UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549





FORM
10-K





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


For the
Fiscal Year ended December 31, 2008





Commission
File Number 0-13839





CAS
MEDICAL SYSTEMS, INC.


(Exact
name of registrant as specified in its charter)





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





44 East Industrial Road,
Branford, Connecticut  06405


(Address
of principal executive offices, including zip code)





(203)
488-6056


(Registrant’s telephone
number, including area code)





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





Title of Each Class
              Name of Each Exchange on Which
      RegisteredCommon
      Stock, $.004 par value
              The
      NASDAQ Global Market





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





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes  o   No 
x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.   Yes  o   No 
x





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





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check one):






Large accelerated
      filer  o
            Accelerated
      filer  o
            Non-accelerated
      filer  o
              (Do not check if a smaller
      reporting company)
            Smaller
      reporting company  x





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




As of
June 30, 2008, which is the last business day of the registrant’s most recently
completed second fiscal quarter, the aggregate market value of the registrant’s
common stock held by non-affiliates of the registrant was $26,674,000 based on
the closing price as reported on the NASDAQ Global Market.  This
calculation does not reflect a determination that persons are affiliates for any
other purpose.




As of
March 31, 2009, there were 11,356,662 shares of common stock
outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Registrant’s Proxy Statement for its Annual Meeting of Stockholders to be
held on June 10, 2009 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-K.















INDEX
                            
                            PagePART
      IItem
      1
                            Business
                            3Item
      1A
                            Risk
      Factors
                            11Item
      1B
                            Unresolved
      Staff Comments
                            15Item
      2
                            Properties
                            15Item
      3
                            Legal
      Proceedings
                            15Item
      4
                            Submission
      of Matters to a Vote of Security Holders
                            16PART
      IIItem
      5
                            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                            16Item
      6
                            Selected
      Financial Data
                            17Item
      7
                            Management’s
      Discussion and Analysis of Financial Condition
      and Results of Operations
                            17Item
      7A
                            Quantitative
      and Qualitative Disclosures About Market Risk
                            23Item
      8
                            Financial
      Statements and Supplementary Data
                            23Report
      of Independent Registered Public Accounting Firm
                            F-1Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                            F-2Consolidated
      Statements of Operations for the Years EndedDecember 31, 2008,
      2007 and 2006
                            F-3Consolidated
      Statements of Changes in Shareholders’ Equityfor the Years
      Ended December 31, 2008, 2007 and 2006
                            F-4Consolidated
      Statements of Cash Flows for the Years EndedDecember 31, 2008,
      2007 and 2006
                            F-5Notes
      to Consolidated Financial Statements
                            F-6
      to F-18Item
      9
                            Changes
      in and Disagreements with Accountants onAccounting and Financial
      Disclosure
                            24Item
      9A(T)
                            Controls
      and Procedures
                            24Item
      9B
                            Other
      Information
                            24PART
      IIIItem
      10
                            Directors,
      Executive Officers and Corporate Governance
                            25Item
      11
                            Executive
      Compensation
                            25Item
      12
                            Security
      Ownership of Certain Beneficial Owners andManagement
      and Related Stockholder Matters
                            25Item
      13
                            Certain
      Relationships and Related Transactions, and Director
      Independence
                            25Item
      14
                            Principal
      Accountant Fees and Services
                            25PART
      IVItem
      15
                            Exhibits
      and Financial Statement Schedules
                            26Signatures
                            
                            29










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: potential liquidity constraints;
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 or
other litigation 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; changes in the competitive environment;
and other risks described in Item 1A of this filing.  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.




Unless
the context indicates otherwise, as used in this report, the terms “CAS,”
“CASMED,” the “Company,” “we,” “us” and “our” refer to CAS Medical Systems,
Inc.




Item 1.
Business





Overview





We
develop, manufacture and market medical devices for non-invasive patient
monitoring.  Our products include cerebral oximeters and sensors,
bedside monitoring products, blood pressure measurement technology, blood
pressure cuffs and neonatal supplies. These products are designed to improve the
quality of patient care by providing accurate non-invasive measurements that
improve patient outcomes.





Our
products have well established brand recognition in the markets we
serve.  Our most recent addition is the FORE-SIGHT cerebral
oximeter.  This device is designed to measure absolute levels of brain
oxygenation in the most critically ill patients, including pediatric and
neonatal intensive care patients and adults undergoing cardiac bypass
surgery.  Use of the FORE-SIGHT system enables the clinician to
significantly reduce potentially serious negative outcomes in these settings by
providing real-time non-invasive measurement of the level of oxygen in the
brain, allowing the clinician to intervene before brain damage
occurs.  The brain is the organ least tolerant of oxygen deprivation.
Without sufficient oxygen, brain damage may occur within minutes, which can
result in stroke, paralysis, other disabilities or death. Reliable measurement
of absolute levels of brain oxygen is therefore important to clinicians,
especially in critical care situations where there is a high risk of the brain
getting less oxygen than it needs.





Description of Products and
Services




The
Company has several categories of products and services.  The combined
categories represent one reportable business unit. Categories of products and
services are as follows:




·
            Critical
      care monitoring – includes sales of the FORE-SIGHT cerebral oximeter
      monitors, sensors and accessories.




·
            Bedside
      monitoring– includes sales of the Company’s vital signs monitors and
      accessories incorporating various combinations of measurement parameters
      for both human and veterinary use.  Parameters found in these
      monitors include pulse oximetry, electro-cardiography, temperature,
      non-invasive blood pressure, and capnography.  Also included in
      the bedside monitoring category are products developed and manufactured by
      Analogic Corporation, or otherwise supplied through Analogic, including
      vital signs monitors utilizing parameters as described above and
      additional monitors which measure non-invasive cardiac output and
      hemodynamic status, and maternal/fetal monitors.  These vital
      signs monitors allow for connectivity to a central
      station.  Additionally, the Company’s cardio-respiratory
      monitors and accessories used to monitor apnea in home-based and hospital
      settings are also included in this
category.







Page 4






·
            Blood
      pressure measurement technology – includes sales to Original Equipment
      Manufacturers (“OEM”) of the Company’s proprietary non-invasive blood
      pressure technology (MAXNIBP), blood pressure cuffs and accessories for
      the OEM market, and related license
fees.




·
            Supplies
      and service – includes sales of blood pressure cuffs and rapid infusor
      cuffs, neonatal intensive care supplies including electrodes and skin
      temperature probes, and service repair
revenues.




Critical
Care Monitoring





The
FORE-SIGHT Cerebral Oximeter non-invasively and continuously measures absolute
brain tissue oxygen levels, enabling clinicians to identify and quickly react to
instances of lowered brain oxygen levels before the situation becomes
critical.  With one or two single-use disposable sensors placed on the
patient’s forehead, FORE-SIGHT utilizes the Company’s LASER-SIGHT Optical
Technology to project near infrared light into the brain to provide an absolute
measurement indicating cerebral tissue oxygen saturation.





Unlike
readings obtained from a trend-only monitor, absolute cerebral tissue oxygen
saturation readings have stand-alone clinical significance because individual
measurements have a direct correlation to the standard invasive measurements
with which clinicians are familiar.  Several studies have been
published showing that the use of cerebral oximetry during cardiac surgery can
significantly reduce adverse clinical outcomes due to neurological
complications, including permanent stroke. Other published studies have shown
decreased length of stay and decreased post operative ventilator time when
cerebral oximetry is used. Use of cerebral oximetry can lead to improved patient
outcomes and significant cost savings to hospitals.





In
February 2008, the Company received 510(k) clearance expanding the indications
for use of its FORE-SIGHT infant sensor to include the neonatal patient
population above 2,500 grams of weight. Measuring cerebral oxygen saturation is
significant for a variety of neonatal patients, including those born with
congenital heart defects that affect the ability of the heart to supply
oxygenated blood to the brain. Approximately 550 hospitals in the U.S. contain
Neonatal Intensive Care Units (“NICU”) with 13,000 high acuity Level 3 beds.
Approximately four million births occur in the U.S. each year of which
approximately 4% are babies with a birth defect and about 12% are preterm births
(defined as less than 37 weeks from gestation).





The
Company began marketing the neonatal/infant FORE-SIGHT oximeter sensor in the
second half of 2008, primarily targeting the hospital market for use in the
Neonatal/Infant cardiovascular operating room, the Cardiac Intensive Care Unit
and the NICU. The FORE-SIGHT product accurately detects low cerebral oxygen
saturation events during critical periods, thereby allowing clinicians to
intervene and reverse potentially life threatening events before they become
critical.  In neonates in particular, the issue is compounded by the
lack of physiological reserve mechanisms that the body can use to regulate blood
flow and protect the brain from low oxygen levels. CASMED is the only company in
the marketplace to have received FDA regulatory clearance with labeling for use
of absolute cerebral oximetry in neonatal and infant populations.





Additionally,
in March 2009 we received 510(k) clearance from the Food and Drug Administration
(“FDA”) for a medium size FORE-SIGHT sensor to complement the large and small
sensor offerings. We expect to begin marketing this sensor, targeted at the
pediatric patient population, during mid-2009, thus completing our cerebral
oximeter sensor offerings. In addition, during 2009 we expect to pursue
additional FDA 510(k) clearance for other expanded uses including additional
non-cerebral sensors and features.





We are
sponsoring and evaluating sponsorship of clinical trials which may allow us to
more actively target the sale of the FORE-SIGHT System for use in high risk
neonatal and pediatric patient populations.





In
January 2009, a review paper published in the Journal of
Perinatology and authored by JC Fenik and K. Rais-Bahrami titled “Neonatal cerebral oximetry
monitoring during ECMO cannulation”, detailed the benefits of absolute
cerebral oximetry in neonatal patients undergoing extracorporeal membrane
oxygenation (ECMO) therapy, including its ability to reliably measure brain
oxygen levels during CPR when conventional technologies such as pulse oximetry
have failed.








Page 5





Additional
studies targeted at the pediatric and neonatal populations are underway
including the use of monitoring absolute cerebral oximetry on pediatric patients
undergoing cardiac catheterization, neonatal pain management, peri-operative
monitoring of congenital heart patients, as well as auto-regulation
response.





The
Company believes that there is also an opportunity for establishment of
FORE-SIGHT Absolute Cerebral Oximetry as a standard of care in all cardiac
surgical procedures, where nearly 700,000 procedures are performed annually in
the U.S.  Several clinical studies have already been published
demonstrating the importance and effectiveness of monitoring changes in cerebral
oximetry during cardiac surgery.  Examples of these published studies
include –





·
            In
      September 2004 a retrospective, blinded intervention 2,279-patient
      published as Scott Goldman, M.D., et al., “Optimizing Intraoperative
      Cerebral Oxygen Delivery Using Noninvasive Cerebral Oximetry Decreases the
      Incidence of Stroke for Cardiac Surgical Patients”, in the Heart Surgery
      Forum #2004-1062 showed a significant reduction in permanent stroke
      when information from cerebral oximetry was used to help manage regional
      brain blood oxygen saturation in cardiac surgery
  patients.





·
            In
      January 2007, a 200-patient study, published as John M. Murkin, M.D., et
      al., “Monitoring Brain
      Oxygen Saturation During Coronary Bypass Surgery:  A Randomized,
      Prospective Study”, in Anesthesia and
      Analgesia showed a statistically significant reduction in
      incidences of major organ dysfunction when cerebral oximetry was used to
      provide information to help manage regional brain blood oxygen saturation
      in coronary artery bypass surgery
patients.





·
            In
      March 2008, a review paper published as Gregory W. Fischer, M.D.,
      Co-Director of Cardiac Anesthesia at Mount Sinai Medical Center in New
      York “Recent Advances in
      the Application of Cerebral Oximetry in Adult Cardiovascular
      Surgery”, in Seminars in
      Cardiothoracic and Vascular Anesthesiadetailed the benefits of
      absolute cerebral oximetry in patients undergoing Deep Hypothermic Cardiac
      Arrest (“DHCA”) aortic arch
surgery.





·
            In
      June 2008, a paper published as Thomas Hemmerling M.D., et al., “Cerebral desaturation during
      single lung ventilation correlates with postoperative morbidity”,
      in Canadian
      Journal of Anesthesia Supplement detailed the benefits of
      monitoring absolute cerebral oximetry in patients undergoing single lung
      ventilation (SLV) and showed a positive correlation between the decrease
      of SctO2 during SLV and postoperative non-pulmonary organ
      failure.





Additional
cardiac and thoracic surgery studies are underway in the U.S and Europe with
results from these studies expected to be published during 2009.





The
Company is actively supporting several on-going clinical studies throughout
North America and Europe, specifically designed to expand the available market
by highlighting the benefits of absolute cerebral oximetry.  These
studies include –





·
            An
      NIH-funded major multi-center study researching cognitive decline and
      delirium in elderly patients undergoing major general
      surgery.  The study, which began in 2008, involves seven key
      medical institutions throughout the U.S.  Approximately five
      million elderly patients have surgery in the U.S. each
      year.  These surgeries are generally considered high risk due to
      a variety of factors.  The Company believes that monitoring
      cerebral oximetry using FORE-SIGHT can also significantly benefit this
      population of patients.





·
            Two
      studies to show the benefit of absolute cerebral oximetry monitoring
      during shoulder surgery in the sitting or “beach chair”
      position.  In the summer of 2007, a newsletter of the Anesthesia Patient
      Safety Foundation (“APSF”) described two patients with no
      significant risk factors or evidence of cerebral vascular disease who both
      developed permanent neurological deficits likely from global cerebral
      hypo-perfusion while undergoing shoulder surgery in the beach chair
      position.  The beach chair position can cause significant
      hemodynamic changes, the response to which are further blocked by the
      combination of inhalation/intravenous drugs.  The current
      standard of care for these patients is to measure blood pressure using a
      cuff laced on the opposite arm or either leg that automatically identifies
      oscillometric blood pressure readings.  The Company believes
      that monitoring cerebral oximetry using FORE-SIGHT can significantly
      benefit patients during these
procedures.







Page 6





The
Company continues to evaluate sponsoring other clinical studies that expand the
use of FORE-SIGHT Absolute Cerebral Oximetry into other patient populations and
applications.





During
our fiscal year ended December 31, 2008, net sales from disposable sensors
comprised approximately 4% of our overall net sales. As of December 31,
2008, 151 FORE-SIGHT monitors were installed in approximately 70 hospitals
worldwide.





Bedside
Monitoring





The
Company offers a full line of non-invasive vital signs monitoring products for a
variety of general care settings in hospitals such as outpatient medical
surgical units, recovery, procedure labs, physician offices and emergency
response settings. The monitors are small, lightweight, portable and easy to use
with central station capabilities.





The
Company manufactures two platforms of vital signs monitors incorporating various
combinations of industry-leading measurement parameters.  The product
lines include options for measurement of non-invasive blood pressure using the
Company’s proprietary MAXNIBP technology, pulse oximetry,
electro-cardiography, temperature, and capnography.  CASMED 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. During 2003, the Company was awarded a multi-year,
sole-source purchasing agreement by the U.S. Department of Veterans Affairs
(“VA”) for its vital signs monitors. This agreement expired during 2008. The VA
has since issued a blanket purchase agreement in effect through June 2009 naming
CASMED as an approved vendor. The Company is currently seeking an extension of
the blanket purchase agreement. Management does not believe that its business
with the VA will be materially affected should it not be successful in receiving
such extension.





Also
included in the bedside monitoring category are products developed and
manufactured by Analogic Corporation, or otherwise supplied through Analogic,
including vital signs monitors utilizing parameters as described above and
additional monitors which measure non-invasive cardiac output and hemodynamic
status, and maternal/fetal monitors.  These vital signs monitors allow
for connectivity to a central station.





The
Company also manufactures a line of cardio-respiratory monitors used to monitor
apnea in home-based and hospital settings.  This niche market is
primarily a replacement market.  Revenues in this market have been
steadily declining over the past several years. Revenues generated from this
line were less than 5% of overall revenues in 2008. The Company plans to exit
this market during 2009.





Blood
Pressure Measurement Technology





The
Company has developed a proprietary non-invasive blood pressure measurement
technology, MAXNIBP.  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 OEM
agreements to supply its MAXNIBP technology to various
companies throughout the world.  This technology is 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.





Supplies
and Service





The
Company offers a complete line of disposable and reusable blood pressure cuffs
that can be used with any manufacturer’s monitoring equipment.  The
product line includes cuffs and pressure infusors manufactured by Statcorp, Inc.
which was purchased by CASMED in 2005.  The blood pressure cuffs,
including UltraCheck and Tuff-Cuff Reusable Cuffs, and SoftCheck and Safe-Cuff
Disposable Cuffs, can be used on patients from neonate through adult, as well as
on veterinary patients, and complement the Company’s MAXNIBP blood pressure measurement
technology.  The Company’s Unifusor line of infusor cuffs are used to
rapidly infuse intra-venous fluids into a patient.  The Company has
various private-label versions of both the blood pressure and infusor cuffs
available for OEM partners.








Page 7





The
Company offers a line of specialty neonatal supplies - 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, and
SoftCheck neonatal blood pressure cuffs.





Sales and
Marketing





The
Company markets its products globally, through hospital, alternate site,
homecare, veterinary and emergency medical distribution channels. A number of
different sales channels are utilized to maximize opportunities with the various
product lines we offer.





In 2008,
the Company hired a new Vice-President of Sales and Marketing and achieved
several important milestones including establishing a full sales, marketing and
clinical team to support future efforts in the markets for its FORE-SIGHT
cerebral oximetry products.





The
Company’s critical care FORE-SIGHT cerebral oximeters are sold via a direct
sales force and key manufacturers representatives groups within the U.S. and via
distribution partners outside the U.S. In the fourth quarter of 2008 we began
the hiring of a direct sales force which was supplemented by an existing base of
manufacturer representative groups. As of December 31, 2008, the Company
employed a team of 12 sales and clinical support specialist staff dedicated to
the FORE-SIGHT product line in the U.S. market. We expect to increase the size
of our U.S. direct sales team as the market opportunity expands. Outside the
United States, the Company has one sales manager located in Europe focused on
FORE-SIGHT sales, selling to select markets via distribution
partners.





The
Company’s bedside monitoring products and consumable cuff products are sold via
a direct sales force within the U.S., supplemented by a small group of key
distribution partners, and via distribution partners outside the U.S. Within the
U.S., we have six full-time field sales personnel focused primarily on sales to
the Veterans Affairs hospitals for our full line of vital signs monitors.
International sales are conducted through exclusive distributors in the
European, African, Middle Eastern, 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 sells its non-invasive blood pressure technology, in the form of
sub-assemblies to be joined to multi-parameter monitors, on a direct basis to
various firms operating in both the domestic and international markets. The
Company is in the process of pursuing additional OEM agreements.





Sales of
the Company’s supplies and services are primarily sold via key distribution
partners in both the U.S. and International markets.




Financial
      Information Relating to SalesYear
      Ended December 312008
                            
                            
                            2007
                            
                            
                            2006Domestic
      Sales
                            
                            $
                            30,031,921
                            
                            
                            $
                            29,601,305
                            
                            
                            $
                            27,518,584International
      Sales
                            
                            
                            10,617,136
                            
                            
                            
                            8,631,100
                            
                            
                            
                            7,683,427$
                            40,649,057
                            
                            
                            $
                            38,232,405
                            
                            
                            $
                            35,202,011





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 various areas of
the hospital market.





For our
critical care monitoring products, we believe there are currently only two other
companies with FDA 510(k) clearance to sell a cerebral oximeter in the U.S. We
believe that in the future the market for cerebral oximetry may
become  highly   competitive.   We  are
aware that several companies and individuals are engaged in the research
and







Page 8





development
of non-invasive cerebral oximeters, and we believe that there are several other
potential entrants into the market. Additionally there are other companies that
have FDA clearance to market somatic or tissue oximeters in the United States.
Competition might cause our sales cycle to lengthen to the extent that customers
take longer to make purchasing decisions. Competition might also reduce our
gross margins and market share and prevent us from achieving further market
penetration. Competitors might be more successful than we are in obtaining FDA
clearance with broader claims in their labeling or more successful than we are
in manufacturing and marketing their products and may be able to take advantage
of the significant time and effort we have invested to gain medical acceptance
of cerebral oximetry.





For our
line of bedside monitoring products and supplies, we are in a highly competitive
global market with numerous U.S. and international based medical equipment
companies.





We also
compete with numerous medical equipment companies and medical device integration
companies for the portions of hospital budgets allocated to capital equipment.
Some of these potential competitors have well-established reputations, customer
relationships and extensive marketing, distribution and service networks. Some
of them have substantially longer histories in the medical products industry,
larger product lines and greater financial, technical, manufacturing, research
and development and management resources than we do. Many of these potential
competitors have long-term product supply relationships with our potential
customers. These potential competitors might be able to use their resources,
reputations and ability to leverage existing customer relationships to give them
a competitive advantage over us, including in securing dollars from hospital
capital equipment budgets to purchase their products. They might also succeed in
developing products that are at least as reliable and effective as our products,
perform additional measurements, are less costly than our products or provide
alternatives to our products. Competitors might be more successful than we are
in manufacturing and marketing their products and may be able to take advantage
of the significant time and effort we have invested in developing our
markets.





The
Company’s products maintain a high, professional standard of accuracy and
quality in demanding environments such as those encountered in hospital and
transport situations. We believe that our reputation for producing innovative,
accurate, reliable, products that are user-friendly, manufactured in the U.S.,
and contain best-in-class technology are key factors in our ability to
successfully compete with larger organizations in the medical equipment market.
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.





Research and
Development





During
2008, 2007 and 2006, the Company incurred expenses of approximately $2,610,000,
$2,733,000, and $2,782,000 respectively, on activities related to the research
and development of new products, and 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 $2,028,000 for 2008, $2,254,000 for 2007, and $2,762,000 for
2006.   Reimbursements from the NIH were approximately $582,000
for 2008, $479,000 for 2007, and $20,000 for 2006. Funding provided to the
Company is recorded as a reduction in R&D expenses.





The
majority of the Company’s 2008 development efforts were directed toward
furthering the design and development of its patented LASER-SIGHT Near-Infrared
Spectroscopy (“NIRS”) technology used in the FORE-SIGHT Cerebral Oximeter. Other
development efforts included enhancements to the Company’s Vital Signs Monitors
as well as design improvements to certain of the Company’s OEM non-invasive
blood pressure modules.




As of
December 31, 2008, the Company employed a staff of 16 engineers and scientists
focused on internal R&D activities outlined above. For 2009, we expect an
increase in our research, development and engineering expenses primarily as a
result of costs associated with development of additional FORE-SIGHT sensors,
cost reduction programs, further enhancements to the cerebral oximeter and
continued clinical research efforts to continue to expand the market
opportunities for the Company’s cerebral oximetry products, as well as continued
advancement the Company’s proprietary OEM non-invasive blood pressure
technology.








Page 9


Grant
Awards





On
September 17, 2007, the Company was awarded a three year grant totaling $2.8
million by the National Institute of Neurological Disorders (“NINDS”) and Stroke
of the NIH under its Small Business Innovative Research Program. The grant was
awarded primarily to support advanced clinical outcome studies that focus
onthe Company’s
proprietary LASER-SIGHT technology incorporated into the FORE-SIGHT cerebral
oximeter. Further clinical studies funded by this grant will be used to expand
the clinical applications for FORE-SIGHT outside of the initial target market of
high risk cardio-vascular surgery. As of December 31, 2008, a maximum of
approximately $1.7 million remained under the 2007 grant award.




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





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:  CASâ,
CAS Express®,
CASMED®, For
Every Life and Breath Situation®,  For
What’s Vital®,
FORE-SIGHT®,
Klear-Traceâ,
LASER-SIGHT®,
Limboardâ,
MAXNIBPâ,
NeoGuardâ,
OscilloMateâ,
Pedisphygâ,
Premie Nestieâ,
Safe-Cuff®,
SoftCheck®,
SWANK®,
Tuff-Cuffâ,
UltraCheck®,
Unifusor®, Woods
Pump®,  the
heart shaped mark for use as a thermal reflector and the Company’s corporate
logo.   The Company also holds trademarks for the Event-Linkâ
monitoring system, the Edentec Assuranceâ
monitor, Edentrendâ
software and the AMIâ
and AMIâPlus
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 monitoring 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 FORE-SIGHT cerebral
oximetry technology.





The
FORE-SIGHT NIRS cerebral oximetry technology has four U.S. patents issued (U.S.
6,456,862 B2, 7,047,054, 7,072,701, and 7,313,427) and one international patent
issued. In addition, the Company currently has several patents pending with U.S.
and foreign patent offices. The Company believes the design concepts covered in
its current patent applications and provisional patent applications are
important to providing a cerebral oximeter capable of absolute brain tissue
oxygen saturation measurements.





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. The Company is not aware of any infringement by its products of the
claims of any issued patents, and no charge of patent infringement has been
asserted against the Company.





The
Company also relies on trade secret, copyright and other laws and on
confidentiality agreements to protect its technology.  The Company has
copyright protection for the software used in its blood pressure, apnea and
cerebral oximeter monitors.





The
Company will continue to seek patent, trademark and copyright protections as it
deems advisable to protect the markets 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, 2008, the Company had 172 employees, of which 170 were
full-time.  The Company has no collective bargaining agreements and
believes that relations with its employees are good.








Page 10


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
“FD&C Act”) and numerous acts and amendments such as the Quality System
Regulations (“QSR”), often referred to as Good Manufacturing Practices
(“GMP’s”).





In
addition, depending upon product type, the Company must also comply with those
regulations governing the Conduct of Human Investigations, Pre-Market
Notification Regulations and other requirements, as promulgated by the
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 in violation of the FD&C Act.





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 FD&C 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.  In the last factory inspection of the Company there were no
material non-conformities.





International Regulatory
Compliance





CASMED
maintains certification to ISO 13485:2003 by the accredited body, BSI Inc., in
each of its manufacturing facilities. These certifications allow CASMED to use
the “CE” mark on its products.  The CE mark is required for medical
devices to gain access to the European Union common market.  The FDA,
recognizing the value of this universally accepted quality system, has patterned
its Quality System Regulations after ISO 9001 and ISO 13485. CASMED maintains
full compliance with the FDA Quality System Regulations and has recently been
recertified to ISO-13485.





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, printed circuit boards,
semi-conductor circuits, electronic and pneumatic components, power supplies,
proprietary software and many other parts and sub-assemblies are obtained from
outside vendors.  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.





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.





Customers





Our five
largest customers accounted for approximately 31%, 26%, and 33% of revenues in
2008, 2007, and 2006, respectively.  Among these customers, Medtronic,
Inc., customarily the Company’s largest customer, accounted for 11% of revenues
during both 2008 and 2006. During 2007, no customer accounted for 10% or more of
the Company’s revenues. During January 2007, Medtronic announced a voluntary
suspension of U.S. product shipments from its Physio-Control division. Despite
strong sales to Medtronic during the latter six months of 2007, overall sales to
Medtronic for 2007 decreased approximately $1,510,000 from 2006 and represented
approximately 7% of overall







Page 11





revenues.





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.





Corporate
Information





CAS
Medical Systems, Inc. is a Delaware corporation organized in 1984. Our corporate
offices are located at 44 East Industrial Road, Branford, CT 06405, and our
telephone number is (203) 488-6056. Our website address is www.casmed.com. The
information on, or that can be accessed through, our website is not a part of
this report.





Item 1A.  Risk
Factors





Our
business faces many risks.  If any of the events or circumstances
described in the following risk factors actually occurs, our business, financial
condition or results of operations could suffer, and the trading price of our
common stock could decline.  The risks described below may not be the
only risks we face.  Additional risks that we do not yet know of or
that we currently believe are immaterial may also impair our business
operations.  You should consider the following risks, as well as the
other information included or incorporated by reference in this Form 10-K before
deciding to invest in our common stock.





We
Are Subject To Risks Related To Future Liquidity





Our
ordinary capital needs are expected to be met from a combination of cash flows
from operations and borrowings under our line-of-credit agreement. Future cash
flows, however, may be impacted by a number of factors, including changing
market conditions, market acceptance of the FORE-SIGHT system, changes in
payment terms to one or more major suppliers, loss of one or more key customers,
or failure to meet financial covenants under our current or any future loan
agreement.





We
believe that our current levels of working capital and available debt financing
are insufficient to fund major growth initiatives, such as significant increases
in our sales and marketing personnel, or material acquisitions. Any major growth
initiatives would require us to seek other sources or forms of debt or equity
capital. There can be no assurance that we will be successful in securing such
funding for major initiatives. Any issuance of equity or equity-linked
securities would dilute the ownership interest of existing
shareholders.





We
Are a Small Company In A Highly Competitive Industry





Competition
from other medical device companies, diversified healthcare companies and
research and academic institutions is intense and expected to
increase.  Many companies engaged in the medical device sector have
substantially greater financial and other resources and development capabilities
than we do, and have substantially greater experience in testing of products,
obtaining regulatory approvals and manufacturing and marketing medical
devices.  Therefore, our competitors may succeed in obtaining approval
for products more rapidly than we can.  Other companies may succeed in
developing and commercializing products earlier than we do.  In
addition to competing with universities and other research institutions in the
development of products, technologies and processes, the Company may compete
with other companies in acquiring rights to products or technologies
from  universities.  Also, the medical device
market  is  experiencing increasing customer concentration,
due to the emergence of large purchasing groups.  We cannot assure you
that we will develop products that are more effective or achieve greater market
acceptance than competitive products, or that our competitors will not succeed
in developing products and technologies that are more effective than those being
developed by us or that would render our products and technologies less
competitive or obsolete.  Moreover, there can be no assurance that we
will be able to successfully sell to large purchasing groups, which are
increasingly looking to suppliers that can provide a broader range of products
than we currently offer.








Page 12


Our
Business Is Impacted By Customer Concentration.





Our five
largest customers accounted for approximately 31%, 26%, and 33% of revenues in
2008, 2007, and 2006, respectively.  Among these customers, Medtronic,
Inc., customarily the Company’s largest customer, accounted for 11% of revenues
during both 2008 and 2006. During 2007, no customer accounted for 10% or more of
the Company’s revenues. During January 2007, Medtronic announced a voluntary
suspension of U.S. product shipments from its Physio-Control division. Despite
strong sales to Medtronic during the latter six months of 2007, overall sales to
Medtronic for 2007 decreased approximately $1,510,000 from 2006 and represented
approximately 7% of overall revenues. The loss of one or more of the major
customers noted above could result in a material adverse effect on the Company’s
financial condition, our cash flows and results of operations.





The
Recent Global Economic Crisis Has Had And May Continue To Have A Negative Effect
On Our Business And Operations





The
recent global economic crisis has caused, among other things, lower business
spending, which has had and is expected to continue to have a negative effect on
our business and results of operations.  Many of our customers and
suppliers have been affected by the current economic turmoil.  Current
or potential customers and suppliers may no longer be in business, may be unable
to fund purchases or determine to reduce purchases, all of which has led and is
expected to continue to lead to reduced demand for our products and increased
customer payment delays.  Further, suppliers may not be able to supply
us with needed components on a timely basis, may increase prices or go out of
business, which could result in our inability to met customer demand or affect
our gross margins.  The timing and     nature
of any recovery in the economy remains uncertain, and there can be no assurance
that market conditions will   improve in the near future or that
our results will not be materially and adversely affected.  Such
conditions make it very difficult to forecast operating results, make business
decisions and identify and address material business risks.




We
Are Devoting Substantial Resources To The Development And Marketing Of Our
Cerebral Oximetry Products





We expect
to devote a significant amount of resources to continue the development and
marketing of our FORE-SIGHT cerebral oximetry products. We believe that
substantial resources are required to further our opportunity in the markets for
these products. Such investments include further research and development,
including significant expenditures for clinical studies, manufacturing
equipment, further expansion of a direct sales force, marketing expenditures and
general working capital requirements. There can be no assurance that we will be
successful in these


endeavors.





The
Sale Of Our Products May Result In Significant Product Liability
Exposure





As a
manufacturer of medical diagnostic equipment, we could face product liability
claims.  We maintain product liability insurance in an aggregate
amount of $5 million.  We cannot assure you that this insurance
coverage will be adequate to cover any product liability claims that occur in
the future or that product liability insurance will continue to be available at
reasonable prices.We are
currently a defendant in a product liability action which is scheduled for trial
during mid-2009.  We believe that our product liability insurance is
sufficient to cover any damages and costs that are likely with respect to this
matter.  Any product liability judgments or settlements in excess of
insurance coverage could have a material adverse effect on our business and
results of operations.





Our
Business Could Be Adversely Affected If We Cannot Protect Our Proprietary
Technology Or If We Infringe On The Proprietary Technology Of
Others.





Our
proprietary technology aids our ability to compete effectively with other
companies in certain markets in which we compete. Although we have been awarded,
have filed applications for, or have been licensed under numerous patents, these
patents may not fully protect our technology or competitive position. Further,
our competitors may apply for and obtain patents that will restrict our ability
to make and sell our products.





Our
competitors may intentionally infringe our patents. Third parties may also
assert infringement claims against us in the future. Litigation may be necessary
to enforce patents issued to us, to protect our trade secrets or know-how, to
defend ourselves against claimed infringement of the rights of others or to
determine the scope and validity of the proprietary rights of others. The
defense and prosecution of patent suits are both costly and time-consuming, even
if the outcome is favorable to us. Such proceedings can be extremely expensive
and their outcome very unpredictable. An adverse outcome in the defense of a
patent suit could cause us to lose proprietary rights, subject us to
significant







Page 13





liabilities
to third parties or require us to license rights from third parties or to cease
selling our products. Any of these events could have a material adverse effect
on our business, operating results and financial condition. We also rely on
unpatented proprietary technology that others may independently develop or
otherwise obtain access to. Our inability to maintain the proprietary nature of
our technologies could negatively affect our revenues and earnings.





We
Are Subject To Significant Government Regulation





Our
business is subject to varying degrees of governmental regulation in the
countries in which we operate.  In the United States, our products are
subject to regulation as medical devices by the FDA, and by other federal and
state agencies.  These regulations pertain to the manufacturing,
labeling, development and testing of our devices as well as to the maintenance
of required records. An FDA regulation also requires prompt reporting by all
medical device manufacturers of an event or malfunction involving a medical
device where the device caused or contributed to death or serious injury or is
likely to do so.





Federal
law provides for several routes by which the FDA reviews medical devices before
their entry into the marketplace.  Medical products of the type
currently being marketed and under development by us are subject to regulation
under the FD&C Act and numerous acts and amendments such as the Quality
System Regulations which replaced the regulations formerly called Good
Manufacturing Practices.  In addition, depending upon product type, we
must also comply with those regulations governing the Conduct of Human
Investigations, Pre-Market Regulations and other requirements, as
promulgated by the 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.  Our products are
primarily Class I and II devices and several of them have required FDA
notification under Section 510(k) of the FD&C Act.





Satisfaction
of clearance or approval requirements may take up to several years or more and
may vary substantially based upon the type, complexity and novelty of the
product.  The effect of government regulation may be to delay
marketing of new products for a considerable or indefinite period of time, to
impose costly procedures upon our activities and to furnish a competitive
advantage to larger companies that compete with us.  We cannot assure
you that FDA or other regulatory clearance or approval for any products we
develop will be granted on a timely basis, if at all, or, once granted, that
clearances or approvals will not be withdrawn or other regulatory action taken
which might limit our ability to market our proposed products.  Any
delay in obtaining or failure to obtain these clearances or approvals would
adversely affect the manufacturing and marketing of our products and the ability
to generate additional product revenue.





We
Rely To A Significant Degree On Our Proprietary Rights





We rely
on a combination of patents, trade secrets, trademarks and non-disclosure
agreements to protect our proprietary rights.  We cannot assure you
that our patent applications will result in the issuance of patents or that any
patents owned by us now or in the future will afford protection against
competitors that develop similar technology.  We also cannot assure
you that our non-disclosure agreements will provide meaningful protection for
our trade secrets or other proprietary information.  Moreover, in the
absence of patent protection, our business may be adversely affected by
competitors who independently develop substantially equivalent or superior
technology.





It is
possible that we may need to acquire licenses to, or to contest the validity of,
issued or pending patents of third parties relating to our technology or to
products presently marketed or under development by us.  In addition,
we cannot assure that any license required under any patent would be made
available to us on acceptable terms, if at all, or that we would prevail in any
patent litigation.








Page 14


We
Are Party To An Arbitration Proceeding





On May 8,
2007, the Company signed an exclusive distribution agreement (the “Agreement”)
with Analogic Corporation (“Analogic”) under which the Company obtained
worldwide exclusive rights to market the Analogic Lifegard® family of
non-invasive patient monitors. Under the Agreement, Analogic would co-brand the
devices and reconfigure its Lifegard II monitor to include the Company’s MAXNIBP
branded non-invasive blood pressure and    other branded
technologies. Accordingly, the Company would reimburse Analogic approximately
$900,000 upon meeting agreed milestone dates for such efforts. As of December
31, 2008, the Company had made payments to Analogic of $90,000.





On
November 24, 2008, Analogic commenced arbitration against the Company contending
that the Company breached the Agreement.  Analogic is seeking damages
of approximately $765,000 for costs it allegedly incurred in performing under
the Agreement including winding down costs and additional remedies which may
provide for relief totaling double or treble damages, in addition to attorney
fees.  The Company denies Analogic’s claims and is asserting a
counterclaim for damages in excess of those sought by Analogic. The arbitration
hearing is expected to be conducted in the second quarter of
2009.  There can be no assurance as to the ultimate outcome of this
proceeding.





During
2008, the Company recorded sales of Analogic products of
$2,173,000.





Our
Products May Become Rapidly Obsolete





The areas
in which we are developing, distributing, and/or licensing products involve
rapidly developing technology. Others may develop products that might cause
products being developed, distributed or licensed by us to become obsolete or
uneconomical or result in products superior to our products.





Our
international sales subject us to currency and related risks.  Our
international sales accounted for 26% of our total net sales for the 2008 fiscal
year.  We expect that international sales will continue to constitute
a significant portion of our business.  Although we sell our products
in United States dollars and are not subject to significant currency risks, an
increase in the value of the United States dollar relative to foreign currencies
in our international markets could make our products less price competitive in
these markets.





An
Acquisition Of The Company May Be Hindered





Our Board
of Directors is authorized to issue from time to time, without stockholder
authorization, shares of preferred stock, in one or more designated series or
classes.  We are also subject to a Delaware statute regulating
business combinations.  These provisions could discourage, hinder or
preclude an unsolicited acquisition of the Company and could make it less likely
that stockholders receive a premium for their shares as a result of any takeover
attempt.





Sales
Of A Substantial Number Of Shares Of Our Common Stock In The Public Market
Originally Issued Through The Exercise Of Options Or Warrants Could Adversely
Affect The Market Price Of Our Common Stock And May Also Adversely Affect Our
Ability To Raise Additional Capital





As of
December 31, 2008, options and warrants for the purchase of 1,654,526 shares of
our common stock were outstanding.  Historically, our common stock has
been thinly traded.  This low trading volume may have had a
significant effect on the market price of our common stock, which may not be
indicative of the market price in a more liquid market.




We Depend Highly On Certain Key
Management Personnel





We
believe that our future success will depend to a significant extent on the
efforts and abilities of our senior management, in particular, Andrew Kersey,
our President and Chief Executive Officer, and Jeffery Baird, our Chief
Financial Officer.  The loss of the services of Messrs. Kersey or
Baird could have a material adverse effect on our business and results of
operations.








Page
15





We
Do Not Expect To Pay Cash Dividends





We have
not paid cash dividends on our common stock since inception, and at this time we
do not anticipate that we will pay cash dividends in the foreseeable
future.





Item
1B.  Unresolved Staff Comments





None.





Item 2.
Properties





The
Company currently leases four separate operating facilities as described in
further detail below.





On
September 6, 2007, the Company closed the sale and leaseback of its headquarters
and manufacturing facility in Branford, Connecticut (the “Property”) which
comprises approximately 24,000 square feet of office and manufacturing
space.  Net proceeds from the sale were $2,791,529 of which $928,872
was used to retire the related outstanding mortgage debt. The gain of $1,346,373
realized on the sale has been deferred and will be recognized in operations
against rent expense over the initial term of the lease. The lease has an
initial term of ten years expiring on September 6, 2017 and contains an option
for two additional five-year periods. The lease provides for an annual base rent
in years one through five of $244,800 and $268,800 in years six through ten. The
Company will recognize rent   expense on a straight-line basis
over the ten years. Under the lease, the Company is responsible for the costs
of  utilities, insurance, taxes and maintenance expenses. Further, the
Company is required to maintain at least $600,000 in cash and cash equivalents
(increasing at 3% per annum) and net current assets of not less than
$3,600,000.





In
addition, the Company has a right of first offer to lease any additional space
or building built by the lessor on the Property, subject to certain
restrictions.  The Company also has the right to require the lessor to
build an addition or additional building (“Expansion Premises”), subject to
certain restrictions.  Upon the delivery of any Expansion Premises,
the term of the Lease would extend for a ten year term. The base rent for the
Expansion Premises shall be the greater of the then prevailing market rent or an
amount equal to a return on actual costs of construction of the greater of 250
basis points over the rate on ten year U.S. Treasury Notes, or
8%.  Upon delivery of the Expansion Premises, the lessor would assume
obligations under the Company’s leases of its two adjacent properties, in
exchange for a payment equal to three months rent and certain unamortized costs
incurred in these facilities.





The
Company is also leasing two properties adjacent to its corporate facilities.
Approximately 8,300 square feet of office and limited warehouse space is being
leased under an agreement effective June 1, 2006, as amended, and expires on May
31, 2014.  Minimum annual rental expense is approximately $78,000
excluding apportioned real estate taxes and certain utility costs. Approximately
9,600 square feet of office and warehouse space is being leased under an
agreement effective July 1, 2007, as amended, and expires June 30, 2015. Minimum
annual rental expense is approximately $83,000 excluding apportioned real estate
taxes and certain common area maintenance charges.





The
Company’s subsidiary, Statcorp, is leasing approximately 17,500 square feet of
warehouse and office space under an agreement, as amended, which expires March
31, 2012.  Minimum annual rental expense is approximately $84,000
excluding apportioned real estate taxes and certain common area maintenance
charges.





The
Company believes that its premises meet its current and expected operating needs
and are adequately insured.





Item 3. Legal
Proceedings




The
manufacture and sale of our products exposes us to product liability claims and
product recalls, including those which may arise from misuse or malfunction of,
or design flaws in, our products or use of our products with components or
systems not manufactured or sold by us.  Product liability claims or
product recalls, regardless of their ultimate outcome, could require us to spend
significant time and money in litigation or to pay significant
damages.  We are currently a defendant in a product liability action
which is scheduled for trial during mid 2009.  We believe that our
product liability insurance is sufficient to cover any damages and costs that
are likely with respect to this matter. There can be no assurance however, that
this will be the case with respect to any future







Page
16




matters.  Furthermore,
we may not be able to obtain insurance in the future at satisfactory rates or in
adequate amounts.




In
addition, publicity pertaining to the misuse or malfunction of, or design flaws
in, our products could impair our ability to successfully market and sell our
products and could lead to product recalls.





On May 8,
2007, the Company signed an exclusive distribution agreement (the “Agreement”)
with Analogic Corporation (“Analogic”) under which the Company obtained
worldwide exclusive rights to market the Analogic Lifegard® family of
non-invasive patient monitors. Under the Agreement, Analogic would co-brand the
devices and reconfigure its Lifegard II monitor to include the Company’s MAXNIBP
branded non-invasive blood pressure and other branded technologies. Accordingly,
the Company would reimburse Analogic approximately $900,000 upon meeting agreed
milestone dates for such efforts. As of December 31, 2008, the Company had made
payments to Analogic of $90,000.





On
November 24, 2008, Analogic commenced arbitration against the Company contending
that the Company breached the Agreement.  Analogic is seeking damages
of approximately $765,000 for costs it allegedly incurred in performing under
the Agreement including winding down costs and additional remedies which may
provide for relief totaling double or treble damages, in addition to attorney
fees.  The Company denies Analogic’s claims and is asserting a
counterclaim for damages in excess of those sought by Analogic. The arbitration
hearing is expected to be conducted in the second quarter of
2009.  There can be no assurance as to the ultimate outcome of this
proceeding.





During
2008, the Company recorded sales of Analogic products of
$2,173,000.





In
addition, we may become in the normal course of our business operations a party
to other legal proceedings in addition to those described in the paragraphs
above.  None of these other proceedings would be expected to have a
material adverse impact on our results of operations, financial condition, or
cash flows.





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





None.





PART II





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





Effective
December 2005, the common stock of the Company began trading on the NASDAQ
Capital Market, under the symbol “CASM.”  Effective December 2006, the
common stock of the Company began trading on the NASDAQ Global Market while
continuing to utilize the CASM symbol.





The
following table shows the high and low sales prices for the Company’s common
stock during each quarterly period for the last two years.





Quarter Ended
                      
                      High
                      
                      
                      LowMarch
      31, 2007
                      
                      $
                      8.40
                      
                      
                      $
                      6.26June
      30, 2007
                      
                      $
                      8.51
                      
                      
                      $
                      6.27September
      30, 2007
                      
                      $
                      7.50
                      
                      
                      $
                      4.25December
      31, 2007
                      
                      $
                      6.47
                      
                      
                      $
                      4.76March
      31, 2008
                      
                      $
                      5.54
                      
                      
                      $
                      4.05June
      30, 2008
                      
                      $
                      4.30
                      
                      
                      $
                      2.81September
      30, 2008
                      
                      $
                      4.21
                      
                      
                      $
                      2.72December
      31, 2008
                      
                      $
                      4.00
                      
                      
                      $
                      1.66








Page 17





The
following table sets forth the approximate number of holders of record of common
stock of the Company on December 31, 2008.





Title of Class
              Number of ShareholdersCommon
      stock, $.004 par value
              1,862





To date,
no cash dividends have been declared on the Company’s common
stock.  The Company does not currently intend to pay a cash dividend
in the near future.





The
Company did not issue any shares of common stock during the fourth quarter of
2008 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 2008.





Item 6.  Selected
Financial Data





For
      Year Ended December 31,
              
              2008(1)
              
              
              2007(1)
              
              
              2006(1)
              
              
              2005(2)
              
              
              2004(amounts
      in thousands, except pershare
      amounts)Net
      sales
              
              $
              40,649
              
              
              $
              38,232
              
              
              $
              35,202
              
              
              $
              26,884
              
              
              $
              20,059Cost
      of sales
              
              
              26,748
              
              
              
              24,585
              
              
              
              20,803
              
              
              
              15,092
              
              
              
              11,056Gross
      profit
              
              
              13,901
              
              
              
              13,647
              
              
              
              14,399
              
              
              
              11,792
              
              
              
              9,003Operating
      expenses:Research
      and development
              
              $
              2,028
              
              
              $
              2,254
              
              
              $
              2,762
              
              
              $
              1,631
              
              
              $
              1,033Selling,
      general and administrative
              
              
              12,165
              
              
              
              10,815
              
              
              
              8,659
              
              
              
              7,438
              
              
              
              6,263Total
      operating expenses
              
              
              14,193
              
              
              
              13,069
              
              
              
              11,421
              
              
              
              9,069
              
              
              
              7,296Operating
      (loss) income
              
              
              (291
              )
              
              
              579
              
              
              
              2,978
              
              
              
              2,723
              
              
              
              1,707(Loss)
      income before income taxes
              
              
              (564
              )
              
              
              304
              
              
              
              2,730
              
              
              
              2,556
              
              
              
              1,635Net
      (loss) income
              
              
              (388
              )
              
              
              306
              
              
              
              1,747
              
              
              
              1,815
              
              
              
              1,205Net
      (loss) income perdiluted
      common share
              
              $
              (0.04
              )
              
              $
              0.03
              
              
              $
              0.14
              
              
              $
              0.15
              
              
              $
              0.11Diluted
      shares outstanding
              
              
              11,032
              
              
              
              12,212
              
              
              
              12,147
              
              
              
              11,729
              
              
              
              11,128At
      Year End:Working
      capital
              
              $
              10,819
              
              
              $
              10,388
              
              
              $
              9,096
              
              
              $
              7,482
              
              
              $
              5,369Long-term
      debt, less current portion
              
              
              1,708
              
              
              
              2,323
              
              
              
              3,807
              
              
              
              4,416
              
              
              
              1,035Total
      assets
              
              
              23,685
              
              
              
              23,888
              
              
              
              21,443
              
              
              
              17,918
              
              
              
              10,993Stockholder’s
      equity
              
              $
              14,900
              
              
              $
              13,751
              
              
              $
              12,625
              
              
              $
              9,117
              
              
              $
              7,156








(1)
            Operating
      income reduced by $410, $303 and $390 for 2008, 2007 and 2006,
      respectively, from stock compensation expense. The Company adopted FAS
      123R – Share-Based Payment, as of January 1,
  2006.


(2)
            2005
      operating income includes $401 credit from curtailment gain of
      post-retirement benefit plan.
              2005 reflects the acquisition of Statcorp,
      Inc. on May 15, 2005.




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





Certain
statements included in this report, including without limitation statements in
the Management’s Discussion and Analysis of Financial Condition and Results of
Operations, which are not historical facts, are “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the Company’s current expectations
regarding future events. The Company cautions that such statements are qualified
by important factors that could cause actual results to differ materially from
expected results which may be contained in the forward-looking statements. All
forward-looking statements involve risks and uncertainties, including, but not
limited to, the following:  potential liquidity constraints; 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







Page 18





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 or other litigation 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;
changes in the competitive environment; and other risks described in Item 1A of
this filing.





Year Ended December 31, 2008
Compared to Year Ended December 31, 2007





The
Company recorded a net loss of $388,000 for 2008 or ($0.04) per basic and
diluted common share compared to net income of $306,000 or $0.03 per diluted
common share for 2007. Pre-tax (loss) income for 2008 and 2007 were affected by
$410,000 and $303,000, respectively, of stock compensation expense.





The
operating loss for 2008 was $291,000 or 0.7% of net sales compared to operating
income of $579,000 or 1.5% of net sales for 2007. Several key factors
contributed to the decrease in operating income during 2008. Cost of sales as a
percentage of sales increased to 65.8% from 64.3% for 2007 primarily as a result
of higher costs in the first quarter of 2008. Lower than expected sales during
that period combined with fixed manufacturing costs resulted in a 70.1% cost of
sales percentage during the first quarter. Operating expenses for 2008 increased
$1,124,000 or 9% to reach $14,193,000 or 34.9% of net sales from $13,069,000 or
34.2% of net sales for 2007. Sales and marketing expenses related to the
cerebral oximetry market reached $3,094,000 in 2008, an increase of $1,355,000
over 2007 spending levels.





The
following table provides comparative results of net sales by product and
geographic category:





Year
      Ended
                
                
                Year
      Ended
                
                
                Increase(amounts
      in thousands)
                
                December 31, 2008
                
                
                December 31, 2007
                
                
                (Decrease)Bedside
      Monitoring
                
                $
                15,889
                
                
                $
                18,640
                
                
                $
                (2,751
                )Critical
      Care Monitoring
                
                
                2,258
                
                
                
                315
                
                
                
                1,943Blood
      Pressure Measurement Technology
                
                
                7,769
                
                
                
                5,825
                
                
                
                1,944Supplies/Service
                
                
                14,733
                
                
                
                13,452
                
                
                
                1,281$
                40,649
                
                
                $
                38,232
                
                
                $
                2,417Domestic
      Sales
                
                $
                30,032
                
                
                $
                29,601
                
                
                $
                431International
      Sales
                
                
                10,617
                
                
                
                8,631
                
                
                
                1,986$
                40,649
                
                
                $
                38,232
                
                
                $
                2,417





Net sales
for 2008 increased 6% or $2,417,000 to $40,649,000 from $38,232,000 for 2007.
Bedside monitoring sales decreased $2,751,000 or 15% from 2007 primarily due to
lower sales levels of vital signs monitors and accessories sold to the Veterans
Administration and lower sales of veterinary products sold under a private label
agreement. Approximately $311,000 of the veterinary sales are classified as of
2008 as blood pressure measurement technology sales. Increased sales of Analogic
products marketed by the Company since May 2007 partially offset reductions in
vital signs products sales. Critical care monitoring sales increased $1,943,000
to $2,258,000 and represent the Company’s Fore-Sight cerebral oximetry
technology launched during mid-2007.  Net sales in this category are
primarily sensor related (72% for 2008).  In certain U.S. markets, the
Company routinely places the monitor and retains ownership of the device in
exchange for commitments to purchase disposable sensors. During 2008, the
Company placed or sold approximately 116 monitors with customers bringing the
installed base of Fore-Sight monitors worldwide to 151 as of the end of 2008.
Blood pressure measurement technology sales increased $1,944,000 or 33% due to a
rebound of sales to a key customer, Medtronic. 2007 sales to Medtronic were
affected by a voluntary suspension of U.S. product shipments from its
Physio-Control division announced during January 2007. Sales of supplies and
service increased $1,281,000 or 10% over 2007 sales and are primarily comprised
of sales of blood pressure cuffs accounting for approximately 71% of sales in
this category. Sales to the U.S. market accounted for $30,032,000 or 74% of the
total net sales reported for 2008, an increase of $431,000 or 1% over the
$29,601,000 reported for 2007. International sales accounted for $10,617,000 or
26% of total net sales, an increase of $1,986,000 or 23% over 2007 sales levels.
The growth in international sales was led by sales of Analogic products and
blood pressure cuff sales.








Page 19





Cost of
sales as a percentage of net sales increased to 65.8% for 2008 compared to 64.3%
of net sales for 2007. The increase in cost of sales as a percentage of sales
for 2008 was primarily related to the first quarter of 2008 where lower than
expected sales combined with fixed manufacturing costs. The Company is focusing
its efforts during 2009 to achieve cost reductions to improve overall gross
profit levels.





R&D
expenses decreased $226,000 or 10% to $2,028,000 for 2008 from $2,254,000 for
2007. R&D expenses are reported net of reimbursements received from the
National Institutes of Health (“NIH”) pertaining to the Company’s development of
its Near-Infrared Spectroscopy (“NIRS”) technology. Amounts reimbursed from the
NIH, including accruals, for 2008 and 2007 were $582,000 and $480,000,
respectively. Increased reimbursements for 2008 reflect the fact that during
September 2007 the Company was awarded a three year grant totaling approximately
$2,800,000 to support its NIRS research. R&D expenses before NIH
reimbursement approximated 6.4% and 7.2%, respectively, of 2008 and 2007
revenues.





Selling,
general and administrative (“S,G&A”) expenses increased $1,350,000 or 12.5%
to $12,165,000 or 29.9% of net sales for 2008 from $10,815,000 or 28.3% of net
sales for 2007. Sales and marketing expenses in 2008 pertaining to the Company’s
Fore-Sight cerebral oximeter were approximately $3,094,000 and accounted for
100% of the overall increase in S,G&A spending. Increased manufacturers
representative commission expenses from increased sales, salaries and related
benefits from expanded direct sales personnel costs, travel and entertainment
and depreciation expenses were primarily responsible for the increase in the
cerebral oximetry related expenses. General and administrative (“G&A”)
expenses increased by $219,000 or 5.9% as a result of increases in salaries and
related benefits and legal and accounting expenses which were partially offset
by reductions in Sarbanes Oxley section 404  compliance costs,
investor relations fees and company-wide incentive payouts. Together, the
G&A expenses were offset by reductions in non-cerebral oximetry related
marketing costs and decreased international sales support expenses.





Net
interest expense decreased $3,000 to $272,000 for 2008 from $275,000 for 2007 as
a result of reduced balances on the Company’s long-term debt loan. Higher
average balances on the line-of-credit facility for 2008 were offset by reduced
costs of borrowed funds.





The
income tax benefit for 2008 was $176,000 compared to a benefit of $3,000 for
2007. The benefit for 2008 is related to taxable losses and federal R&D
related tax credits.  The benefit for 2007 is primarily related to an
exchange of $155,000 of state tax carry-forwards for reduced cash receipts
payable to the Company partially offset by certain non-deductible expenses
including stock option compensation and entertainment costs.





Year Ended December 31, 2007
Compared to Year Ended December 31, 2006





Net
income for 2007 was $306,000 or $0.03 per common share on a diluted basis
compared to $1,747,000 or $0.14 per diluted common share for 2006. Pre-tax
income for 2007 and 2006 were affected by $303,000 and $390,000, respectively,
of stock compensation expense of which $98,000 and $343,000, respectively, was
non-deductible for income tax purposes.





Operating
income for 2007 was $579,000 or $1.5% of  sales compared to $2,978,000
or 8.5% of  sales for 2006. Several key factors contributed to the
decrease in operating income levels during 2007 including significant
investments in the cerebral oximetry market particularly in the areas sales and
marketing expenditures which increased approximately $1,300,000 over 2006
spending levels; product mix issues largely caused by reduced OEM sales which
normally carry higher than average gross margin rates and international sales of
Analogic products; increased manufacturing overhead costs including Fore-Sight
cerebral oximetry start-up costs; and Sarbanes Oxley 404 internal control
consulting fees of approximately $164,000. The Company generated sales of
$38,232,000 for 2007, an increase of $3,030,000 or 8.6% over sales of
$35,202,000 for 2006.  The following table provides comparative
results by product and geographic category:





Year
      Ended
                
                
                Year
      Ended
                
                
                Increase(amounts
      in thousands)
                
                December 31, 2007
                
                
                December 31, 2006
                
                
                (Decrease)Bedside
      Monitoring
                
                $
                18,640
                
                
                $
                16,071
                
                
                $
                2,569Critical
      Care Monitoring
                
                
                315
                
                
                
                —
                
                
                
                315Blood
      Pressure Measurement Technology
                
                
                5,825
                
                
                
                6,571
                
                
                
                (746
                )  Page
20
 Supplies/Service
                
                
                13,452
                
                
                
                12,560
                
                
                
                892$
                38,232
                
                
                $
                35,202
                
                
                $
                3,030Domestic
      Sales
                
                
                29,601
                
                
                
                27,519
                
                
                
                2,082International
      Sales
                
                
                8,631
                
                
                
                7,683
                
                
                
                948$
                38,232
                
                
                $
                35,202
                
                
                $
                3,030





Sales for
2007 increased 8.6% or $3,030,000 to $38,232,000 from $35,202,000 for 2006.
Bedside monitoring sales increased $2,569,000 or 16% over 2006 led by vital
signs monitoring and accessories sales primarily sold to the VA and sales of
Analogic products marketed by the Company since May 2007, partially offset by
reductions in apnea monitoring products sales. Critical care monitoring sales
represent the Company’s Fore-Sight cerebral oximetry technology launched during
mid-2007.   Sales in this category are primarily sensor related
where the Company places the monitor and retains ownership of the device in
exchange for commitments to purchase disposable sensors. Blood pressure
measurement technology sales decreased $746,000 or 11% due to reductions in
sales to a key customer, Medtronic. During January 2007, Medtronic announced a
voluntary suspension of U.S. product shipments from its Physio-Control division.
Despite strong fourth quarter sales which exceeded the prior year fourth
quarter, overall sales to Medtronic for 2007 decreased $1,510,000 as compared to
2006. Medtronic represented approximately 11% of the Company’s sales for the
full year 2006. Sales of supplies and service increased $892,000 or 7% over 2006
sales and are primarily comprised of sales of blood pressure cuffs accounting
for approximately 71% of sales in this category. Sales to the U.S. market
accounted for $29,601,000 or 77% of the total sales for 2007, an increase of
$2,082,000 or 8% over the $27,519,000 reported for 2006. International sales
accounted for $8,631,000 or 23% of total revenues, an increase of $948,000 or
12% over 2006 sales levels.





Cost of
sales as a percentage of net sales increased to 64.3% for 2007 compared to 59.1%
of net sales for 2006. The increase in cost of sales as a percentage of sales
for 2007 was related to a number of causes including lost gross margins on the
shortfall in OEM  sales which normally carries higher gross margins
than other products sold by the Company; lower margins on Analogic product sales
particularly in the fourth quarter of 2007 primarily as a result of additional
international business; NIRS manufacturing start-up costs; increased indirect
manufacturing overhead costs to support the Company’s expanded operations; and
reductions in accrued post-retirement benefit costs during  2006 for
changes made to terminate the Company’s plan during 2005.





R&D
expenses decreased $508,000 or 18% to $2,254,000 for 2007 from $2,762,000 for
2006. R&D expenses are reported net of reimbursements received from the
National Institutes of Health (“NIH”) pertaining to the Company’s development of
its Near-Infrared Spectroscopy (“NIRS”) technology. Amounts reimbursed from the
NIH, including accruals, for 2007 and 2006 were $480,000 and $21,000,
respectively. Increased reimbursements for 2007 reflect the fact that during
September 2007 the Company was awarded a three year grant totaling approximately
$2,800,000 million to support its NIRS research. R&D expenses before NIH
reimbursement approximated 7.2% and 7.9%, respectively, of 2007 and 2006
revenues. Increased NIH reimbursements offset increases in project material
costs, clinical evaluations and salaries and related fringe
benefits.





Selling,
general and administrative (“S,G&A”) expenses increased $2,156,000 or 25% to
$10,815,000 or 28% of  sales for 2007 from $8,659,000 or 25%
of  sales for 2006. Sales and marketing expenses in 2007 pertaining to
the Company’s Fore-Sight cerebral oximeter were approximately $1,800,000 and
accounted for nearly $1,300,000 or 60% of the increase in S,G&A spending.
The Company also increased its investments in personnel in the areas of
marketing, customer service, international sales consultants and domestic sales
management in order to support   the Company’s
growth.   Additionally, increases in general insurance costs,
amortization and depreciation, and employee health care costs also impacted
S,G&A expenses.  During 2007, the Company also incurred $164,000
in consulting fees pertaining to its Sarbanes Oxley 404 compliance
efforts.




Net
interest expense increased $27,000 to $275,000 for 2007 from $248,000 for 2006
as a result of borrowings on the line-of-credit facility partially offset by
reductions in interest expenses associated with lower balances on the Company’s
Statcorp acquisition loan and the payoff of the mortgage on the Company’s
headquarters facility.





The
income tax benefit for 2007 was $3,000 compared to income tax expense of
$983,000 for 2006. The benefit for 2007 was primarily related to an exchange of
$155,000 of state tax carry-forwards for reduced cash receipts payable to the
Company partially offset by certain non-deductible expenses including stock
option compensation and entertainment costs. The provision for income taxes for
2006 represented an effective tax rate of 36% which was







Page 21





greater
than the statutory rate primarily as a result of non-deductible stock
compensation expense and state income taxes partially offset by R&D and
other tax credits. The income tax benefit for 2007 represented an effective tax
rate of approximately 1% resulting primarily from R&D and other tax
credits.




Financial Condition,
Liquidity and Capital Resources





The
Company’s cash and cash equivalents were $1,083,000 at December 31, 2008
compared to $667,000 at December 31, 2007. Working capital increased $431,000 to
$10,819,000 at December 31, 2008 from $10,388,000 at December 31, 2007. The
Company’s current ratio increased slightly to 2.88 to 1 from 2.63 to
1.





Net cash
provided by operating activities for 2008 was $1,660,000 compared to cash used
of $3,178,000 for the prior year.  The improvement was primarily due
to decreases in accounts receivable and inventories which were partially offset
by decreases in accounts payable and accrued expenses and the increase in an
other receivable related to the transfer of raw material inventories to one of
the Company’s primary vendors under a turn-key agreement initiated during the
fourth quarter of 2008.




Net cash
used by investing activities was $1,466,000 for 2008 compared to cash provided
of $1,124,000 for 2007. During September 2007, the Company realized proceeds of
$2,792,000 from the sale of its headquarters.  The Company incurred
$1,413,000 of capital expenditures during 2008 compared to $1,188,000 for 2007.
Equipment      purchases during 2008 were driven
by Fore-Sight cerebral oximeter demonstration equipment and clinical research
units, information technology, manufacturing equipment and furniture and
fixtures and leasehold improvements pertaining to the Company’s expansion of its
adjacent facilities. Cash used for investing activities in 2007 included
$1,188,000 for manufacturing equipment, leasehold improvements commensurate with
the expansion of the Company’s adjacent leased space, engineering equipment and
enhancements to the Company’s IT infrastructure.  During 2008, the
Company incurred $184,000 of expenditures to purchase intangible assets
including $60,000 related to deferred finance charges and $70,000 pertaining to
patents and trademarks. Current year additions reflect an adjustment of a prior
year accrual of $131,000.





Net cash
provided by financing activities was $222,000 for 2008 compared to $1,387,000
for 2007. During May of 2008, the Company consummated a private placement of
333,333 shares of its common stock for an aggregate sum of $1,000,000. The
Company repaid $577,000 of long-term debt during 2008 and reduced its
line-of-credit balance by $255,000 at December 31, 2008. During 2007, the
Company received advances under the line-of-credit of $2,250,000 and repaid
$1,516,000 of long-term debt which included the retirement of its mortgage debt
of $929,000 upon the sale and leaseback of its headquarters.





The
Company currently leases four facilities and certain equipment under
non-cancelable operating leases. The following table sets forth a summary of the
Company’s cash commitments under contractual obligations as of December 31,
2008:





Contractual
                  
                  
                  
                  
                  One
      Year
                  
                  
                  2 –
      4
                  
                  
                  5 –
      7
                  
                  
                  More
      ThanObligations
                  
                  Total
                  
                  
                  or Less
                  
                  
                  Years
                  
                  
                  Years
                  
                  
                  Seven YearsLong-term
      debt
                  
                  $
                  2,322,560
                  
                  
                  $
                  614,067
                  
                  
                  $
                  1,708,493
                  
                  
                  $
                  —
                  
                  
                  $
                  —Operating
      leases
                  
                  
                  3,379,000
                  
                  
                  
                  472,235
                  
                  
                  
                  1,289,557
                  
                  
                  
                  1,169,208
                  
                  
                  
                  448,000$
                  5,701,560
                  
                  
                  $
                  1,086,302
                  
                  
                  $
                  2,998,050
                  
                  
                  $
                  1,169,208
                  
                  
                  $
                  448,000




On
February 11, 2008, the Company amended and restated its existing line of credit
with NewAlliance Bank (the “Bank”).  The Company entered into a new
Commercial Loan Agreement (the “Loan Agreement”) and related Commercial
Revolving Promissory Note (the “Note”) which provide for borrowings on a
revolving basis, at the Bank’s discretion, in an amount up to
$10,000,000.  Loans in excess of $2,000,000 up to $10,000,000 can be
made only if the maximum principal amount outstanding does not exceed a
borrowing base equal to the sum of (i) 75% of eligible receivables (as defined
in the Loan Agreement) and (ii) the lesser of $2,500,000 or 30% of eligible
inventory (as defined in the Loan Agreement.)  Borrowings under the
Loan Agreement and the Note are secured by a first priority lien in all the
business assets of the Company pursuant to a Security Agreement (the “Security
Agreement”).  The Loan Agreement contains customary non-financial
covenants and financial covenants consisting of a debt service coverage ratio
and a debt to tangible net worth ratio.







Page 22





On
December 31, 2008, the Company amended the line of credit pursuant to a Debt
Modification Agreement (the “Modification Agreement”). The Modification
Agreement amended the Loan Agreement and related Note. The Modification
Agreement extends the maturity date of the Note to July 1, 2010 and also amends
the interest rate for the revolving loans under the Credit Agreement by
increasing the rate from (i) the Prime Rate (as defined in the Loan Agreement)
minus .50% to (ii) the Bank’s Base Rate (as defined in the Modification
Agreement) with a minimum interest rate of 3.25% per annum. The Modification
Agreement also amended the existing debt service coverage ratio covenant to
provide that it would be measured quarterly on a rolling four quarter basis
beginning December 31, 2008.





The
Company executed an amendment to the line of credit agreement on April 3, 2009
pursuant to a Second Modification Agreement with the Bank effective March 31,
2009. Under the terms of the Second Modification Agreement, the debt service
coverage ratio was revised from a quarterly test to an annual test for the
twelve months ended December 31, 2009 and the minimum ratio revised from 1.5 to
1.0. As of the first quarter of 2010 and thereafter, the ratio returns to 1.5
with testing resumed on a quarterly basis. The maximum availability under the
line of credit was reduced to $5,000,000 from $10,000,000. Further, the interest
rate was modified from the Bank’s Base Rate with a floor of 3.25% to the Bank’s
Base Rate plus 1.0% with a floor rate of 4.0%.





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.  However, future cash flows may be impacted by a number
of factors, including changing market conditions or failure to meet financial
covenants under our current or any future loan agreement.  Changes in
payment terms to one or more major suppliers could also have a material adverse
effect on our results of operations and future liquidity.  We believe
that our current levels of working capital and available debt financing are
insufficient to fund major growth initiatives, such as significant increases in
our sales and marketing personnel, or material acquisitions. Any major growth
initiatives would require us to seek other sources or forms of debt or equity
capital. There can be no assurance that we will be successful in securing such
funding for major initiatives. There can be no assurance that we will be
successful in obtaining a new credit agreement or that we would be successful in
securing additional sources or forms of capital for major
initiatives.





Off-Balance Sheet
Arrangements





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





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 unsalable based on estimates of future demand and
the sale price in the market. Judgments with respect to salability 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.  There were no significant write-offs for any period
presented.





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 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.  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.








Page 23





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. Warranty costs have not been material to operating results
over the past several years.  However, 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





Recent
accounting pronouncements potentially affecting the Company’s future financial
statements are described under the caption, “New accounting pronouncements” in
Note 2 – Summary of Significant Accounting Policies. There are no new
pronouncements which are likely to materially impact the Company’s financial
statements.





Item
7A.  Quantitative and Qualitative Disclosures about Market
Risk





The
Company has certain exposures to market risk related to changes in interest
rates.  The Company has an outstanding line-of-credit agreement, under
which there were borrowings of $1,994,000 at December 31, 2008.  The
line-of-credit agreement, amended effective March 31, 2009, bears interest at
variable rates based on prime rate indices. The Company holds no derivative
securities for trading purposes and is not subject in any material respect to
currency or other commodity risk.





Item 8.  Financial Statements and
      Supplementary Data
              PageReport
      of Independent Registered Public Accounting Firm
              F-1Financial
      StatementsConsolidated
      Balance Sheets as of December 31, 2008 and 2007
              F-2Consolidated
      Statements of Operations for the Years Ended December 31, 2008, 2007 and
      2006
              F-3Consolidated
      Statements of Changes in Shareholders’ Equity for the Years Ended December
      31, 2008, 2007 and 2006
              F-4Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
      2006
              F-5Notes
      to Consolidated Financial Statements
              F-6
      to F-18











F-1











Report
of 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, 2008 and 2007, and the related
consolidated statements of operations, changes in shareholders’ equity, and cash
flows for each of the years  in the three-year period ended December
31, 2008.  The Company’s management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial
statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of the
Company’s internal control over financial reporting.  An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.  Accordingly, we
express no such opinion.  An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, 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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2008 and 2007, and the results of its operations and its cash flows for the
each of the years in the three-year period ended December 31, 2008 in conformity
with accounting principles generally accepted in the United States of
America.





As
discussed in Note 2, the Company adopted FIN 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109,effective January 1,
2007.








/s/ UHY
LLP








New Haven, Connecticut


April 3, 2009

















F-2


CAS
MEDICAL SYSTEMS, INC.


Consolidated
Balance Sheets


As of
December 31, 2008 and 2007





ASSETS
              
              2008
              
              
              2007CURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              1,082,619
              
              
              $
              666,722Accounts
      receivable, less allowance of $150,000 in 2008and
      $125,000 in 2007
              
              
              3,681,355
              
              
              
              4,947,300Recoverable
      income taxes
              
              
              101,185
              
              
              
              230,458Other
      receivable
              
              
              715,769
              
              
              
              —Inventories
              
              
              9,786,538
              
              
              
              10,021,118Deferred
      income taxes
              
              
              791,493
              
              
              
              474,265Other
      current assets
              
              
              411,938
              
              
              
              414,204Total
      current assets
              
              
              16,570,897
              
              
              
              16,754,067PROPERTY
      AND EQUIPMENT:Leasehold
      improvements
              
              
              281,612
              
              
              
              266,493Equipment
      at customers
              
              
              1,132,422
              
              
              
              272,360Machinery
      and equipment
              
              
              5,326,735
              
              
              
              4,788,9026,740,769
              
              
              
              5,327,755Accumulated
      depreciation and amortization
              
              
              (4,013,900
              )
              
              
              (2,987,030
              )Property
      and equipment, net
              
              
              2,726,869
              
              
              
              2,340,725INTANGIBLE
      AND OTHER ASSETS, net
              
              
              757,378
              
              
              
              846,602GOODWILL
              
              
              3,379,021
              
              
              
              3,379,021DEFERRED
      INCOME TAXES
              
              
              250,370
              
              
              
              567,971Total
      assets
              
              $
              23,684,535
              
              
              $
              23,888,386





LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIES:Current
      portion of long-term debt
              
              $
              614,067
              
              
              $
              577,453Notes
      payable
              
              
              —
              
              
              
              71,537Line-of-credit
              
              
              1,994,008
              
              
              
              2,249,349Accounts
      payable
              
              
              2,307,675
              
              
              
              2,505,460Accrued
      expenses
              
              
              835,868
              
              
              
              962,154Total
      current liabilities
              
              
              5,751,618
              
              
              
              6,365,953LONG-TERM
      DEBT, less current portion
              
              
              1,708,493
              
              
              
              2,322,561DEFERRED
      GAIN ON SALE AND LEASEBACK OF PROPERTY
              
              
              1,168,701
              
              
              
              1,303,338INCOME
      TAXES PAYABLE
              
              
              155,875
              
              
              
              145,125COMMITMENTS  (Note
      11)
              
              
              —
              
              
              
              —SHAREHOLDERS’
      EQUITY:Series
      A cumulative convertible preferred stock, $.001 par value per
      share,1,000,000
      shares authorized, no shares issued or outstanding
              
              
              —
              
              
              
              —Common
      stock, $.004 par value per share, 40,000,000 shares
      authorized,11,419,535
      and 10,984,785 shares issued as of December 31, 2008and
      2007, respectively, including shares held in treasury
              
              
              45,675
              
              
              
              43,575Common
      stock held in treasury, at cost – 86,000 shares
              
              
              (101,480
              )
              
              
              (101,480
              )Additional
      paid-in capital
              
              
              7,423,340
              
              
              
              5,889,007Retained
      earnings
              
              
              7,532,313
              
              
              
              7,920,307Total
      shareholders’ equity
              
              
              14,899,848
              
              
              
              13,751,409Total
      liabilities and shareholders’ equity
              
              $
              23,684,535
              
              
              $
              23,888,386





See
accompanying notes.







F-3


CAS
MEDICAL SYSTEMS, INC.





Consolidated
Statements of Operations


For the
Years Ended December 31, 2008, 2007 and 2006


2008
              
              
              2007
              
              
              2006NET
      SALES
              
              $
              40,649,057
              
              
              $
              38,232,405
              
              
              $
              35,202,011COST
      OF SALES
              
              
              26,747,590
              
              
              
              24,584,807
              
              
              
              20,802,677Gross
      profit
              
              
              13,901,467
              
              
              
              13,647,598
              
              
              
              14,399,334OPERATING
      EXPENSES:Research
      and development
              
              
              2,027,747
              
              
              
              2,253,512
              
              
              
              2,762,269Selling,
      general and administrative
              
              
              12,164,974
              
              
              
              10,815,248
              
              
              
              8,658,812Total
      operating expenses
              
              
              14,192,721
              
              
              
              13,068,760
              
              
              
              11,421,081OPERATING
      (LOSS) INCOME
              
              
              (291,254
              )
              
              
              578,838
              
              
              
              2,978,253Interest
      expense, net
              
              
              272,471
              
              
              
              274,977
              
              
              
              248,404(LOSS) INCOME BEFORE INCOME
      TAXES
              
              
              (563,725
              )
              
              
              303,861
              
              
              
              2,729,849Income
      taxes (benefit)
              
              
              (175,731
              )
              
              
              (2,599
              )
              
              
              983,148NET
      (LOSS) INCOME
              
              $
              (387,994
              )
              
              $
              306,460
              
              
              $
              1,746,701NET
      (LOSS) INCOME  PER COMMON SHARE:Basic
              
              $
              (0.04
              )
              
              $
              0.03
              
              
              $
              0.17Diluted
              
              $
              (0.04
              )
              
              $
              0.03
              
              
              $
              0.14WEIGHTED
      AVERAGE NUMBER OF COMMONSHARES
      OUTSTANDING:Basic
              
              
              11,031,855
              
              
              
              10,696,217
              
              
              
              10,373,225Diluted
              
              
              11,031,855
              
              
              
              12,211,694
              
              
              
              12,147,373








See
accompanying notes.








F-4


CAS
MEDICAL SYSTEMS, INC.


Consolidated
Statements of Changes in Shareholders’ Equity


For the
Years Ended December 31, 2008, 2007 and 2006


Common
      StockIssued
                                  
                                  
                                  Held
      in Treasury
                                  
                                  
                                  Paid-in
                                  
                                  
                                  RetainedShares
                                  
                                  
                                  Amount
                                  
                                  
                                  Shares
                                  
                                  
                                  Amount
                                  
                                  
                                  Capital
                                  
                                  
                                  Earnings
                                  
                                  
                                  TotalBALANCE,
      December 31, 2005
                                  
                                  
                                  10,113,860
                                  
                                  
                                  $
                                  40,456
                                  
                                  
                                  
                                  86,000
                                  
                                  
                                  $
                                  (101,480
                                  )
                                  
                                  $
                                  3,176,911
                                  
                                  
                                  $
                                  6,001,521
                                  
                                  
                                  $
                                  9,117,408Net
      income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,746,701
                                  
                                  
                                  
                                  1,746,701Common
      stock issued uponexercise of stock options and
      warrants
                                  
                                  
                                  493,425
                                  
                                  
                                  
                                  1,973
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  401,349
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  403,322Common
      stock issued understock purchase plan
                                  
                                  
                                  25,022
                                  
                                  
                                  
                                  100
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  101,341
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  101,441Tax
      benefit from exercise of warrants
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  865,842
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  865,842Restricted
      stock issued under equityincentive
      plans
                                  
                                  
                                  47,000
                                  
                                  
                                  
                                  188
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (188
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  -Stock
      compensation
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  390,283
                                  
                                  
                                  
                                  
                                  
                                  
                                  390,283BALANCE,
      December 31, 2006
                                  
                                  
                                  10,679,307
                                  
                                  
                                  
                                  42,717
                                  
                                  
                                  
                                  86,000
                                  
                                  
                                  
                                  (101,480
                                  )
                                  
                                  
                                  4,935,538
                                  
                                  
                                  
                                  7,748,222
                                  
                                  
                                  
                                  12,624,997Adoption
      of FIN 48
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (134,375
                                  )
                                  
                                  
                                  (134,375
                                  )Net
      income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  306,460
                                  
                                  
                                  
                                  306,460Common
      stock issued uponexercise of stock options and
      warrants
                                  
                                  
                                  192,824
                                  
                                  
                                  
                                  771
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  116,391
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  117,162Common
      stock issued understock
      purchase plan
                                  
                                  
                                  21,654
                                  
                                  
                                  
                                  87
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  114,543
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  114,630Tax
      benefit from exercise of warrants
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  419,399
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  419,399Restricted
      stock issued under equityincentive
      plans
                                  
                                  
                                  91,000
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  —Stock
      compensation
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  303,136
                                  
                                  
                                  
                                  
                                  
                                  
                                  303,136BALANCE,
      December 31, 2007
                                  
                                  
                                  10,984,785
                                  
                                  
                                  
                                  43,575
                                  
                                  
                                  
                                  86,000
                                  
                                  
                                  
                                  (101,480
                                  )
                                  
                                  
                                  5,889,007
                                  
                                  
                                  
                                  7,920,307
                                  
                                  
                                  
                                  13,751,409Net
      loss
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (387,994
                                  )
                                  
                                  
                                  (387,994
                                  )Common
      stock issued uponexercise of stock options and
      warrants
                                  
                                  
                                  29,300
                                  
                                  
                                  
                                  118
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  40,847
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  40,965Common
      stock issued understock
      purchase plan
                                  
                                  
                                  26,417
                                  
                                  
                                  
                                  106
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  99,690
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  99,796Private
      placement
                                  
                                  
                                  333,333
                                  
                                  
                                  
                                  1,333
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  998,667
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,000,000Tax
      benefit from exercise of warrants
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (14,730
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (14,730
                                  )Restricted
      stock issued under equityincentive
      plans, net of cancellations
                                  
                                  
                                  45,700
                                  
                                  
                                  
                                  543
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (543
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  —Stock
      compensation
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  410,402
                                  
                                  
                                  
                                  
                                  
                                  
                                  410,402BALANCE,
      December 31, 2008
                                  
                                  
                                  11,419,535
                                  
                                  
                                  $
                                  45,675
                                  
                                  
                                  
                                  86,000
                                  
                                  
                                  $
                                  (101,480
                                  )
                                  
                                  $
                                  7,423,340
                                  
                                  
                                  $
                                  7,532,313
                                  
                                  
                                  $
                                  14,899,848




See
accompanying notes.













CAS MEDICAL SYSTEMS,
INC.


Consolidated
Statements of Cash Flows


For the
Years Ended December 31, 2008, 2007 and 2006





2008
              
              
              2007
              
              
              2006OPERATING
      ACTIVITIES:Net
      (loss) income
              
              $
              (387,994
              )
              
              $
              306,460
              
              
              $
              1,746,701Adjustments
      to reconcile net (loss) income to net cashprovided
      (used) by operating activities:Depreciation
      and amortization
              
              
              1,169,335
              
              
              
              816,286
              
              
              
              516,150Deferred
      income taxes
              
              
              373
              
              
              
              (537,167
              )
              
              
              37,813Provision
      for doubtful accounts
              
              
              25,000
              
              
              
              50,000
              
              
              
              —Stock
      compensation
              
              
              410,402
              
              
              
              303,136
              
              
              
              390,283Amortization
      of gain on sale and leaseback
              
              
              (134,637
              )
              
              
              (43,035
              )
              
              
              —Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              1,240,945
              
              
              
              (90,997
              )
              
              
              (1,687,340
              )Other
      receivable
              
              
              (715,769
              )
              
              
              —
              
              
              
              —Recoverable
      income taxes
              
              
              129,273
              
              
              
              90,485
              
              
              
              (320,943
              )Inventories
              
              
              234,580
              
              
              
              (3,212,925
              )
              
              
              (1,215,386
              )Other
      current assets
              
              
              2,266
              
              
              
              (6,033
              )
              
              
              86,011Accounts
      payable and accrued expenses
              
              
              (324,071
              )
              
              
              (865,377
              )
              
              
              1,097,560Income
      taxes payable
              
              
              10,750
              
              
              
              10,750
              
              
              
              (18,999
              )Retirement
      benefit obligation
              
              
              —
              
              
              
              —
              
              
              
              (349,567
              )Net
      cash provided (used) by operating activities
              
              
              1,660,453
              
              
              
              (3,178,417
              )
              
              
              282,283INVESTING
      ACTIVITIES:Purchases
      of intangible assets
              
              
              (53,241
              )
              
              
              (479,543
              )
              
              
              (157,561
              )Proceeds
      from sale of property
              
              
              —
              
              
              
              2,791,529
              
              
              
              —Contingent
      consideration for business purchased
              
              
              —
              
              
              
              —
              
              
              
              (300,000
              )Purchases
      of property and equipment
              
              
              (1,413,014
              )
              
              
              (1,188,030
              )
              
              
              (1,042,143
              )Net
      cash (used) provided by investing activities
              
              
              (1,466,255
              )
              
              
              1,123,956
              
              
              
              (1,499,704
              )FINANCING
      ACTIVITIES:Borrowings
      under notes payable
              
              
              298,704
              
              
              
              410,639
              
              
              
              312,182Repayments
      of notes payable
              
              
              (370,241
              )
              
              
              (408,343
              )
              
              
              (449,300
              )(Repayments)
      borrowings under line-of-credit, net
              
              
              (255,341
              )
              
              
              2,249,349
              
              
              
              —Repayments
      of long-term debt
              
              
              (577,454
              )
              
              
              (1,516,188
              )
              
              
              (574,115
              )Tax
      benefit (reversal) from exercise of warrants
              
              
              (14,730
              )
              
              
              419,399
              
              
              
              865,842Proceeds
      from issuance of common stock
              
              
              1,140,761
              
              
              
              231,792
              
              
              
              504,763Net
      cash provided by financing activities
              
              
              221,699
              
              
              
              1,386,648
              
              
              
              659,372Net
      change in cash and cash equivalents
              
              
              415,897
              
              
              
              (667,813
              )
              
              
              (558,049
              )Cash
      and cash equivalents, beginning of year
              
              
              666,722
              
              
              
              1,334,535
              
              
              
              1,892,584CASH
      AND CASH EQUIVALENTS, END OF YEAR
              
              $
              1,082,619
              
              
              $
              666,722
              
              
              $
              1,334,535SUPPLEMENTAL
      DISCLOSURES OF CASH FLOWINFORMATION:Cash
      paid during the year for interest
              
              $
              282,056
              
              
              $
              263,732
              
              
              $
              247,663Cash
      (collected) paid during the year for income taxes, net
              
              $
              (301,398
              )
              
              $
              13,934
              
              
              $
              417,710





See
accompanying notes.





F-6





CAS
MEDICAL SYSTEMS, INC.





Notes to
Consolidated Financial Statements





(1)
            THE
      COMPANY





CAS
Medical Systems, Inc. (“CASMED”) and its wholly-owned subsidiary, Statcorp, Inc.
(“Statcorp”) operate as one reportable business segment. Together, CASMED 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 manufacturers representatives under contract, and pursuant to
original equipment manufacturer (“OEM”) agreements both internationally and in
the United States. The Company’s operations and manufacturing facilities are
located in the United States. During 2008 and 2006, one customer accounted for
approximately 12% and 11%, respectively, of net sales. No customer accounted for
more than 10% of net sales during 2007. The Company
generated  international sales of approximately $10.6 million in 2008,
$8.6 million in 2007, and $7.7 million in 2006.  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)
            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 sales 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 CASMED 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 a maturity of three months
or less when purchased 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 cost, determined by the first-in, first-out method,
or market.





Property
and equipment





Property
and equipment, including leasehold improvements, 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.  Leasehold
improvements are amortized over the life of the improvement or the lease term,
whichever is shorter.  Maintenance and repairs are charged to expense
when incurred.








F-7





The
Company has separately reported its FORE-SIGHT cerebral oximetry monitors
located at customer sites within the U.S.  Such equipment is held
under a no cost program whereby customers purchase disposable sensors for use
with the Company’s equipment.  The Company retains title to the
monitors shipped to its customers under this program. The monitors are
depreciated on a straight-line basis over five years to cost of
sales.  As of December 31, 2008, the Company has capitalized
$1,132,422 of costs pertaining to the monitors which have a net book value of
$905,854.





Depreciation
and amortization expense on property and equipment was $1,026,870 in 2008,
$750,411 in 2007, and $455,755 in 2006.





Long-lived
assets





The
Company reviews its long-lived assets including goodwill 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 any year presented.





Intangible
and other assets




Intangible
and other assets at December 31, 2008 and 2007 consist of:


2008
                    
                    
                    2007Patents
      and other assets
                    
                    $
                    628,273
                    
                    
                    $
                    555,446Patents
      pending
                    
                    
                    204,510
                    
                    
                    
                    161,249Purchased
      technology
                    
                    
                    123,893
                    
                    
                    
                    254,393Capitalized
      software
                    
                    
                    177,813
                    
                    
                    
                    170,063Deferred
      finance charges
                    
                    
                    71,938
                    
                    
                    
                    12,0351,206,427
                    
                    
                    
                    1,153,186Accumulated
      amortization
                    
                    
                    (449,049
                    )
                    
                    
                    (306,584
                    )$
                    757,378
                    
                    
                    $
                    846,602





Intangible
and other assets are stated at cost. Patents are amortized over their estimated
useful lives which range from 1 to 20 years. Purchased technology is amortized
over five years.  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 3
year useful lives. Deferred financing costs were amortized over the term of the
related debt. Amortization expense was $142,465 in 2008, $63,808 in 2007 and
$60,395 in 2006.





Expected
      amortization expense of intangible assets as of December 31, 2008 over the
      next five years follows:





2009
                  
                  $
                  126,0002010
                  
                  
                  86,0002011
                  
                  
                  53,0002012
                  
                  
                  25,0002013
                  
                  
                  13,000$
                  303,000





Revenue
and accounts receivable recognition





Revenue
from sales and accounts receivable are recognized when evidence of an
arrangement exists, delivery has occurred based upon shipping terms, the selling
price is fixed and determinable, and collectability is reasonably assured. Terms
of sale for most domestic sales are FOB origin and for most international sales
are EX-Works reflecting that ownership and risk of loss are assumed by the buyer
at shipping point. In addition, the Company








F-8





has
certain agreements with its customers to ship FOB destination reflecting that
ownership and risk of loss are assumed by the buyer upon
delivery.  While the Company accepts returns of products from its
customers from time to time for various reasons including defective goods, order
entry, shipping or other errors, the Company’s business practices do not include
providing right of return at the time of sale. Historically, such returns have
not been significant. The Company has entered into agreements with several
customers to provide them with price rebates based upon their level of
purchases. Rebates are accrued by the Company as a reduction in net sales as
they are earned by customers. Payment terms range from prepayment to net sixty
days depending upon certain factors including customer credit worthiness,
geographical location and customer type (i.e., end-user, distributor, government
or private entity) and also includes irrevocable letters of credit for certain
international shipments.  Price discounts that may be taken by
customers under contractual arrangements for payment of invoices within
specified periods are recorded as reductions to net sales. Further, the Company
accrues expected payment discounts based upon specific customer accounts
receivable balances. The Company does not incur post shipment obligations with
the exception of product warranties which are generally fulfilled from the
Company’s corporate facilities and which costs are not material relative to the
sale of the product. Accounts receivable are charged to the allowance for
doubtful accounts when deemed uncollectible.





As of
December 31, 2008, the Company was owed $715,769 (included in the caption “Other
Receivables”) for materials sold at cost by it to a vendor who provides
subcontracted manufacturing services for the Company.





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.





As
ofJanuary 1, 2007,
the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
prescribes a more-likely-than-not threshold for financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return.
This interpretation also provides guidance on de-recognition of income tax
assets and liabilities, the classification of current and deferred income tax
assets and liabilities, the accounting for interest and penalties associated
with tax positions, the accounting for income taxes in interim periods, and
income tax disclosures. In conjunction with the adoption of FIN 48, the Company
recognized non-current liabilities of $134,375 for uncertain tax positions with
a charge to retained earnings. There was no effect on operating results or cash
flows.





The
Company files U.S. Federal and multiple state income tax
returns.  With few exceptions, the Company’s tax returns have been
examined for years prior to 2004.  During 2006, an examination of the
Company’s 2004 U.S. Federal income tax return was completed.  There
was no material effect on the Company’s financial statements. Interest and
penalties related to uncertain tax positions are classified with income
taxes.





During
2007 and 2006, warrants to purchase 164,599 and 257,600 shares, respectively, of
the Company’s common stock were exercised, including those held by a former
outside director and the Chairman of the Board of Directors of the
Company.   The exercise of the warrants resulted in income tax
deductions in excess of compensation expense recognized of $1,140,573 in 2007
and $2,735,875 in 2006. Such amounts are included in the taxable income of the
applicable individuals and deducted by the Company for federal and state income
tax reporting purposes. As a result, the Company has reduced its current federal
and state income tax obligations by $419,399 in 2007 and $865,842 in 2006 and
credited additional paid-in-capital.  A change in estimate for prior
year amounts of $14,730 was recorded in 2008.





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:





2008
                
                
                2007Beginning
      balance
                
                $
                50,000
                
                
                $
                50,000Provision
                
                
                188,775
                
                
                
                185,962Warranty
      costs incurred
                
                
                (188,775
                )
                
                
                (185,962
                )Ending
      balance
                
                $
                50,000
                
                
                $
                50,000





Research
and development costs





The
Company expenses all research and development costs as incurred. Research and
development 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. Funding
provided to the Company is being recorded as a reduction of 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 $936,000 in 2008, $990,000 in 2007 and
$667,000 in 2006.





Earnings
per common share





Basic
earnings per share is calculated by dividing net income (loss) 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 (loss) per share
for the years ended December 31, 2008, 2007 and 2006 follow:





2008
                
                
                2007
                
                
                2006Weighted
      average shares outstanding, net of restrictedshares
      – used to compute basic earnings (loss) per share
                
                
                11,031,855
                
                
                
                10,696,217
                
                
                
                10,373,225Dilutive
      effect of restricted shares, and outstandingwarrants
      and options
                
                
                —
                
                
                
                1,515,477
                
                
                
                1,774,148Weighted
      average shares of dilutive securitiesoutstanding
      – used to compute dilutedearnings
      (loss) per share
                
                
                11,031,855
                
                
                
                12,211,694
                
                
                
                12,147,373




Stock-based
compensation





As of
December 31, 2008, the unrecognized stock-based compensation cost related to
non-vested stock awards was $689,233. Such amount, reduced for forfeitures, will
be recognized in operations over a weighted average period of 2.1
years.





The fair
value of each option is estimated on the date of grant using the Black-Scholes
option pricing model Similar to other option pricing models, the Black-Scholes
model requires the input of highly subjective assumptions which may materially
affect the estimated fair value of the Company’s stock options. The following
weighted-average assumptions were used for grants in 2008, 2007 and 2006:
risk-free interest rates of 3.6% to




F-10




3.9%,
4.6% and 4.4%; expected lives of 4.2 years, 4.2 years and 7.0 years; dividend
yield of 0%; and expected volatility of 63%, 115% and 130%. Risk-free interest
rates approximate U.S. Treasury yields in effect at the time of the grant. The
expected lives of the stock options are determined using historical data
adjusted for the estimated exercise dates of unexercised
options.  Volatility is determined using both current and historical
implied volatilities of the underlying stock which is obtained from public data
sources.





Fair
value of financial instruments





The
Company has not expanded the use of fair value measurements to the amounts shown
in its financial statements for financial instruments, including debt, under
Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
(SFAS 157), described below.  The fair value disclosures for financial
instruments as of December 31, 2008 have been determined under SFAS 157. The
fair value of the Company’s long-term debt as of December 31, 2008 approximates
its carrying value of $2,322,560. Fair value was determined using unobservable
inputs (i.e. Level III as defined in SFAS 157). The fair value of all other
financial instruments approximates their carrying value using active market data
(i.e. Level I as defined in SFAS 157).





As of
December 31, 2007, the carrying value of all financial instruments approximated
fair value using fair value measurements then in effect.





New
accounting pronouncements





In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosure
requirements regarding fair value measurement. SFAS 157 does not expand the use
of fair value measurements.Further,
this statement simplifies and codifies fair value related guidance previously
issued and is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company has not expanded the use of fair value measurements. However,
all fair value disclosures included in the accompanying financial statements are
determined in accordance with SFAS 157. In addition, the Company considers fair
value determined under SFAS 157 when performing its annual goodwill impairment
test. FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157,”
(“FSP 157-2”) delayed the effective date of SFAS 157 for all nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least
annually), until the beginning of fiscal 2009.  The Company is
currently assessing the impact that the application of SFAS 157 to nonfinancial
assets and liabilities will have on its results of operations and financial
position.




In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Liabilities—Including an amendment of FASB Statement No. 115
(“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not
affect existing standards which require assets or liabilities to be carried at
fair value. The objective of SFAS 159 is to improve financial reporting by
providing companies with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. Under SFAS 159, a company
may elect to use fair value to measure eligible items at specified election
dates and report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. Eligible
items include, but are not limited to, accounts receivable, accounts payable,
and issued debt. If elected, SFAS 159 is effective for fiscal years beginning
after November 15, 2007. The Company has not
elected to measure and report any additional financial assets or liabilities at
fair value under SFAS 159 that were not already measured at fair value under
existing standards.




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS
141(R)”).  SFAS 141(R) establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non-controlling interest in the
acquiree and the goodwill acquired. SFAS 141(R) also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination. SFAS 141(R) is effective for fiscal years beginning after
December 15, 2008. The Company, as required, will apply the provisions SFAS
141(R) to any acquisition after January 1, 2009.







F-11


(3)
            ALLOWANCE
      FOR DOUBTFUL ACCOUNTS





Changes
in the allowance for doubtful accounts during the years ended December 31, 2008
and 2007 follow:





2008
                
                
                2007Balance
      at beginning of year
                
                $
                125,000
                
                
                $
                75,000Provision
                
                
                25,350
                
                
                
                58,000Accounts
      written off
                
                
                (350
                )
                
                
                (8,000
                )Balance
      at end of year
                
                $
                150,000
                
                
                $
                125,000





(4)
            INVENTORIES





Inventories
at December 31, 2008 and 2007 consist of:





2008
                
                
                2007Raw
      materials
                
                $
                7,560,332
                
                
                $
                7,481,065Work
      in process
                
                
                24,560
                
                
                
                187,134Finished
      goods
                
                
                2,201,646
                
                
                
                2,352,919$
                9,786,538
                
                
                $
                10,021,118




(5)
            FINANCING
      ARRANGEMENTS





Line-of-credit





On
February 11, 2008, the Company amended and restated its existing line of credit
with NewAlliance Bank (the “Bank”).  The Company entered into a new
Commercial Loan Agreement (the “Loan Agreement”) and related Commercial
Revolving Promissory Note (the “Note”) which provide for borrowings on a
revolving basis, at the Bank’s discretion, in an amount up to
$10,000,000.  Loans in excess of $2,000,000 up to $10,000,000 can be
made only if the maximum principal amount outstanding does not exceed a
borrowing base equal to the sum of (i) 75% of eligible receivables (as defined
in the Loan Agreement) and (ii) the lesser of $2,500,000 or 30% of eligible
inventory (as defined in the Loan Agreement.)  Borrowings under the
Loan Agreement and the Note are secured by a first priority lien in all the
business assets of the Company pursuant to a Security Agreement (the “Security
Agreement”).  The Loan Agreement contains customary non-financial
covenants and financial covenants consisting of a debt service coverage ratio
and a debt to tangible net worth ratio.





On
December 31, 2008, the Company amended the line of credit pursuant to a Debt
Modification Agreement (the “Modification Agreement”). The Modification
Agreement amended the Loan Agreement and related Note. The Modification
Agreement extends the maturity date of the Note to July 1, 2010 and also amends
the interest rate for the revolving loans under the Credit Agreement by
increasing the rate from (i) the Prime Rate (as defined in the Loan Agreement)
minus .50% to (ii) the Bank’s Base Rate (as defined in the Modification
Agreement) with a minimum interest rate of 3.25% per annum. The Modification
Agreement also amended the existing debt service coverage ratio covenant to
provide that it would be measured quarterly on a rolling four quarter basis
beginning December 31, 2008.





The
Company executed an amendment to the line of credit agreement on April 3, 2009
pursuant to a Second Modification Agreement with the Bank effective March 31,
2009. Under the terms of the Second Modification Agreement, the debt service
coverage ratio was revised from a quarterly test to an annual test for the
twelve months ending December 31, 2009 and the minimum ratio was revised from
1.5 to 1.0. As of the first quarter of 2010 and thereafter, the ratio returns to
1.5 with testing resumed on a quarterly basis. Also, the maximum availability
under  the line of credit was reduced to $5,000,000 from $10,000,000.
Further, the interest rate was modified from the Bank’s Base Rate with a floor
of 3.25% to the Bank’s Base Rate plus 1.0% with a floor rate of
4.0%.








F-12


Notes
payable





During
2008, 2007, and 2006, the Company financed the premiums for its property
casualty insurance policies and for 2007 and 2006 its directors and officers
insurance with short-term borrowings of $289,886, $410,639, and $312,182,
respectively. There were no outstanding balances as of December 31,
2008.





Long-term
debt




Long-term
debt at December 31, 2008 and 2007consists
of:


2008
                  
                  
                  2007Note
      payable to a bank in monthly installmentsof
      $61,533, including interest at 6.0%to
      May 2012
                  
                  $
                  2,322,560
                  
                  
                  $
                  2,900,014Less
      current portion
                  
                  
                  614,067
                  
                  
                  
                  577,453$
                  1,708,493
                  
                  
                  $
                  2,322,561





Scheduled
principal maturities of long-term debt follow:


2009
                
                
                614,0672010
                
                
                652,4822011
                
                
                693,3002012
                
                
                362,711$
                2,322,560





Collateral
and covenants





Substantially
all assets are pledged as collateral for long-term debt and borrowings under the
line-of-credit.  In addition, the Company is required to meet, among
others, debt service and debt to equity covenants.  As of December 31,
2008, the Company was in compliance with such covenants.





(6)
            ACCRUED
      EXPENSES





Accrued expenses at December 31, 2008
and 2007 consist of:


2008
                
                
                2007Payroll
                
                $
                327,239
                
                
                $
                212,716Professional
      fees
                
                
                174,529
                
                
                
                119,681Warranty
                
                
                50,000
                
                
                
                50,000Contract
      fees
                
                
                —
                
                
                
                130,500Bonuses
                
                
                —
                
                
                
                146,110Travel
      and entertainment
                
                
                53,270
                
                
                
                54,701Other
                
                
                230,830
                
                
                
                248,446$
                835,868
                
                
                $
                962,154




(7)
            SHARE-BASED
      PAYMENT PLANS





Under the
CAS Medical Systems, Inc. 2003 Equity Incentive Plan (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 key employees and directors, certain
compensatory arrangements related to growth in the value of the Company’s 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





F-13





whose
efforts can affect the Company’s financial growth and profitability; and align
in general theinterests
of employees and directors with the interests of stockholders. The Incentive
Plan is administered by the Compensation Committee of the Board of Directors,
which in turn determines the employees, officers and directors to receive awards
and the terms and conditions of these awards.





As of
December 31, 2007, 343,750 shares were available for issuance under the
Incentive Plan. During 2008, under the Incentive Plan, options for 125,000
shares of common stock were granted to the Company’s employees. Further, 74,000
shares of restricted stock were issued during 2008 to employees and members of
the Board of Directors and 58,300 shares were cancelled. As such, 203,050 shares
of common stock remain available for issuance under the Incentive Plan as of
December 31, 2008.





As of
December 31, 2008, options to purchase 124,700 shares 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.





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








2008
                        
                        
                        
                        
                        
                        
                        
                        
                        2007Weighted
                        
                        
                        
                        
                        
                        
                        
                        
                        WeightedAverage
                        
                        
                        Aggregate
                        
                        
                        
                        
                        
                        Average
                        
                        
                        AggregateOption
                        
                        
                        Exercise
                        
                        
                        Intrinsic
                        
                        
                        Option
                        
                        
                        Exercise
                        
                        
                        IntrinsicShares
                        
                        
                        Price
                        
                        
                        Value
                        
                        
                        Shares
                        
                        
                        Price
                        
                        
                        ValueOutstanding
      atbeginning
      of year
                        
                        
                        524,425
                        
                        
                        $
                        2.11
                        
                        
                        
                        
                        
                        
                        537,650
                        
                        
                        $
                        1.98Granted
                        
                        
                        125,000
                        
                        
                        
                        3.89
                        
                        
                        
                        
                        
                        
                        15,000
                        
                        
                        
                        5.64Exercised
                        
                        
                        (29,300
                        )
                        
                        
                        1.40
                        
                        
                        
                        
                        
                        
                        (28,225
                        )
                        
                        
                        1.54Canceled
                        
                        
                        (30,000
                        )
                        
                        
                        4.00
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        0.00Outstanding
      at endof year
                        
                        
                        590,125
                        
                        
                        
                        2.43
                        
                        
                        $
                        0.37
                        
                        
                        
                        524,425
                        
                        
                        
                        2.11
                        
                        
                        $
                        3.39Exercisable
      at endof year
                        
                        
                        461,791
                        
                        
                        
                        2.00
                        
                        
                        
                        0.47
                        
                        
                        
                        509,425
                        
                        
                        
                        2.01
                        
                        
                        
                        3.49Vested
      or expected to vestat end of year
                        
                        
                        589,125
                        
                        
                        
                        2.43
                        
                        
                        $
                        0.37
                        
                        
                        
                        514,425
                        
                        
                        
                        2.06
                        
                        
                        $
                        3.39Weighted
      average grant-date fair value of options grantedduring the
      year
                        
                        
                        
                        
                        
                        $
                        2.90
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        5.11





The total
intrinsic value of stock options exercised was $62,731 in 2008 and $143,821 in
2007. The intrinsic value of a stock option is the amount by which the current
market value of the underlying stock exceeds the option exercise
price.





Additional
information about stock options outstanding and exercisable at December 31, 2008
follows:





F-14




WeightedRemaining
                    
                    
                    Average
                    
                    
                    
                    
                    
                    AverageRange
      of
                    
                    
                    Number
                    
                    
                    Contractual
                    
                    
                    Exercise
                    
                    
                    Number
                    
                    
                    ExerciseExercise Prices
                    
                    
                    Outstanding
                    
                    
                    Life in Years
                    
                    
                    Price
                    
                    
                    Exercisable
                    
                    
                    Price$
                    0.53
      - $ 0.82
                    
                    
                    
                    124,700
                    
                    
                    
                    2.9
                    
                    
                    $
                    0.67
                    
                    
                    
                    124,700
                    
                    
                    $
                    0.671.40
      - 2.81
                    
                    
                    
                    215,425
                    
                    
                    
                    6.0
                    
                    
                    
                    1.87
                    
                    
                    
                    190,425
                    
                    
                    
                    1.753.10
      - 4.65
                    
                    
                    
                    225,000
                    
                    
                    
                    8.5
                    
                    
                    
                    3.61
                    
                    
                    
                    145,000
                    
                    
                    
                    3.425.02 - 6.93
                    
                    
                    
                    25,000
                    
                    
                    
                    9.2
                    
                    
                    
                    5.40
                    
                    
                    
                    1,666
                    
                    
                    
                    6.93$
                    0.53
      - $ 6.93
                    
                    
                    
                    590,125
                    
                    
                    
                    6.1
                    
                    
                    $
                    2.43
                    
                    
                    
                    461,791
                    
                    
                    $
                    2.00








During
2008, the Company issued an aggregate of 74,000 shares of restricted stock to
employees including 35,000 to its executive officers and 9,000 shares of
restricted stock to outside members of the Board of Directors under the
Incentive Plan.  The restricted stock issued to employees during 2008
vests from twenty-four months to thirty-six months from date of grant while the
restricted stock issued to members of the Board of Directors vests ratably over
twelve months from date of grant. The weighted average value of the restricted
stock was $4.00 per share and the aggregate fair value of the stock issued based
on the closing market price on the date granted was $295,760. The fair value of
the restricted common shares was estimated based upon the market value of the
common stock on the date of issuance.





As of
December 31, 2008, 147,455 shares of non-vested restricted common stock issued
to date remain outstanding.  Stock compensation expense of $589,460
has been recognized to December 31, 2008 related to restricted shares granted in
2008 and in prior years. The unamortized stock compensation expense associated
with the restricted shares at December 31, 2008 was $464,449 and will be
recognized ratably through 2011.





Warrants
to purchase 1,064,401 shares of common stock at a weighted average exercise
price of $0.50 per share were outstanding at December 31,
2008.  Included in the outstanding warrants at December 31, 2008 is a
warrant issued to the Company’s Chairman of the Board of Directors and former
President and CEO during 1998 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, which rights to exercise terminate
upon expiration of the Chairman’s employment contract with the Company, which is
scheduled to expire on March 31, 2009.  Except for the warrants
related to the change in control, the remaining warrants have no specific
expiration date and have an exercise price range of $0.30 to $1.44 per
share.





During
2007, a former director and the Company’s Chairman of the Board of Directors
exercised warrants to purchase a total of 164,599 shares of common stock at a
weighted average exercise price of $0.45 per share.  There was no
warrant activity during 2008.





Under the
CAS Medical Systems, Inc. Employee Stock Purchase Plan (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. To December 31, 2008, 103,405 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 23,127 shares issued
during January 2009.





(8)
            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







F-15





Company
were $109,421 in 2008, $110,586 in 2007 and $96,266 in 2006.





The
Company offered certain retirement benefits through a plan accounted for under
Financial Accounting Standards Board Statement No. 106, “Accounting for
Post-Retirement Benefits Other than Pensions” as a post-


retirement
benefit plan (the “Plan”). The benefits were funded through the purchase of
medical insurance for each retiree each year. The Company funded 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 provided 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 advised those
participants that it would 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. Negative unrecognized prior service costs of
$195,921 applicable to current retirees receiving benefits and an unrecognized
net gain of $145,710 as of December 31, 2005 were amortized to the date coverage
expired (December 31, 2006) in accordance with the closure of the
Plan.





Components
of net periodic benefit cost under the Plan during the year ended December 31,
2006 prior to the elimination of benefits follow:





2006Interest
      cost
                  
                  $
                  216Amortization
      of prior service cost
                  
                  
                  (195,921
                  )Amortization
      of unrecognized gain
                  
                  
                  (145,710
                  )Net
      periodic benefit income
                  
                  $
                  (341,415
                  )





Final
benefit obligations under the Plan of $8,152 were paid in 2006.





(9)
            INCOME
    TAXES





Recoverable
income taxes as of December 31, 2008 and 2007 consist of estimated tax deposits
in excess of the current provision.  The provision for income taxes
for the years ended December 31, 2008, 2007 and 2006 consists of:





2008
                    
                    
                    2007
                    
                    
                    2006Current
      (benefit):Federal
                    
                    $
                    (28,597
                    )
                    
                    $
                    657,438
                    
                    
                    $
                    914,089State
                    
                    
                    (147,508
                    )
                    
                    
                    (133,620
                    )
                    
                    
                    31,246(176,105
                    )
                    
                    
                    523,818
                    
                    
                    
                    945,335Deferred
      (benefit):Federal
                    
                    
                    (155,637
                    )
                    
                    
                    (507,348
                    )
                    
                    
                    79,527State
                    
                    
                    156,011
                    
                    
                    
                    (19,069
                    )
                    
                    
                    (41,714
                    )374
                    
                    
                    
                    (526,417
                    )
                    
                    
                    37,813Income
      taxes (benefit)
                    
                    $
                    (175,731
                    )
                    
                    $
                    (2,599
                    )
                    
                    $
                    983,148








F-16





A
reconciliation of U.S. Federal income taxes computed at the statutory rate to
income taxes shown in operations   for the years ended December
31, 2008, 2007 and 2006 follows:





2008
                
                
                2007
                
                
                2006Income
      taxes at the statutory rate
                
                $
                (191,667
                )
                
                $
                103,313
                
                
                $
                928,148State
      income taxes, net of federal effect
                
                
                5,612
                
                
                
                (100,774
                )
                
                
                (6,910
                )R&D
      and other tax credits
                
                
                (25,021
                )
                
                
                (80,700
                )
                
                
                (134,642
                )Stock
      options
                
                
                3,523
                
                
                
                33,424
                
                
                
                116,522Other
                
                
                31,822
                
                
                
                42,138
                
                
                
                80,030Income
      taxes (benefit)
                
                $
                (175,731
                )
                
                $
                (2,599
                )
                
                $
                983,148





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





2008
                
                
                2007Inventories
                
                $
                545,930
                
                
                $
                319,115Warranty
      accrual
                
                
                17,495
                
                
                
                17,495Allowance
      for doubtful accounts
                
                
                52,492
                
                
                
                43,738Tax
      credits
                
                
                163,830
                
                
                
                196,232Property
      and equipment
                
                
                —
                
                
                
                8,835Deferred
      gain on sale and leaseback
                
                
                408,928
                
                
                
                455,262Other
                
                
                155,884
                
                
                
                138,5711,344,559
                
                
                
                1,179,248Prepaid
      expenses
                
                
                (144,137
                )
                
                
                (137,012
                )Property
      and equipment
                
                
                (158,559
                )
                
                
                —$
                1,041,863
                
                
                $
                1,042,236





A
reconciliation of unrecognized income tax benefits for 2008 and 2007
follows:





2008
                    
                    
                    2007Balance
      at beginning of year
                    
                    $
                    107,500
                    
                    
                    
                    —Adoption
      of FIN 48
                    
                    
                    —
                    
                    
                    $
                    107,500Tax
      positions taken in current year
                    
                    
                    —
                    
                    
                    
                    —Settlements
                    
                    
                    —
                    
                    
                    
                    —Lapse
      of applicable statute of limitation
                    
                    
                    —
                    
                    
                    
                    —Balance
      at end of year
                    
                    $
                    107,500
                    
                    
                    $
                    107,500


During
2008, $10,750 of interest on uncertain tax positions was recognized as income
tax expense. As of December 31, 2008, $48,375 of interest and penalties were
accrued and, together with $107,500 of unrecognized tax benefits, were included
in the $155,875 reported as income taxes payable on the Company’s balance sheet.
The total amount of unrecognized income tax benefits, if recognized, would
affect the Company’s effective income tax rate by approximately $36,500.
Currently, the Company does not believe that the unrecognized income tax
benefits will significantly change in 2009.





(10)
            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 have been used to support the
development of the Company’s Near-Infrared Spectroscopy (“NIRS”) technology
which non-invasively measures the brain oxygenation level of a patient. In
accordance with the terms of these grants, the Company has been reimbursed for
certain qualifying expenditures.  On September 17, 2007, the Company
was awarded a three year grant totaling $2,800,000 to support its NIRS
research.







F-17





Qualifying
research and development costs (“R&D”) of $582,000 in 2008, $479,000 in 2007
and $20,000 in 2006 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. As of December 31, 2008, a maximum of approximately $1,700,000 remains
available under the 2007 grant.





(11)
              SALE
      AND LEASEBACK OF PROPERTY





On
September 6, 2007, the Company closed the sale and leaseback of its headquarters
and manufacturing facility (the “Property”). Net proceeds from the sale were
$2,791,529 of which $928,872 was used to retire the related outstanding mortgage
debt. The gain of $1,346,373 realized on the sale has been deferred and will be
recognized in operations as a reduction in rent expense over the term of the
lease. The lease has an initial term of ten years expiring on September 6, 2017
and an option for two additional five-year periods. The lease provides for an
annual base rent in years one through five of
$244,800  and  $268,800  in years six through ten.
The Company recognizes rent expense on a straight-line basis over the ten years.
Under the lease, the Company is responsible for the costs of utilities,
insurance, taxes and maintenance expenses. Further, the Company is required to
maintain at least $600,000 in cash and cash equivalents (increasing at 3% per
annum) and net current assets of not less than $3,600,000.





In
addition, the Company has a right of first offer to lease any additional space
or building built by the lessor on the Property, subject to certain
restrictions.  The Company also has the right to require the lessor to
build an addition or additional building (“Expansion Premises”), subject to
certain restrictions.  Upon the delivery of any Expansion Premises,
the term of the Lease would extend for a ten year term. The base rent for the
Expansion Premises shall be the greater of the then prevailing market rent or an
amount equal to a return on actual costs of construction of the greater of 250
basis points over the rate on ten year U.S. Treasury Notes, or
8%.  Upon delivery of the Expansion Premises, the lessor would assume
obligations under the Company’s existing leases of its two adjacent properties,
in exchange for a payment equal to three months rent and certain unamortized
costs incurred with respect to these two facilities.





(12)
            COMMITMENTS




The
manufacture and sale of our products exposes us to product liability claims and
product recalls, including those which may arise from misuse or malfunction of,
or design flaws in, our products or use of our products with components or
systems not manufactured or sold by us.  Product liability claims or
product recalls, regardless of their ultimate outcome, could require us to spend
significant time and money in litigation or to pay significant
damages.  We are currently a defendant in a product liability action
which is scheduled for trial during mid 2009. We believe that our product
liability insurance is sufficient to cover any damages and costs that are likely
with respect to this matter. There can be no assurance however, that this will
be the case with respect to any future matters.  Furthermore, we may
not be able to obtain insurance in the future at satisfactory rates or in
adequate amounts.




In
addition, publicity pertaining to the misuse or malfunction of, or design flaws
in, our products could impair our ability to successfully market and sell our
products and could lead to product recalls.





On May 8,
2007, the Company signed an exclusive distribution agreement (the “Agreement”)
with Analogic Corporation under which the Company obtained worldwide exclusive
rights to market the Analogic Lifegard® family of non-invasive patient monitors.
Under the Agreement, Analogic would co-brand the devices and reconfigure its
Lifegard II monitor to include the Company’s MAXNIBP branded non-invasive blood
pressure and other branded technologies. Accordingly, the Company would
reimburse Analogic approximately $900,000 upon meeting agreed milestone dates
for such efforts. As of December 31, 2008, the Company had made payments to
Analogic of $90,000.





On
November 24, 2008, Analogic commenced arbitration against the Company contending
that the Company breached the Agreement.  Analogic is seeking damages
of approximately $765,000 for costs it allegedly incurred in performing under
the Agreement including winding down costs and additional remedies which may
provide for relief totaling double or treble damages, in addition to attorney
fees. The Company denies Analogic’s claims and is asserting a counterclaim for
damages in excess of those sought by Analogic. The arbitration hearing is
expected to be conducted in the second quarter of 2009.




F-18


In
addition, we may become, in the normal course of our business operations, a
party to other legal proceedings in addition to those described in the
paragraphs above.  None of these other proceedings would be expected
to have a material adverse impact on our results of operations, financial
condition, or cash flows.





The
Company currently leases four separate operating facilities and certain
equipment under non-cancellable operating leases.





Rent
expense under these leases was $639,000 in 2008, $280,000 in 2007 and $150,000
in 2006.  Future annual minimum rental payments as of December 31,
2008 to the expiration of the leases follow: 2009-$428,000; 2010-$410,000;
2011-$415,000; 2012-$428,000; 2013-$450,000; and thereafter
$1,168,000.




(13)
            UNAUDITED
      QUARTERLY INFORMATION




Unaudited
quarterly financial information follows:




First
              
              
              Second
              
              
              Third
              
              
              Fourth
              
              
              TotalQuarter
              
              
              Quarter
              
              
              Quarter
              
              
              Quarter
              
              
              YearYear
      ended December 31, 2008Net
      sales
              
              $
              8,961,551
              
              
              $
              10,542,919
              
              
              $
              11,708,082
              
              
              $
              9,436,505
              
              
              $
              40,649,057Cost
      of sales
              
              
              6,281,396
              
              
              
              7,051,041
              
              
              
              7,407,603
              
              
              
              6,007,550
              
              
              
              26,747,590Gross
      profit
              
              
              2,680,155
              
              
              
              3,491,878
              
              
              
              4,300,479
              
              
              
              3,428,955
              
              
              
              13,901,467Net
      (loss) income
              
              
              (529,891
              )
              
              
              (32,008
              )
              
              
              328,866
              
              
              
              (154,961
              )
              
              
              (387,994
              )Net
      (loss) income per common share (1):Basic
              
              $
              (0.05
              )
              
              $
              (0.00
              )
              
              $
              0.03
              
              
              $
              (0.01
              )
              
              $
              (
      0.04
              )Diluted
              
              $
              (0.05
              )
              
              $
              (0.00
              )
              
              $
              0.03
              
              
              $
              (0.01
              )
              
              $
              (0.04
              )Year
      ended December 31, 2007Net
      sales
              
              $
              9,289,332
              
              
              $
              7,962,396
              
              
              $
              10,663,435
              
              
              $
              10,317,242
              
              
              $
              38,232,405Cost
      of sales
              
              
              5,747,621
              
              
              
              5,447,781
              
              
              
              6,634,787
              
              
              
              6,754,618
              
              
              
              24,584,807Gross
      profit
              
              
              3,541,711
              
              
              
              2,514,615
              
              
              
              4,028,648
              
              
              
              3,562,624
              
              
              
              13,647,598Net
      income (loss)
              
              
              79,439
              
              
              
              (300,618
              )
              
              
              539,194
              
              
              
              (11,555
              )
              
              
              306,460Net
      income (loss) per common share (1):Basic
              
              $
              0.01
              
              
              $
              (0.03
              )
              
              $
              0.05
              
              
              $
              (0.00
              )
              
              $
              0.03Diluted
              
              $
              0.01
              
              
              $
              (0.03
              )
              
              $
              0.05
              
              
              $
              (0.00
              )
              
              $
              0.03





(1) The
sum of quarterly per share amounts may not equal per share amounts reported for
year-to-date or full-year periods due to change the number of weighted average
shares outstanding and the effects of rounding.







Page
24





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





None.








Item 9A(T). 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, 2008. 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, 2008 that have materially affected, or are
reasonably likely to materially affect the Company’s internal control over
financial reporting.




Management’s Annual Report
on Internal Control Over Financial Reporting




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of the
Company’s management, including the principal executive officer and principal
financial officer, an evaluation was conducted to determine the effectiveness of
internal control over financial reporting based on the framework in Internal Control - Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on the Company’s evaluation under the framework in
Internal Control — Integrated
Framework, the Company’s management concluded that its internal control
over financial reporting was effective as of December 31, 2008.




This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this
annual report.





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 9B.  Other
Information





The
Company executed an amendment to the line of credit agreement on April 3, 2009
pursuant to a Second Modification Agreement with NewAlliance Bank (the
“Bank”)
effective March 31, 2009. Under the terms of the Second Modification Agreement,
the debt service coverage ratio was revised from a quarterly test to an annual
test for the twelve months ended December 31, 2009 and the minimum ratio revised
from 1.5 to 1.0. As of the first quarter of 2010 and thereafter, the ratio
returns to 1.5 with testing resumed on a quarterly basis. The maximum
availability under the line of credit was reduced to $5,000,000 from
$10,000,000. Further, the interest rate was modified from the Bank’s Base
Rate with a floor of 3.25% to the Bank’s Base Rate plus 1.0% with a floor rate
of 4.0%. The Second Modification Agreement is attached as Exhibit 10.29 to this
annual report on Form 10-K.








Page
25





PART
III




Item
10.  Directors, Executive Officers and Corporate
Governance





Reference
is made to the disclosure required by Items 401, 405, 406 and 407(c)(3), (d)(4)
and (d)(5) of Regulation S-K to be contained in the Registrant’s definitive
proxy statement to be mailed to shareholders on or about April 25, 2009, and to
be filed with the Securities and Exchange Commission.





Item
11.  Executive Compensation





Reference
is made to the disclosure required by Items 402 and 407 (e) (4) and (e) (5) of
Regulation S-K to be contained in the Registrant’s definitive proxy statement to
be mailed to shareholders on or about April 25, 2009, and to be filed with the
Securities and Exchange Commission.





Item 12.  Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters





Reference
is made to the disclosure required by Item 403 of Regulation S-K to be contained
in the Registrant’s definitive proxy statement to be mailed to shareholders on
or about April 25, 2009, 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, 2008:





Number
      of securities
                  
                  
                  
                  
                  
                  Number
      of securitiesto
      be issued upon
                  
                  
                  Weighted-average
                  
                  
                  remaining
      availableexercise
      of
                  
                  
                  exercise
      price of
                  
                  
                  for
      future issuanceoutstanding
      options
                  
                  
                  outstanding
      options
                  
                  
                  under
      equityPlan Category
                  
                  and warrants
                  
                  
                  and warrants
                  
                  
                  compensation plansEquity
      compensation plansapproved
      by security holders
                  
                  
                  590,125
                  
                  
                  $
                  2.43
                  
                  
                  
                  203,050Equity
      compensation plansnot
      approved by security  holders
                  
                  
                  1,064,401
                  
                  
                  
                  0.50
                  
                  
                  
                  —Total
                  
                  
                  1,654,526
                  
                  
                  $
                  1.19
                  
                  
                  
                  203,050





Securities
remaining available for issuance under equity compensation plans approved by
security holders are from the CAS Medical Systems, Inc. 2003 Equity Incentive
Plan approved during 2004. The equity compensation plans not approved by
security holders consist of warrants granted both current and former directors
of the Company as compensation for services rendered.  These warrants
have no expiration date. See Note 7 to the Company’s Financial
Statements.





Item 13.  Certain
Relationships and Related Transactions, and Director
Independence





Reference
is made to the disclosure required by Item 404 of Regulation S-K to be contained
in the Registrant’s definitive proxy statement to be mailed to shareholders on
or about April 25, 2009, and to be filed with the Securities and Exchange
Commission.





Item 14. Principal
Accountant Fees and Services





Reference
is made to the proposal regarding the approval of the Registrant’s independent
accountants to be contained in the Registrant’s definitive proxy statement to be
mailed to shareholders on or about April 25, 2009, and to be filed with the
Securities and Exchange Commission.





Page 26





PART
IV





Item 15.  Exhibits
and Financial Statement Schedules





(a) (1)
Financial Statements





The
Company’s financial statements are included in response to Item 8 of this
report.





Report of
Independent Registered Public Accounting Firm


Financial
Statements


Consolidated Balance Sheets as of
December 31, 2008 and 2007


Consolidated Statements of Operations
for the Years Ended December 31, 2008, 2007 and 2006


Consolidated Statements of Changes in
Shareholders’ Equity for the Years Ended December 31, 2008, 2007 and
2006


Consolidated Statements of Cash Flows
for the Years Ended December 31, 2008, 2007 and 2006


Notes to Consolidated Financial
Statements





(2)  Financial
Statement Schedules





None.





(3)  Exhibits





The
Exhibits to this report are as set forth in the “Exhibit Index” on page 27 of
this report. Management contracts or compensatory plans or arrangements filed as
an exhibit to this report are identified in the “Index to Exhibits” with an
asterisk after the exhibit number.














Page
27








EXHIBIT
INDEX








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
(14)


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 andCAS
      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)


10.16
            Commercial
      Line of Credit Note and Loan Agreement dated October 27, 2006
      (11)


10.17
            Security
      Agreement in favor of NewAlliance Bank dated October 27, 2006
      (11)


10.18*
            Employment
      Agreement between Andrew E. Kersey and CAS Medical Systems, Inc. effective
      April 1, 2007 (12)


10.19
            Purchase
      and Sale Agreement between CAS Medical Systems, Inc. and Davis Marcus
      Partners, Inc. (13)


10.20
            Lease
      Agreement between CAS Medical Systems, Inc. and DMP New Branford, LLC
      (13)


10.21
            Commercial
      Loan Agreement dated February 11, 2008 between CAS Medical Systems, Inc.
      and NewAlliance Bank (15)


10.22
            Commercial
      Revolving Promissory Note dated February 11, 2008
  (15)


10.23
            Security
      Agreement dated February 11, 2008 in favor of NewAlliance Bank
      (15)


10.24
            Subscription
      Agreement dated May 9, 2008 with jVen Capital, LLC
  (16)


10.25
            First
      Amendment to Employment Agreement with Andrew E. Kersey dated December 29,
      2008 (17)


10.26
            Amendment
      No. 7 to Employment Agreement with Louis P. Scheps dated December 29, 2008
      (17)


10.27
            Amendment
      to the CAS Medical Systems, Inc. 2003 Equity Incentive Plan
      (17)


10.28
            Debt
      Modification Agreement dated December 31, 2008
  (18)


10.29
            Second
      Modification Agreement dated April 3,
2009


21.1
            Subsidiaries
      of the Registrant


23.1
            Consent
      of 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








Page
28





(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


(11)
            Incorporated
      by reference to the Company’s Form 8-K filed October 30,
    2006


(12)
            Incorporated
      by reference to the Company’s Form 10-KSB filed March 19,
    2007


(13)
            Incorporated
      by reference to the Company’s Form 8-K filed September 10,
      2007


(14)
            Incorporated
      by reference to the Company’s Form 8-K filed November 30,
    2007


(15)
            Incorporated
      by reference to the Company’s Form 8-K filed February 14,
    2008


(16)
            Incorporated
      by reference to the Company’s Form 8-K filed May 14,
  2008


(17)
            Incorporated
      by reference to the Company’s Form 8-K filed December 31,
    2008


(18)
            Incorporated
      by reference to the Company’s Form 8-K filed January 6,
    2009














Page
29





SIGNATURES





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








CAS MEDICAL SYSTEMS,
INC.





(Registrant)


/s/
      Andrew E. Kersey
                                              
                                              Date:  April
      3, 2009By:  Andrew
      E. KerseyPresident
      and Chief Executive OfficerPursuant
      to the requirements of the Securities Exchange Act of 1934, this report
      has been signed below by the following persons on behalf of the Registrant
      and in the capacities and on the dates indicated./s/
      Louis P. Scheps
                                              
                                              Date:  April
      3, 2009Louis
      P. Scheps, Chairman of the Board/s/
      Lawrence Burstein
                                              
                                              Date:  April
      3, 2009Lawrence
      Burstein, Director/s/
      Jerome Baron
                                              
                                              Date:  April
      3, 2009Jerome
      Baron, Director/s/
      Evan Jones
                                              
                                              Date:  April
      3, 2009Evan
      Jones, Director/s/
      Andrew E. Kersey
                                              
                                              Date:  April
      3, 2009Andrew
      E. Kersey, President, Chief ExecutiveOfficer
      and Director/s/
      Jeffery A. Baird
                                              
                                              Date:  April
      3, 2009Jeffery
      A. Baird, Chief Financial Officer(Chief
      Financial and Accounting Officer)