UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      DC 20549





FORM
      10-KSB





Annual
      Report under Section 13 or 15 (d) of the Securities Exchange Act of 1934


For
      the
      Fiscal Year ended December 31, 2005





Commission
      File Number 0-13839








CAS
      MEDICAL SYSTEMS, INC.


(Name
      of
      small business issuer in its charter)




Delaware
            
            06-1123096(State
                or other jurisdiction of
            
            (I.R.S.
                Employer Identification
                No.)incorporation
                or organization)




44
      East Industrial Road, Branford, Connecticut 06405


(Address
      of principal executive offices)





(203)
      488-6056


(Issuer's
      telephone number, including area code)





Securities
      registered under Section 12(b) of the Exchange Act: None





Securities
      registered under Section 12(g) of the Exchange Act:





Common
      Stock, $.004 par value


(Title
      of
      Class)








Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act.  o





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




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will 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-KSB or any
      amendment to this Form 10-KSB.   o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).   Yes o No x




The
      Registrant's revenues for the fiscal year ended December 31, 2005 were
      $26,884,421.





The
      aggregate market value of common equity held by non-affiliates of the Registrant
      as of March 1, 2006 based upon the last sale price of such stock on that date
      on
      the NASDAQ Capital Market was $108,545,624. The number of shares of the
      Registrant's Common Stock outstanding as of March 1, 2006 was
      10,326,336.





DOCUMENTS
      INCORPORATED BY REFERENCE:





Portions
      of the Registrant's Proxy Statement for its Annual Meeting of Stockholders
      to be
      held on June 14, 2006 are incorporated by reference in Part III of this Report.
      Except as expressly incorporated by reference, the Registrant's Proxy Statement
      shall not be deemed to be part of this Form 10-KSB.





Transitional
      Small Business Disclosure format (check one):   Yes oNo x













INDEX
              
              
              PagePART
                  IItem
                  1
              Description
                  of Business
              
              3Item
                  2
              Description
                  of Property
              
              8Item
                  3
              Legal
                  Proceedings
              
              8Item
                  4
              Submission
                  of Matters to a Vote of Security Holders
              
              8PART
                  IIItem
                  5
              Market
                  for Common Equity, Related Stockholder Matters and Small Business
                  Issuer
                  Purchases of Equity Securities
              
              8Item
                  6
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              9Item
                  7
              Financial
                  Statements
              
              13Report
                  of UHY LLP, Independent Registered Public Accounting Firm
              
              F-1Consolidated
                  Balance Sheets as of December 31, 2005 and 2004
              
              F-2Consolidated
                  Statements of Operations for the Years Ended December 31, 2005
                  and
                  2004
              
              F-3Consolidated
                  Statements of Changes in Shareholders’ Equity for the Years Ended December
                  31, 2005 and 2004
              
              F-4Consolidated
                  Statements of Cash Flows for the Years Ended December 31, 2005
                  and
                  2004
              
              F-5Notes
                  to Consolidated Financial Statements
              
              F-6
                  to F-17Item
                  8
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              
              14Item
                  8A
              Controls
                  and Procedures
              
              14Item
                  8B
              Other
                  Information
              
              14PART
                  IIIItem
                  9
              Directors,
                  Executive Officers, Promoters and Control Persons; Compliance with
                  Section
                  16(a) of the Exchange Act
              
              14Item
                  10
              Executive
                  Compensation
              
              14Item
                  11
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              
              15Item
                  12
              Certain
                  Relationships and Related Transactions
              
              15Item
                  13
              Exhibits
              
              16Item
                  14
              Principal
                  Accountant Fees and Services
              
              17Signatures
              
              
              18








Page
      3


PART
      I




This
      report may contain information that includes or is based on forward-looking
      statements within the meaning of the federal securities laws that are subject
      to
      risks and uncertainties. These statements may be identified by the use of words
      such as "anticipates," "expects," "estimates," "projects," "intends" and
      "believes" and variations thereof and other terms of similar meaning. Factors
      that could cause the Company's actual results and financial condition to differ
      from the Company's expectations include, but are not limited to: price and
      product competition; rapid technological changes; dependence on new product
      development; failure to introduce new products effectively or on a timely basis;
      the mix of products sold; supply and prices of raw materials and products;
      customer demand for the Company’s products; regulatory actions; changes in
      reimbursement levels from third-party payors; product liability claims; changes
      in economic conditions that adversely affect the level of demand for the
      Company's products; changes in foreign exchange markets; changes in financial
      markets; and changes in the competitive environment. While the Company believes
      that the assumptions underlying such forward-looking statements are reasonable,
      there can be no assurance that future events or developments will not cause
      such
      statements to be inaccurate. All forward-looking statements contained in this
      report are qualified in their entirety by this cautionary
      statement.







Item
      1.  Description of
      Business





The
      Company





CAS
      Medical Systems, Inc. ("CAS" or the "Company") is a Delaware corporation
      organized in 1984. The Company designs, manufactures and markets medical
      products, specifically blood pressure measurement technology, blood pressure
      cuffs, vital signs measurement equipment, cardio-respiratory monitoring
      equipment and supplies for neonatal intensive care. The Company’s products are
      designed to improve the quality of patient care and provide exceptional value
      and performance. The Company has several products in various stages of
      development that it believes will add to and complement its current product
      lines.





On
      May
      15, 2005, CAS completed the purchase of all of the outstanding capital stock
      of
      Statcorp, Inc. from its stockholders for cash. The cost of the acquisition
      was
      $4.8 million including a post-closing working capital adjustment and direct
      acquisition costs. An additional purchase adjustment may be required based
      upon
      post-closing revenues of Statcorp for the twelve month period following the
      closing date. Statcorp, a privately-owned company based in Jacksonville,
      Florida, develops, assembles and sells liquid infusion devices, blood pressure
      cuffs, and blood transfusion filters for worldwide use in the medical industry.





Principal
      Products and Services





Blood
      Pressure Measurement Technology





The
      Company has developed a proprietary non-invasive blood pressure technology,
      MAX NIBP ®.
      The
      Company believes this technology is more accurate, reliable, and able to produce
      a measurement result faster than its competitors. These advantages strengthen
      the Company’s competitive position, especially in clinical situations where
      measurements can be difficult. The Company has entered into original equipment
      manufacturer (“OEM”) agreements to supply its MAX NIBP technology in the form of modules to various companies throughout the world.
      These modules are used in larger monitoring systems where non-invasive blood
      pressure is but one measurement parameter. The Company’s OEM agreements are
      typically multi-year arrangements.





Blood
      Pressure Cuffs





The
      Company offers a full line of disposable and reusable blood pressure cuffs.
      The
      product line includes cuffs and pressure infusers manufactured by Statcorp,
      Inc.
      which was purchased by CAS in 2005. The blood pressure cuffs can be used on
      patients from neonate through adult, as well as veterinary patients, and
      complement the Company’s MAX NIBP blood
      pressure measurement technology.








Page
      4




Vital
      Signs Monitoring Equipment





The
      Company offers two platforms of vital signs monitors incorporating various
      combinations of measurement parameters. The product lines include options for
      measurement of non-invasive blood pressure using the Company’s


proprietary
      MAX NIBP technology, pulse oximetry, electro-cardiography, temperature, and capnography.
      CAS monitors are ideal for a range of clinical settings (both human and
      veterinary) including emergency medical service, medical/surgical units,
      out-patient care, and procedural sedation. The Company also offers a full line
      of disposable and reusable blood pressure cuffs to complement its
      monitors.




Cardio-Respiratory
      Monitoring Equipment





The
      CAS
      line of cardio-respiratory monitors is used to monitor apnea in home-based
      and
      hospital settings. The Company’s product line includes two of the industry’s
      best selling infant apnea monitoring products and has the broadest range of
      capabilities available. The AMI® and 511 monitors allow cardio-respiratory and
      pulse oximetry monitoring and recording for a range of patients. Proprietary *CAS
      Express* ®
      software saves patient data from the monitors and generates reports for review
      by the clinician.





Supplies
      for Neonatal Intensive Care





The
      Company’s specialty neonatal supplies are a foundation of its business. CAS has
      a long record of producing high quality products designed specifically to meet
      the unique needs of neonatal intensive care. The varied product line includes
      Klear-Trace® ECG Electrodes, NeoGuard® skin temperature probes and adhesive
      reflectors, SoftCheck® neonatal blood pressure cuffs, BiliBottomsTM light
      permeable diapers for use during phototherapy, and the Premie Nestie® neonatal
      positioning device.





Sales
      and Marketing





The
      Company markets its products throughout North America, through hospital,
      alternate site, homecare, veterinarian and emergency medical distribution
      channels.





Sales
      in
      the United States are conducted by specialty distributors working under both
      exclusive and non-exclusive arrangements in conjunction with nine full time
      Company field managers. International sales are conducted through exclusive
      distributors in the European, Pacific Rim and Latin American regions and Canada
      working together with regional sales consultants and one employee located
      outside of the United States.





The
      Company also sells its non-invasive blood pressure technology, in the form
      of
      sub-assemblies to be joined to multi-parameter hospital monitors, to various
      firms operating on both a domestic and international basis. The Company is
      in
      the process of pursuing other OEM agreements.





Financial
                Information Relating to SalesYear
                Ended December 31**2005**
            
            **2004**Domestic
                Sales
            
            $
            21,891,805
            
            $
            15,589,202Export
                Sales
            
            
            4,992,616
            
            
            4,470,070$
            26,884,421
            
            $
            20,059,272




Competition





The
      Company competes in the medical equipment market where there are many suppliers
      with greater financial and personnel resources that sell a broad line of both
      commodity products and monitoring equipment and have a dedicated selling
      capability. The Company's products primarily serve the hospital and emergency
      medical services markets. The Company’s equipment is compact, portable,
      lightweight and user-friendly. The monitors maintain a high, professional
      standard of accuracy and quality in demanding environments such as those
      encountered in hospital and transport situations. With respect to all of its
      products, the Company competes on the basis of price, features, product quality
      and promptness of delivery and overall quality of customer service.








Page
      5





Customers





During
      2005 and 2004, the Company had sales to Medtronic, Inc. which accounted for
      approximately 14% and 18% of net sales, respectively.





Research
      and Development





During
      2005 and 2004, the Company incurred expenses of approximately $2,150,000 and
      $1,554,000, respectively, on activities relating to research, the development
      of
      new products and the improvement of existing products. These amounts are before
      consideration of reimbursements received from the National Institutes of Health
      (“NIH”) further explained under Grant
      Awards below.
      Net research and development (“R&D”) expenses after reimbursements from the
      NIH approximated $1,631,000 for 2005 and $1,032,000 for 2004.





The
      Company’s 2005 development efforts were largely focused on the design and
      development of its patented Near-Infrared Spectroscopy (“NIRS”) technology. The
      NIRS technology has multiple potential applications and the company has selected
      its first target development to be a monitor that can non-invasively measure
      brain oxygenation levels in adults during cardiac bypass and other high risk
      surgeries. The Company has been actively researching the technology since 1999
      and believes it can create a unique proprietary system. These development
      efforts culminated in the successful 510(k) clearance of the NIRS system during
      December 2005. Further development work is expected in 2006 to continue to
      refine the system with a market launch planned for the end of 2006.





Each
      year, there are over 500,000 cardiac and carotid surgeries performed in the
      United States. Following these procedures, approximately one in sixteen
      patients, or 6%, experience severe adverse cerebral outcomes. Additionally,
      500,000 people in the United States undergo high risk surgery with similar
      risks. Approximately 17-23% of people undergoing cardiopulmonary bypass surgery
      suffer from cerebral venous oxygen de-saturation, resulting in compromised
      cognitive outcomes. Continuous oxygen delivery is critical for the brain, which
      is among the most susceptible organs to oxygen deprivation. After about ten
      seconds of brain ischemia, loss of consciousness will occur. After about 20
      seconds, electrical activity in the brain will stop. In just a few minutes,
      a
      person experiencing brain ischemia will begin to sustain irreversible brain
      damage. If cerebral tissue oxygen de-saturation can be detected before it
      reaches a critical point, there is an opportunity for interventions to occur
      to
      minimize or prevent permanent damage. As a result, the Company believes that
      monitoring brain oxygenation via cerebral oximetry is a vital new tool for
      improving surgical outcomes as described above.





Additional
      development efforts focused on the design and development of the new Model
      750C
      and 750E series cardio-respiratory monitors; along with continued support of
      the
      740 series vital signs monitors, our proprietary non-invasive blood pressure
      technology and apnea monitor and neonatal product support.





The
      Company’s 2005 research efforts were again centered on the NIRS platform. Adult
      and neonatal clinical studies continued at various sites and following
      successful adult volunteer testing were expanded to include a cardiac outcome
      study and a general adult surgery outcome study. Clinical studies to date have
      shown significant promise and have led to the Company’s decision to continue to
      aggressively pursue the development of a commercial product in the emerging
      market of cerebral oximetry. The Company holds one U.S. patent, and has several
      patents pending on the technology and intends to actively seek additional patent
      protection.





The
      Company continues to develop and expand its patient monitoring capabilities
      by
      adding new complimentary physiological parameters. This will enable the Company
      to attempt to increase sales penetration into key markets for the Company’s
      products.





Grant
      Awards





The
      Company has in prior years been awarded various grants by the National Institute
      of Neurological Disorders and Stroke of the NIH under its Small Business
      Innovative Research Program. Grants under this program are being used to support
      its NIRS development. In accordance with the terms of these grants, the Company
      is being reimbursed for certain qualifying expenditures. Such grant awards
      are
      providing substantial support for the Company’s clinical efforts which are being
      undertaken at multiple adult and neonatal sites.








Page
      6





The
      Company has received various grants under this program including a phase II
      award received during May 2004 approximating $1,000,000 for continued
      development in the adult population. During March 2004, the Company was awarded
      a $100,000 grant for developing a new generation of automated non-invasive
      blood
      pressure (“NIBP”) monitors, which have incorporated advanced NIBP algorithms
      that compensate for arterial stiffness.





Reimbursements
      were approximately $531,000 for 2005 and $521,000 for 2004. Funding provided
      to
      the Company is being recorded as a reduction in R&D expenses. The Company is
      pursuing additional NIH grants to support its NIRS research.





Trademarks,
      Patents and Copyrights





Certificates
      of Registration have been issued to the Company by the United States Department
      of Commerce Patent and Trademark Office for the following marks: CAS â ,
      Pedisphyg â ,
      OscilloMate â ,
      NeoGuard â ,
      Tuff-Cuff â ,
      Limboard â ,
      Klear-Trace â ,
      Premie
      Nestie â ,
      MAXNIBP â ,
      and the
      heart shaped mark for use as a thermal reflector and the Company's corporate
      logo. The Company continues to use the Safe-CuffTM ,
      BiliBottoms Ô and CAS
      Express Ô common
      law trademarks. The Company also holds trademarks for the Event-Link â monitoring system, the Edentec Assurance â monitor,
      Edentrend â software
      and the AMI â and
      AMI â Plus
      monitors.





The
      Company holds various patents for its blood pressure measurement technology
      which it believes provide it with a competitive market advantage. In addition,
      it has patents with respect to apnea monitor technology. Although the Company
      holds such patents and has patents pending related to certain of its products,
      it does not believe that its business as a whole is significantly dependent
      upon
      patent protection with the exception of the Near Infra Red Spectroscophy (NIRS)
      cerebral oximetry technology.





The
      NIRS
      cerebral oximetry technology has one U.S. patent issued (US 6,456,862 B2).
      In
      addition, we currently have two patent applications pending in the United
      States, including one with a request for continuation examination application
      (“RCE”). We believe the design concepts covered in our current patent
      applications and provisional patent applications are important to providing
      a
      cerebral oximeter capable of absolute brain tissue oxygenation measurement.





Many
      other patents have previously been issued to third parties involving optical
      spectroscopy and the interaction of light with tissue, some of which relate
      to
      the use of optical spectroscopy and NIRS in the area of brain metabolism
      monitoring. We are not aware of any infringement by our products of the claims
      of any issued patents, and no charge of patent infringement has been asserted
      against us.





The
      Company also relies on trade secret, copyright and other laws and on
      confidentiality agreements to protect our technology.





The
      Company has copyright protection for the software used in its blood pressure
      and
      apnea monitors.





The
      Company will continue to actively seek patent, trademark and copyright
      protections as it deems advisable to protect the market for its products and
      its
      R&D efforts.





We
      believe that neither our patents nor our other legal rights will necessarily
      prevent third parties from developing or using a similar or a related technology
      to compete against our products.





Employees





As
      of
      December 31, 2005, the Company had 144 employees, of which 143 were full-time.
      The Company has no collective bargaining agreements and believes that relations
      with its employees are good.





Government
      Regulation





Medical
      products of the type currently being marketed and under development by the
      Company are subject to regulation under the Food, Drug and Cosmetic Act (the
      "FDC Act") and numerous acts and amendments such as the Quality System
      Regulations (“QSR”), often referred to as Good Manufacturing Practices
      (“GMP's”).








Page
      7





In
      addition, depending upon product type, the Company must also comply with those
      regulations governing the Conduct of Human Investigations, Pre-Market Approval
      Regulations and other requirements, as promulgated by the Food and Drug
      Administration (“FDA”). The FDA is authorized to inspect a device, its labeling
      and advertising, and the facilities in which it is manufactured in order to
      ensure that the device is not manufactured or labeled in a manner which could
      cause it to be injurious to health.





The
      FDA
      has adopted regulations which classify medical devices based upon the degree
      of
      regulation believed necessary to assure safety and efficacy. A device is
      classified as a Class I, II, or III device. Class I devices are subject only
      to
      general controls. Class II devices, in addition to general controls, are or
      will
      be subject to "performance standards." Most devices are also subject to the
      510(k) pre-market notification provision. In addition, some Class III devices
      require FDA pre-market approval before they may be marketed commercially because
      their safety and effectiveness cannot be assured by the general controls and
      performance standards of Class I or II devices.





The
      Company's products are primarily Class I and II devices and several of them
      have
      required FDA notification under Section 510(k) of the FDC Act.





The
      FDA
      has the authority to, among other things, deny marketing approval until all
      regulatory protocols are deemed acceptable, halt the shipment of defective
      products, and seize defective products sold to customers. Adverse publicity
      from
      the FDA, if any, could have a negative impact upon sales. The FDA completed
      a
      factory audit of the Company in March 2005. There were no material
      non-conformities.





Manufacturing
      and Quality Assurance





The
      Company assembles its products at its facilities in Branford, Connecticut and
      Jacksonville, Florida. The various components for the products, which include
      plastic sheeting, plastic moldings, wire, semi-conductor circuits, electronic
      and pneumatic components and power supplies, are obtained from outside vendors.
      The Company does not have any long-term contracts with its suppliers and
      believes that needed components are available from alternative sources if
      needed. While the Company has not experienced any sustained interruption in
      production or the supply of components and does not anticipate any difficulties
      in obtaining the components necessary to manufacture its products, there can
      be
      no assurance that the Company will continue to receive its components as needed
      and would be able to readily find alternative sources.





Quality
      control procedures are performed by the Company at its facilities and
      occasionally at its suppliers' facilities to standards set forth in the FDA's
      "Quality System Regulations." These procedures include the inspection of
      components and full testing of finished goods. The Company has a controlled
      environment where the final assembly of single-patient-use products is
      conducted.





ISO
      9001 and 13485





In
      September 1996, the quality system at CAS was first certified to ISO 9001/EN
      46001 by the accredited body, BSI Inc. This certification recognizes CAS for
      its
      achievement in implementing and maintaining a world-class quality system and
      prepares CAS for the use of the "CE" mark. The CE mark is now required for
      medical devices to gain access to the European Union common market. The FDA,
      recognizing the value of a universally accepted quality system, has patterned
      its Quality System Regulations after ISO 9001 and ISO 13485. CAS maintains
      full







Page
      8





compliance
      with the FDA Quality System Regulations. In 2003, CAS became certified to
      another universal Quality System Standard, ISO 13485, meeting a requirement
      for
      sales in Canada, and in preparation for the termination of the 1994 version
      of
      ISO 9001 which ended August 31, 2003. In December 2005, the Company’s Branford,
      Connecticut facility achieved certification to ISO13485:2003, a process oriented
      quality system update. The Jacksonville, Florida facility is working toward
      certification which is presently scheduled for May 2006.





Backlog





The
      Company’s backlog includes orders pursuant to long-term OEM agreements as well
      as orders for products shippable on a current basis. Total backlog, therefore,
      is not a meaningful indicator of future sales. As of December 31, 2005,
      approximately $2,596,000 of total backlog was scheduled for shipment within
      the
      first quarter of 2006 as compared to $1,364,000 for the first quarter of the
      prior year.





Item
      2.  Description of
      Property





The
      Company’s corporate facilities in Branford, Connecticut are situated on
      approximately 4.6 acres and comprise 24,000 square feet of office, laboratory
      and manufacturing space designed and constructed for the Company in 1998 at
      a
      total cost of approximately $1.9 million. The Company relocated to this facility
      during November 1998 and is the sole occupant. During January 1999, the Company
      entered into a nineteen-year, $1,310,000 mortgage obligation. The payments
      are
      approximately $9,750 per month. The mortgage, as amended, is secured by a first
      mortgage lien on the property.





The
      Company is leasing approximately 5,700 square feet of office and limited
      warehouse space at an adjacent facility under a three-year agreement effective
      December 1, 2004. Minimum annual rental expense is approximately $38,000
      excluding apportioned real estate taxes and certain utility costs.





The
      Company’s subsidiary, Statcorp, is leasing approximately 17,500 square feet of
      warehouse and office space under a five-year agreement effective April 1, 2004.
      Minimum annual rental expense is approximately $102,000 excluding apportioned
      real estate taxes and certain common area maintenance charges.





The
      Company believes that its premises are adequately insured.








Item
      3.  Legal
      Proceedings





No
      material legal proceedings involving the Company are pending at this
      time.








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





None.








PART
      II





Item
      5.  Market for Common
      Equity, Related Stockholder Matters and Small Business Issuer Purchases of
      Equity Securities





On
      December 15, 2005, the common stock of the Company began trading on the NASDAQ
      Capital Market, under the symbol “CASM.” Prior to that date during 2005 and
      2004, the Company’s common stock was traded on the Over-the-Counter Bulletin
      Board under the symbol “CAMY.OB.” The following table shows the high and low bid
      quotations for the Company's common stock during each quarterly period for
      the
      last two years. Over-the-Counter Bulletin Board prices reflect inter-dealer
      prices and may not represent actual transactions and do not include retail
      mark-ups, mark-downs or commissions.








Page
      9


**Quarter
                  Ended**
              
              
              **High**
              
              **Low**March
                  31, 2004
              
              
              $
              1.62
              
              $
              1.27June
                  30, 2004
              
              
              $
              1.67
              
              $
              1.21September
                  30, 2004
              
              
              $
              1.51
              
              $
              1.29December
                  31, 2004
              
              
              $
              2.95
              
              $
              1.33March
                  31, 2005
              
              
              $
              2.72
              
              $
              2.20June
                  30, 2005
              
              
              $
              4.15
              
              $
              2.33September
                  30, 2005
              
              
              $
              5.60
              
              $
              3.75December
                  31, 2005
              
              
              $
              9.10
              
              $
              4.21





The
      following table sets forth the approximate number of holders of record of common
      stock of the Company on December 31, 2005.




**Title
                  of Class**
              
              **Number of
                  Shareholders**Common
                  stock, $.004 par value
              
              2,030


No
      cash
      dividends have been declared on the Company's common stock during 2004 or
      2005.





The
      Company did not issue any shares of common stock during the fourth quarter
      of
      2005 that were not registered under the Securities Act. In addition, the Company
      did not repurchase any of its common stock during the fourth quarter of
      2005.








Item
      6.  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations





Acquisition





On
      May
      15, 2005, the Company purchased all the outstanding capital stock of Statcorp,
      Inc. The cost of the acquisition was $4.8 million. Additional cash up to
      $1,000,000 may be paid depending on Statcorp’s sales level for the twelve month
      period ending May 15, 2006. If, however, Statcorp’s sales level for such period
      are below specified amounts, the purchase price paid will be reduced in
      increments ranging from $175,000 to $700,000.





Statcorp
      develops, assembles and sells blood pressure cuffs, liquid infusion devices,
      and
      blood transfusion filters for worldwide use in the medical industry. The
      acquisition enhances the Company’s position in the non-invasive blood pressure
      monitoring market by enabling it to offer a complete, low cost, high performance
      accessories solution to its customers to compliment its proprietary monitoring
      products and OEM technologies. Statcorp also enjoys certain key OEM, private
      label, and distributor relationships which the Company may seek to expand to
      its
      other product lines.





Results
      of Operations





**Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004**





Net
      income for 2005 was $1,815,000 or $0.15 per common share on a diluted basis
      compared to $1,205,000 or $0.11 per diluted common share for 2004. During the
      fourth quarter of 2005, the Company recorded a $401,000 credit from the
      curtailment of its retirement benefit plan. Pre-tax income for 2005 was affected
      by a significant increase in research and development (“R&D”) expenses of
      $599,000 primarily pertaining to the development of the Company’s Near-Infrared
      Spectroscopy (“NIRS”) monitoring device. Reductions in selling, general and
      administrative (“S,G&A”) expenses as a percentage of sales contributed to
      the increase in operating income to $2,723,000 for 2005 compared to operating
      income of $1,708,000 in 2004.








Page
      10





Revenues
      for 2005 increased 34% or $6,825,000 to $26,884,000 from $20,059,000 for 2004.
      The growth in revenues was led by sales of Statcorp products which accounted
      for
      $4,386,000 of the increase. Sales of blood pressure products increased 34%
      and
      accounted for 45% of the increase in revenues. Sales to domestic customers
      including the Department of Veterans Affairs (“VA”) under the Company’s
      multi-year contract and sales to the veterinary market under a private-label
      distribution arrangement were primarily responsible for the increase in blood
      pressure product sales. Increases in neonatal product sales and service revenues
      also contributed to the overall growth in revenue. Partially offsetting the
      increase were reductions in sales of Apnea monitors and accessories.





Cost
      of
      products sold as a percentage of net revenues increased to 56.1% for 2005 from
      54.4% for the prior year. The increase in cost of products sold as a percentage
      of revenue is related to the lower average gross margins on products sold by
      Statcorp. Cost of products sold for 2005 includes a net credit of $243,000
      which
      includes a $301,000 credit related to the curtailment gain on the retirement
      benefit plan and $57,000 of retirement benefit expenses. 2004 includes $151,000
      of retirement benefit expenses. Cost of products sold for 2005 excluding
      Statcorp and net retirement benefit credits were unchanged from 2004. The
      Company is continuing to pursue product cost reductions through improvements
      in
      manufacturing processes and inventory control, capital expenditures to replace
      aged equipment, adoption of company-wide quality initiatives and increases
      in
      employee training.





R&D
      expenses increased $599,000 or 58% to $1,631,000 for 2005 from $1,032,000 for
      2004. R&D expenses are reported net of reimbursements received from the
      National Institutes of Health (“NIH”) primarily pertaining to the Company’s
      development of its Near-Infrared Spectroscopy (“NIRS”) technology. Amounts
      reimbursed from the NIH, including accruals, for 2005 and 2004 were $531,000
      and
      $521,000, respectively. R&D expenses for 2005 and 2004 before reimbursement
      approximated 8.0% and 7.8% of revenues, respectively. R&D expenses before
      reimbursement reflected an increase of 39% for 2005 as compared to the prior
      year. Increased expenditures for salaries and related benefits, engineering
      project materials, clinical expenses and outside services were responsible
      for
      the increases in spending.





Selling,
      General and Administrative (“S,G&A”) expenses increased $1,176,000 or 19% to
      $7,439,000 or 27% of revenues for 2005 from $6,263,000 or 31% of revenues for
      2004. Sales, marketing and administrative expenses of Statcorp accounted for
      $781,000 of the increase in expenses. General and administrative expenses
      (“G&A”) accounted for $180,000 or 7.2% of the increase in S,G&A expenses
      due to increases in legal fees, shareholder and investor communication expenses
      including NASDAQ listing fees and post-transaction travel and entertainment
      expenses pertaining to the Statcorp acquisition, and were partially offset
      by
      reductions in bad debt expense, depreciation and amortization and bonuses.
      G&A expenses for 2005 included a reduction in retirement benefit expenses of
      $112,000 compared to expenses of $51,000 for 2004. Increases in marketing
      salaries and related fringe benefits were primarily responsible for the
      remainder of the increase in S,G&A expenses.





Net
      interest expense increased $95,000 or 132% to $167,000 for 2005 from $72,000
      for
      the prior year. Interest expense associated with the Statcorp acquisition loan
      accounted for $157,000 of the overall interest expense. Mortgage related
      interest expense partially offset by interest income from excess cash balances
      primarily accounted for the remainder of the net interest expense.





Income
      tax expense for 2005 was $741,000 compared to income tax expense of $430,000
      for
      2004. The provision for income taxes for 2005 represents an effective tax rate
      of 29% which is lower than the statutory rate primarily as a result of R&D
      and other tax credits. The provision for income taxes for 2004 represents an
      effective tax rate of approximately 26% resulting primarily from R&D and
      other tax credits and realized net operating loss carry forwards.




Financial
      Condition, Liquidity and Capital Resources





The
      Company’s cash and cash equivalents were $1,893,000 at December 31, 2005
      compared to $1,973,000 at December 31, 2004. Working capital decreased $556,000
      to $5,550,000 at December 31, 2005 from $6,106,000 at December 31, 2004. The
      Company’s current ratio declined to 2.9 to 1 from 4.0 to 1 partially due to the
      rise in inventory and associated accounts payable and to the effects of
      consolidating Statcorp as of May 15, 2005 which had lower levels of working
      capital and related ratios.








Page
      11





Cash
      provided by operations for 2005 was $1,150,000 compared to $2,689,000 for the
      prior year. The decrease resulted primarily from an increase in inventory and
      the non-cash curtailment gain on the Company’s retirement benefit plan.





Cash
      used
      by investing activities was $5,480,000 for 2005 compared to $506,000 for 2004
      reflecting $450,000 of increased expenditures for equipment and intangible
      assets  and
      $4,524,000 (net of cash acquired of $250,000) for the purchase of Statcorp.
      Equipment purchases of $657,000 were primarily related to the acquisition and
      installation of the Company’s new enterprise resource planning system and
      related hardware upgrades, leasehold improvements related to a three year
      facilities lease agreement effective December 2004, and manufacturing equipment.





Net
      cash
      provided by financing activities was $4,249,000 for 2005 compared to $1,090,000
      used for 2004. During May 2005, the Company entered into a fixed rate seven
      year
      obligation with its bank for $4,200,000 to finance a portion of the Statcorp
      acquisition. During 2005, the Company repaid $389,000 of long-term debt and
      notes payable compared to payments of $1,136,000 during 2004 which included
      $582,000 of unscheduled term loan payments. During the second quarter of 2004,
      the Company purchased 86,000 shares of its common stock at fair value from
      a
      former employee for $101,500.





During
      August 2005, the Company renewed its $3,000,000 line-of-credit with its bank
      lender which expired on August 31, 2005 to August 31, 2007. Borrowings under
      the
      line-of-credit are payable on demand and bear interest at the bank’s base rate
      (7.25% at December 31, 2005) which may change from time to time. During 2005,
      there were no borrowings under the line of credit. Under the terms of the
      related agreement, the Company is permitted to borrow based on accounts
      receivable and inventories according to pre-established criteria. The bank
      has a
      first security interest on substantially all assets of the Company.





During
      2006, the Company intends to significantly increase its spending associated
      with
      the NIRS cerebral oximeter, scheduled for launch by the end of the year. Such
      spending includes additional R&D, on-going clinical studies, marketing
      expenses, manufacturing start-up costs and capital expenditures. The Company
      believes that its sources of funds consisting of cash and cash equivalents,
      cash
      flow from operations and funds available from the revolving credit facility
      will
      be sufficient to meet its current and expected short-term requirements.
      Management believes that, if needed, it would be able to find additional sources
      of funds on commercially acceptable terms which may be required to support
      the
      Company’s long-term initiatives.





The
      following table sets forth a summary of the Company’s cash commitments under
      contractual obligations as of December 31, 2005:




Contractual
                Obligations
              
              
              Total
              
              One
                  Year
                or
                  Less
              
              2
                  -
                  4
                Years
              
              5
                  -
                  7
                Years
              
              More
                  Than
                Seven
                  YearsLong-term
                  debt
              
              
              $
              4,990,317
              
              $
              574,115
              
              $
              1,943,752
              
              $
              1,953,720
              
              $
              518,730Notes
                  payable
              
              
              
              206,359
              
              
              206,359
              
              
              —
              
              
              —
              
              
              —Operating
                  leases
              
              
              
              361,469
              
              
              159,877
              
              
              195,787
              
              
              5,805
              
              
              —Retirement
                  benefit obligation, as amended
              
              
              
              8,151
              
              
              8,151
              
              
              —
              
              
              —
              
              
              —$
              5,566,296
              
              $
              948,502
              
              $
              2,139,539
              
              $
              1,959,525
              
              $
              518,730


Off-Balance
      Sheet Arrangements





The
      Company has no off-balance sheet arrangements other than operating leases for
      office and warehouse space.








Page
      12





Critical
      Accounting Policies





The
      Company's financial statements have been prepared in accordance with generally
      accepted accounting principles in the United States. In preparing the financial
      statements, the Company is required to make estimation judgments. Such judgments
      are based upon historical experience and certain assumptions that are believed
      to be reasonable in the particular circumstances. Those judgments affect both
      balance sheet and income statement accounts and disclosures. The Company
      evaluates its assumptions on an ongoing basis by comparing actual results with
      its estimates. Actual results may differ from the original estimates. The
      following accounting policies are those that the Company believes to be most
      critical to the preparation of its financial statements.





Inventory
      Valuation --The
      Company's inventories are stated at the lower of cost or market. The Company
      provides allowances on inventories for any material that has become obsolete
      or
      may become unsaleable based on estimates of future demand and sale price in
      the
      market. Judgments with respect to saleability and usage of inventories,
      estimated market value, and recoverability upon sale are complex and subjective.
      Such assumptions are reviewed periodically and adjustments are made, as
      necessary, to reflect changed conditions.





Deferred
      Income Tax Assets --The
      Company has recorded deferred income tax assets for the estimated benefit of
      future tax deductions on inventories, property and equipment, retirement benefit
      obligation and other accruals and various tax credits. Based on the Company’s
      projection of future taxable income and certain prudent tax planning strategies,
      management believes its deferred income tax assets will be realized and no
      valuation allowance is necessary. Should circumstances change and the Company
      determine that some or all of the deferred income tax assets would not be
      realized, a valuation allowance would be recorded resulting in a charge to
      operations in the period the determination is made.




Accrued
      Warranty Costs --The
      Company warranties its products for up to three years and records the estimated
      cost of such product warranties at the time the sale is recorded. Estimated
      warranty costs are based upon actual past experience of product returns and
      the
      related estimated cost of labor and material to make the necessary repairs.
      If
      actual future product return rates or the actual costs of material and labor
      differ from the estimates, adjustments to the accrued warranty liability would
      be made.





Recent
      Accounting Pronouncements





In
      December 2004, the FASB released its final revised standard, FAS No. 123R, *Share-Based
      Payment* .
      SFAS
      123R requires that a public entity measure the cost of equity based service
      awards based on the grant-date fair value of the award. That cost will be
      recognized over the period during which an employee is required to provide
      service in exchange for the award or the vesting period. No compensation cost
      is
      recognized for equity instruments for which employees do not render the
      requisite service.





FAS
      No. 123R does not mandate an option-pricing model to be used in determining
      fair value, but does require that the model selected consider certain variables.
      Different models would result in different valuations. Regardless of the method
      selected, significant judgment is required for some of the valuation variables.
      The most significant of these is the volatility of our common stock and the
      estimated term over which our stock options will be outstanding. The valuation
      calculation is sensitive to even slight changes in these estimates.





The
      Company is required to adopt FAS No. 123R on January 1, 2006. Although there
      will be no impact to our overall cash flows, the adoption of FAS No. 123R
      will have a material impact on our results of operations.








Page
      13





Item
      7.  Financial
      Statements





PageReport
                  of UHY LLP, Independent Registered Public Accounting Firm
              
              F-1Financial
                  StatementsConsolidated
                  Balance Sheets as of December 31, 2005 and 2004
              
              F-2Consolidated
                  Statements of Operations for the Years Ended December 31, 2005
                  and 2004
              
              F-3Consolidated
                  Statements of Changes in Shareholders' Equity for the Years
                  Ended December
                  31, 2005 and 2004
              
              F-4Consolidated
                  Statements of Cash Flows for the Years Ended December 31, 2005
                  and 2004
              
              F-5Notes
                  to Consolidated Financial Statements
              
              F-6
                  to F-17










F-1











**Report
      of UHY LLP, Independent Registered Public Accounting Firm**








Shareholders
      and Board of Directors


CAS
      Medical Systems, Inc :








We
      have
      audited the accompanying consolidated balance sheets of CAS Medical Systems,
      Inc. (the “Company”) as of December 31, 2005 and 2004 and the related
      consolidated statements of operations, changes in shareholders' equity, and
      cash
      flows for years then ended. 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 audit.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Standards 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
      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 consolidated financial position of the Company at
      December 31, 2005 and 2004 and the consolidated results of its operations and
      its cash flows for the year then ended in conformity with accounting principles
      generally accepted in the United States of America.





/s/ 
      UHY LLP











New
      Haven, Connecticut


March
      6,
      2006








F-2





**CAS
      MEDICAL SYSTEMS, INC.**


Consolidated
      Balance Sheets


As
      of
      December 31, 2005 and 2004





**ASSETS**
            
            **2005**
            
            **2004**CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            1,892,584
            
            $
            1,973,452Accounts
                receivable, less allowance of $75,000 in 2005 and
                $94,000 in 2004
            
            
            3,218,963
            
            
            2,929,167Inventories
            
            
            5,592,807
            
            
            2,662,686Deferred
                income taxes
            
            
            318,262
            
            
            250,342Other
                current assets
            
            
            494,182
            
            
            355,367Total
                current assets
            
            
            11,516,798
            
            
            8,171,014PROPERTY
                AND EQUIPMENT:Land
                and improvements
            
            
            535,000
            
            
            535,000Buildings
                and improvements
            
            
            1,584,159
            
            
            1,473,698Machinery
                and equipment
            
            
            3,698,457
            
            
            2,908,3765,817,616
            
            
            4,917,074Accumulated
                depreciation
            
            
            (3,080,160
            )
            
            (2,649,031
            )Property
                and equipment, net
            
            
            2,737,456
            
            
            2,268,043INTANGIBLE
                AND OTHER ASSETS, net
            
            
            360,186
            
            
            167,990GOODWILL
            
            
            3,079,021
            
            
            —DEFERRED
                INCOME TAXES
            
            
            224,620
            
            
            385,935Total
                assets
            
            $
            17,918,081
            
            $
            10,992,982





**LIABILITIES
                AND SHAREHOLDERS' EQUITY**CURRENT
                LIABILITIES:Current
                portion of long-term debt
            
            $
            574,115
            
            $
            58,929Notes
                payable
            
            
            206,359
            
            
            —Accounts
                payable
            
            
            2,167,396
            
            
            734,939Income
                taxes payable
            
            
            18,999
            
            
            417,130Accrued
                expenses
            
            
            1,068,035
            
            
            854,410Total
                current liabilities
            
            
            4,034,904
            
            
            2,065,408LONG-TERM
                DEBT, less current portion
            
            
            4,416,202
            
            
            1,034,495RETIREMENT
                BENEFIT OBLIGATION
            
            
            349,567
            
            
            736,988COMMITMENTS
                AND CONTINGENCIES (Note 13)SHAREHOLDERS'
                EQUITY:Series
                A cumulative convertible preferred stock, $.001 parvalue
                per share, 1,000,000 shares authorized, no sharesissued
                or outstanding
            
            
            —
            
            
            —Common
                stock, $.004 par value per share, 19,000,000shares
                authorized, 10,027,860 and 9,959,173 shares issuedas
                of December 31, 2005 and 2004, respectively,including
                shares held in treasury
            
            
            40,456
            
            
            39,837Common
                stock held in treasury, at cost - 86,000 shares
            
            
            (101,480
            )
            
            (101,480
            )Additional
                paid-in capital
            
            
            3,176,911
            
            
            3,031,387Retained
                earnings
            
            
            6,001,521
            
            
            4,186,347Total
                shareholders' equity
            
            
            9,117,408
            
            
            7,156,091Total
                liabilities and shareholders' equity
            
            $
            17,918,081
            
            $
            10,992,982







See
      accompanying notes.








F-3


**CAS
      MEDICAL SYSTEMS, INC.**


Consolidated
      Statements of Operations


For
      the
      Years Ended December 31, 2005 and 2004






**2005**
            
            **2004****NET
                SALES**
            
            $
            26,884,421
            
            $
            20,059,272**OPERATING
                EXPENSES:**Cost
                of product sales
            
            
            15,092,322
            
            
            11,055,912Research
                and development
            
            
            1,630,681
            
            
            1,032,445Selling,
                general and administrative
            
            
            7,438,511
            
            
            6,263,35224,161,514
            
            
            18,351,709Operating
                income
            
            
            2,722,907
            
            
            1,707,563Interest
                expense
            
            
            166,613
            
            
            72,432Income
                before income taxes
            
            
            2,556,294
            
            
            1,635,131Income
                taxes
            
            
            741,120
            
            
            430,246**NET
                INCOME**
            
            $
            1,815,174
            
            $
            1,204,885****
              **WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:**Basic
            
            
            9,941,670
            
            
            9,796,684Diluted
            
            
            11,729,347
            
            
            11,128,643**EARNINGS
                PER COMMON SHARE:**Basic
            
            $
            0.18
            
            $
            0.12Diluted
            
            $
            0.15
            
            $
            0.11





See
      accompanying notes.








F-4


**CAS
      MEDICAL SYSTEMS, INC.**


Consolidated
      Statements of Changes in Shareholders' Equity


For
      the
      Years Ended December 31, 2005 and 2004





**Common
                Stock****Issued**
            
            **Held
                in Treasury**
            
            **Paid-in**
            
            **Retained****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Earnings**
            
            **Total**BALANCE,
                December 31, 2003
            
            
            9,712,577
            
            $
            38,851
            
            
            —
            
            
            —
            
            $
            2,870,769
            
            $
            2,981,462
            
            $
            5,891,082Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,204,885
            
            
            1,204,885Common
                stock issued uponexercise
                of stock options
            
            
            246,596
            
            
            986
            
            
            
            
            
            
            
            
            146,651
            
            
            
            
            
            147,637Purchase
                of common stock fortreasury,
                from former employeeat
                fair value
            
            
            
            
            
            
            
            
            86,000
            
            $
            (101,480
            )
            
            
            
            
            
            
            
            (101,480
            )Tax
                benefit from exercise ofstock
                options
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,967
            
            
            
            
            
            13,967BALANCE,
                December 31, 2004
            
            
            9,959,173
            
            
            39,837
            
            
            86,000
            
            
            (101,480
            )
            
            3,031,387
            
            
            4,186,347
            
            
            7,156,091Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,815,174
            
            
            1,815,174Common
                stock issued uponexercise
                of stock options
            
            
            124,375
            
            
            498
            
            
            
            
            
            
            
            
            99,063
            
            
            
            
            
            99,561Common
                stock issued underStock
                purchase plan
            
            
            30,312
            
            
            121
            
            
            
            
            
            
            
            
            46,461
            
            
            
            
            
            46,582BALANCE,
                December 31, 2005
            
            
            10,113,860
            
            $
            40,456
            
            
            86,000
            
            $
            (101,480
            )
            $
            3,176,911
            
            $
            6,001,521
            
            $
            9,117,408







See
      accompanying notes.







F-5


**CAS
      MEDICAL SYSTEMS, INC.**


Consolidated
      Statements of Cash Flows


For
      the
      Years Ended December 31, 2005 and 2004





**2005**
            
            **2004****OPERATING
                ACTIVITIES:**Net
                income
            
            $
            1,815,174
            
            $
            1,204,885Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            542,073
            
            
            503,108Deferred
                income taxes
            
            
            36,940
            
            
            80,691Provision
                for doubtful accounts
            
            
            4,000
            
            
            38,000Curtailment
                gain on retirement benefit plan
            
            
            (400,739
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            126,558
            
            
            339,892Inventories
            
            
            (1,409,062
            )
            
            (392,070
            )Other
                current assets
            
            
            (122,462
            )
            
            134,084Accounts
                payable, income taxes and accrued expenses
            
            
            544,296
            
            
            577,866Retirement
                benefit obligation
            
            
            13,318
            
            
            202,089Net
                cash provided by operating activities
            
            
            1,150,096
            
            
            2,688,545**INVESTING
                ACTIVITIES:**Purchase
                of intangible assets
            
            
            (299,214
            )
            
            (80,722
            )Purchase
                of business, net of cash acquired of $250,060
            
            
            (4,524,249
            )Expenditures
                for property and equipment
            
            
            (656,896
            )
            
            (425,712
            )Net
                cash used by investing activities
            
            
            (5,480,359
            )
            
            (506,434
            )**FINANCING
                ACTIVITIES:**Borrowing
                under short-term notes payable
            
            
            292,267
            
            
            —Repayments
                of short-term notes payable
            
            
            (85,908
            )
            
            (219,619
            )Proceeds
                from long-term debt
            
            
            4,200,000
            
            
            —Repayments
                of long-term debt
            
            
            (303,107
            )
            
            (916,284
            )Purchase
                of common stock for treasury
            
            
            —
            
            
            (101,480
            )Proceeds
                from issuance of common stock
            
            
            146,143
            
            
            147,637Net
                cash provided (used) by financing activities
            
            
            4,249,395
            
            
            (1,089,746
            )Net
                change in cash and cash equivalents
            
            
            (80,868
            )
            
            1,092,365Cash
                and cash equivalents, beginning of year
            
            
            1,973,452
            
            
            881,087CASH
                AND CASH EQUIVALENTS, END OF YEAR
            
            $
            1,892,584
            
            $
            1,973,452**SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATION:**Cash
                paid during the year for interest
            
            $
            148,656
            
            $
            90,798Cash
                  paid (received) during the year forincome taxes, net of
                  refunds
            
            $
            1,164,873
            
            $
            (193,798
            )






See
      accompanying notes.





F-6




**CAS
      MEDICAL SYSTEMS, INC.**


Notes
      to
      Consolidated Financial Statements





**(1)** **THE
      COMPANY**





CAS
      Medical Systems, Inc. (“CAS Medical”) and its wholly-owned subsidiary, Statcorp,
      Inc. (“Statcorp”) operate as one reportable business segment. Together, CAS
      Medical and Statcorp (the “Company”) develop, manufacture and distribute
      diagnostic equipment and medical products for use in the healthcare and medical
      industry. These products are sold by the Company through its own sales force,
      via distributors and pursuant to original equipment manufacturer agreements
      both
      internationally and in the United States. The Company's operations and
      manufacturing facilities are located in the United States. During 2005 and
      2004,
      the Company had sales to one customer which accounted for approximately 14%
      and
      18%, respectively, of net sales. The Company generated revenues from
      international sales of approximately $5.0 million in 2005 and $4.5 million
      in
      2004. In the normal course of business the Company grants credit to customers
      and does not require collateral. Credit losses are provided for in the period
      the related sales are recognized based on experience and an evaluation of the
      likelihood of collection. Credit losses have been within management’s
      expectations.





**(2)** **ACQUISITION**





On
      May
      15, 2005, CAS Medical purchased all the outstanding capital stock of Statcorp,
      Inc. Statcorp develops, assembles and sells blood pressure cuffs, liquid
      infusion devices, and blood transfusion filters for worldwide use in the medical
      industry. The acquisition enhances CAS Medical’s position in the non-invasive
      blood pressure monitoring market by enabling it to offer a complete, low cost,
      high performance accessories solution to its customers to compliment its
      proprietary monitoring products and OEM technologies. Statcorp also enjoys
      certain key OEM, private label, and distributor relationships which CAS Medical
      may seek to expand to its other product lines.





In
      2005,
      CAS Medical acquired Statcorp, Inc. for cash. Additional cash up to $1,000,000
      may be paid depending on Statcorp’s sales level for the twelve month period
      ending May 15, 2006. If, however, Statcorp’s sales level for such period are
      below specified amounts the purchase price paid will be reduced in increments
      ranging from $175,000 to $700,000.





The
      cost
      of the Statcorp acquisition has been allocated to the assets acquired and the
      liabilities assumed based on an internal valuation of their estimated fair
      values as follows:





Cash
            
            $
            250,060Accounts
                receivable
            
            
            420,354Inventories
            
            
            1,521,059Other
                current assets
            
            
            16,353Property
                and equipment
            
            
            243,646Intangible
                assets, other than goodwill
            
            
            3,926Goodwill
            
            
            3,079,021Accounts
                payable
            
            
            (579,067
            )Accrued
                expenses
            
            
            (46,053
            )Income
                taxes
            
            
            (62,563
            )Deferred
                income taxes
            
            
            (56,455
            )Capital
                lease obligations
            
            
            (15,972
            )$
            4,774,309





None
      of
      the amount allocated to goodwill is expected to be deductible for tax purposes.
      The consolidated results of operations include Statcorp from its acquisition
      date. The final allocation of the cost of the Statcorp acquisition will be
      completed by May 16, 2006.








F-7





Unaudited
      pro forma results assuming the acquisition of Statcorp occurred as of the
      beginning of the periods presented follows:





**2005**
            
            **2004**Net
                sales
            
            $
            29,676,900
            
            $
            25,774,700Net
                income
            
            $
            1,995,500
            
            $
            1,315,500Per
                share:Basic
            
            $
            0.20
            
            $
            0.13Diluted
            
            $
            0.17
            
            $
            0.12





**(3)** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**




**Use of estimates**





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 disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Estimates that are particularly sensitive to change
      in the near term are the inventory valuation allowances, capitalized software
      development costs, allowance for doubtful accounts and warranty accrual. Actual
      results could differ from those estimates.





**Principles
      of Consolidation**





The
      consolidated financial statements include the accounts of CAS Medical and its
      wholly-owned subsidiary. All intercompany accounts and transactions are
      eliminated in consolidation.




**Cash and cash equivalents**





The
      Company considers all highly liquid investments with an original maturity of
      three months or less to be cash equivalents. The Company has deposits in a
      limited number of financial institutions with federally insured limits. Cash
      (including cash equivalents) at these institutions is normally in excess of
      the
      insured limits. However, the Company believes that the institutions are
      financially sound and there is only nominal risk of loss.





**Inventories**





Inventories
      are stated at the lower of first-in, first-out cost or market.





**Property
      and equipment**





Property
      and equipment are stated at cost. Depreciation is computed using the
      straight-line method based on the estimated useful lives of the assets, which
      range from two to five years for machinery and equipment, and twenty years
      for
      building and improvements. Maintenance and repairs are charged to expense when
      incurred.





Depreciation
      expense on property and equipment was $431,129 in 2005 and $381,166 in
      2004.





**Long-lived
      assets**





The
      Company reviews its long-lived assets for impairment at least annually or
      whenever events or changes in circumstances indicate that the carrying amount
      of
      an asset may not be recoverable. The Company believes that the carrying amounts
      of its long-lived assets are fully recoverable. Accordingly, no impairment
      loss
      has been reflected in the Company's reported results of operations for either
      2005 or 2004.








F-8





**Intangible
      and other assets**




Intangible
                  and other assets consist of:**2005**
              
              **2004**Patents,
                  purchased technology and other
              
              $
              356,018
              
              $
              185,083Deferred
                  finance charges
              
              
              26,484
              
              
              26,484Capitalized
                  software
              
              
              160,063
              
              
              139,870542,565
              
              
              351,437Accumulated
                  amortization
              
              
              (182,379
              )
              
              (183,447
              )$
              360,186
              
              $
              167,990





Patents
      and purchased technology costs are amortized over their estimated useful lives.
      Deferred finance charges are amortized over the term of the related debt. Costs
      associated with the development of new external use software products are
      expensed as incurred until technological feasibility has been established in
      accordance with SFAS No. 86 “Accounting for the Costs of Computer Software to be
      Sold, Leased or Otherwise Marketed.” Technological feasibility is demonstrated
      by the completion of a detailed design plan. Capitalization ceases when the
      product is available for general release to customers. Capitalized costs are
      amortized over their estimated useful lives. Amortization expense was $110,944
      in 2005 and $121,942 in 2004.





Approximate
          amortization expense of intangible assets as of December 31, 2005 over
          the next
          five years follows:





2006
            
            $
            60,0002007
            
            
            49,7002008
            
            
            32,8002009
            
            
            29,7002010
            
            
            15,200$
            187,400





**Revenue
      and
      accounts receivable recognition**





Revenues
      from sales and accounts receivable are recognized when evidence of an
      arrangement exists, delivery has occurred based on shipping terms (which are
      generally FOB shipping point for sales within the United States and EX-Works
      for
      export sales), the selling price is fixed and determinable, and collectibility
      is reasonably assured. Accounts receivable are charged to the allowance for
      doubtful accounts when deemed uncollectible.





**Income
      taxes**





The
      Company recognizes deferred income tax assets and liabilities for future tax
      consequences resulting from differences between the book and tax bases of
      existing assets and liabilities. A valuation allowance is provided for that
      portion of deferred income tax assets which may not be realized.





**Warranty
      costs**





The
      Company warrants some of its products against defects and failures for up to
      three years and records the estimated cost of such warranties at the time the
      sale is recorded. Estimated warranty costs are based upon actual past
      experiences of product returns and the related estimated cost of labor and
      material to make the necessary repairs.








F-9





A
      summary
      of the changes in the Company’s warranty accrual follows:





**2005**
            
            **2004**Beginning
                balance
            
            $
            122,000
            
            $
            122,000Provisions
            
            
            91,234
            
            
            128,964Warranty
                costs incurred
            
            
            (91,234
            )
            
            (128,964
            )Ending
                balance
            
            $
            122,000
            
            $
            122,000








**Research
      and development costs**





The
      Company expenses all research and development costs as incurred. Research and
      development expense includes, among other expenses, direct costs for salaries,
      employee benefits, professional services, materials and facility related
      expenses.





The
      Company has received various grants which support its research and development
      efforts. In accordance with the terms of these grants, the Company is being
      reimbursed for certain qualifying expenditures under the agreement. F unding
      provided to the Company is being recorded as a reduction in R&D expenses.
      The Company recognizes the reimbursement on an accrual basis as the qualifying
      costs are incurred.





**Advertising
      costs**





Non-direct
      response advertising costs are expensed as incurred and include product
      promotion, samples, meetings and conventions, and print media. Advertising
      expense was $594,000 in 2005 and $589,000 in 2004.





**Earnings
      per common share**





The
      Company computes earnings per common share in accordance with SFAS No. 128,
      "Earnings Per Share." Under SFAS No. 128, basic earnings per share is calculated
      by dividing net income by the weighted average number of shares of common stock
      outstanding during the year. Diluted earnings per share assumes the exercise
      or
      conversion of dilutive securities using the treasury stock method.





A
      summary
      of the denominators used to compute basic and diluted earnings per share
      follow:





**2005**
            
            **2004**Weighted
                  average shares outstanding - used to compute basic earnings per
                  share
            
            
            9,941,670
            
            
            9,796,684Dilutive
                  effect of outstanding warrants and
                  options
            
            
            1,787,677
            
            
            1,331,959Weighted
                average shares of dilutive securities outstanding -
                used to compute diluted earnings
                per share
            
            
            11,729,347
            
            
            11,128,643





**Reclassifications**




Certain
          prior year balances for net sales, cost of sales, and selling, general
          and
          administrative expenses have been reclassified to conform to the current
          year
          presentation. The reclassification relates to costs for outbound freight.
          Reimbursed outbound freight costs by customers are now included in net
          sales
          rather than as a reduction of expenses and outbound freight costs are now
          included in cost of sales rather than selling, general and administrative
          expenses.








F-10




**Stock-based
          compensation**




The
          Company grants qualified stock options for a fixed number of shares to
          employees
          with an exercise price equal to the fair market value of the shares at
          the date
          of the grant. The Company has adopted the disclosure only provisions of
          SFAS No.
          123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148,
“Accounting for Stock-Based Compensation Transition and
          Disclosure”.





SFAS
      No.
      123, "Accounting for Stock-Based Compensation," encourages, but does not
      require, companies to record compensation cost for stock-based employee
      compensation plans at fair value. The Company has chosen to continue to account
      for stock-based compensation using the intrinsic value method prescribed in
      Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
      Employees," and related interpretations where, generally, when the exercise
      price of stock options equals the market price of the underlying stock on


the
      date
      of grant, no compensation expense is recorded. Pro forma information using
      the
      fair value method to record stock-based compensation cost follows:





**2005**
            
            **2004**Net
              income:As
                reported
            
            $
            1,815,176
            
            $
            1,204,885Compensation
                expense for stockoptions
                based on fair value
            
            
            485,395
            
            
            147,428Pro
                forma
            
            $
            1,329,781
            
            $
            1,057,457Earnings
              per share:As
                reported - Basic
            
            $
            0.18
            
            $
            0.12Pro
                forma - Basic
            
            
            0.13
            
            
            0.11As
                reported - Diluted
            
            
            0.15
            
            
            0.11Pro
                forma - Diluted
            
            
            0.11
            
            
            0.10





The
      fair
      value of each option is estimated on the date of grant using the Black-Scholes
      option pricing model with the following weighted-average assumptions used for
      grants in 2005 and 2004: risk-free interest rates of 4.4% and 4.6%; expected
      lives of 7 years; dividend yield of 0% and expected volatility of 130% and
      136%,
      respectively.






**Fair
          value of financial instruments**





The
          carrying value of long-term debt approximates its fair value based on current
          market conditions and risks. The carrying amounts of the Company’s other
          financial instruments approximate their fair value.





**New
      accounting pronouncements**




FAS
      No.
      123R, “Share-Based Payment” requires that a public entity measure the cost of
      equity based service awards based on the grant-date fair value of the award.
      That cost will be recognized over the period during which an employee is
      required to provide service in exchange for the award or the vesting period.
      No
      compensation cost is recognized for equity instruments for which employees
      do
      not render the requisite service. A public entity will initially measure the
      cost of liability based service awards based on current fair value. The fair
      value of those awards will be re-measured subsequently at each reporting date
      through the settlement date. Changes in fair value during the requisite period
      will be recognized as compensation cost over the period. The Company is required
      to adopt FAS No. 123R on January 1, 2006. Although there will be no impact
      on
      the Company’s cash flows, the adoption of FAS No. 123R will have significant
      impact on its operating results.





The
      Company does not believe that there are any other new accounting pronouncements
      that the Company is required to adopt that are likely to have at least some
      effect on the Company’s future financial statements.








F-11




**(4)** **ALLOWANCE
      FOR DOUBTFUL ACCOUNTS**




Changes
      in the
      allowance for doubtful accounts follow:





**2005**
            
            **2004**Balance
                at beginning of year
            
            $
            94,000
            
            $
            50,000Provision
            
            
            4,000
            
            
            38,000Accounts
                recovered (written off)
            
            
            (23,000
            )
            
            6,000Balance
                at end of year
            
            $
            75,000
            
            $
            94,000








**(5)** **INVENTORIES**




Inventories
      consist of:





**2005**
            
            **2004**Raw
                materials
            
            $
            1,140,400
            
            $
            1,727,578Work
                in process
            
            
            —
            
            
            144,628Finished
                goods
            
            
            4,452,407
            
            
            790,480$
            5,592,807
            
            $
            2,662,686








**(6)** **FINANCING
      ARRANGEMENTS**





**Line-of-credit**





During
      August 2005, the Company renewed its $3,000,000 line-of-credit with its bank
      to
      September 2007. Borrowings under the line-of-credit are payable on demand and
      bear interest at the bank's base rate which may change from time to time (7.25%
      at December 31, 2005). During 2005 there were no borrowings under the
      line-of-credit. Under the terms of the related agreement, the Company is
      permitted to borrow based on accounts receivable and inventories according
      to
      pre-established criteria. Substantially all assets of the Company are pledged
      as
      collateral for borrowings under the line-of-credit.





**Notes
      payable**





The
      Company financed the premiums for its directors and officers and property
      casualty insurance policies during 2005 with short-term borrowings of $292,267.
      The outstanding balance as of December 31, 2005 of $206,359 is due in monthly
      installments of $34,393 including interest at 5.22% to July 2006.


**Long-term
      debt**





Long-term
                debt consists of:
            
            **2005**
            
            **2004**Mortgage
                payable to a bank in monthly installments of $9,750, including interest
                at
                5.45%, as amended, to January 2018
            
            $
            1,034,495
            
            $
            1,093,424Note
                payable to a bank in monthly installments of
                $61,533, including interest at 6.0% to
                May 2012
            
            
            3,955,822
            
            
            —4,990,317
            
            
            1,093,424Less
                current portion
            
            
            574,115
            
            
            58,929$
            4,416,202
            
            $
            1,034,495








F-12





Scheduled
      principal maturities of long-term debt follow:


2006
                
                $
                574,1152007
                
                
                609,6152008
                
                
                646,8232009
                
                
                687,3142010
                
                
                729,822Thereafter
                
                
                1,742,628$
                4,990,317


Substantially
      all assets are pledged as collateral for long-term debt.





**(7)** **ACCRUED
      EXPENSES**





Accrued
      expenses consist of:





**2005**
            
            **2004**Payroll
            
            $
            214,402
            
            $
            163,732Professional
                fees
            
            
            218,808
            
            
            58,775Warranty
            
            
            122,000
            
            
            122,000Bonuses
            
            
            300,000
            
            
            315,000Customer
                refunds
            
            
            53,514
            
            
            83,364Other
            
            
            159,311
            
            
            111,539$
            1,068,035
            
            $
            854,410




**(8)** **STOCK
      OPTIONS AND WARRANTS AND STOCK PURCHASE PLAN**





In
      June
      2004, the Company’s stockholders approved the CAS Medical Systems, Inc. 2003
      Equity Incentive Plan (the "Incentive Plan"). Under the Incentive Plan,
      1,000,000 shares of common stock have been reserved for issuance. Awards that
      may be granted under the Incentive Plan include options, restricted stock,
      restricted stock units, and other stock-based awards. The purposes of the
      Incentive Plan are to make available to our key employees and directors, certain
      compensatory arrangements related to growth in the value of our stock so as
      to
      generate an increased incentive to contribute to the Company’s financial success
      and prosperity; to enhance the Company’s ability to attract and retain
      exceptionally qualified individuals whose efforts can affect the Company’s
      financial growth and profitability; and align in general the interests of our
      employees and directors with the interests of our stockholders. The Incentive
      Plan is administered by the Compensation Committee of the Board of Directors,
      which in turn determines the employees, officers and directors subject to
      receive awards and the terms and conditions of these awards.





During
      2005, under the Incentive Plan, options for 317,500 shares of common stock
      were
      granted to the Company’s employees and options to purchase 30,000 shares were
      cancelled, leaving 466,750 shares available for issuance.





As
      of
      December 31, 2005, 299,700 options remain outstanding under the 1994 Employees
      Incentive Stock Option Plan (the “1994 Plan”). The 1994 Plan expired during 2003
      and, as such, there are no further options available for issuance under the
      1994
      Plan.





During
      2005, non-qualified stock options to purchase 7,500 shares were granted to
      each
      of the Company’s three outside directors under the Incentive Plan.








F-13





A
      summary
      of the Company’s stock option plans and changes during the years
      follow:




**2005**
              
              **2004****Shares**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Shares**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**Outstanding
                  at beginning of year
              
              
              640,450
              
              $
              0.96
              
              
              693,800
              
              $
              0.63Granted
              
              
              317,500
              
              
              2.94
              
              
              249,250
              
              
              1.46Exercised
              
              
              (124,375
              )
              
              0.80
              
              
              (246,600
              )
              
              0.60Canceled
              
              
              (30,000
              )
              
              2.10
              
              
              (56,000
              )
              
              0.63Outstanding
                  at end of year
              
              
              803,575
              
              
              1.73
              
              
              640,450
              
              
              0.96Exercisable
                  at end of year
              
              
              388,200
              
              $
              0.85
              
              
              364,700
              
              $
              0.64Weighted
                average grant-date fair value of options granted during the year
              
              
              
              
              $
              2.94
              
              
              
              
              
              1.46




Additional
      information about stock options outstanding and exercisable at December 31,
      2005
      follows:





**Weighted****Average**
            
            **Weighted**
            
            
            
            **Weighted****Range
                of**
            
            
            
            **Remaining**
            
            **Average**
            
            
            
            **Average**Exercise
            
            **Number**
            
            **Contractual**
            
            **Exercise**
            
            **Number**
            
            **Exercise****Prices**
            
            **Outstanding**
            
            **Life
                in Years**
            
            **Price**
            
            **Exercisable**
            
            **Price**$
                0.53 - $ 0.67
            
            
            192,200
            
            
            5.1
            
            $
            0.60
            
            
            192,200
            
            
            0.600.70
                - 0.93
            
            
            107,500
            
            
            6.0
            
            
            0.78
            
            
            107,500
            
            
            0.841.37
                - 2.30
            
            
            331,375
            
            
            8.6
            
            
            1.81
            
            
            88,500
            
            
            1.472.50
                - 4.65
            
            
            172,500
            
            
            9.5
            
            
            3.41
            
            
            —
            
            
            —$
                0.53 - $ 4.65
            
            
            803,575
            
            
            7.6
            
            $
            1.58
            
            
            388,200
            
            
            0.85





Warrants
      to purchase 1,386,500 shares of common stock at a weighted average exercise
      price of $0.53 per share are outstanding at December 31, 2005. These warrants
      have no specific expiration date and have an exercise price range of $0.31
      to
      $1.44 per share. Also outstanding at December 31, 2004 is a warrant issued
      to
      the Company’s President and Chief Executive Officer to purchase 100,000 shares
      of the Company’s common stock at $1.00 per share. This warrant is exercisable
      solely in the event of a change of control of the Company as defined.





In
      June
      2004, the Company’s stockholders approved the CAS Medical Systems, Inc. Employee
      Stock Purchase Plan (the “Purchase Plan”). Under the Purchase Plan, 150,000
      shares of common stock have been reserved for issuance. Under the Purchase
      Plan
      employees may purchase the Company’s common stock through payroll deductions.
      The initial offering period began on July 1, 2004. As of December 31, 2005,
      30,312 shares of common stock have been issued to plan participants under the
      Purchase Plan and amounts had been withheld from employees’ compensation for an
      additional 13,501 shares for future issuance.








F-14





**(9)      
      LI** **FE
      INSURANCE**





During
      2005 and 2004, the Company paid term-life insurance premiums of approximately
      $65,741 and $31,000 respectively, on policies on the lives of three officers
      of
      the Company. The face amount of insurance on one of the policies is $1,000,000
      under which the Company is named as a beneficiary for $750,000. The remaining
      two policies have face amounts that are the equivalent of two times each
      officer’s annual salaries. The Company is not a beneficiary on either of these
      two policies.







**(10)** **BENEFIT
      PLANS**





The
      Company maintains a 401(k) benefit plan for its employees, which generally
      allows participants to make contributions via salary deductions up to allowable
      Internal Revenue Service limits on a tax-deferred basis. Such deductions are
      matched in part by discretionary contributions by the Company. Matching
      contributions by the Company were $91,077 in 2005 and $75,578 in 2004.





The
      Company offers certain retirement benefits through a plan accounted for under
      Financial Accounting Standards Board Statement No. 106, “Accounting for
      Post-Retirement Benefits Other than Pensions” to a post-retirement benefit plan
      (the “Plan”). The benefits are funded through the purchase of medical insurance
      for each retiree each year. The Company continues to fund the Plan on a
“pay-as-you-go” basis.





The
      Plan
      became effective in January 2002 for qualifying employees who retire at age
      65
      or later and have provided ten continuous years of service to the Company.
      The
      Plan provides certain prescription drug and


supplemental
      health benefits for Medicare qualified retirees of the Company.





During
      February 2005, the Company initiated certain changes to the Plan to
      significantly reduce its future funding requirements. Effective September 1,
      2005, participants under the Plan were required to share fifty percent of the
      premiums for benefit costs.





As
      of
      December 1, 2005, the Plan was also amended to allow only those participants
      retired and receiving benefits as of that date to remain eligible to receive
      future benefits under the Plan. In addition, the Company also advised those
      participants that it will no longer provide benefits after December 31, 2006.
      In
      connection therewith, the Company recognized a curtailment gain of $400,739
      during the fourth quarter of 2005.





Components
      of net periodic benefit cost under the Plan follow:





**2005**
            
            **2004**Service
                cost
            
            $
            43,249
            
            $
            88,865Interest
                cost
            
            
            32,148
            
            
            46,918Amortization
                of prior service cost
            
            
            (22,258
            )
            
            113,060Amortization
                of unrecognized gain
            
            
            (13,155
            )
            
            (20,010
            )Net
                periodic benefit (income) cost prior to curtailment
            
            
            39,984
            
            
            228,833Recognized
                curtailment gain
            
            
            (400,739
            )
            
            —Net
                periodic benefit (income) cost
            
            $
            (360,755
            )
            $
            228,833











F-15





Changes
      in the benefit obligation under the Plan and a reconciliation of its funded
      status as of the measurement
      date (December 31) to amounts shown in the Company’s balance sheets
      follow:




**2005**
            
            **2004**Benefit
                obligation at beginning of year
            
            $
            1,036,500
            
            $
            797,177Service
                cost
            
            
            43,249
            
            
            88,865Interest
                cost
            
            
            32,148
            
            
            46,918Plan
                curtailment gain
            
            
            (400,739
            )
            
            —Plan
                amendment
            
            
            (576,581
            )
            
            —Actuarial
                loss (gain)
            
            
            (99,975
            )
            
            130,284Benefits
                paid
            
            
            (26,666
            )
            
            (26,744
            )Benefit
                obligation at end of year
            
            
            7,936
            
            
            1,036,500Unrecognized
                prior service costs
            
            
            195,921
            
            
            (358,402
            )Unrecognized
                net gain
            
            
            145,710
            
            
            58,890Accrued
                post-retirement benefit costs
            
            $
            349,567
            
            $
            736,988







The
      negative unrecognized prior service costs of $195,921 applicable to current
      retirees receiving benefits and the unrecognized net gain of $145,710 as of
      December 31, 2005 will be amortized to the date coverage expires (December
      31,
      2006). Benefit payments in 2006 are expected to approximate $8,000; no benefit
      payments will be made thereafter.





Because
      the Plan’s benefit formula grants credit only for service after age 55, the
      expected post-retirement benefit obligation for an employee is attributed from
      age 55 to age 65.




Weighted
      average discount rate assumptions used under the Plan follow:





**2005**
            
            **2004**Year-end
                benefit obligation
            
            
            5.50
            %
            
            5.75
            %Net
                periodic benefit cost
            
            
            5.75
            %
            
            6.00
            %




Health
      care trend rate assumptions used to develop cost under the Plan at year-end
      follow:





**2005**
            
            **2004**Initial
                trend rate
            
            
            8.00
            %
            
            8.00
            %Ultimate
                trend rate
            
            
            5.00
            %
            
            5.00
            %Years
                to ultimate trend rate
            
            
            3
            
            
            3




Assumed
      health care trend rates effect the amounts reported for benefit costs and the
      benefit obligation. A one percentage point change in assumed health care cost
      trend rates has the following effects on reported amounts for 2005:




**Increase**
              
              **Decrease**Effect
                  on total of service and interest cost components
              
              $
              11,687
              
              $
              (9,802
              )


F-16





**(11)** **INCOME
      TAXES**





The
      provision for income taxes consists of:




**2005**
            
            **2004**Current:Federal
            
            $
            642,630
            
            $
            427,188State
                (benefit)
            
            
            61,549
            
            
            (77,632
            )704,179
            
            
            349,556Deferred:Federal
            
            
            86,599
            
            
            66,656State
                (benefit)
            
            
            (49,658
            )
            
            14,03436,941
            
            
            80,690Income
                taxes
            
            $
            741,120
            
            $
            430,246








A
      reconciliation of U.S. Federal income taxes computed at the statutory rate
      to
      income taxes shown in operations follows:





**2005**
            
            **2004**Income
                taxes at the statutory rate
            
            $
            869,140
            
            $
            555,945State
                income taxes, net of federal effect
            
            
            4,895
            
            
            (41,975
            )R&D
                and other tax credits
            
            
            (108,821
            )
            
            (61,230
            )Net
                operating loss carry forward realized
            
            
            —
            
            
            (61,985
            )Other
            
            
            (24,094
            )
            
            39,491Income
                taxes
            
            $
            741,120
            
            $
            430,246








Deferred
      income tax assets and (liabilities) at December 31 relate to:





**2005**
            
            **2004**Inventories
            
            $
            237,023
            
            $
            252,225Warranty
                accrual
            
            
            42,688
            
            
            42,688Allowance
                for doubtful accounts
            
            
            26,090
            
            
            32,891Tax
                credits
            
            
            74,440
            
            
            40,284Property
                and equipment
            
            
            79,281
            
            
            87,002Retirement
                benefit obligation
            
            
            122,313
            
            
            257,872Other
            
            
            108,360
            
            
            44,620690,195
            
            
            757,582Prepaid
                expenses
            
            
            (147,313
            )
            
            (121,305
            )$
            542,882
            
            $
            636,277





**(12)** **GRANT
      AWARDS**





The
      Company has been awarded various grants by the National Institutes of
      Neurological Disorders and Stroke of the NIH under its Small Business Innovative
      Research Program. Grants under this program are being used to support
      development of a new technology, Near-Infrared Spectroscopy (“NIRS”) which can
      non-invasively measure the brain oxygenation level of a neonatal patient. In
      accordance with the terms of these grants, the Company is reimbursed for certain
      qualifying expenditures. The Company is pursuing additional NIH grants to
      support its NIRS research.





The
      Company has received various grants under the NIH program including a phase
      II
      award received during May 2004 approximating $1,000,000 for continued
      development in the adult population.








F-17





During
      March 2004, the Company was awarded a $100,000 grant for developing a new
      generation of automated non-invasive blood pressure (“NIBP”) monitors, which
      have incorporated advanced NIBP algorithms that compensate for arterial
      stiffness.





During
      2005 and 2004, approximately $531,000 and $521,000, respectively, of qualifying
      research and development costs (“R&D”) were reimbursed under grants. Such
      reimbursements are recorded as a reduction in R&D expenses. The Company
      recognizes these reimbursements on an accrual basis as the qualifying costs
      are
      incurred.






**(13)** **COMMITMENTS
      AND CONTINGENCIES**





The
      Company is committed under an employment agreement with its Chief Executive
      Officer, Louis P. Scheps, for payments aggregating approximately $275,000 per
      year, through March 31, 2007. Mr. Scheps will then serve as a part-time employee
      in a senior executive role from April 1, 2007 through March 31, 2009 at an
      annual salary of $100,000. From October 1, 2005 to October 1, 2007 the Company
      will maintain life insurance coverage for Mr. Scheps naming him as the insured
      party in an amount not less than $250,000. Further, the Company will use
      commercially reasonable efforts to secure continuation of Mr. Scheps’ Company
      paid life insurance for the period from October 1, 2007 to March 31, 2009 in
      amounts commensurate with existing coverage of $250,000.





The
      Company’s articles of incorporation provide that the Company will indemnify its
      directors to the full extent legally permissible, against all liabilities
      reasonably incurred in connection with any action in which such individual
      may
      be involved by reason of being or having been a director of the Company. Given
      the nature of this indemnification, the Company is unable to make a reasonable
      estimate of the maximum potential amount that the Company could be required
      to
      pay. Historically, the Company has not made any significant payments related
      to
      the above indemnification. Currently, there are no known matters for which
      the
      Company may be required to provide indemnification. As such, no amount has
      been
      accrued in the accompanying financial statements.





The
      Company leases operating facilities and certain equipment under noncancellable
      operating leases. Rent expense under these leases was $139,767 in 2005. (Rent
      expense was insignificant in 2004.) Future annual minimum rental payments as
      of
      December 31, 2005 to the expiration of the leases follow: 2006- $159,877; 2007-
      $146,483; 2008- $41,564; 2009- $7,740 and 2010- $5,805.








Page
      14





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





None.








Item
      8A.  Controls and
      Procedures





The
      Company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in the Company's Exchange Act reports
      is recorded, processed, summarized and reported within the time periods
      specified in the SEC's rules and forms, and that such information is accumulated
      and communicated to the Company's management, including its Chief Executive
      Officer and Chief Financial Officer, as appropriate, to allow timely decisions
      regarding required disclosure based on the definition of "disclosure controls
      and procedures" in Rule 13a-15(e). In designing and evaluating the disclosure
      controls and procedures, management recognizes that any controls and procedures,
      no matter how well designed and operated, can provide only reasonable assurance
      of achieving the desired control objectives, and management necessarily is
      required to apply its judgment in evaluating the cost-benefit relationship
      of
      possible controls and procedures.





The
      Company carried out an evaluation, under the supervision and with the
      participation of the Company's management, including the Company's Chief
      Executive Officer and the Company's Chief Financial Officer, of the
      effectiveness of the design and operation of the Company's disclosure controls
      and procedures as of December 31, 2005. Based upon the foregoing evaluation,
      the
      Chief Executive Officer and the Chief Financial Officer have concluded that
      its
      disclosure controls and procedures were effective as of that date.





There
      have been no changes in the Company’s internal control over financial reporting
      during the quarter ended December 31, 2005 that have materially affected, or
      are
      reasonable likely to materially affect the Company’s internal control over
      financial reporting.





Reference
      is made to the Certifications of the Chief Executive Officer and the Chief
      Financial Officer about these and other matters attached as Exhibits 31.1,
      31.2
      and 32.1 to this report.






Item
      8B.  Other
      Information





On
      February 24, 2006, the Compensation Committee of the Board of Directors approved
      a discretionary cash bonus resulting from the 2005 financial performance in
      the
      aggregate of $100,000 payable to the Company’s officers. As such Mr. Scheps
      received $50,000, Andrew E. Kersey, Chief Operating Officer, received $25,000
      and Jeffery A. Baird, Chief Financial Officer, received $25,000.











PART
      III





Item
      9.   
Directors, Executive Officers,
      Promoters and Control Persons; Compliance with
      Section 16(a) of the Exchange Act





Reference
      is made to the sections entitled "Election of Directors", “Management”, and
“Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant's
      definitive proxy statement to be mailed to shareholders on or about April 24,
      2006, and to be filed with the Securities and Exchange Commission.








Item
      10.  Executive
      Compensation





Reference
      is made to the sections entitled "Compensation of Executive Officers" and
      "Election of Directors" in the Registrant's definitive proxy statement to be
      mailed to shareholders on or about April 24, 2006, and to be filed with the
      Securities and Exchange Commission.








Page
      15







Item
      11.   Security Ownership
      of Certain Beneficial Owners and Management and Related Stockholder
      Matters





Reference
      is made to the section entitled "Stock Ownership" in the Registrant's definitive
      proxy statement to be mailed to shareholders on or about April 24, 2006, and
      to
      be filed with the Securities Exchange Commission.




The
      following table provides information regarding the Company’s equity compensation
      plans as of December 31, 2005:




Plan
                  Category
              
              Number
                  of securities to be issued upon exercise of outstanding options
                  and
                  warrants
              
              Weighted-average
                  exercise price of outstanding options and warrants
              
              Number
                  of securities remaining available for future issuance under equity
                  compensation plansEquity
                  compensation plans approved by security holders
              
              
              803,575
              
              $
              1.73
              
              
              466,750Equity
                  compensation plans not approved by security holders
              
              
              1,486,500
              
              
              0.53Total
              
              
              2,290,075
              
              $
              1.06
              
              
              466,750


Securities
      remaining available for issuance under equity compensation plans approved by
      security holders represent the 2003 Equity Incentive Plan approved during 2004.
      The equity compensation plans not approved by security holders consist of
      warrants granted to an officer and directors of the Company as compensation
      for
      services rendered. These warrants have no expiration date. See Note 8 to the
      Company’s Financial Statements.





Item
      12.  Certain Relationships
      and Related Transactions





The
      Company and Louis P. Scheps have entered into an employment agreement pursuant
      to which Mr. Scheps serves as President and Chief Executive Officer of the
      Company. The employment agreement, dated September 1, 2000, has been amended,
      most recently on November 8, 2005 (the “Amendment"). Pursuant to the Amendment,
      Mr. Scheps shall be employed by the Company as President and Chief Executive
      Officer, and shall serve as a director of the Company if elected by the
      stockholders, through March 31, 2007. Mr. Scheps will then serve as a part-time
      employee in a senior executive role from April 1, 2007 through March 31, 2009
      and will remain as a director of the Company if elected by the stockholders.
      Mr.
      Scheps will continue to serve as Chairman of the Board during the term of the
      employment agreement if elected as such by the Board of Directors. Pursuant
      to
      the Amendment, as of October 1, 2005, Mr. Scheps is compensated at an annual
      salary of $275,000. Commencing April 1, 2007 through March 31, 2009 Mr. Scheps
      will be compensated at an annual salary of $100,000. From October 1, 2005 to
      October 1, 2007 the Company will maintain life insurance coverage for Mr. Scheps
      naming Mr. Scheps as the insured party in an amount not less than $250,000.
      Further, the Company will use commercially reasonable efforts to secure
      continuation of Mr. Scheps’ Company paid life insurance for the period October
      1, 2007 to March 31, 2009 in amounts commensurate with existing coverage of
      $250,000.





The
      change of control provisions of the employment agreement were revised pursuant
      to the Amendment such that if a Change of Control (as defined) occurs and Mr.
      Scheps’ employment terminates for any reason after such Change of Control
      occurs, including termination by Mr. Scheps, Mr. Scheps will be paid a lump
      sum
      of $275,000 within ten (10) days of such termination. Notwithstanding the
      foregoing if the Change of Control occurs on or after April 1, 2007, Mr. Scheps
      will be entitled to $100,000, rather than $275,000, except that if an agreement
      of sale or merger agreement is executed while Mr. Scheps is being paid at the
      $275,000 rate but the Change of Control is not consummated until after April
      1,
      2007 then his payment under this provision will be equal to $275,000 rather
      than
      $100,000.








Page
      16





The
      Amendment defines “Change of Control” as (i) a sale of all or substantially all
      of the Company’s assets, (ii) a merger involving the Company in which the
      Company’s stockholders prior to the merger control less than fifty percent of
      the voting stock of the surviving entity, (iii) a sale by the Company’s
      stockholders to an acquirer or acquirers action in concert of more than a
      majority of the then outstanding stock of the Company owned by the Company’s
      stockholders, or (iv) any event similar to any of the foregoing.





During
      October 1998, Mr. Scheps was granted a warrant to purchase 100,000 shares of
      the
      Company common stock at an exercise price of $1.00 per share, the fair market
      value of the option at the date of the grant. This warrant is exercisable solely
      in the event of a Change of Control.





Item
      13.  Exhibits





2.1
            Stock
                Purchase Agreement dated May 15, 2005 between CAS Medical Systems,
                Inc.,
                Statcorp, Inc., and the Stockholders of Statcorp Inc.
                (1)


3.1
            Certificate
                of Incorporation of Registrant (2)


3.2
            Amended
                and Restated Bylaws of Registrant
                (3)


10.1
            Employment
                Agreement dated September 1, 1993 between Louis P. Scheps and CAS
                Medical
                Systems, Inc. (4)


10.2
            Amendment
                Number One to Employment Agreement between Louis P. Scheps and CAS
                Medical
                Systems, Inc. (4)


10.3
            Amendment
                Number Two to Employment Agreement between Louis P. Scheps and CAS
                Medical
                Systems, Inc. (4)


10.4
            Amendment
                Number Three to Employment Agreement between Louis P. Scheps and
                CAS
                Medical Systems, Inc. (4)


10.5
            Amendment
                Number Four to Employment Agreement between Louis P. Scheps and CAS
                Medical Systems, Inc. (3)


10.6
            Amendment
                Number Five to Employment Agreement between Louis P. Scheps and CAS
                Medical Systems, Inc. (5)


10.7
            Amendment
                Number Six to Employment Agreement between Louis P. Scheps and CAS
                Medical
                Systems, Inc. (6)


10.8
            1994
                Employees’ Incentive Stock Option Plan
                (7)


10.9
            CAS
                Medical Systems, Inc. Employee Stock Purchase Plan
                (8)


10.10
            CAS
                Medical Systems, Inc. 2003 Equity Incentive Plan
                (9)


10.11
            Form
                of Option Agreement (5)


10.12
            Commercial
                Line of Credit Note and Loan Agreement with NewAlliance Bank
                (10)


10.13
            Security
                Agreement with NewAlliance Bank
                (10)


10.14
            Commercial
                Loan and Security Agreement between CAS Medical Systems, Inc., NewAlliance
                Bank and Statcorp Inc. (1)


10.15
            Modification
                to Agreement between CAS Medical Systems, Inc. and NewAlliance Bank.
                (6)


21.1
            Subsidiaries
                of the Registrant


23.1
            Consent
                of UHY LLP, Independent Registered Public Accounting
                Firm


31.1
            Certification
                of CEO Pursuant to Rule 13a-14


31.2
            Certification
                of CFO Pursuant to Rule 13a-14


32.1
            Certification
                of CEO and CFO Pursuant to 18 U.S.C.
                1350


______________________________________________________





(1)
            Incorporated
                by reference to the Company’s Form 8-K/A filed July 29,
                2005


(2)
            Incorporated
                by reference to the Company’s Registration Statement, dated April 15,
                1985, filed with the Securities and Exchange
                Commission


(3)
            Incorporated
                by reference to the Company’s Form 10-KSB filed March 29,
                2004


(4)
            Incorporated
                by reference to the Company’s Form 10-KSB filed March 28,
                2003


(5)
            Incorporated
                by reference to the Company’s Form 10-KSB filed March 31,
                2005


(6)
            Incorporated
                by reference to the Company’s Form 10-QSB filed November 14,
                2005


(7)
            Incorporated
                by reference to the Company’s Form S-8 filed October 4,
                2000


(8)
            Incorporated
                by reference to the Company’s Form S-8 filed June 10,
                2004


(9)
            Incorporated
                by reference to the Company’s Form S-8 filed June 10,
                2004


(10)
            Incorporated
                by reference to the Company’s Form 10-QSB filed November 12,
                2004





Page
      17





Item
      14.  Principal Accountant
      Fees and Services





Reference
      is made to the proposal entitled “Ratification of Selection of Independent
      Auditors” in the Registrant's definitive proxy statement to be mailed to
      shareholders on or about April 24, 2006, and to be filed with the Securities
      and
      Exchange Commission.










































Page
      18





SIGNATURES





In
      accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
      the
      Registrant caused this report to be signed on its behalf by the undersigned,
      thereunto duly authorized.








**CAS
      MEDICAL SYSTEMS, INC.**


(Registrant)






/s/ 
Louis
                P.
                Scheps
              
              
              Date:   March 23, 2006By: 
                  Louis P. Scheps
                Chairman of the Board, President and
                Chief
                  Executive Officer






In
      accordance with 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.





/s/ 
Lawrence
              Burstein
            
            
            Date:   March 23, 2006Lawrence
                Burstein, Director






/s/ 
Jerome
              Baron
            
            
            Date:   March 23, 2006Jerome
                Baron, Director







/s/ 
Saul
              Milles
            
            
            Date:   March 23, 2006Saul
                Milles, Director





/s/ 
Louis
              P.
              Scheps
            
            
            Date:   March 23, 2006Louis
                  P. Scheps, Chairman of the Board,
                President,
                  Chief Executive Officer and Director






/s/ 
Jeffery
              A. Baird
            
            
            Date:   March 23, 2006Jeffery
                  A. Baird, Chief Financial Officer
                (Chief
                  Financial and Accounting Officer)