessary to meet the requirements of its customers.

Competition

     The Company is aware of several demand valve, electronically controlled devices currently being marketed. Of these devices, those that have been the principal competitors of the OXYMATIC conserver in the past were targeted primarily to a specific segment of the market — liquid oxygen usage. Several companies, including Caire Inc. and Puritan Bennett, market small (3.4 to 5.5 lbs.) portable liquid oxygen systems incorporating simple oxygen conserving devices that double the useful life of these systems. Some of these companies have substantially greater marketing and financial resources than the Company. However, these units are more expensive than systems utilizing the OXYMATIC conservers and still require the supplier to make frequent and costly oxygen deliveries. The Company does not know the levels of sales achieved by the companies marketing these systems.

     Several of these competitors are now marketing conservers in direct competition with the Company’s OXYMATIC electronic and CYPRESS pneumatic conservers. Some of these conservers only provide two to one (2:1) to three to one (3:1) savings ratios compared to continuous flow. As a

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result, these units while weighing about the same as the OXYMATIC conserver provide only one-third (1/3) or one-half (1/2) as much ambulation time. In addition, the Company is aware of two (2) companies marketing oxygen conserving devices that claim similar oxygen savings ratios as the OXYMATIC conserver. The Company believes that some of these competitors have been able to offer their oxygen conservers as part of a bundle of products with perceived pricing advantages over the Company’s products. The Company does not know the level of sales achieved by these companies.

     There are several other types of portable oxygen systems which compete with the Company’s OXYMATIC conservers but do not utilize oxygen conserving devices. Aluminum and steel oxygen cylinders with continuous flow regulators are utilized by some oxygen suppliers as portable systems. Although they do provide users with some portability, their size and bulk limit their use by patients who need or want to be truly ambulatory. The most commonly used of these cylinders is approximately three (3) feet high, weighs over 20 lbs., and provides an average patient with less than five (5) hours of oxygen. These systems are enjoying some level of success due to their lower unit price advantage. The OXYMATIC electronic and CYPRESS pneumatic conservers allow the use of smaller, lighter cylinders and thus provides greater mobility.

     Until the availability of portable systems utilizing the OXYMATIC conservers and the previously cited changes in Medicare oxygen reimbursement, liquid oxygen was the modality of choice for truly mobile users. Portable liquid oxygen systems that weigh 3.4 to 10 lbs., provide an average patient with six (6) to eight (8) hours of oxygen, compared to the smallest OXYLITE system which weighs 4.5 lbs. and provides an average patient with 7.3 hours of oxygen. These systems are more costly than systems utilizing the OXYMATIC conservers and require frequent and expensive (often weekly) deliveries of bulk liquid oxygen to the patient’s home. In addition, the patient must remain within range of the base unit for refilling, unlike with the systems utilizing the OXYMATIC conservers with which a patient can take as many cylinders as needed to provide the amount of time necessary to be away from their base unit.

     The Company is aware of one (1) combination oxygen concentrator and refilling station being marketed in competition with the TOTAL O₂ system. This system is larger and heavier and does not contain some of the integrated features found in the TOTAL O₂ system. The competitor has substantially greater financial and marketing resources than the Company. The Company does not know the level of sales achieved for this system by the competition.

Patents and Trademarks

     The Company regards the products that it develops or licenses and its manufacturing processes as proprietary and relies on a combination of patents, trademarks, trade secret laws and confidentiality agreements to protect its rights in its products. U.S. patents have been issued covering the original OXYMATIC conserver, the CYPRESS OXYPneumatic conserver, the TOTAL O₂ Delivery System, and the SAGE Oxygen Therapeutic Device. A number of foreign patent applications pertaining to the Company’s activities have also been issued.

     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 products developed for it 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 could have an adverse impact upon the Company’s business.

     There can be no assurance that patents, domestic or foreign, will be obtained with respect to the Company’s products, or that, if issued, they will provide substantial protection or be of commercial benefit to the Company. In addition, the patent laws of foreign countries may differ from those of the

10

United States as to the patentability of the Company’s products and processes and, accordingly, the degree of protection afforded by foreign patents may be more or less than in the United States.

     In the United States, although a patent has a statutory presumption of validity, the issuance of a patent is not conclusive as to such validity or as to the enforceable scope of its claims therein. The validity and enforceability of a patent can be attacked by litigation after its issuance by the U.S. Patent and Trademark Office. If the outcome of such litigation is adverse to the owner of the patent in that the patent is held to be invalid, other parties may then use the invention covered by the patent. Accordingly, there can be no assurance that patents with respect to the Company’s products, if issued, will afford protection against competitors with similar products, nor can there be any assurance that the patents will not be infringed upon or designed around by others.

     Through patent searches, contacts in the industry and representations and indemnities received from licensors and development partners, the Company seeks to ensure that its products do not infringe on the intellectual property rights claimed by others. However, interpretation of the scope and validity of existing patent rights may differ, and no assurance can be given that the Company products will in all cases not infringe on the rights of others. Moreover, any dispute regarding potential infringement may require substantial management and financial resources to defend.

     The Company has obtained U.S. registration for the trademarks “OXYMIZER,” “OXYMATIC,” “LOTUS,” “OXYPneumatic,” “CHAD,” “OXYCOIL,” and “TOTAL O_2.” A series of foreign applications to register the trademark “OXYMIZER” in a number of countries of commercial interest to the Company have been filed.

Governmental Regulation

     The commercialization of the OXYMIZER, OXYMATIC, LOTUS, CYPRESS, TOTAL O_2, and SAGE devices is subject to the Federal Food, Drug and Cosmetic Act (the “Food and Drug Act”) and to regulations issued thereunder. The Company anticipates that commercialization of other devices that it intends to market will also be subject to the Food and Drug Act. The Food and Drug Act is administered by the FDA, which has authority to regulate the marketing, manufacturing, labeling, packaging and distribution of products subject to the Food and Drug Act. In addition, there are requirements under other federal laws and under state, local and foreign statutes that may apply to the manufacture and marketing of the Company’s products. The Medical Device Amendments of 1976 to the Food and Drug Act (the “Amendments”) and the Safe Medical Device Act of 1990 significantly extended the authority of the FDA to regulate the commercialization of medical devices. The Amendments established three (3) classifications of medical devices: Class I, Class II and Class III. With respect to all three (3) classes, the general provisions of the Food and Drug Act prohibit adulteration and misbranding. A medical device may be adulterated if the device is or could be adversely affected by its methods of manufacture, storage or packaging. A medical device may be misbranded if its labeling is false or misleading or if its labeling does not contain specific information required by law applicable to such type of device. In addition, failure to register a medical device covered under the Food and Drug Act will render it misbranded under the Food and Drug Act.

     All manufacturers of medical devices must register with the FDA and list all medical devices produced by them. This listing must be updated annually. In addition, prior to commercial distribution of additional devices, the manufacturer must file with the FDA and receive approval prior to the commencement of such commercial distribution, a notice setting forth certain information about the device, including the classification into which the manufacturer believes it falls.

     Class I devices are subject only to the general controls concerning adulteration, misbranding, good manufacturing practices, record keeping and reporting requirements. Class II devices must, in addition, comply with performance standards as promulgated by the FDA.

11

     The Company has registered with the Bureau of Medical Devices of the FDA as a Medical Device Establishment and with the Department of Health Services of the State of California as a Medical Device Manufacturer. In addition, the Company has developed procedures to comply with FDA standards concerning good manufacturing practices, record keeping and reporting and is ISO 9001 certified.

     The Company has filed notification submissions pursuant to Section 510(k) of the Food and Drug Act of its intent to market the OXYMIZER, the OXYMIZER Pendant, the OXYMATIC conserver, the LOTUS conserver, the CYPRESS OXYPneumatic conserver, the OXYCOIL, the TOTAL O2 Delivery System, and the SAGE Oxygen Therapeutic Device; it has been granted permission by the FDA to market the OXYMIZER and the OXYMIZER Pendant as Class I devices. Permission has been granted to market the OXYMATIC, the CYPRESS OXYPneumatic, the LOTUS Electronic Oxygen conserver, the OXYCOIL, the TOTAL O₂ Delivery System, and the SAGE Oxygen Therapeutic Device as Class II devices.

Employees

     As of June 27, 2005, CHAD had 129 full-time employees and one (1) part-time employee. Sixty-two (62) of the Company’s employees are engaged in manufacturing and the remaining are engaged in marketing, sales, administration and management. None of the Company’s employees are represented by unions, and the Company believes its employee relations are satisfactory. The Company will employ additional personnel in all phases of its activities as required by the growth in its activities. The number of additional personnel will be dependent on sales levels of individual products.

Item 2. Properties.

     The Company’s offices and manufacturing facilities are situated in premises located in Chatsworth, California, and consist of approximately 55,500 square feet, at a monthly rental fee of $34,000 pursuant to a lease expiring in June 2008. Management believes this facility should adequately handle the Company’s needs for the foreseeable future. The Company does not own any real property and does not anticipate acquiring any in the foreseeable future.

Item 3. Legal Proceedings.

     The Company becomes involved in legal proceedings in the ordinary course of business. The Company maintains product liability insurance in an amount it deems customary in the industry for protection of the Company against potential product liability claims. Although the Company believes its

12

product liability insurance is sufficient and no pending legal proceeding poses a material threat, no assurance can be given that pending or future proceedings will not have a material impact on the Company’s financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders.

     Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

     The information required herein is hereby incorporated by reference to the information contained under the caption “Corporate Data” in the Company’s Annual Report.

Item 6. Selected Financial Data.

     The information required herein is hereby incorporated by reference to the information contained under the caption “Selected Financial Data” in the Company’s Annual Report.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     The information required herein is hereby incorporated by reference to the information contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report.

Item 7a. Quantitative and Qualitative Disclosures about Market Risk

     The Company has no significant exposure to market risk sensitive instruments or contracts.

Item 8. Financial Statements and Supplementary Data.

     The information required herein is hereby incorporated by reference to the Financial Statements and the Notes thereto contained in the Company’s Annual Report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

     None.

Item 9A. Controls and Procedures

     (a) Evaluation of Disclosure Controls and Procedures. An evaluation as of the end of the period covered by this report was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d –15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that we record, process, summarize, and report information required to be disclosed by us in our reports filed under the Securities Exchange Act within the time periods specified by the Securities and Exchange Commission’s rules and forms.

13

     (b) Changes in Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting during our fourth (4^th) fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART III

Item 10. Directors and Executive Officers of the Registrant.

     The information required herein is hereby incorporated by reference to the information appearing under the captions “Election of Directors” and “Executive Officers” in the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission.

Item 11. Executive Compensation.

     The information required herein is hereby incorporated by reference to the information appearing under the caption “Compensation of Directors and Executive Officers” in the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

     The information required herein is hereby incorporated by reference to the information appearing under the caption “Voting Securities and Principal Holders Thereof” in the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission.

Item 13. Certain Relationships and Related Transactions.

     None.

Item 14. Principal Accountant Fees and Services

     The information required herein is hereby incorporated by reference to the information appearing under the caption “Proposal 2: Ratification of Appointment of Independent Accountants” in the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission.

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

     (a) (1) Financial Statements.

          Included in Part II of this Report:

Report of Independent Registered Public Accounting Firm

Balance Sheets — March 31, 2005 and 2004

Statements of Operations — Years ended March 31, 2005, 2004, and 2003.

Statements of Shareholders’ Equity — Years ended March 31, 2005, 2004, and 2003.

Statements of Cash Flows — Years ended March 31, 2005, 2004, and 2003.

14

Notes to Financial Statements.

     (a) (2) Financial Statement Schedules.

See Notes to Financial Statements.

(3) Exhibits.

3.1 Articles of Incorporation of the Registrant, as amended*****

3.2 Bylaws of the Registrant, as amended*

10.5 Pulser System License Agreement, as amended, with Robert E. Phillips, Brian L. Tiep, M.D. and Ben A. Otsap. (The Pulser System is now called the OXYMATIC.)*

10.20 OXYCOIL tubing License Agreement with Mary Smart (licensed under the name Respi-Coil).***

10.23 Summary plan description for CHAD Therapeutics, Inc. Employee Savings and Retirement Plan****

10.24 1994 Stock Option Plan******

10.25 Lease on real property at 21622 Plummer Street, Chatsworth, California******

10.26 TOTAL O₂ Delivery System License Agreement, as amended, with the Carleton Life Support Division of Litton Industries, Inc.*******

10.27 2004 Equity Incentive Plan************

13.1 Annual Report to Shareholders for the year ended March 31, 2005.

23.1 Consent of Independent Registered Public Accounting Firm

31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.1 Letter from the FDA authorizing the Company to market the OXYMIZER oxygen conserving device as a Class I device.*

99.2 Letter from the FDA authorizing the Company to market the OXYMIZER Pendant oxygen conserving device as a Class I device.**

99.3 Letter from the FDA authorizing the Company to market the OXYMATIC electronic

15

oxygen conserver as a Class II device.***

99.4 Letter from the FDA authorizing the Company to market the OXYCOIL coiled oxygen tubing as a Class II device.***

99.5 Letter from the FDA authorizing the Company to market the TOTAL O₂ Delivery System as a Class II device*******

99.6 Letter from the FDA authorizing the Company to market the OXYMATIC 411 conserver as a Class II device********

99.7 Letter from the FDA authorizing the Company to market the OXYMATIC 401A and 411A conservers as a Class II devices********

99.8 Letter from the FDA authorizing the Company to market the TOTAL O₂ Post Valve Cylinders*********

99.9 Letter from the FDA authorizing the Company to market the CYPRESS OXYPneumatic conserver**********

99.10 Letter from the FDA authorizing the Company to market the SAGE Oxygen Therapeutic Device***********

99.11 Letter from the FDA authorizing the Company to market the LOTUS Electronic Oxygen Conserver

*	Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-18, File No. 2-83926.
**	Previously filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the year ended March 31, 1984.
***	Previously filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the year ended March 31, 1986.
****	Previously filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the year ended March 31, 1993.
*****	Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended March 31, 1994.
******	Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended March 31, 1996.
*******	Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended March 31, 1998.
********	Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended March 31, 2001.
*********	Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended March 31, 2002.
**********	Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended March 31, 2003.
***********	Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended March 31, 2004.
************	Previously filed as Appendix A of the Registrant’s Proxy Statement for the 2004 Annual Shareholders’ Meeting.

16

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Los Angeles, State of California, on the 20th day of June, 2004.

CHAD THERAPEUTICS, INC.
By	/s/ Earl L. Yager
Earl L. Yager, Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Thomas E. Jones	Chairman of the Board of Directors	June 27, 2005
Thomas E. Jones
/s/ Earl L. Yager	Chief Executive Officer, President,	June 27, 2005
Earl L. Yager	and Director
	(Principal Executive Officer)
/s/ Tracy A. Kern	Chief Financial Officer	June 27, 2005
Tracy A. Kern	(Principal Financial and Accounting Officer)
/s/ Kathleen M. Griggs	Director	June 27, 2005
Kathleen M. Griggs
/s/ John C. Boyd	Director	June 27, 2005
John C. Boyd
/s/ Edward Anthony Oppenheimer, M.D.	Director	June 27, 2005
Edward Anthony Oppenheimer, MD
/s/ Philip T. Wolfstein	Director	June 27, 2005
Philip T. Wolfstein
/s/ James M. Brophy	Director	June 27, 2005
James M. Brophy

17

Exhibit Index

	Exhibit Index
Exhibit No.	Document
13.1	Annual Report to Shareholders for the year ended March 31, 2005.
23.1	Consent of Independent Accountant
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.11	Letter from the FDA authorizing the Company to market the LOTUS Electronic Oxygen Conserver

18

EX-13.1

Exhibit 13.1

Letter from the CEO

To Our Shareholders

     To our Shareholders

     Fiscal 2005 was another good year for CHAD Therapeutics. Revenue increased for the fourth consecutive year, and net income rose to an eight-year high. We met all of our primary product development objectives, including the release of our newest device, the LOTUS^TM electronic oxygen conserver, and in May of 2005 we completed the initial round of independent clinical trials of our new therapeutic product for sleep apnea. Our progress in fiscal 2005 set the stage for continued success in the rapidly changing competitive environment in the home oxygen market, and positioned CHAD to take advantage of new growth opportunities in the sleep disorder market.

     One key to our strategic growth plan is continued expansion of our oxygen conserver product lines. The success of our conservers in domestic and international markets has restored CHAD’s traditional leadership in this important market segment, and we continued to build on that platform. The SAGE Oxygen Therapeutic Device, which we launched in fiscal 2004, is the first in a planned line of therapeutic oxygen devices, and it performed well for us in fiscal 2005. The recent introduction of the LOTUS Electronic Oxygen Conserver represents another product innovation at CHAD that we believe will contribute to our growth. These devices, along with CHAD’s OXYMATIC^® 400 Series electronic conservers and CYPRESS OXYPneumatic^® conservers, provide the industry’s widest range of cost-effective choices for homecare providers to satisfy individual patient requirements and preferences for ambulatory oxygen products.

     We also experienced substantial growth in sales of our TOTAL O₂^® home oxygen filling system. Recent changes in home oxygen reimbursement are encouraging homecare providers to evaluate their monthly operating costs more carefully and to seek more cost-effective ways to service their home oxygen patients. CHAD’s proprietary TOTAL O₂ system was designed specifically to reduce these costs while improving the quality of patient care. We remain convinced that the TOTAL O₂ system can become a major contributor to CHAD’s growth, and that our new marketing initiatives have put us on the right track to build awareness and demand.

Financial Results

     For the fiscal year ended March 31, 2005, revenue increased 13% to $24,287,000 from $21,541,000 for fiscal 2004. Research and development spending increased to $1,473,000 for fiscal 2005 from $1,292,000 for fiscal 2004 to support our various product development initiatives, with all funding provided from internally generated sources. Earnings before income taxes increased 33% to $1,327,000 from $1,001,000 for fiscal 2004. Net earnings for fiscal 2005 rose 81% to $1,811,000, or $0.17 per diluted share. This compares to net earnings for fiscal 2004 of $1,001,000, or $0.10 per diluted share.

     At March 31, 2005, the Company had approximately $1,846,000 in California net operating loss carryforwards available to offset future income taxes payable. Based on earnings performance and future earnings projections, the Company released the valuation allowance that had been placed on its deferred tax assets, resulting in a net income tax benefit of $484,000 for fiscal 2005. The effective combined Federal and California income tax rate in fiscal 2006 and future years is currently expected to be approximately 40%.

     CHAD’s balance sheet remains well positioned to sustain our growth. Working capital at March 31, 2005, was $10.4 million versus $9.2 million at March 31, 2004, and shareholders’ equity was $13 million versus $11.2 million at March 31, 2004. The company has no debt.

The Year In Review

     As we discussed in last year’s annual report, the Medicare Improvement and Modernization Act signed into law in December 2003 has increased pressure on home care providers to reduce the costs of providing home oxygen services. This has created both positive and negative trends for CHAD. Sales of oxygen conservers to domestic customers increased by only 5% in fiscal 2005 compared to fiscal 2004, reflecting increased pricing pressure in the domestic market as well as lower sales of conservers to a large customer.

     On the positive side, TOTAL O₂ sales increased 64% in fiscal 2005 compared to fiscal 2004. The very same competitive pressures that restrained the growth of our domestic conserver business in fiscal

1

To Our Shareholders

2005 are working to expand the market opportunity for our TOTAL O2® home oxygen filling system. By producing unlimited oxygen just like a standard oxygen concentrator, while simultaneously allowing patients to easily and safely refill their portable oxygen cylinders at home, this device can significantly reduce monthly operating costs while at the same time improving patient care.

     We have been approached by several major distributors regarding our TOTAL O₂ system. These new distribution opportunities have the potential to significantly expand TOTAL O₂  sales and may also have a positive impact on our conserver sales. We hope that we will be able to convert these opportunities into formal distribution agreements during fiscal 2006.

     We are also encouraged that the international conserver market is now emerging as an important growth opportunity for CHAD. Sales of our conservers to international customers, which accounted for 6% of sales in fiscal 2005, increased 51% in fiscal 2005 compared to fiscal 2004. The international conserver market is in a much earlier stage of development than the domestic market, and we are taking advantage of this opportunity by offering the industry’s broadest conserver product line and by modifying certain of our conservers to meet specific foreign market requirements. As a result, based on current trends and orders received to date, we expect another significant increase in international sales in fiscal 2006.

LOTUS Electronic Oxygen Conserver

     In October 2004 we received clearance from the FDA to market CHAD’s new LOTUS Electronic Oxygen Conserver. The latest addition to CHAD’s extensive line of oxygen conserving devices, the new LOTUS conserver combines innovative new features with the proven technologies in the Company’s OXYMATIC 400 Series conservers.

     The LOTUS conserver offers several significant enhancements to our popular OXYMATIC 400 Series platform. Sleek and lightweight at less than a pound, our new device will be offered with or without a breath-sensing alarm and will incorporate additional liter flow settings and an audible and visual low battery alarm. Two AA-size batteries will provide power for up to four months of normal usage. An optional rechargeable battery pack is also available for both versions. These advanced features demonstrate yet again CHAD’s commitment to offering homecare providers and their patients the widest array of home oxygen choices to suit individual needs, preferences and disease conditions.

Sleep Products Update

     The initial independent clinical trial of our first potential product for the sleep disorder market recently was completed at a university sleep clinic. The trial confirmed that our sleep apnea therapeutic device incorporating our proprietary sensor technology achieved a significant reduction in the air pressure needed to treat sleep apnea patients, in addition to potentially providing other therapeutic benefits. We believe this is why all of the patients tested preferred our device to the standard device that was used for comparative purposes in the clinical trial. This may translate into improved compliance by patients who use our device, which is a significant factor in sleep apnea therapy. We expect to make a decision this summer regarding our distribution options for our sleep apnea products.

Outlook For Growth

     An unusually large number of factors affect the outlook for fiscal 2006. These include the wide range of outcomes that could result from the distribution options we are pursuing for our TOTAL O₂system and our sleep apnea products, the emerging opportunities for our conserver products in international markets, continued uncertainty with respect to the domestic conserver market, and our expectation of a significantly higher tax rate beginning this year. On balance, we expect CHAD to report higher revenue and earnings before income taxes in fiscal 2006 than in fiscal 2005.

     We are encouraged by our progress and excited by our opportunities for growth. We appreciate the commitment of every member of CHAD’s team, whose hard work, dedication and professionalism make our success possible. We also thank our shareholders for their continued support. We look forward to an exciting year for CHAD Therapeutics.

Earl L. Yager
Chief Executive Officer

2

Selected Financial Data

Selected Financial Data

	Years Ended March 31,
	2005		2004		2003			2002		2001
Net sales	$	24,287,000	$	21,541,000	$	19,541,000		$	19,006,000	$	12,400,000
Interest income, net		39,000		22,000		20,000			50,000		87,000
Net earnings (loss)		1,811,000		1,001,000		(433,000	)		1,157,000		(3,011,000	)
Basic earnings (loss) per share		.18		.10		(.04	)		.12		(.30	)
Diluted earnings (loss) per share		.17		.10		(.04	)		.11		(.30	)
Net working capital		10,393,000		9,175,000		8,224,000			7,497,000		5,847,000
Total assets		15,790,000		13,043,000		12,105,000			12,323,000		10,788,000
Shareholders’ equity		13,024,000		11,153,000		10,100,000			10,373,000		9,211,000

No cash dividends have been declared or paid during the periods presented.

3

Balance Sheets

	March 31,
	2005			2004
Assets
Current assets:
Cash	$	177,000		$	2,708,000
Accounts receivable, less allowance for doubtful accounts of $39,000 and $68,000 in 2005 and 2004, respectively		3,745,000			2,911,000
Inventories, net (Note 2)		8,512,000			4,989,000
Prepaid expenses		264,000			233,000
Deferred income taxes (Note 3)		461,000			224,000
Total current assets		13,159,000			11,065,000
Property and equipment, at cost:
Office equipment and furniture		1,854,000			1,809,000
Machinery and equipment		957,000			877,000
Tooling		1,441,000			1,283,000
Leasehold improvements		1,888,000			1,820,000
		6,140,000			5,789,000
Less accumulated depreciation and amortization		4,949,000			4,571,000
Net property and equipment		1,191,000			1,218,00
Intangible assets, net (Note 4)		802,000			729,000
Deferred income taxes (Note 3)		568,000			—
Other assets		70,000			31,000
	$	15,790,000		$	13,043,000
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	1,196,000		$	502,000
Accrued expenses (Note 7)		1,370,000			1,185,000
Income taxes payable (Note 3)		200,000			203,000
Total current liabilities		2,766,000			1,890,000
Commitments (Note 8)
Shareholders’ equity (Note 5):
Common shares, $0.01 par value
Authorized 40,000,000 shares;
10,134,000 and 10,096,000 shares issued and outstanding		13,369,000			13,309,000
Accumulated deficit		(345,000	)		(2,156,000	)
Net shareholders’ equity		13,024,000			11,153,000
	$	15,790,000		$	13,043,000

See accompanying notes to financial statements.

4

Statements of Operations

	Years Ended March 31,
	2005			2004		2003
Net sales	$	24,287,000		$	21,541,000	$	19,541,000
Cost of sales		14,581,000			12,846,000		12,292,000
Gross profit		9,706,000			8,695,000		7,249,000
Costs and expenses:
Selling, general and administrative		6,947,000			6,436,000		6,708,000
Research and development		1,473,000			1,292,000		989,000
Total costs and expenses		8,420,000			7,728,000		7.697,000
Operating income (loss)		1,286,000			967,000		(448,000	)
Interest income, net		39,000			22,000		20,000
Other income		2,000			12,000		—
Earnings (loss) before income taxes		1,327,000			1,001,000		(428,000	)
Income tax expense (benefit) (Note 3)		(484,000	)		—		5,000
Net earnings (loss)	$	1,811,000		$	1,001,000	$	(433,000	)
Basic earnings (loss) per share	$	.18		$	.10	$	(.04	)
Diluted earnings (loss) per share	$	.17		$	.10	$	(.04	)
Weighted shares outstanding:
Basic		10,122,000			10,084,000		10,071,000
Diluted		10,625,000			10,362,000		10,071,000

See accompanying notes to financial statements.

5

Statements of Shareholders’ Equity

For the years ended March 31, 2005, 2004, and 2003

	Common Shares (Note 5)				Accumulated
	Shares		Amount		Deficit
Balance at March 31, 2002		10,059,000	$	13,097,000	$	(2,724,000	)
Exercise of stock options		17,000		20,000		—
Stock options granted as part of technology acquisition		—		140,000		—
Net loss		—		—		(433,000	)
Balance at March 31, 2003		10,076,000		13,257,000		(3,157,000	)
Exercise of stock options		20,000		26,000		—
Stock options granted as part of technology acquisition		—		23,000		—
Tax benefit from exercise of non-qualified stock options		—		3,000		—
Net earnings		—		—		1,001,000
Balance at March 31, 2004		10,096,000		13,309,000		(2,156,000	)
Exercise of stock options		38,000		60,000		—
Net earnings		—		—		1,811,000
Balance at March 31, 2005		10,134,000	$	13,369,000	$	(345,000	)

See accompanying notes to financial statements.

6

Statements of Cash Flows

	Years Ended March 31,
	2005			2004			2003
Cash flows from operating activities:
Net earnings (loss)	$	1,811,000		$	1,001,000		$	(433,000	)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		417,000			450,000			768,000
Loss on write down of intangible asset		—			—			934,000
Loss on asset disposition		—			57,000			—
Tax benefit attributable to stock options		—			3,000			—
Changes in assets and liabilities:
Decrease (increase) in accounts receivable		(834,000	)		(394,000	)		(184,000	)
Decrease (increase) in inventories		(3,523,000	)		522,000			(227,000	)
Decrease (increase) in income taxes refundable		—			4,000			991,000
Decrease (increase) in prepaid expenses		(31,000	)		368,000			(286,000	)
Decrease (increase) in other assets		(39,000	)		47,000			(41,000	)
Decrease (increase) in deferred income taxes		(805,000	)		(224,000	)		—
Increase (decrease) in accounts payable		694,000			(239,000	)		(36,000	)
Increase (decrease) in accrued expenses		185,000			(78,000	)		94,000
Increase (decrease) in income taxes payable		(3,000	)		202,000			(3,000	)
Net cash provided by (used in) operating activities		(2,128,000	)		1,719,000			1,577,000
Cash flows from investing activities:
Additions to other assets		(112,000	)		(146,000	)		(278,000	)
Capital expenditures		(351,000	)		(487,000	)		(243,000	)
Net cash used in investing activities		(463,000	)		(633,000	)		(521,000	)
Cash flows from financing activities:
Exercise of stock options		60,000			26,000			20,000
Net cash provided by financing activities		60,000			26,000			20,000
Net increase (decrease) in cash		(2,531,000	)		1,112,000			1,076,000
Cash beginning of year		2,708,000			1,596,000			520,000
Cash end of year	$	177,000		$	2,708,000		$	1,596,000
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	—		$	—		$	2,000
Income taxes		325,000			13,000			15,000

See accompanying notes to financial statements.

7

Notes to Financial Statements

(1) Summary of Significant Accounting Policies

The Company

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.

Fair Value of Financial Instruments

The carrying amounts of financial instruments approximate fair value as of March 31, 2005 and 2004. The carrying amounts related to cash, accounts receivable, other current assets, and accounts payable approximate fair value due to the relatively short maturity of such instruments.

Inventories

Inventories are valued at lower of cost or market. Cost is determined based on standard cost which approximates the first-in, first-out method.

Property and Equipment

Property and equipment are stated at cost. Depreciation of property and equipment is provided using the straight-line method based on the estimated useful lives of the related assets as follows:

Office Equipment and Furniture	5-10 Years
Machinery and Equipment	5-10 Years
Tooling	4 Years

Amortization of leasehold improvements is over the life of the related lease or asset, whichever is shorter.

Use of Estimates

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and the reporting of revenues and expenses during the periods to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.

Significant estimates include the allowance for doubtful accounts, inventory valuation, deferred income tax asset valuation allowances, and the estimated future operating cash flows from the Company’s long-lived assets, including its intangible assets. Considerable management judgment is necessary to estimate future operating cash flows as future cash flows are impacted by competitive and other factors that are generally out of management’s control. Accordingly, actual results could vary significantly from management’s estimates.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Revenue Recognition

Revenue from product sales is recognized upon shipment of merchandise. Products are shipped FOB shipping point and title, to the products transfers to the purchaser upon shipment. Shipping charges billed to customers are included in net sales. Allowances for customer returns have not been established, as historical experience has been minor. Costs paid to shipping companies are recorded as a cost of sales.

Comprehensive Income (Loss)

The Company did not have components of other comprehensive income during the periods ended March 31, 2005, 2004, and 2003. As a result, comprehensive income (loss) is the same as net earnings (loss) for the periods ended March 31, 2005, 2004, and 2003.

Royalty Expense

The Company charges royalties incurred on product licenses to costs of sales.

Earnings (Loss) Per Common Share

Following is a calculation of basic and diluted earnings (loss) per common share for the years ended March 31, 2005, 2004, and 2003, respectively:

	2005		2004		2003
Basic earnings (loss) per share Numerator — net earnings (loss)	$	1,811,000	$	1,001,000	$	(433,000	)
Denominator — weighted common shares outstanding		10,122,000		10,084,000		10,071,000
Basic earnings (loss) per share	$	.18	$	.10	$	(.04	)
Diluted earnings (loss) per share
Numerator — net earnings (loss)	$	1,811,000	$	1,001,000	$	(433,000	)
Denominator — weighted common shares outstanding		10,122,000		10,084,000		10,071,000
Common stock equivalents		503,000		278,000		—
		10,625,000		10,362,000		10,071,000
Diluted earnings (loss) per share	$	.17	$	.10	$	(.04	)

Options to purchase 128,000, 379,000, and 1,089,000 shares of common stock at prices ranging from $5.00 to $12.54, $3.14 to $12.54, and from $0.50 to $12.54 per share were not included in the computation of diluted earnings per share in 2005, 2004, and 2003, respectively, because their inclusion would be anti-dilutive.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and net operating loss and tax credit carryforwards. In assessing whether there is a need for a valuation allowance on deferred tax assets, we determine whether it is more

8

Notes to Financial Statements

likely than not that we will recognize tax benefits associated with deferred tax assets. In making this determination, we consider future taxable income and tax planning strategies that are both prudent and feasible. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Major Customer

One national chain customer accounted for 36%, 27%, and 24% of net sales during 2005, 2004, and 2003, respectively. Another national chain customer accounted for 11%, 14%, and 11% of net sales during 2005, 2004, and 2003, respectively. The Company’s customers are affected by Medicare reimbursement policy as approximately 80% of home oxygen patients are covered by Medicare and other government programs.

Concentration of Credit Risk

At times the Company maintains balances of cash that exceed $100,000 per account, the maximum insured by the Federal Deposit Insurance Corporation. The Company’s right to the cash is subject to the risk that the financial institution will not pay when the cash is requested. The potential loss is the amount in any one account over $100,000. At March 31, 2005, the amount at risk was approximately $77,000.

At March 31, 2005, the outstanding accounts receivable balance from one customer was 26% of gross accounts receivable and from a second customer was 23% of gross accounts receivable. No individual customer accounted for ten (10) percent or more of accounts receivable at March 31, 2004.

Stock Option Plan

The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The Company has also adopted the pro forma disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which permits entities to provide pro forma net income and pro forma net earnings per share disclosures as if the fair-value-based method defined in SFAS No. 123 had been applied.

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

	Year Ended March 31,
	2005			2004			2003
Net earnings (loss), as reported	$	1,811,000		$	1,001,000		$	(433,000	)
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects		(108,000	)		(81,000	)		(147,000	)
Pro forma net earnings (loss)		1,703,000			920,000			(580,000	)
Earnings (loss) per share:
Basic — as reported		.18			.10			(.04	)
Basic — pro forma		.17			.09			(.05	)
Diluted — as reported		.17			.10			(.04	)
Diluted — pro forma		.16			.09			(.05	)

The weighted average fair value of options granted during 2005, 2004, and 2003 is estimated at $3.71, $2.69, and $1.74, respectively. The disclosure of compensation cost under this pronouncement may not be representative of the effects on net earnings (loss) for future years. The fair value of options granted during each period was estimated using the Black-Scholes option pricing model with the following assumptions:

	2005			2004			2003
Risk-free interest rate		3.3	%		3.9	%		5.9	%
Forfeiture rate		2.0	%		2.0	%		2.0	%
Dividend yield		.0			.0			.0
Volatility		98	%		82	%		86	%
Expected life (years)		10.0			10.0			5.0

Segment Information

The Company operates in one segment, the respiratory care market.

Reclassifications

The Company reclassified royalty expense of $552,000, $776,000, and $1,102,000 from selling, general and administrative expenses to costs of sales for fiscal years ended 2005, 2004, and 2003, respectively.

(2) Inventories

At March 31, 2005 and 2004, inventories consisted of the following:

	2005			2004
Finished goods	$	2,767,000		$	1,223,000
Work in process		1,790,000			1,062,000
Raw materials and supplies		4,063,000			2,806,000
Inventory reserve		(108,000	)		(162,000	)
	$	8,512,000		$	4,989,000

9

Notes to Financial Statements

(3) Income Taxes

Income tax expense (benefit) for fiscal 2005, 2004, and 2003 consisted of the following:

	2005			2004			2003
Current:
Federal	$	307,000		$	204,000		$	3,000
State		15,000			16,000			2,000
		322,000			220,000			5,000
Deferred:
Federal		(466,000	)		(204,000	)		—
State		(340,000	)		(16,000	)		—
		(806,000	)		(220,000	)		—
Total	$	(484,000	)	$	—		$	5,000

A reconciliation of the difference between the Company’s income tax expense (benefit) and the statutory income tax for the years ended March 31, 2005, 2004, and 2003, respectively, is as follows:

	2005			2004			2003
Statutory tax expense (benefit)	$	451,000		$	341,000		$	(145,000	)
State income tax, net		72,000			—			(22,000	)
Valuation allowance		(1,004,000	)		(383,000	)		157,000
Warranty and other		(3,000	)		42,000			15,000
	$	(484,000	)	$	—		$	5,000

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at March 31, 2005 and 2004 are presented as follows:

	2005			2004
Bad debt reserves	$	17,000		$	29,000
Accrued expenses		283,000			286,000
Inventories		88,000			70,000
Depreciation and amortization		258,000			391,000
Intangible assets		346,000			373,000
Net operating loss		149,000			226,000
Other		—			5,000
Total deferred tax assets		1,141,000			1,380,000
Deferred tax liabilities:
State taxes		(112,000	)		(152,000	)
Subtotal		1,029,000			1,228,000
Valuation allowance		—			(1,004,000	)
Net deferred tax assets	$	1,029,000		$	224,000

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. At March 31, 2005, based on earnings performance and projections, the Company determined it was more likely than not that all of the deferred tax assets would be realized, and accordingly, released the remaining allowance on its deferred tax assets, which resulted in a $484,000 net tax benefit for the year ended March 31, 2005. The Company has California net operating loss carryforwards of $1,846,000. The State of California suspended the utilization of net operating loss carryforwards during tax years starting in 2002 and 2003. As a result, the Company was unable to use its California net operating loss carryforwards until the tax year beginning April 1, 2004. The California net operating losses expire in 2008.

(4) Intangible Assets

Intangible assets include amounts paid for licenses on new and existing products. License fees are being amortized using the straight-line method over the life of the related patents. Accumulated amortization on the license fees amounted to $39,000 and $17,000 at March 31, 2005 and 2004, respectively. Annual amortization on intangible assets currently in service will be $39,000 for each of the next five years. During 2003, the Company wrote off a license fee asset that had a net book value of $934,000 in accordance with the provisions of FASB Statement No. 144, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of. Net intangible assets were $802,000 and $729,000 at March 31, 2005 and 2004, respectively.

(5) Shareholders’ Equity

The Company has an equity incentive plan (the Plan) for key employees as defined under Section 422(A) of the Internal Revenue Code. The Plan provides that 750,000 common shares be reserved for issuance under the Plan, which expires on September 8, 2014. In addition, the Plan provides that non-qualified options can be granted to directors and independent contractors of the Company. Transactions involving the equity plan and the 1994 stock option plan, which expired in 2004, are summarized as follows:

				Weighted
				Average
	Option			Price
	Shares			Per Share
Incentive options:
Outstanding — March 31, 2002		882,000		$	3.25
Cancelled		(120,000	)		9.32
Granted		77,000			2.49
Exercised		(17,000	)		1.18
Expired		(33,000	)		1.85
Outstanding — March 31, 2003		789,000			2.37
Cancelled		(16,000	)		3.44
Granted		15,000			2.80
Exercised		(9,000	)		.78
Outstanding — March 31, 2004		779,000			2.37
Cancelled		(13,000	)		2.51
Exercised		(17,000	)		1.02
Expired		(83,000	)		8.19
Outstanding — March 31, 2005		666,000		$	1.98
Exercisable — March 31, 2005		594,000		$	1.88
Non-qualified options:
Outstanding — March 31, 2002		190,000		$	7.50
Cancelled		(10,000	)		8.90
Granted		120,000			2.27
Outstanding — March 31, 2003		300,000			5.37
Cancelled		(42,000	)		8.20
Granted		75,000			2.04
Exercised		(11,000	)		1.58
Outstanding — March 31, 2004		322,000			4.30
Cancelled		(41,000	)		8.33
Granted		55,000			3.71
Exercised		(21,000	)		2.07
Expired		(6,000	)		5.18
Outstanding — March 31, 2005		309,000		$	3.83
Exercisable — March 31, 2005		182,000		$	1.98

10

Notes to Financial Statements

At March 31, 2005, information regarding outstanding options is summarized as follows:

	Range of Exercise Prices
	$	50-6.69	$	7.63-12.54
Number outstanding		894,000		81,000
Weighted average remaining life (yrs.)		5.9		1.3
Weighted average exercise price	$	1.78	$	11.22
Number exercisable		776,000		81,000
Weighted average exercise price	$	1.90	$	11.22

Incentive and non-qualified options were granted at prices not less than 100% of market value at dates of grant. Options under the Plan become exercisable on the anniversary of the grant date on a pro rata basis over a defined period and expire ten (10) years after the date of grant. To the extent the Company derives a tax benefit from options exercised by employees, such benefit is credited to Common Shares.

(6) Employee Benefit Plan

In December 1992, the Company adopted a defined contribution profit sharing plan, including features under Section 401(k) of the Internal Revenue Code. The purpose of the plan is to provide an incentive for employees to make regular savings for their retirement. Company contributions to the profit sharing plan are discretionary and are determined by the Board of Directors. There have been no contributions since 2002.

(7) Accrued Expenses

Accrued expenses consist of the following:

	2005		2004
Accrued royalties	$	347,000	$	374,000
Deferred rent		48,000		24,000
Accrued vacation		182,000		181,000
Warranty reserve		109,000		103,000
Payroll and incentive compensation		215,000		172,000
Customer deposits		132,000		120,000
Other		337,000		211,000
	$	1,370,000	$	1,185,000

(8) Commitments

The Company is currently leasing its administrative and plant facilities and certain office equipment under noncancelable operating leases which expire through June 2008.

The Company’s minimum annual rental commitments under these leases are as follows:

2006	$	427,000
2007		441,000
2008		454,000
2009		113,000
Thereafter		0
TOTAL:	$	1,435,000

Rent expense amounted to $577,000, $552,000, and $469,000 for the years ended March 31, 2005, 2004, and 2003, respectively.

The Company has minimum annual royalty requirements pursuant to the terms of license agreements related to certain products in the amount of $515,000. Annual royalty expense on all products amounted to $552,000, $776,000, and $1,102,000 for the years ended March 31, 2005, 2004, and 2003, respectively. License agreements with minimum annual royalty requirements are in place through fiscal year 2012.

The Company is involved in certain legal actions resulting from the ordinary course of business. The Company believes the ultimate outcome of the legal actions will not have a material adverse impact on the Company’s financial statements as a whole.

(9) Geographic Information

The Company has one reportable operating segment as defined in Note
1. Geographic information regarding the Company’s net sales is as follows:

	2005		2004		2003
United States	$	22,912,000	$	20,498,000	$	18,639,000
Canada		306,000		303,000		307,000
Japan		405,000		238,000		207,000
All other countries		664,000		458,000		342,000
	$	24,287,000	$	21,541,000	$	19,541,000

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

Sales of OXYMATIC^® and CYPRESS conservers accounted for 73%, 77%, and 74% of the Company’s net sales for the years ended March 31, 2005, 2004, and 2003, respectively.

(10) Valuation and Qualifying Accounts and Reserves

The following is the Company’s schedule of activity in the valuation and qualifying accounts and reserves for the years ended March 31, 2005, 2004, and 2003:

	Balance at		Charged to				Balance
	Beginning		Costs and				at End
	of Year		Expenses		Deductions		of Year
Allowance for doubtful accounts:
2003	$	76,000		97,000		61,000	$	112,000
2004		112,000		7,000		51,000		68,000
2005	$	68,000		—		29,000	$	39,000
Warranty reserve:
2003	$	161,000		15,000		36,000	$	140,000
2004		140,000		22,000		59,000		103,000
2005	$	103,000		57,000		51,000	$	109,000

11

Notes to Financial Statements

(11) Quarterly Financial Data (Unaudited)

The following table presents summarized, unaudited, quarterly financial data for 2005 and 2004:

							Diluted
			Gross		Net		Earnings
	Revenue		Profit		Earnings		Per Share
2005
First quarter	$	6,099,000	$	2,420,000	$	262,000	$	0.02
Second quarter		6,309,000		2,613,000		455,000		0.04
Third quarter		6,444,000		2,703,000		505,000		0.05
Fourth quarter		5,435,000		1,970,000		589,000		0.06
Year	$	24,287,000	$	9,706,000	$	1,811,000	$	0.17
2004
First quarter	$	5,669,000	$	2,246,000	$	224,000	$	.02
Second quarter		5,284,000		2,116,000		150,000		.02
Third quarter		5,237,000		2,220,000		418,000		.04
Fourth quarter		5,351,000		2,113,000		209,000		.02
Year	$	21,541,000	$	8,695,000	$	1,001,000	$	.10

(12) Accounting Standards.

In November 2004 the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 151 (“Inventory Costs”), an amendment of ARB No. 43, Chapter 4. The statement clarifies accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage and requires those items to be expensed when incurred. SFAS 151 is applicable to inventory costs incurred during fiscal years beginning after June 15, 2005. The Company has not yet determined if the adoption of this standard will have a significant impact on its financial statements.

In December 2004, the Financial Accounting Standard Board issued Statement of Financial Accounting Standard (“SFAS”) No. 123R (“Share-Based Payment”). SFAS 123R requires the Company to recognize compensation expense based on the fair value of equity instruments awarded to employees. We currently plan to adopt SFAS 123R on April 1, 2006, and the Company does not anticipate a significant impact to its financial statements.

12

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

CHAD Therapeutics, Inc.

We have audited the accompanying balance sheets of CHAD Therapeutics, Inc. as of March 31, 2005 and 2004 and the related statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended March 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CHAD Therapeutics, Inc. as of March 31, 2005 and 2004 and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

Los Angeles, California
April 29, 2005

13

Management’s Discussion and Analysis of Financial Condition and Results of Operation

Overview

The Company develops, assembles and markets medical devices that furnish supplementary oxygen to home health care patients. The Company was a pioneer in developing oxygen conserving devices that enhance the quality of life for patients by increasing their mobility and, at the same time, lower operating costs by achieving significant savings in the amount of oxygen actually required to properly oxygenate patients. The market for oxygen conserving devices has been, and continues to be, significantly affected by increased competition, consolidation among home oxygen dealers and revisions (and proposed revisions) in governmental reimbursement policies. All of these factors, as described more fully below, have contributed to a more competitive market for the Company’s products, as devices that were less expensive but which provided lower oxygen savings (or, in some cases, did not truly provide ambulatory oxygen) have achieved some level of success.

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

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 care providers. Major national and regional home medical equipment chains have continued to expand their distribution networks through the acquisition of independent home care providers in strategic areas. Margins on sales to national chains are generally lower due to quantity pricing, and management anticipates continued downward pressure on its average selling price. Four major national chains accounted for approximately 53%, 49%, and 47% of the Company’s net sales, for the years ended March 31, 2005, 2004, and 2003, respectively. One chain accounted for 36%, 27%, and 24% of sales in the years ended March 31, 2005, 2004, and 2003, respectively, and one other chain accounted for 11%, 14%, and 11% of sales in the years ended March 31, 2005, 2004, and 2003, respectively.

The Company believes that price competition and continuing industry consolidation will continue to affect the marketplace for the foreseeable future. To address the competitive nature of the oxygen conserver marketplace, the Company has developed and introduced a number of new products in this area in recent years. 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 CYPRESS OXYPneumatic^® conserver in July 2002. The Company received clearance from the FDA to market its newest oxygen conserving device, the LOTUS™ Electronic Oxygen Conserver, in October 2004. The LOTUS conserver weighs less than a pound and will be offered with or without a breath-sensing alarm. It also offers additional liter flow settings and an extended battery life of up to four months of normal usage on two AA-size batteries. Management believes the features and improvements in these products have enabled the Company to regain some of the market share lost in the conserver market prior to 2001 and reestablish the Company as a leader in the conserver market.

In May of 2004 the Company received clearance from the FDA to market its new SAGE Oxygen Therapeutic Device. The SAGE device is the first in a planned family of oxygen therapeutic devices that use the Company’s proprietary technologies to sense a patient’s movements and automatically adjust the rate of oxygen delivery to reduce the risk of desaturation as activity increases. This device combines the industry’s first truly dynamic delivery technology with the proven oxygen sensor technology in the OXYMATIC 400 series conservers. As a result, the new SAGE Oxygen Therapeutic Device addresses the common problem of oxygen desaturation, which causes a patient to feel weak and out of breath when activity increases, while it still maximizes patient ambulatory capability. This new device underscores the Company’s dedication to providing home care suppliers and their patients with the widest range of home oxygen choices to suit individual needs, preferences and disease conditions. The Company began selling the SAGE device nationwide in October 2004. No estimate can currently be made regarding the level of success the Company may achieve with this line of products or when the additional therapeutic devices based on this advanced new platform that are now in development may be introduced to the market.

14

Management’s Discussion and Analysis of Financial Condition and Results of Operation

In 1998 the Company introduced the TOTAL O₂^® Delivery System, which provides stationary oxygen for patients at home, portable oxygen, including an oxygen conserving device for ambulatory use, and a safe and efficient mechanism for filling portable oxygen cylinders in the home. This provides home care providers with a means to reduce their monthly cost of servicing patients, while at the same time providing a higher quality of service by maximizing ambulatory capability. The Company received clearance in November 1997 from the Food and Drug Administration to sell this product. Initial sales were adversely affected by several factors, including the overall home oxygen market climate and home care providers’ reluctance to invest in the higher cost of the TOTAL O₂ Delivery System to achieve the lower monthly operating costs. Recent changes in home oxygen reimbursement appear to be causing home care providers to examine their operating costs more carefully and this is improving the marketing climate for the TOTAL O₂ system.

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

• Development of additional oxygen conserver models, such as the LOTUS Electronic Oxygen conserver introduced in October 2004, that diversify the product line in order to offer customers a wide range of oxygen conservation choices;

• A continued promotional and educational campaign with respect to the benefits of the TOTAL O₂ system; and

• An effort to expand the Company’s product lines and improve existing products through the investment in and development of new technologies, such as proprietary sensor technology and control software licensed in January of 2003 and the introduction of the SAGE Oxygen Therapeutic Device in May 2004. These new technologies will provide the Company with an opportunity to expand its oxygen delivery product lines and potentially enter the high-growth sleep disorder market.

While the turnaround measures of the past four years have had a positive impact, and management believes the current growth strategy should continue to enhance the Company’s competitive position and future operating performance, no assurances can be given that these objectives will be achieved. Management of the Company will continually monitor the success of these efforts and will attempt to remain flexible in order to adjust to possible future changes in the market for respiratory care devices. For information that may affect the outcome of forward-looking statements in this Overview regarding the Company’s business strategy and its introduction of new products, see Outlook: Issues and Risks — New Products, Consolidation of Home Care Industry, Competition, Rapid Technological Change, and Potential Changes in the Administration of Health Care, beginning on page 16 of this Report.

Results of Operations

Sales for the years ended March 31, 2005 and 2004 increased by $2,746,000 (12.7%) and $2,000,000 (10.2%), respectively, as compared to prior years. The primary driver of the Company’s increase in sales has been the significant growth in sales of its conservers, largely as a result of the introduction of the OXYMATIC 400 series conservers and CYPRESS OXYPneumatic conservers. Management believes that the performance features of these conservers have enabled the Company to recapture significant market share. Unit sales of conservers for the year ended March 31, 2005, increased 34% over the prior year, while the increase in revenues from conserver sales was 7%. This resulted from price reductions, the impact of national chain contract pricing (see above), and the generally lower pricing for pneumatic conservers in the marketplace.

Sales to foreign distributors represented 6% and 5% of total sales for the years ended March 31, 2005 and 2004. 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.

Cost of sales as a percent of net sales increased from 56.2% to 60.0% for the year ended March 31, 2005, as compared to the prior year period. This was a result of downward price pressures in the marketplace, increased chain sales, and a change in the product mix, as the TOTAL O₂system has a lower gross profit margin than conservers. We currently expect continued downward price pressure for the foreseeable future. Cost of sales as a percent of net sales decreased from 57.3% to 56.1% for the year ended March 31, 2004, as compared to the prior year primarily due to cost efficiencies gained from increased sales.

Selling, general and administrative expenditures decreased from 33.5% to 28.6% and from 40.0% to 33.5% of net sales for years ended March 31, 2005 and 2004, respectively, as compared to the prior year periods. The Company’s cost reduction efforts over the past two years have helped align staffing and operating expenses more closely with current sales expectations but were offset, to some extent, by commissions paid to the company’s field sales force of manufacturer’s representatives. Research and development expenses increased by $181,000 and $303,000 for the years

15

Management’s Discussion and Analysis of Financial Condition and Results of Operation

ended March 31, 2005 and 2004, respectively, as compared to the prior years. Currently, management expects research and development expenditures to total approximately $1,512,000 in the fiscal year ending March 31, 2006, on projects to enhance and expand the Company’s product line.

At March 31, 2005, the Company had fully utilized its net operating loss carrybacks and federal net operating loss carryforwards and had approximately $1,846,000 in California net operating loss carryforwards. In December 2002 California enacted legislation that suspends the utilization of net operating loss carryforwards during tax years starting 2002 and 2003 effective retroactively back to January 1, 2002. As a result, the Company was unable to use its California net operating loss carryforwards until the tax year beginning April 1, 2004.

Financial Condition

At March 31, 2005, the Company had cash totaling $177,000 or 1.1% of total assets as compared to $2,708,000 or 20.8% at March 31, 2004. Net working capital increased from $9,175,000 at March 31, 2004, to $10,393,000 at March 31, 2005. Net accounts receivable increased $834,000 during the year ended March 31, 2005, due to the increase in sales. 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 $3,523,000, while cash decreased by $2,531,000. These changes resulted in large part from a significant inventory build in the latter part of fiscal 2005 to fill certain customer orders and anticipated customer orders. Certain of these orders did not materialize or were deferred. However, there is an active market for the products involved, and the company believes the inventory will be sold in due course. The Company attempts to maintain sufficient inventories to meet its customer needs as orders are received and new products are introduced. 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.

The Company depends upon its cash flow from operations to meet its capital requirements. Management believes cash balances and funds derived from operations should be adequate to meet the Company’s near- and long-term cash requirements given the recent recovery of market share of oxygen conservers. Cash derived from operations will depend on the ability of the Company to maintain profitable operations and the timing of increases in receivables and inventories. If profitable operations do not continue, the Company may need to seek other sources of working capital. While the Company has no established lines of credit or other arrangements in place to obtain working capital, management believes the Company would be able to secure a line of credit from a bank should that be deemed necessary. The Company currently has no debt; however, no assurance can be given that if and when needed other sources of working capital will be available. The Company expects capital expenditures during the next twelve months to be approximately $800,000.

The following table aggregates all of the Company’s material contractual obligations as of March 31, 2005:

	Payments Due By Period
Contractual			Less than 1		1-3		3-5		After 5
Cash Obligations	Total		Year		Years		Years		Years
Operating lease obligations	$	1,435,000	$	427,000	$	1,008,000		—		—
Minimum royalty obligations	$	3,285,000	$	515,000	$	1,590,000	$	1,090,000	$	90,000

Operating lease commitments consist primarily of a real property lease for our corporate office as well as minor equipment leases. Payments for these lease commitments are provided for by cash flows generated from operations. Please see Note 8 to the financial statements.

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

Significant Accounting Policies

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

16

Management’s Discussion and Analysis of Financial Condition and Results of Operation

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

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

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

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

Outlook: Issues & Risks

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

Dependence Upon a Single Product Line

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

New Products

The Company’s future growth in the near term will depend in significant part upon its ability to successfully introduce new products. In recent years the Company has introduced the OXYMATIC 400 series, the SEQUOIA and CYPRESS OXYPneumatic conservers, and the TOTAL O₂ Delivery System and in May 2004 introduced the SAGE Oxygen Therapeutic Device; the Company is currently developing additional new products. The success of the Company’s products will depend upon the health care community’s perception of such products’ capabilities, clinical efficacy and benefit to patients, as well as obtaining timely regulatory approval for new products. In addition, prospective sales will be impacted by the degree of acceptance achieved among home care providers and patients requiring supplementary oxygen. As with any product, the Company’s ability to successfully promote new products cannot be determined at this time.

Consolidation of Home Care Industry - Dependence on Key Customers

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 53% of the Company’s net sales during the year ended March 31, 2005, up from 49% in the prior year. One customer accounted for 36% of our sales in the year ended March 31, 2005, up from 27% in the prior year. Future sales may be increasingly dependent upon a limited number of customers, which may result in continuing downward pressure on our average selling price due to quantity pricing. Moreover, our dependence on a limited number of significant customers increases the risk that our financial performance will be adversely affected if one or more of these customers reduces their purchases of our products or terminates their relationship with the Company.

Competition

CHAD’s success in the early 1990s has drawn competition to vie for a share of the home oxygen market. These new competitors include both small and very large companies. While the Company believes the quality of its products and its established reputation will continue to be a competitive advantage, some competitors have successfully introduced lower priced products that do not provide oxygen conserving

17

Management’s Discussion and Analysis of Financial Condition and Results of Operation

capabilities comparable to the Company’s products. Most of these competitors have greater capital resources than the Company. No assurance can be given that increased competition in the home oxygen market will not have an adverse affect on the Company’s operations.

Rapid Technological Change

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

Potential Changes in Administration of Health Care

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

Approximately 80% of home oxygen patients are covered by Medicare and other government programs. Federal law has altered the payment rates available to providers of Medicare services in various ways during the last several years. In November of 2003, Congress enacted the Medicare Improvement and Modernization Act, which is resulting in changes and reductions in home oxygen reimbursement over the next several years. These changes in reimbursement will cause increased downward pressure on the average selling price of the Company’s products.

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 cost of defense or judgments which might be entered against the Company. The type and frequency of these claims could have an adverse impact on the Company’s results of operations and financial position.

Availability and Reliability of Third Party Component Products

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

Accounting Standards

In November 2004 the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 151 (“Inventory Costs”), an amendment of ARB No. 43, Chapter 4. The statement clarifies accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage and requires those items to be expensed when incurred. SFAS 151 is applicable to inventory costs incurred during fiscal years beginning after June 15, 2005. The Company has not yet determined if the adoption of this standard will have a significant impact on its financial statements.

18

Management’s Discussion and Analysis of Financial Condition and Results of Operation

In December 2004 the Financial Accounting Standard Board issued Statement of Financial Accounting Standard (“SFAS”) No. 123R (“Share-Based Payment”). SFAS 123R requires the Company to recognize compensation expense based on the fair value of equity instruments awarded to employees. We will adopt SFAS 123R on April 1, 2006, and the Company does not anticipate a significant impact to its financial statements.

Additional Risk Factors

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

19

Corporate Data

Officers

THOMAS E. JONES
Chairman
EARL L. YAGER
Chief Executive Officer and President
ALFONSO DEL TORO
Vice President, Manufacturing
TRACY A. KERN
Chief Financial Officer
ERIKA LASKEY
Vice President, Sales and Marketing
KEVIN McCULLOH
Vice President, Engineering
PAULA O’CONNOR
Corporate Secretary
OSCAR J. SANCHEZ
Vice President,
Business Development

Directors

THOMAS E. JONES
Chairman
CHAD Therapeutics, Inc.
EARL L. YAGER
President and Chief Executive Officer
CHAD Therapeutics, Inc.
JOHN C. BOYD
Retired
JAMES M. BROPHY
Hospital Executive
KATHLEEN M. GRIGGS
Financial Consultant
EDWARD ANTHONY
OPPENHEIMER, M.D.
Associate Clinical
Professor of Medicine
UCLA School of Medicine
PHILIP T. WOLFSTEIN
International Trade Consultant

Corporate Data

CORPORATE HEADQUARTERS
21622 Plummer Street
Chatsworth, CA 91311
(818)882-0883
LEGAL COUNSEL
Morrison & Foerster, LLP
AUDITORS
KPMG LLP
Los Angeles, California
TRANSFER AGENT AND REGISTRAR
American Stock Transfer Company
40 Wall Street
New York, NY 10005

Common Stock Price Range

Beginning August 3, 1993, the Company’s common shares were traded on the American Stock Exchange Emerging Company Marketplace and on June 6, 1994, the Company’s shares moved to the primary list of the American Stock Exchange with the symbol CTU. The following table sets forth, for the periods indicated, the high and low closing prices as furnished by the American Stock Exchange.

Quarter Ended	High		Low
June 30, 2003		1.67		1.67
September 30, 2003		2.13		2.05
December 31, 2003		2.40		2.21
March 31, 2004		3.70		3.45
June 30, 2004		4.39		4.12
September 30, 2004		4.40		4.26
December 31, 2004		5.50		5.35
March 31, 2005		3.70		3.10

As of June 12, 2005, there were approximately 257 shareholders of record and approximately 2,500 beneficial owners of the Company’s common stock. No cash dividends have been paid on the common stock.

SEC Form 10-K

A copy of the Company’s annual report to the Securities and Exchange Commission on Form 10-K is available without charge upon written request to:

Chief Financial Officer
CHAD Therapeutics, Inc.
21622 Plummer Street
Chatsworth, CA 91311

20

EX-23.1

Exhibit 23.1

KPMG LLP

Suite 2000

355 South Grand Avenue

Los Angeles, CA 90071-1568

Report of Independent Registered
Public Accounting Firm

The Board of Directors and Shareholders
Chad Therapeutics, Inc.:

We have audited the accompanying balance sheets of Chad Therapeutics, Inc. as of March 31, 2005 and 2004 and the related statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Chad Therapeutics, Inc. as of March 31, 2005 and 2004 and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

Los Angeles, California
April 29, 2005

KPMG LLP, a U.S. limited liability partnership, is the U.S.
member firm of KPMG International, a Swiss cooperative.

KPMG LLP

Suite 2000

355 South Grand Avenue

Los Angeles, CA 90071-1568

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Chad Therapeutics, Inc.:

We consent to the incorporation by reference in the registration statement (No. 33-93734) on Form S-8 of Chad Therapeutics, Inc. of our report dated April 29, 2005, with respect to the balance sheets of Chad Therapeutics, Inc. as of March 31, 2005 and 2004 and the related statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2005, which report appears in the March 31, 2005 annual report on Form 10-K of Chad Therapeutics, Inc.

Los Angeles, California
June 17, 2005

KPMG LLP, a U.S. limited liability partnership, is the U.S.
member firm of KPMG International, a Swiss cooperative.

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002

I, Earl L Yager, as Chief Executive Officer of CHAD Therapeutics, Inc. (the “Company”), hereby certify that:

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

(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Paragraph omitted;
(c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report based on such evaluation; and
(d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 27, 2005	/s/ Earl L. Yager
	Earl L. Yager
	Chief Executive Officer of CHAD Therapeutics, Inc.

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002

I, Tracy A. Kern, as Chief Financial Officer of CHAD Therapeutics, Inc. (the “Company”), hereby certify that:

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

(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Paragraph omitted;
(c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report based on such evaluation; and
(d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

(10) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 27, 2005	/s/ Tracy A. Kern
	Tracy A. Kern
	Chief Financial Officer of CHAD Therapeutics, Inc.

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     I, Tracy A. Kern, Chief Financial Officer of CHAD Therapeutics, Inc. (the “Company”), certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

     (1) the Annual Report of the Company on Form 10-K for the fiscal year ended March 31, 2005, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

     This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

/s/ Tracy A. Kern

Tracy A. Kern

Chief Financial Officer

June 27, 2005

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     I, Earl L. Yager, Chief Executive Officer of CHAD Therapeutics, Inc. (the “Company”), certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

     (1) the Annual Report of the Company on Form 10-K for the fiscal year ended March 31, 2005, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

     This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

/s/ Earl L. Yager

Earl L. Yager

Chief Executive Officer

June 27, 2005

EX-99.11

Exhibit 99.11

Mr. Kevin McCulloh
Vice President of Engineering
Chad Therapeutics, Incorporated
21622 Plummer Street
Chatsworth, California 91311

Re.	K042142
	Trade/Device Name: Chad Therapeutics Lotus Models OM-700 and OM-700S
	Regulation Number: 21 CFR 868.5905 Regulation Name: Noncontinuous Ventilator (IPPB)
	Regulatory Class: II
	Product Code: NFB Dated: September 7, 2004
	Received: September 13, 2004

Dear Mr. McCulloh:

We have reviewed your Section 510(k) premarket notification of intent to market the device referenced above and have determined the device is substantially equivalent (for the indications for use stated in the enclosure) to legally marketed predicate devices marketed in interstate commerce prior to May 28, 1976 the enactment date of the Medical Device Amendments, or to devices that have been reclassified in accordance with the provisions of the Federal Food, Drug, and Cosmetic Act (Act) that do not require approval of a premarket approval application (PMA). You may, therefore, market the device, subject to the general controls provisions of the Act. The general controls provisions of the Act include requirements for annual registration, listing of devices, good manufacturing practice, labeling, and prohibitions against misbranding and adulteration.

If your device is classified (see above) into either class II (Special Controls) or class III (PMA), it may be subject to such additional controls. Existing major regulations affecting your device can be found in the Code of Federal Regulations, Title 21, Parts 800 to 898. In addition, FDA may publish further announcements concerning your device in the Federal Register.

Page 2 — Mr. McCulloh

Please be advised that FDA’s issuance of a substantial equivalence determination does not mean that FDA has made a determination that your device complies with other requirements of the Act or any Federal statutes and regulations administered by other Federal agencies. You must comply with all the Act’s requirements, including, but not limited to: registration and listing (21 CFR Part 807); labeling (21 CFR Part 801); good manufacturing practice requirements as set forth in the quality systems (QS) regulation (21 CFR Part 820): and if applicable, the electronic product radiation control provisions (Sections 531-542 of the Act); 21 CFR 1000-1050.

This letter will allow you to begin marketing your device as described in your Section 510(k) premarket notification. The FDA finding of substantial equivalence of your device to a legally marketed predicate device results in a classification for your device and thus, permits your device to proceed to the market.

If you desire specific advice for your device on our labeling regulation (21 CFR Part 801), please contact the Office of Compliance at (301) 594-4646. Also, please note the regulation entitled, “Misbranding by reference to premarket notification” (21 CFR Part 807.97). You may obtain other general information on your responsibilities under the Act from the Division of Small Manufacturers, International and Consumer Assistance at its toll-free number (800) 638-2041 or (301) 443-6597 or at its Internet address http://www.fda.gov/cdrh/dsma/dsmamain.html

Sincerely yours,

Chiu Lin, Ph.D.

Director

Division of Anesthesiology, General Hospital,

    Infection Control and Dental Devices

Office of Device Evaluation

Center for Devices and

    Radiological Health

Enclosure