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Subordinated Secured Promissory Note

CHAD THERAPEUTICS, INC.

SUBORDINATED SECURED PROMISSORY NOTE

AND WARRANT PURCHASE AGREEMENT

THIS NOTE AND WARRANT PURCHASE AGREEMENT (this ?Agreement?) is made as of January 2, 2008 by and among CHAD Therapeutics, Inc., a California corporation (the ?Company?), and the investors listed on Exhibit A hereto, each of which is herein referred to as an ?Investor.?

THE PARTIES HEREBY AGREE AS FOLLOWS:

ISSUANCE OF NOTES AND WARRANTS

1.1 Issuance of Notes. Subject to the terms and conditions of this Agreement, at each Closing (as defined below), the Company shall issue and sell to each Investor participating in such Closing a subordinated secured promissory note (each such note, a ?Note? and collectively, the ?Notes?) in the principal amount (the ?Principal Amount?) equal to the amount set forth beneath the caption ?Principal Amount? with respect to such Closing set forth opposite such Investor?s name on Exhibit A attached hereto, against payment by such Investor to the Company of the Principal Amount. The Notes shall each be in the form of Exhibit B attached hereto. Capitalized but otherwise undefined terms used herein shall have the meanings provided therefor in the Notes.

1.2 Issuance of Warrants. Subject to the terms and conditions of this Agreement, at the Initial Closing, the Company shall issue to each Investor that has purchased a Note thereunder, with respect to each such Note, a warrant (the ?Warrant?), in the form of Exhibit C attached hereto, representing the right to purchase up to that number of shares of common stock of the Company (?Common Stock?) (as adjusted for stock splits, recapitalizations or other similar events) calculated as follows:


number of shares of Common Stock	=	(Principal Amount of the Note issued at the Initial Closing) x (0.30)
issuable upon exercise of the Warrant		Stock Purchase Price

The Warrant shall, unless sooner terminated as provided therein, have a term of five (5) years from the date of issuance and shall be exercisable at an exercise price (subject to adjustment as set forth in the Warrant) equal to the Stock Purchase Price.

1.3 Stock Purchase Price. For purposes of this Agreement, (i) ?Stock Purchase Price? shall mean the average of the closing price per share of the Common Stock on the American

Stock Exchange for each of the five (5) business days ending immediately prior to the date of the Initial Closing.

SECTION 2

CLOSINGS

2.1 Initial Closing. The initial closing of the purchase and sale of the Notes hereunder (the ?Initial Closing?) shall be held at the offices of Morrison & Foerster LLP located at 555 West Fifth Street, Suite 3500, Los Angeles, California 90013 on the date of this Agreement or at such other place and date as is mutually agreeable to the Company and Investors that are identified on Exhibit A as purchasing Notes.

2.2 Subsequent Closings. From and after Initial Closing until the July 31, 2010, the Company may issue and sell additional Notes to the Investors up to an aggregate principal amount of Seven Hundred Thousand Dollars ($700,000.00). Each Investor hereby agrees to accept and purchase fifty percent (50%) of each additional Note. For the avoidance of doubt, notwithstanding any provision in this Agreement, the aggregate Principal Amount issuable under this Agreement shall be One Million Dollars ($1,000,000), such amount includes the Principal Amount from the Initial Closing. The decision to issue and sell additional Notes subsequent to the Initial Closing shall be made by the Chief Financial Officer of the Company, with the approval of the Audit Committee of the Board of Directors of the Company. All additional Principal Amounts invested hereunder shall be reflected on Exhibit A, which shall be automatically amended without any further action by any party hereto. The closing of the purchase and sale of such additional Notes hereunder shall be held at Morrison & Foerster LLP located at 555 West Fifth Street, Suite 3500, Los Angeles, California 90013 on such date or at such other place as is mutually agreeable to the Company and Investors that are identified on Exhibit A (which each such date and place, together with the Initial Closing, are designated as a ?Closing?).

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