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, 2009





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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o    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  oNon-accelerated
      filer  o
            Smaller reporting
      company  x(Do not check if a
      smaller reporting company)










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, 2009, 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 $15,784,000 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 15, 2010, there were 11,532,084 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 9, 2010 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
              4Item
      1A
              Risk
      Factors
              15Item
      1B
              Unresolved
      Staff Comments
              19Item
      2
              Properties
              19Item
      3
              Legal
      Proceedings
              20PART
      IIItem
      5
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
              20Item
      6
              Selected
      Financial Data
              21Item
      7
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              22Item
      7A
              Quantitative
      and Qualitative Disclosures About Market Risk
              28Item
      8
              Financial
      Statements and Supplementary Data
              29Report
      of Independent Registered Public Accounting Firm
              F-1Consolidated
      Balance Sheets as of December 31, 2009 and 2008
              F-2Consolidated
      Statements of Operations for the Years Ended December 31, 2009, 2008 and
      2007
              F-3Consolidated
      Statements of Changes in Shareholders’ Equity  for the Years
      Ended December 31, 2009, 2008 and 2007
              F-4Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
      2007
              F-5Notes
      to Consolidated Financial Statements
              F-6
      to F-18Item
      9
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              30Item
      9A(T)
              Controls
      and Procedures
              30Item
      9B
              Other
      Information
              30PART
      IIIItem
      10
              Directors,
      Executive Officers and Corporate Governance
              31Item
      11
              Executive
      Compensation
              31Item
      12
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              31Item
      13
              Certain
      Relationships and Related Transactions, and Director
      Independence
              32Item
      14
              Principal
      Accountant Fees and Services
              32PART
      IVItem
      15
              Exhibits
      and Financial Statement Schedules
              32Signatures
              
              35


Page
4





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
and its subsidiary, Statcorp, Inc. (“Statcorp”).





Item 1.
Business





Overview





We are a
medical technology company that develops, manufactures and markets non-invasive
patient monitoring products that are vital to patient care. Our products include
the FORE-SIGHT cerebral oximeter and sensors, MAXNIBP blood pressure measurement
technology, bedside monitoring products, blood pressure cuffs and neonatal
supplies. These products are designed to improve the quality of patient care by
providing accurate non-invasive measurements that can improve patient outcomes
and decrease hospital costs.





Our
products have well established brand recognition in the markets we
serve.  We are the inventors of LASER-SIGHT NIRS technology, which is
the foundation for our newest product, the FORE-SIGHT Absolute Cerebral
Oximeter.  This product is the only cerebral oximeter on the market
today approved to provide a non-trend, absolute measure of cerebral tissue
oxygen saturation for all patient populations, from neonate through adult,
regardless of age or weight. 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 may be a high
risk of the brain receiving less oxygen than it needs. FORE-SIGHT measures
absolute levels of brain oxygenation in the most critically ill patients,
including pediatric and neonatal intensive care patients and adults undergoing
cardiac bypass and other high risk surgeries.  Use of the FORE-SIGHT
system enables the clinician to reduce potentially serious negative outcomes in
these settings by providing real-time non-invasive measurement of oxygen levels
in the brain, allowing the clinician to intervene before brain damage
occurs.





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.






·
            Blood
      Pressure Measurement Technology-includes sales to
      Original Equipment Manufacturers (“OEM”) of the Company’s proprietary
      non-invasive blood pressure technology (MAXNIBP) sold as a discrete module
      to be included in the OEM customers own multi-parameter monitors, and
      associated blood pressure cuffs and accessories for the OEM market, and
      related license fees.







Page
5






·
            Bedside
      Monitoring– includes sales of the Company’s vital signs and
      bedside monitors and accessories incorporating various combinations of
      measurement parameters for both human and veterinary
      use.  Parameters found in these monitors include the Company’s
      proprietary MAXNIBP non-invasive blood pressure, pulse oximetry,
      electro-cardiography, temperature, and
  capnography.






·
            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.




Critical
Care Monitoring





We
invented FORE-SIGHT’s LASER-SIGHT technology to fill a vital need in the care of
critically ill patients. 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. Deficits in
brain oxygen levels can be caused by an imbalance in the oxygen supply to the
brain versus the consumption, or metabolism, of oxygen in the brain. Inadequate
oxygen supply to the brain can be caused by a number of factors such as a
decrease of arterial oxygen saturation levels, or a decrease in blood flow to
the brain, or an inadequate concentration of oxygen carrying red blood cells in
the blood supply.  Reliable measurement of the balance between the
supply and demand levels of oxygen in the brain is therefore important to
clinicians, especially in critical care situations where there may be a high
risk of the brain receiving less oxygen than it needs. In the past, clinicians
have had no non-invasive method to accurately measure absolute levels of oxygen
saturation in the brain itself. FORE-SIGHT is the only device in its class that
has received FDA 510(k) clearance to provide an absolute measure of cerebral
tissue oxygen saturation for all patients, regardless of age or weight. Use of
the FORE-SIGHT system enables the clinician to reduce potentially serious
negative outcomes by providing absolute cerebral tissue oxygen saturation
readings that are clinically relevant, repeatable measurements that directly
correlate to invasive measurements.  The advanced algorithms used in
FORE-SIGHT monitor incorporate age and weight to optimize accuracy.





There are
approximately six million surgeries performed each year in the U.S. that we
believe could be categorized as having a high likelihood of the occurrence of
cerebral de-saturations or brain hypoxia and an increased risk of post-operative
complications. These surgeries include cardiac and carotid surgeries, as well as
other major surgeries involving elderly or other high risk patients. Other
immediate applications for FORE-SIGHT include pediatric and neonatal patients
undergoing major surgeries and other critically ill patients, such as those in
intensive care units (“ICU’s”).




Measurement
of the balance of absolute brain oxygen saturation level is important in
surgical procedures requiring general anesthesia and in other critical care
situations where there may be a high likelihood of brain oxygen
deficits. When aware of these potentially life threatening brain oxygen
deficits, clinicians can immediately begin corrective actions through various
standard interventions to attempt to correct the problem and alleviate the risk
of brain injury. In addition, knowledge of absolute brain oxygen saturation
levels can guide clinicians regarding the adequacy of the selected therapies,
providing immediate feedback on how the patient is responding to a therapy. This
immediate knowledge of brain oxygen deficits in any individual patient can have
the potential to improve patient outcomes and reduce cost of care.




In the
U.S. and other countries around the world, an increased focus has been placed on
controlling health care costs. Hospitals in the U.S. often receive a standard
fixed fee for monitoring services for each OR procedure, based on the type of
procedure rather than on the services performed. Hospitals are increasingly
focused on reducing risks during procedures that can result in increased length
of stay in high cost critical care settings.





We
believe that monitoring absolute cerebral oximetry with FORE-SIGHT can help
hospitals contain costs associated with some of the adverse outcomes following
surgery.  Adverse neurological outcomes following cardiac surgery have
been estimated to occur in 6% to 53% of cases.  While some of these
neurological complications are transient, others may be permanent and include
focal injury, stupor, coma, seizures, memory deficit or deterioration in
intellectual function.  These perioperative neurological complications
can dramatically increase the cost of post-operative care. We believe a
cost-effective solution to reliably detect and potentially reduce such
complications can have a positive impact on improving patient outcomes and
reducing the overall cost of care.





Page
6








The
FORE-SIGHT Cerebral Oximeter non-invasively and continuously measures absolute
cerebral 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. The LASER-SIGHT technology uses
harmless lasers at 4 discrete wavelengths that are focused to precisely measure
at specific points along the oxy- and de-oxy hemoglobin spectra, which allows
for accurate and repeatable readings. It is this combination of multiple,
precise, laser-based readings and our proprietary algorithm along with our
sensor design that allows FORE-SIGHT to deliver absolute, non-trended cerebral
oximetry measurements for all patient populations. Our proprietary technology
allows the clinician to use the FORE-SIGHT monitor to get absolute cerebral
oximetry information at any point during a procedure, as there is no measured or
assumed baseline needed.





Our
overall Company mission is to create and provide superior non-invasive patient
monitoring solutions that are vital to patient care.  Our FORE-SIGHT
product focus is to provide solutions that improve patient outcomes and thus
reduce the cost of patient care in key target procedures. From this we are
seeking to establish FORE-SIGHT as a standard of care for high risk surgical
procedures and other critical care settings. We intend to grow our market
position and the overall size of the available market by adopting the following
strategies:





·
            Establish
      Leadership Position in Adult Cardiac Surgery
  Market:


The
Company believes that there is significant opportunity for the establishment of
FORE-SIGHT Absolute Cerebral Oximetry as a standard of care in all
cardio-vascular surgical procedures, where nearly 700,000 procedures are
performed annually in the U.S.  We believe that the cardiac surgery
market is most aware of the risks of brain injury and other damage resulting
from oxygen deficits during cardiac bypass and other surgeries, with a large
number of published studies demonstrating the importance and effectiveness of
monitoring changes in cerebral oximetry during cardiac and thoracic surgery. We
believe we are well positioned to maximize the education and awareness of the
needs to use absolute cerebral oximetry in this market as a means for hospitals
to minimize risks to patients. FORE-SIGHT is already established
in  25% of the top 20 hospitals listed as America’s Best Hospitals by
U.S. News and World
Report. Establishing FORE-SIGHT as a standard of care in this market will
create a platform to leverage other high risk surgical and ICU patient
markets.




·
            Develop
      Pediatric / Neonatal Market
Opportunity:


During
2009, the Company received 510(k) clearances from the Food and Drug
Administration (“FDA”) to market a Medium size FORE-SIGHT sensor and to expand
the indications for use of its FORE-SIGHT Small sensor to include the entire
neonatal patient population below 8Kg. These new indications make FORE-SIGHT the
only cerebral oximetry monitor on the market capable of providing non-trended,
absolute readings on all patient populations.  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.  The FORE-SIGHT monitor
accurately detects low cerebral oxygen saturation events during critical
periods, thereby allowing clinicians to intervene and correct potentially
life-threatening events before they become critical.  This is
especially critical in neonatal patients, who often lack the physiological
mechanisms that regulate blood flow and protect the brain from low oxygen
levels.  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 birth defects and about 12% are preterm births
(defined as less than 37 weeks gestation).





·
            Seek
      Out New Opportunities to Expand the Use of FORE-SIGHT into Other Patient
      Care Settings:


When
FORE-SIGHT was released, our initial focus was on adult cardiac surgery. We have
also been marketing its application in vascular, orthopedic, pediatric,
neonatal, and other markets.  As an example, the orthopedic market has
been previously unexplored, but we believe recent emphasis on the potential
adverse neurological outcomes, combined with the clinical awareness of the value
of FORE-SIGHT absolute cerebral oximetry, will drive demand in this
market.  The Anesthesia Patient Safety Foundation has recognized that
there are increasing reports of severe neurological injury in previously
healthy





Page
7







patients
following surgery in non-supine
positions, including shoulder surgery in the “beach chair” position, and“believes this is a
major patient safety issue that warrants rigorous
study.”In the
first quarter of 2010, the International Anesthesia Research Society will hold
education sessions that examine the use of cerebral oximetry to reduce adverse
neurological outcomes in the beach-chair position.The FORE-SIGHT absolute cerebral
oximeter has been used to monitor such patients in shoulder surgery, and the
value of its use has been presented in several clinical studies.  As
such, we see opportunity for our product for this market.





·
            Build
      Infrastructure to Enhance Sales Distribution Channels in Target
      Markets:


We
believe that our growth has been limited by our lack of adequate sales coverage.
The Company is continuing to focus on adding highly skilled sales and clinical
specialists with clinical and research backgrounds that are able to meet and
drive continued demand for FORE-SIGHT. The Company has expanded the number of
manufacturer representative groups in the U.S. and now has full national
coverage. In Europe, the Company hired two sales managers during 2009 and
expects to have distribution coverage in all major European markets during 2010.
The Company has distribution and sales management covering the Middle East and
is establishing distribution in Asia / Pacific during 2010. With the recent
addition of sales and clinical staff, and the expansion of our distribution
channel in both the U.S. and international markets, CASMED expects to be able to
address more of the customer demand for FORE-SIGHT absolute cerebral
oximetry.





·
            Seek Partners to Interface and
      Integrate FORE-SIGHT into Other Monitoring
  Systems:


We
believe the integration of FORE-SIGHT derived parameters with additional
commonly monitored parameters on one display will enhance the utility and
acceptance of FORE-SIGHT in the clinical community. There are many pre-existing
multi-parameter monitoring systems in the operating room and the
ICU.  Multi-parameter monitors can also act as an important gateway to
electronic medical records and automated data archiving systems. We believe that
interfacing to other systems is a significant factor in maximizing customer
acceptance of a new technology. During 2009, the FORE-SIGHT system was
successfully interfaced to a number of different systems including Philips
Healthcare’s IntelliVue monitoring system, via the Vuelink Module System. We
plan to continue to expand the number of multi-parameter monitors and data
archiving systems that FORE-SIGHT can interface to, and we believe that these
interfaces may provide additional sales opportunities for our FORE-SIGHT
system.





·
            Continue
      to Innovate to Maintain and Protect Our Technology Leadership
      Position:


Over the
past year, we have developed and released two new FORE-SIGHT sensors as well as
various monitor and algorithm improvements. We believe that maintaining our
technical leadership position is vital and, as such, we are continuing to invest
in furthering the LASER-SIGHT technology. Our product development pipeline
includes a number of new LASER-SIGHT technology based products to enhance our
market opportunity. We are also in the process of investigating various
algorithm improvements and enhanced parameter features for the FORE-SIGHT
system. We have four existing U.S. patents protecting various aspects of our
LASER-SIGHT technology as well as nine filed patent applications and numerous
provisional patents filed.





·
            Sponsor
      Clinical Research Studies to Expand Acceptance of the FORE-SIGHT
      System:


Approximately
30 abstracts were published in 2009 involving use of the FORE-SIGHT Absolute
Cerebral Oximeter. Several studies have already been published in peer-review
journals showing that the use of cerebral oximetry during cardiac surgery can
significantly reduce adverse clinical outcomes due to neurological
complications, including permanent stroke. Recent examples of published studies
including FORE-SIGHT monitoring include –





·
            In
      January 2010, a paper was published in the British Journal of
      Anaesthesia, authored by Dr. Gregory Fischer et al., titled, “Mathematical model for
      describing cerebral oxygen desaturation in patients undergoing deep
      hypothermic circulatory arrest.”  This study, on 36
      patients, demonstrated that a mathematical model could be created that
      accurately described the rate of cerebral desaturation during circulatory
      arrest.  These researchers concluded that the proposed model
      “can aid the clinician in determining the length of DHCA [deep hypothermic
      circulatory arrest] that can be
undertaken





Page
8





safely
and can be utilized to define the safest time point to commence
DHCA.”





·
            In
      December 2009, a paper was published in the British Journal of
      Anaesthesia, authored by R. Kazan, D. Bracco and T. M. Hemmerling,
      titled, “Reduced
      cerebral oxygen saturation measured by absolute cerebral oximetry during
      thoracic surgery correlates with postoperative complications.”These researchers concluded that, in 50 patients undergoing
      thoracic surgery with greater than 45 minutes of single-lung ventilation,
      a significant decrease in cerebral tissue oxygenation (SctO2) was
      seen, and this correlated with post-operative cognitive
      dysfunction.





·
            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.





·
            In
      June 2008, a paper published by 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.





·
            In
      March 2008, a review paper published by 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 Anesthesia detailed the benefits of
      absolute cerebral oximetry in patients undergoing Deep Hypothermic Cardiac
      Arrest (“DHCA”) aortic arch
surgery.





Additional
studies using FORE-SIGHT in cardiac, thoracic, vascular, orthopedic and other
surgeries, as well as in the adult, pediatric and neonatal intensive care
setting are underway in the U.S. and Europe, with results from these studies
expected to be published during 2010.





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. In the first quarter of 2010, we are already aware of a number of
ongoing and soon to be published studies where researchers are using FORE-SIGHT
to monitor ischemia and oxygenation of non-cerebral tissue.








2009
FORE-SIGHT Highlights





·
            FORE-SIGHT
      related revenue for 2009 increased by 79% to $4.1 million, versus $2.3
      million for 2008.




·
            Sensor
      related sales account for approximately 67% of total FORE-SIGHT sales for
      2009.




·
            Total
      installations during 2009 increased by 87 monitors to a total of 238 at
      year end.




·
            Approximately
      70% of monitors installed during 2009 were sold, rather than
      placed.




·
            FORE-SIGHT
      monitors are installed in approximately 100 hospitals
      worldwide.




·
            FDA
      clearance for expanded labeling to include neonates weighing less than
      2.5kg.




·
            FDA
      clearance of Medium (pediatric)
sensor.




·
            Monitors
      are installed and generating revenue at 5 of the top 20 hospitals listed
      as America’s Best Hospitals by U.S. News and World
      Report.




·
            Monitors
      are installed and generating revenue in 4 of the top 25 hospitals listed
      as U.S. News and World
      Report’s Best Children’s Heart and Heart Surgery
      Hospitals.




·
            Continued
      expansion of sales distribution channels in Europe and the hiring of 2 new
      European sales managers focused exclusively on the FORE-SIGHT
      market.




·
            First
      European Center of Excellence established in Genk,
  Belgium.







Page
9







·
            Publication
      of six papers in various peer-reviewed journals and periodical reviews, as
      well as over thirty abstracts,
      demonstrating the utility and accuracy of FORE-SIGHT technology in a range
      of different clinical applications, and the value of absolute
      cerebral oximetry to improve patients’ cognitive outcomes following
      surgery.




Increased
      clinical research with follow-on studies began at Duke University Medical
      Center and Mt. Sinai Medical Center to support the use of FORE-SIGHT
      cerebral oximetry in elderly and CABG patients. Additional research at a
      number of sites in the U.S. and Europe in a variety of applications
      including orthopedic shoulder surgery, carotid endarterectomy,
      cardiothoracic surgery, and various neonatal
  applications.








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 the most
challenging clinical situations where measurements can be difficult to
obtain.  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 one of many
measurement parameters.  The Company’s OEM agreements are typically
multi-year arrangements. The Company has a multi-year supply agreement with its
largest OEM customer – Medtronic Physio-Control, which was renewed during the
first quarter of 2010 and will expire in 2013. Sales to this customer accounted
for 11% of total Company sales during 2009.








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 based around its
proprietary MAXNIBP
non-invasive blood pressure technology and incorporating various combinations of
other industry-leading measurement parameters.  The Company believes
that its MAXNIBP
technology is more accurate, reliable, and able to produce a measurement result
faster than its competitors and an advantage over competing products especially
in the most challenging clinical situations where measurements can be difficult
to obtain. In addition to the Company’s proprietary MAXNIBP technology, measurement
options include 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. The Company
has a blanket agreement with the U.S. Department of Veterans Affairs (“VA”) for
purchase of its vital signs monitors through December
2010.   Over the past five years, the Company has sold close to
12,000 vital signs monitors to the VA hospitals and clinics throughout the
U.S.  Collective sales to VA hospitals accounted for over 11% of
overall sales for 2009.





Other
products included in the bedside monitoring category are a line of
cardio-respiratory monitors used to monitor apnea in home-based and hospital
settings and products developed and manufactured by Analogic Corporation, or
otherwise supplied through Analogic. During August 2009, the Company reached an
agreement with Analogic under which the Company will discontinue marketing
Analogic products effective July 31, 2010.  In addition, the Company
has taken steps to exit the cardio-respiratory monitoring market, which is
primarily a niche replacement market with revenues declining steadily over the
past several years. Sales of cardio-respiratory and Analogic products accounted
for approximately 7% of overall sales in 2009.





Page
10







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 Reusable Cuffs, and SoftCheck 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.





Also in
the supplies and services category are a line of specialty neonatal supplies
manufactured in our Branford, CT facility. These high quality single patient use
products are 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.








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.





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. As of December 31, 2009, 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. Outside the United States, the
Company has four sales consultants located in Europe, the Middle East and the
Pacific Rim focused on FORE-SIGHT sales, selling to select markets via
distribution partners. We expect to continue increase the size of our sales
team.





The
Company sells its non-invasive blood pressure technology, in the form of
sub-assemblies to be assembled into other OEM company’s multi-parameter
monitors. The Company sells on a direct basis to various other companies
operating in both the domestic and international markets. The Company is in the
process of pursuing additional OEM agreements.





The
Company’s bedside monitoring products and consumable cuff products are sold
within the U.S. via manufacturers’ representatives and distributors.
International sales are conducted through exclusive distributors in the
European, African, Middle Eastern, Pacific Rim and Latin American regions and
Canada.





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 312009
              
              
              2008
              
              
              2007Domestic
      Sales
              
              $
              23,637,277
              
              
              $
              30,031,921
              
              
              $
              29,601,305International
      Sales
              
              
              10,597,941
              
              
              
              10,617,136
              
              
              
              8,631,100$
              34,235,218
              
              
              $
              40,649,057
              
              
              $
              38,232,405
 
 
 
 Page
11
 
 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 three other
companies with FDA 510(k) clearances to sell a cerebral oximeter in the U.S. as
well other companies selling competitive products in various international
markets and other indirect competitors measuring other related parameters. We
believe that in the future the market for cerebral oximetry may become more
highly competitive. We are aware that several companies and individuals are
engaged in the research and 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.
 
 We
believe that the principal competitive factors that we and other companies
competing in the cerebral oximetry market must address include:
 
 ·
              FDA
      approval or clearance;
 ·
              accuracy,
      reliability and repeatability of
measurement;
 ·
              publication
      of peer reviewed clinical studies;
 ·
              acceptance
      by leading thought-leaders in anesthesia, surgery, perfusion and other key
      clinical roles;
 ·
              documented  improved
      patient outcomes and reduced lengths of
stay;
 ·
              cost
      effectiveness of solution and overall
pricing;
 ·
              interfacing
      of the technology with modular patient monitoring and data archiving
      systems;
 ·
              overall
      ease of use and product quality;
 ·
              sales
      and marketing capability and established sales distribution
      channels;
 ·
              IP
      protection, and timing and acceptance of product
    innovation.
 
 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.
 
 Page
12
 
 Research and
Development
 
 As of
December 31, 2009, our research and development (“R&D”) department consisted
of a staff of 16 full-time engineers and scientists focused on the following
primary areas:
 
 ·
              advanced
      algorithm research
 ·
              sensor
      and optical development
 ·
              hardware
      development and support
 ·
              clinical
      research
 
 Our
R&D efforts focus primarily on continuing to improve the function and
features of the Company’s FORE-SIGHT Cerebral Oximeter and enhancing our
technical position in Near-Infrared Spectroscopy (“NIRS”) technology. We intend
to explore opportunities to leverage our patented LASER-SIGHT NIRS technology
for continued monitor and sensor development and to take advantage of new market
opportunities as they emerge, such as the intensive care unit and beach chair
surgery markets.   Other development efforts include advancing
the design of the Company’s MAXNIBP non-invasive blood pressure
technology.
 
 In 1999,
we began initial research efforts in NIRS based cerebral oximetry and, after
successful initial clinical research proof of concept studies, in 2003 began the
development task for our first commercial cerebral oximeter. The adult version
FORE-SIGHT cerebral oximeter was released in May 2007 and was followed by a
number of enhancements including the addition of the Small (neonatal) sensor in
2008. In 2009 the Company completed its cerebral oximetry sensor offerings with
the releases of the non-adhesive Small sensor and the Medium sensor. The target
markets for the Medium sensor are in the areas of pediatric intensive care,
pediatric cardiovascular OR and cardiovascular intensive care.  In the U.S.
there are 3,800 pediatric intensive care beds and over 200,000 patients per
year. The non adhesive Small sensor is designed specifically for preserving the
skin integrity of newborns and preterm infants. The newborn and preterm infant
population has varying degrees of fragile, underdeveloped skin that can be
easily damaged by adhesives.  Also during 2009, the monitor software was
also updated to allow data collected on FORE-SIGHT to be integrated with three
other providers. Most notably, FORE-SIGHT was made compatible with the large
installed base of Philips Healthcare’s IntelliVue and CMS Patient Monitors. This
patient data integration reduces the number of displays, control, alarm and
documentation points at the bedside - offering convenient central viewing of
decision support variables and providing a clear view of patient
information.
 
 During
2009 we began R&D efforts to expand our LASER-SIGHT technology into the
related market of measuring oxygen levels in other tissue and organs. The
Company conducted various clinical studies during the year on adult, pediatric
and neonatal patients, as well as animal studies, to prove efficacy and accuracy
in this application. This work resulted in the filing of a 510(k) premarket
notification with the FDA during the fourth quarter of 2009 for an expansion of
the FORE-SIGHT technology to include tissue oximetry, along with cerebral
oximetry, measurements. The Company plans to launch this expanded feature
product during the second half of 2010 and expects a number of clinical
abstracts and publications to be available during the year to support its
application in a variety of settings. The Company has filed a number of
provisional patent applications related to this new application.
 
 During
2009, 2008 and 2007, the Company incurred R&D related expenses of
approximately $3,197,000, $2,610,000, and $2,733,000, or 9%, 6% and 7%, of
revenues respectively. These amounts are before consideration of reimbursements
received from the National Institutes of Health (“NIH”) further explained under
Grant Awards
below. Net R&D expenses after reimbursements from the NIH for 2009, 2008 and
2007 approximated $2,460,000, $2,028,000, and $2,254,000, or 7%, 5% and 6%, of
revenues respectively. Reimbursements from the NIH were approximately $737,000
for 2009, $582,000 for 2008, and $479,000 for 2007. Funding provided to the
Company is recorded as a reduction in R&D expenses.
 
 For 2010,
we expect our net R&D expenses to be lower than 2009 primarily due to staff
reductions performed during 2009 in non FORE-SIGHT related R&D activities,
slightly lower NIH reimbursements and the transfer of certain personnel from
R&D to S,G,& A functions. R&D activities for 2010 will be primarily
focused on the continued advancement of the Company’s proprietary LASER-SIGHT
and MAXNIBP technologies with continued algorithm development programs,
technology integration and cost reduction programs and further enhancements
to
 
 Page
13
 
 FORE-SIGHT
including the design and development of a next generation platform and continued
clinical research efforts.
 
 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 that is 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,
2009, a maximum of approximately $1.0 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®,
COOL-LIGHT®, For
Every Life and Breath Situation®,  For
What’s Vital®,
FORE-SIGHT®,
HOLD-TIGHT®,
Klear-Traceâ,
LASER-SIGHT®,
MAXNIBPâ,
Mother/baby®,
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, the Statcorp logo 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 and apnea
monitoring technologies which it believes provide it with a competitive market
advantage.  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 currently engaged in pending patent litigation with
Somanetics Corporation. See “Item 3 – Legal Proceedings.”
 
 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 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.
 
 Page
14
  Employees
 
 As of
December 31, 2009, the Company had 142 employees, of which 140 were
full-time.  The Company has no collective bargaining agreements and
believes that relations with its employees are good.
 
 Government
Regulation
 
 Medical
products of the type currently being marketed and under development by the
Company are subject to regulation under the Food, Drug and Cosmetic Act (the
"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.
 
 Page
15
  Customers
 
 Our five
largest customers accounted for approximately 27%, 31%, and 26% of revenues in
2009, 2008, and 2007, respectively.  Among these customers, Medtronic,
Inc., customarily the Company’s largest individual customer accounted for 11%
and 12% of revenues during 2009 and 2008, respectively. During 2007, no customer
accounted for 10% or more of the Company’s revenues. During January 2007,
Medtronic announced a voluntary suspension of shipments to U.S. customers from
its Physio-Control division. On February 16, 2010, Medtronic announced that it
had received a FDA approval to resume unrestricted worldwide shipments of its
external defibrillators.
 
 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
Have A Recent History of Net Losses and are Subject to Risks Regarding Future
Liquidity
 
 We have
experienced operating losses during our two most recent fiscal
years.  There can be no assurance that we will be able to improve our
results of operations in the near term or at all.
 
 Our
ordinary short-term 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 and the loss of one or more key
customers. Our borrowings may be impacted by our failure to meet financial
covenants under our current or any future loan agreement or the discretionary
actions of our lender.
  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
  
 Page
16
 
 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.
 
 Our
Business Is Impacted By Customer Concentration
 Our five
largest customers accounted for approximately 27%, 31%, and 26% of revenues in
2009, 2008, and 2007, respectively.  Among these customers, Medtronic,
Inc., customarily the Company’s largest single customer, accounted for 11% and
12% of revenues during 2009 and 2008, respectively.  In addition, the
Company has a blanket agreement with the U.S. Department of Veterans Affairs
(“VA”) for purchase of its vital signs monitors through December
2010.   Over the past five years, the Company has sold close to
12,000 vital signs monitors to the VA hospitals and clinics throughout the
U.S.  Collective sales to VA hospitals accounted for over 11% of
overall sales for 2009.  The failure to renew the blanket agreement
with the VA or the loss of any other significant customer could have a material
adverse effect on our financial position and results of operations.
 
 We
Are Party to Material Patent Litigation
 
 On August
7, 2009, Somanetics Corporation (“Somanetics”) filed an action against the
Company in the United States District Court for the Eastern District of Michigan
alleging patent infringement, false advertising, and common law unfair
competition and libel relating to the Company’s FORE-SIGHT product
line.  The complaint requests injunctive relief and unspecified
monetary damages, including treble damages and reasonable attorneys’
fees.  On October 19, 2009, the Company answered  the
complaint, denying all allegations against it. In addition, the Company has
asserted counterclaims against Somanetics for violation of the antitrust laws
and for a declaration that the patents sued upon are invalid, unenforceable,
and/or have not been infringed by the Company.  The defense and
prosecution of this matter is likely to be both costly and time-consuming, even
if the outcome is favorable to us.  An adverse outcome in the defense
of this matter could cause us to lose proprietary rights with respect to our
FORE-SIGHT product, subject us to significant liabilities or require us to
license rights at significant cost or to cease selling our FORE-SIGHT products.
Any of these events could have a material adverse effect on our business,
operating results and financial condition.
 
 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, reductions in
hospital capital equipment expenditures, 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 may go out of business,
which could result in our inability to meet 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 penetrate the
 
 Page
17
   markets
for these products. Such investments include further research and development,
including significant expenditures for clinical studies, equipment for
placements at customer sites, 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. In addition, since we
have limited financial resources, our emphasis on the FORE-SIGHT cerebral
oximetry products may result in a lack of sufficient resources available for our
other existing product lines, which may negatively impact our overall financial
results.
 
 The
Sale Of Our Products May Result In Significant Product Liability
Exposure
 
 As a
manufacturer of medical diagnostic equipment, we 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. A trial date has not yet
been scheduled for this matter.  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. 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
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.
 Page
18
   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.
 
 Federal
Regulatory Reforms May Adversely Affect Our Ability To Successfully Market Our
Products And Impact Our Financial Condition
 
 Recent
efforts to reform the U.S. health care industry led by President Obama and
certain members of Congress have resulted in legislation and other measures
which will effect changes in healthcare delivery and coverage, and public and
private reimbursements for services performed.  Federal initiatives
may also affect state programs. Legislative changes may affect hospital market
expenditures for medical devices, the type and volume of procedures performed,
and the demand for new and innovative products. These changes could be
significant and may adversely affect the demand for our products, our results of
operations, cash flows and our overall financial condition.
 
 Outside
of the U.S., healthcare delivery and reimbursement systems vary by country.
Efforts to control rising healthcare costs, changes in government sponsored
programs and participation and various other economic factors may impact our
ability to successfully market our products outside of the U.S.
 
 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.
 
 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.
 
 We
Are Subject to Currency and Related Risks
 
 Our
international sales subject us to currency and related risks.  Our
international sales accounted for 31% of our total net sales for the 2009 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
 
 Page
19
  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, 2009, options and warrants for the purchase of 1,452,576 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.
 
 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 would be the greater of the then prevailing market rent or an
amount equal to a return on actual costs of
 
 Page
20
   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 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 expiring on
May 31, 2014.  Minimum annual rental expense is approximately $80,000
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 expiring June 30, 2015.
Minimum annual rental expense is approximately $85,000 excluding apportioned
real estate taxes and certain common area maintenance charges.
 
 The
Company is also leasing approximately 17,500 square feet of warehouse and office
space in Jacksonville, Florida under an agreement, as amended, which expires
March 31, 2012.  Minimum annual rental expense is approximately
$86,000 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.  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
this matter or 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 August
7, 2009, Somanetics Corporation (“Somanetics”) filed an action against the
Company in the United States District Court for the Eastern District of Michigan
alleging patent infringement, false advertising, and common law unfair
competition and libel related to the Company’s FORE-SIGHT product line. 
The complaint requests injunctive relief and unspecified monetary damages,
including treble damages and reasonable attorneys’ fees.  On October 19,
2009, the Company answered   the complaint, denying all
allegations against it. In addition, the Company has asserted counterclaims
against Somanetics for violation of the antitrust laws and for a declaration
that the patents sued upon are invalid, unenforceable, and/or have not been
infringed by the Company.
  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.
  
 PART
II
  Item 5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
 
 The
common stock of the Company trades on the NASDAQ Global Market, under the symbol
“CASM.”
 
 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.
 
 Page
21
  
 Quarter Ended
              
              High
              
              
              LowMarch
      31, 2008
              
              $
              5.54
              
              
              $
              4.05June
      30, 2008
              
              $
              4.30
              
              
              $
              2.81September
      30, 2008
              
              $
              4.21
              
              
              $
              2.72December
      31, 2008
              
              $
              4.00
              
              
              $
              1.66March
      31, 2009
              
              $
              2.18
              
              
              $
              0.90June
      30, 2009
              
              $
              2.23
              
              
              $
              1.15September
      30, 2009
              
              $
              3.90
              
              
              $
              1.16December
      31, 2009
              
              $
              2.12
              
              
              $
              1.50
 
 The
following table sets forth the approximate number of beneficial owners of common
stock of the Company on December 31, 2009.
 
 Title of
      Class                                         Number of
      Shareholders
 
 Common
      stock, $.004 par
      value                          1,915
 
 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
2009 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 2009.
 
 Item 6.  Selected
Financial Data
  For
      Year Ended December 31,
              
              2009(1)(2)
              
              
              2008(1)
              
              
              2007(1)
              
              
              2006(1)
              
              
              2005(3)(amounts
      in thousands, except per share amounts)Net
      Sales
              
              $
              34,235
              
              
              $
              40,649
              
              
              $
              38,232
              
              
              $
              35,202
              
              
              $
              26,884Cost
      of Sales
              
              
              23,350
              
              
              
              26,748
              
              
              
              24,584
              
              
              
              20,803
              
              
              
              15,092Gross
      Profit
              
              
              10,885
              
              
              
              13,901
              
              
              
              13,648
              
              
              
              14,399
              
              
              
              11,792Operating
      Expenses:Research
      and development
              
              $
              2,460
              
              
              $
              2,027
              
              
              $
              2,254
              
              
              $
              2,762
              
              
              $
              1,631Selling,
      general and administrative
              
              
              11,603
              
              
              
              12,165
              
              
              
              10,815
              
              
              
              8,659
              
              
              
              7,438Total
      operating expenses
              
              
              14,063
              
              
              
              14,192
              
              
              
              13,069
              
              
              
              11,421
              
              
              
              9,069Goodwill
      impairment
              
              
              2,156
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –Operating
      (loss) income
              
              
              (5,334
              )
              
              
              (291
              )
              
              
              579
              
              
              
              2,978
              
              
              
              2,723(Loss)
      income before income taxes
              
              
              (5,558
              )
              
              
              (564
              )
              
              
              304
              
              
              
              2,730
              
              
              
              2,556Net
      (loss) income
              
              
              (5,790
              )
              
              
              (388
              )
              
              
              306
              
              
              
              1,747
              
              
              
              1,815Net
      (loss) income per diluted common
    share
              
              $
              (0.51
              )
              
              $
              (0.04
              )
              
              $
              0.03
              
              
              $
              0.14
              
              
              $
              0.15Diluted
      shares outstanding
              
              
              11,261
              
              
              
              11,032
              
              
              
              12,212
              
              
              
              12,147
              
              
              
              11,729At
      Year End:Working
      Capital
              
              $
              7,907
              
              
              $
              10,819
              
              
              $
              10,388
              
              
              $
              9,096
              
              
              $
              7,482Long-term
      debt, less current portion
              
              
              1,056
              
              
              
              1,708
              
              
              
              2,323
              
              
              
              3,807
              
              
              
              4,416Total
      Assets
              
              
              18,250
              
              
              
              23,685
              
              
              
              23,888
              
              
              
              21,443
              
              
              
              17,918Stockholders'
      equity
              
              $
              9,349
              
              
              $
              14,900
              
              
              $
              13,751
              
              
              $
              12,625
              
              
              $
              9,117
 
  
 Page
22
  
 (1)
                Operating
      income (loss) reduced by $325, $410, $303 and $390 for 2009, 2008, 2007
      and 2006, respectively, from stock compensation expense. The Company
      adopted FAS 123R – Share-Based Payment, as of January 1,
    2006.
 (2)
                2009
      operating loss affected by $2,156 of goodwill impairment charges. Net
      (loss) income affected by deferred income tax asset valuation allowance of
      $1,449.
 (3)
                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 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, 2009
Compared to Year Ended December 31, 2008
 
 The
Company recorded a net loss of $5,790,000 for 2009 or ($0.51) per basic and
diluted common share compared to a net loss of $388,000 or ($0.04) per basic and
diluted common share for 2008. The pre-tax loss for 2009 of $5,558,000 includes
a goodwill impairment charge of $2,156,000, legal expenses related to the
Somanetics litigation of $345,000 and severance charges of approximately
$401,000 of which $346,000 related to personnel reductions initiated during the
fourth quarter of 2009. The Company also recorded a $1,449,000 charge pertaining
to the establishment of a deferred income tax asset valuation allowance. Pre-tax
losses for 2009 and 2008 were also affected by $325,000 and $410,000,
respectively, of stock compensation expense.
 
 The
operating loss for 2009 before the goodwill impairment charge was $3,178,000
compared to an operating loss of $291,000 for 2008. Reductions in sales volumes
of $6,414,000 from 2008 levels were primarily responsible for the increased
operating loss for 2009 over the prior year. Revenues for 2009 were
significantly impacted by the worldwide economic crisis and reductions in sales
to certain key customers. Gross profit levels declined from 34.2% in 2008 to
31.8% in 2009 reflecting increased inventory related charges over a reduced
revenue base. Non-FORE-SIGHT related operating expense reductions were largely
offset by increases in litigation and severance costs referred to above and by
increased FORE-SIGHT related research and development and sales and marketing
spending of approximately $931,000.
 
 In
response to difficult economic conditions and the decline in the Company’s
revenue compared to 2008, management initiated reductions in personnel during
both May and November 2009.  Those reductions were expected to
generate approximately $2,300,000 in annual savings in fiscal year
2010.  Further, the Company reduced its focus on certain products that
were not considered central to the Company’s strategic objectives and did not
contribute adequate gross margins. The infant sleep apnea product line was
phased out during 2009 and the products manufactured by Analogic Corporation and
resold by the Company are to be phased out by July 2010. Additional reductions
in low gross margin products sold within the blood pressure cuff product lines
have also occurred which are expected to improve overall gross profits during
the 2010 fiscal year.
 
 Page
23
 
 
 The
following table provides comparative results of net sales by product and
geographic category:
 
 ($000’s)
              
              Year
      Ended
              
              
              Year
      Ended
              
              
              Increase/December
      31, 2009
              
              
              December
      31, 2008
              
              
              (Decrease)Bedside
      Monitoring
              
              $
              10,954
              
              
              $
              15,889
              
              
              $
              (4,935
              )Critical
      Care Monitoring
              
              
              4,078
              
              
              
              2,258
              
              
              
              1,820Blood
      Pressure Measurement Technology
              
              
              5,836
              
              
              
              7,769
              
              
              
              (1,933
              )Supplies
      and Service
              
              
              13,367
              
              
              
              14,733
              
              
              
              (1,366
              )$
              34,235
              
              
              $
              40,649
              
              
              $
              (6,414
              )Domestic
      Sales
              
              
              23,637
              
              
              
              30,032
              
              
              
              (6,395
              )International
      Sales
              
              
              10,598
              
              
              
              10,617
              
              
              
              (19
              )$
              34,235
              
              
              $
              40,649
              
              
              $
              (6,414
              )
   Net sales
for 2009 were significantly impacted by the worldwide economic crisis,
decreasing 16% or $6,414,000 to $34,235,000 from $40,649,000 for 2008. Bedside
monitoring sales decreased $4,935,000 or 31% from 2008 primarily due to lower
sales levels of vital signs monitors and accessories sold to the Veterans
Administration, reduced sales of co-branded Analogic products and lower sales of
veterinary products sold under a private label agreement. Critical care
monitoring sales increased $1,820,000 or 81% to $4,078,000 and represent the
Company’s FORE-SIGHT cerebral oximetry technology launched during
mid-2007.  Sensor related sales account for approximately 67% of
critical care sales for 2009.  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 2009, the Company placed or
sold approximately 87 monitors with customers bringing the installed base of
FORE-SIGHT monitors worldwide to 238 as of the end of 2009. Approximately 48
units were placed or sold during the fourth quarter of 2009. Blood pressure
measurement technology sales decreased $1,933,000 or 25%. Sales to nearly all of
the Company’s OEM customers decreased from 2008 reflecting softer worldwide
demand for medical equipment. OEM sales to Medtronic, the Company’s largest
single customer, accounted for $1,081,000 of the overall decrease in blood
pressure measurement technology sales. Sales of supplies and service decreased
$1,366,000 or 9% from 2008 sales. Blood pressure and infusor cuffs accounted for
approximately 69% of sales in this category. The decrease in sales is primarily
due to reductions in sales of low gross margin cuff products to one customer in
this market.
 
 Sales to
the U.S. market accounted for $23,637,000 or 69% of the total net sales reported
for 2009, a decrease of $6,395,000 or 21% from the $30,032,000 reported for
2008. International sales of the Company’s products were basically flat,
decreasing only $19,000 to $10,598,000 or 31% of total net sales, from sales of
$10,617,000 reported for 2008.
 
 Cost of
sales as a percentage of net sales increased to 68.2% for 2009 compared to 65.8%
of net sales for 2008. The increase in cost of sales as a percentage of sales
for 2009 was primarily related to inventory adjustments which were partially
related to products being phased out by the Company and overhead costs
previously capitalized to inventory which are being charged to cost of sales
commensurate with reductions in inventory levels.
  R&D
expenses increased $432,000 or 21% to $2,460,000 for 2009 from $2,028,000 for
2008. 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 2009 and 2008 were $737,000 and $582,000,
respectively. During September 2007 the Company was awarded a three year grant
totaling approximately $2,800,000 to support its NIRS research. As of December
31, 2009, a maximum of approximately $1,000,000 remains available under the
grant. R&D expenses before NIH reimbursement approximated 9.3% and 6.4%,
respectively, of 2009 and 2008 revenues.
 
 Selling,
general and administrative (“S,G&A”) expenses decreased $562,000 or 4.6% to
$11,603,000 or 33.9% of net sales for 2009 from $12,165,000 or 29.9% of net
sales for 2008. Sales and marketing expenses in 2009 pertaining to the Company’s
Fore-Sight cerebral oximeter were approximately $3,565,000 and
increased
 
 Page
24
   approximately
$471,000 or 15% over the $3,094,000 incurred for 2008. Salaries, commissions and
related benefits, travel expenses and consulting were primarily responsible for
the increase and were partially offset by reductions in manufacturers’
representative commissions and advertising and promotional costs. General and
administrative (“G&A”) expenses decreased by $401,000 or 10.2% primarily as
a result of decreases in salaries, partially related to headcount reductions,
and related benefits and general insurance costs. G&A expenses in 2009
included $345,000 of legal costs related to the Somanetics
litigation.
 
 S,
G&A expenses were affected by severance costs of approximately $385,000
incurred during 2009 as a result of reductions in staff initiated during May and
November. The reductions in personnel are expected to generate S,G&A savings
of approximately $1,600,000 for 2010.
 
 During
the fourth quarter of 2009 the Company determined that the goodwill of
$3,379,021 associated with the May 2005 acquisition of Statcorp, Inc. was
impaired. The Company assesses its goodwill for impairment annually in the
fourth quarter or whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Accordingly, the Company recognized an
impairment charge of $2,155,785 during the fourth quarter of 2009.
 
 Net
interest expense decreased $48,000 to $224,000 for 2009 from $272,000 for 2008
as a result of reduced balances on the Company’s long-term debt.
 
 The
income tax expense for 2009 was $232,000 compared to a benefit of $176,000 for
2008. The income tax expense for 2009 results primarily from the
non-deductibility of the goodwill impairment charge of $2,156,000 and the
recording of a deferred income tax asset valuation allowance of $1,449,000 which
were partially offset by pre-tax operating losses. The benefit for 2008 is
related to taxable losses and federal R&D related tax credits.
  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:
 
 ($000’s)
              
              Year
      Ended
              
              
              Year
      Ended
              
              
              Increase/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
      and 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
 
 
 Page
25
   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. 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.
 
 R&D
expenses decreased $226,000 or 10% to $2,028,000 for 2008 from $2,254,000 for
2007. R&D expenses were 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. 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.
 
 Page
26
  Financial Condition,
Liquidity and Capital Resources
 
 The
Company’s cash and cash equivalents were $1,187,000 at December 31, 2009
compared to $1,083,000 at December 31, 2008. Working capital decreased
$2,913,000 to $7,907,000 at December 31, 2008 from $10,819,000 at December 31,
2008. The Company’s current ratio decreased to 2.21 to 1 from 2.88 to
1.
 
 Net cash
provided by operating activities for 2009 was $480,000 compared to cash provided
of $1,660,000 for the prior year. Operating losses before depreciation and
amortization and goodwill impairment were offset by reductions in inventories
and the reduction in other receivables during 2009. Cash provided by operations
during 2008 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 $402,000 for 2009 compared to cash used of
$1,466,000 for 2008. The Company incurred $288,000 of capital expenditures
during 2009 compared to $1,413,000 for 2008. 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. During 2010, the Company expects to increase its
expenditures for FORE-SIGHT cerebral oximeter equipment placed at customer
locations and clinical research equipment over amounts spent for 2009. The
Company also incurred $114,000 of expenditures during 2009 to purchase
intangible assets, primarily patents, trademarks and deferred finance
charges.
 
 Net cash
provided by financing activities was $26,000 for 2009 compared to $222,000 for
2008. The Company repaid $614,000 of long-term debt during 2009 while increasing
its borrowings under its line-of-credit agreement by $676,000 as of December 31,
2009. Cash provided by financing activities for 2008 was generated by a private
placement of 333,333 shares of its common stock consummated during May of that
year for an aggregate sum of $1,000,000.
 
 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,
2009.
 
 Contractual
              
              
              
              
              Less
      than
              
              
              1 –
      3
              
              
              3 -
      5
              
              
              More
      ThanObligations
              
              Total
              
              
              One Year
              
              
              Years
              
              
              Years
              
              
              Five YearsLong-term
      debt
              
              $
              1,708,755
              
              
              $
              652,482
              
              
              $
              1,056,273
              
              
              $
              –
              
              
              $
              –Note
      payable
              
              
              50,678
              
              
              
              50,678
              
              
              
              –
              
              
              
              –
              
              
              
              –Operating
      leases
              
              
              3,071,265
              
              
              
              541,003
              
              
              
              913,054
              
              
              
              851,604
              
              
              
              765,604$
              4,830,698
              
              
              $
              1,244,163
              
              
              $
              1,969,327
              
              
              $
              851,604
              
              
              $
              765,604
 
 
 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 originally provided 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 could be
made only if the maximum principal amount outstanding did 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 “First Modification”). The First Modification
amended the Loan Agreement and related Note and extended the
 
 Page
27
  
 maturity
date of the Note to July 1, 2010 and also amended the interest rate for the line
of credit to the Bank’s base rate with a minimum interest rate of 3.25% per
annum. The line-of-credit was further amended by the Second Modification
Agreement (the “Second Modification”) dated April 3, 2009 and effective March
31, 2009 which reduced the maximum availability under the line of credit from
$10,000,000 to $5,000,000 and also amended the debt service coverage ratio from
a quarterly test to an annual test for the twelve months ended December 31, 2009
and revised the minimum ratio from 1.5 to 1 to 1.0 to 1. As of the first quarter
of 2010 and thereafter, the ratio was scheduled to return to 1.5 to 1 resumed on
a quarterly basis.
 
 On March
11, 2010, the line-of-credit was amended by the Third Modification Agreement
(the “Third Modification”). The Third Modification amended the Loan Agreement
and the Note each as previously amended. Under the Third Modification, the
maturity date was extended to April 1, 2011 and the interest rate for the
revolving loans under the Loan Agreement was increased from the Bank’s Base Rate
(as defined in the Second Modification) plus 1.0% with a minimum of 4.0% per
annum to the Bank’s Base Rate (as defined in the Third Modification) plus 2.0%
with a minimum interest rate of 5.0% per annum. The interest rate effective upon
execution of the Third Modification was 5.25% per annum. Additionally, the Third
Modification amended the existing debt service coverage ratio covenant from 1.5
to 1.0 to 1.25 to 1.0, tested beginning March 31, 2010 and quarterly thereafter,
measured on a year-to-date basis. In connection with the Third Modification, the
Bank waived the testing of the debt service coverage ratio covenant as of
December 31, 2009.
 
 The
Company also amended it existing term note with the Bank to conform the debt
service coverage ratio covenant to the ratio contained in the Third
Modification.
 
 As of
March 11, 2010, the outstanding balance under the line of credit was $2,129,000
and the availability was approximately $1,442,000. In addition, the Company held
approximately $1,000,000 in cash and cash equivalents as of March 11,
2010.
 
 During
2009, management initiated reductions in its overhead structure in response to
lower revenue levels experienced in that year. After careful review of the
profit contributions of certain product lines, management phased out those
products in order to improve future profitability, conserve capital and increase
attention toward more strategic opportunities. Despite a difficult 2009 calendar
year, the Company maintained its bank debt levels at December 31, 2009 nearly
commensurate with those at December 31, 2008 through focused asset management.
Inventory reductions were a key contributor to cash flows during 2009 with
inventory declining $1,980,000 from year-end 2008 levels. Capital expenditures
were modest at $110,000 during 2009 excluding Fore-Sight equipment required for
customer sites. Accounts receivable were collected timely with few exceptions.
Further, the Company is anticipating proceeds from its federal net operating
loss carry back of $871,000 by mid-2010.
 
 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 operating and capital
requirements for 2010. The Company expects to reduce its overall bank debt
levels as of the end of 2010 compared to bank debt outstanding as of December
31, 2009 as a result of improved cash from operations. However, future cash
flows may be impacted by a number of factors, including changing market
conditions, failure to meet financial covenants under our current or any future
loan agreement, or discretionary actions of our senior
lender.  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.
 
 The
Company’s results of operations were not affected by inflation during
2009.
 
 Off-Balance Sheet
Arrangements
 
 The
Company has no off-balance sheet arrangements other than operating leases for
office and warehouse space.
  
 Page
28
  
 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 recent
cumulative pre-tax losses and the Company’s estimates of future taxable income,
management has established a deferred tax asset valuation
allowance.
 
 Goodwill-The Company assesses
goodwill for impairment annually in the fourth quarter or whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable.  All of the Company’s goodwill is attributable to the
Statcorp business unit. The Company uses adjusted quoted market prices and other
observable inputs to estimate the fair value of the Statcorp business unit when
conducting its impairment analysis.
 
 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.  In June 2009,
the Financial Accounting Standards Board (“FASB”) issued FASB ASC 105, Generally
Accepted Accounting Principles, which establishes the FASB Accounting Standards
Codification as the sole source of authoritative generally accepted accounting
principles. Pursuant to the provisions of FASB ASC 105, the Company has updated
references to GAAP in its financial statements issued for the period ended on or
after September 30, 2009. The adoption of FASB ASC 105 did not impact the
Company’s financial position or results of operations.
 
 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 $2,670,000 at December 31, 2009.  The
line-of-credit agreement, amended effective March 11, 2010, 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.
 
 Page
29
 
   
 Item 8.  Financial
Statements and Supplementary Data
 
 PageReport
      of Independent Registered Public Accounting Firm
                
                F-1Financial
      StatementsConsolidated
      Balance Sheets as of December 31, 2009 and 2008
                
                F-2Consolidated
      Statements of Operations for the Years Ended December 31, 2009, 2008 and
      2007
                
                F-3Consolidated
      Statements of Changes in Shareholders’ Equity for the Years
      EndedDecember
      31, 2009, 2008 and 2007
                
                F-4Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
      2007
                
                F-5Notes
      to Consolidated Financial Statements
                
                F-6
      to F-18
 
 
 
 
 
 
 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, 2009 and 2008, 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, 2009.  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, 2009 and 2008, and the results of its operations and its cash flows for the
each of the years in the three-year period ended December 31, 2009 in conformity
with accounting principles generally accepted in the United States of
America.
 
 As
discussed in Note 2, the Company changed its accounting for uncertain income tax
positions as required by accounting principles generally accepted in the United
States of America, effective January 1, 2007.
 
 
 
 /s/ UHY
LLP
 
 
 New Haven, Connecticut
 March 29, 2010
 
 
 
 F-2
 CAS
MEDICAL SYSTEMS, INC.
 Consolidated
Balance Sheets
 As of
December 31, 2009 and 2008
 
 ASSETS
              
              2009
              
              
              2008CURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              1,186,779
              
              
              $
              1,082,619Accounts
      receivable, less allowance of $175,000 in 2009and
      $150,000 in 2008
              
              
              4,192,730
              
              
              
              3,681,355Recoverable
      income taxes
              
              
              871,206
              
              
              
              101,185Other
      receivable
              
              
              —
              
              
              
              715,769Inventories
              
              
              7,806,912
              
              
              
              9,786,538Deferred
      income taxes (Note 9)
              
              
              —
              
              
              
              791,493Other
      current assets
              
              
              383,152
              
              
              
              411,938Total
      current assets
              
              
              14,440,779
              
              
              
              16,570,897PROPERTY
      AND EQUIPMENT:Leasehold
      improvements
              
              
              303,710
              
              
              
              281,612Equipment
      at customers
              
              
              1,219,418
              
              
              
              1,132,422Machinery
      and equipment
              
              
              5,414,368
              
              
              
              5,326,7356,937,496
              
              
              
              6,740,769Accumulated
      depreciation and amortization
              
              
              (4,976,819
              )
              
              
              (4,013,900
              )Property
      and equipment, net
              
              
              1,960,677
              
              
              
              2,726,869INTANGIBLE
      AND OTHER ASSETS, net
              
              
              625,761
              
              
              
              757,378GOODWILL
              
              
              1,223,236
              
              
              
              3,379,021DEFERRED
      INCOME TAXES (Note 9)
              
              
              —
              
              
              
              250,370Total
      assets
              
              $
              18,250,453
              
              
              $
              23,684,535
 
 LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIES:Current
      portion of long-term debt
              
              $
              652,482
              
              
              $
              614,067Note
      payable
              
              
              50,678
              
              
              
              —Line-of-credit
              
              
              2,669,657
              
              
              
              1,994,008Accounts
      payable
              
              
              1,848,185
              
              
              
              2,307,675Accrued
      expenses
              
              
              1,313,164
              
              
              
              835,868Total
      current liabilities
              
              
              6,534,166
              
              
              
              5,751,618LONG-TERM
      DEBT, less current portion
              
              
              1,056,273
              
              
              
              1,708,493DEFERRED
      GAIN ON SALE AND LEASEBACK OF PROPERTY
              
              
              1,034,064
              
              
              
              1,168,701INCOME
      TAXES PAYABLE
              
              
              277,280
              
              
              
              155,875COMMITMENTS  (Note
      12)
              
              
              —
              
              
              
              —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,11,610,075
      and 11,419,535 shares issued as of December 31, 2009and
      2008, respectively, including shares held in treasury
              
              
              46,440
              
              
              
              45,675Common
      stock held in treasury, at cost – 86,000 shares
              
              
              (101,480
              )
              
              
              (101,480
              )Additional
      paid-in capital
              
              
              7,661,061
              
              
              
              7,423,340Retained
      earnings
              
              
              1,742,649
              
              
              
              7,532,313Total
      shareholders’ equity
              
              
              9,348,670
              
              
              
              14,899,848Total
      liabilities and shareholders’ equity
              
              $
              18,250,453
              
              
              $
              23,684,535
 
 See
accompanying notes.
 
 
 F-3
 CAS
MEDICAL SYSTEMS, INC.
 Consolidated
Statements of Operations
 For the
Years Ended December 31, 2009, 2008 and 2007
  2009
              
              
              2008
              
              
              2007NET
      SALES
              
              $
              34,235,218
              
              
              $
              40,649,057
              
              
              $
              38,232,405COST
      OF SALES
              
              
              23,350,636
              
              
              
              26,747,590
              
              
              
              24,584,807Gross
      profit
              
              
              10,884,582
              
              
              
              13,901,467
              
              
              
              13,647,598OPERATING
      EXPENSES:Research
      and development
              
              
              2,459,508
              
              
              
              2,027,747
              
              
              
              2,253,512Selling,
      general and administrative
              
              
              11,602,928
              
              
              
              12,164,974
              
              
              
              10,815,24814,062,436
              
              
              
              14,192,721
              
              
              
              13,068,760Goodwill
      impairment
              
              
              2,155,785
              
              
              
              —
              
              
              
              —OPERATING
      (LOSS) INCOME
              
              
              (5,333,639
              )
              
              
              (291,254
              )
              
              
              578,838Interest
      expense, net
              
              
              224,215
              
              
              
              272,471
              
              
              
              274,977(LOSS) INCOME BEFORE INCOME
      TAXES
              
              
              (5,557,854
              )
              
              
              (563,725
              )
              
              
              303,861Income
      tax expense (benefit)
              
              
              231,810
              
              
              
              (175,731
              )
              
              
              (2,599
              )NET
      (LOSS) INCOME
              
              $
              (5,789,664
              )
              
              $
              (387,994
              
              
              $
              306,460NET
      (LOSS) INCOME  PER COMMON SHARE:Basic
              
              $
              (0.51
              )
              
              $
              (0.04
              )
              
              $
              0.03Diluted
              
              $
              (0.51
              )
              
              $
              (0.04
              )
              
              $
              0.03WEIGHTED
      AVERAGE NUMBER OF COMMONSHARES
      OUTSTANDING:Basic
              
              
              11,260,553
              
              
              
              11,031,855
              
              
              
              10,696,217Diluted
              
              
              11,260,553
              
              
              
              11,031,855
              
              
              
              12,211,694
 
 
 See
accompanying notes.
 
 
 F-4
 CAS
MEDICAL SYSTEMS, INC.
 Consolidated
Statements of Changes in Shareholders’ Equity
 For the
Years Ended December 31, 2009, 2008 and 2007
  Common
      StockIssued
              
              
              Held
      in Treasury
              
              
              Paid-in
              
              
              RetainedShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Earnings
              
              
              TotalBALANCE,
      December 31, 2006
              
              
              10,679,307
              
              
              $
              42,717
              
              
              
              86,000
              
              
              $
              (101,480
              )
              
              $
              4,935,538
              
              
              $
              7,748,222
              
              
              $
              12,624,997Change
      in accounting for uncertain income taxpositions
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (134,375
              )
              
              
              (134,375
              )Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              306,460
              
              
              
              306,460Common
      stock issued upon exercise ofstock options and
    warrants
              
              
              192,824
              
              
              
              771
              
              
              
              
              
              
              
              
              
              
              
              116,391
              
              
              
              
              
              
              
              117,162Common
      stock issued under stock 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
              
              
              
              14,899,848Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,789,664
              )
              
              
              (5,789,664
              )Common
      stock issued upon exercise ofstock options
              
              
              24,700
              
              
              
              99
              
              
              
              
              
              
              
              
              
              
              
              23,542
              
              
              
              
              
              
              
              23,641Common
      stock issued under stock purchase plan
              
              
              37,813
              
              
              
              151
              
              
              
              
              
              
              
              
              
              
              
              60,581
              
              
              
              
              
              
              
              60,732Restricted
      stock issued under equityincentive
      plans, net of cancellations
              
              
              128,027
              
              
              
              515
              
              
              
              
              
              
              
              
              
              
              
              (515
              )
              
              
              
              
              
              
              —Deferred
      income taxes regarding restricted stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (170,757
              )
              
              
              
              
              
              
              (170,757
              )Stock
      compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              324,870
              
              
              
              
              
              
              324,870BALANCE,
      December 31, 2009
              
              
              11,610,075
              
              
              $
              46,440
              
              
              
              86,000
              
              
              $
              (101,480
              )
              
              $
              7,661,061
              
              
              $
              1,742,649
              
              
              $
              9,348,670
 
 
 See
accompanying notes.
  
 F-5
 CAS MEDICAL SYSTEMS, INC.
 Consolidated
Statements of Cash Flows
 For the
Years Ended December 31, 2009, 2008 and 2007
 
 
 2009
              
              
              2008
              
              
              2007OPERATING
      ACTIVITIES:
              
              $
              (5,789,664
              )
              
              $
              (387,994
              )
              
              $
              306,460Net
      (loss) incomeAdjustments
      to reconcile net (loss) income to net cashprovided
      (used) by operating activities:Depreciation
      and amortization
              
              
              1,189,114
              
              
              
              1,169,335
              
              
              
              816,286Deferred
      income taxes
              
              
              1,041,863
              
              
              
              373
              
              
              
              (537,167
              )Provision
      for doubtful accounts
              
              
              63,689
              
              
              
              25,350
              
              
              
              50,000Impairment
      of assets
              
              
              2,266,238
              
              
              
              —
              
              
              
              —Stock
      compensation
              
              
              324,870
              
              
              
              410,402
              
              
              
              303,136Amortization
      of gain on sale and leaseback
              
              
              (134,637
              )
              
              
              (134,637
              )
              
              
              (43,035
              )Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (575,064
              )
              
              
              1,240,595
              
              
              
              (90,997
              )Other
      receivable
              
              
              715,769
              
              
              
              (715,769
              )
              
              
              —Recoverable
      income taxes
              
              
              (770,021
              )
              
              
              129,273
              
              
              
              90,485Inventories
              
              
              1,979,626
              
              
              
              234,580
              
              
              
              (3,212,925
              )Other current
      assets
              
              
              28,786
              
              
              
              2,266
              
              
              
              (6,033
              )Accounts payable and accrued
      expenses
              
              
              17,806
              
              
              
              (324,071
              )
              
              
              (865,377
              )Income taxes
    payable
              
              
              121,405
              
              
              
              10,750
              
              
              
              10,750Net cash provided (used) by operating
      activities
              
              
              479,780
              
              
              
              1,660,453
              
              
              
              (3,178,417
              )INVESTING
      ACTIVITIES:Purchases
      of intangible assets
              
              
              (114,116
              )
              
              
              (53,241
              )
              
              
              (479,543
              )Proceeds
      from sale of property
              
              
              —
              
              
              
              —
              
              
              
              2,791,529Purchases
      of property and equipment
              
              
              (287,642
              )
              
              
              (1,413,014
              )
              
              
              (1,188,030
              )Net
      cash (used) provided by financing activities
              
              
              (401,758
              )
              
              
              (1,466,255
              )
              
              
              1,123,956FINANCING
      ACTIVITIES:Borrowings
      under notes payable
              
              
              228,052
              
              
              
              298,704
              
              
              
              410,639Repayments
      of notes payable
              
              
              (177,374
              )
              
              
              (370,241
              )
              
              
              (408,343
              )Repayments
      (borrowings) under line-of-credit, net
              
              
              675,649
              
              
              
              (255,341
              )
              
              
              2,249,349Repayments
      of long-term debt
              
              
              (613,805
              )
              
              
              (577,454
              )
              
              
              (1,516,188
              )Income
      tax benefit (reversal) related to equity instruments
              
              
              (170,757
              )
              
              
              (14,730
              )
              
              
              419,399Proceeds
      from issuance of common stock
              
              
              84,373
              
              
              
              1,140,761
              
              
              
              231,792Net
      cash provided by financing activities
              
              
              26,138
              
              
              
              221,699
              
              
              
              1,386,648Net
      change in cash and cash equivalents
              
              
              104,160
              
              
              
              415,897
              
              
              
              (667,813
              )Cash
      and cash equivalents, beginning of year
              
              
              1,082,619
              
              
              
              666,722
              
              
              
              1,334,535CASH
      AND CASH EQUIVALENTS, END OF YEAR
              
              $
              1,186,779
              
              
              $
              1,082,619
              
              
              $
              666,722SUPPLEMENTAL
      DISCLOSURES OF CASH FLOWINFORMATION:Cash
      paid during the year for interest
              
              $
              224,059
              
              
              $
              282,056
              
              
              $
              263,732Cash
      paid (collected) during the year for income taxes, net
              
              $
              9,318
              
              
              $
              (301,398
              )
              
              $
              13,934
 
 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 2009 and 2008, one customer accounted for
approximately 11% and 12%, 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 both 2009 and 2008 and $8.6 million in
2007.  In the normal course of business, the Company grants credit to
its 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, 2009, the Company has capitalized
$1,219,418 of costs pertaining to the monitors which have a net book value of
$768,979.
 
 Depreciation
and amortization expense on property and equipment was $1,053,834 in 2009,
$1,026,870 in 2008, and $750,411 in 2007.
 
 Goodwill
 
 The
Company assesses its goodwill for impairment annually in the fourth quarter or
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable.  All of the Company’s goodwill is attributable
to the Statcorp business unit. In connection with its 2009 impairment review
during the fourth quarter, the Company determined that the goodwill of
$3,379,021 associated with the acquisition of Statcorp, Inc. during May 2005 was
impaired. Accordingly, the Company recognized an impairment charge of $2,155,785
during the fourth quarter of 2009. The fair market value of the goodwill as of
December 31, 2009 is recorded as $1,223,236. The Company used adjusted quoted
market prices and other observable (Level 2) inputs to estimate the fair value
of the Statcorp business unit.
 
 Intangible
and other assets
 
 The
Company reviews its intangible and other assets for impairment 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.
  Intangible
      and other assets at December 31, 2009 and 2008 consist of:2009
              
              
              2008Patents
      and other assets
              
              $
              606,271
              
              
              $
              628,273Patents
      pending
              
              
              240,981
              
              
              
              204,510Purchased
      technology
              
              
              33,893
              
              
              
              123,893Capitalized
      software
              
              
              179,946
              
              
              
              177,813Deferred
      finance charges
              
              
              46,986
              
              
              
              71,9381,108,077
              
              
              
              1,206,427Accumulated
      amortization
              
              
              (482,316
              )
              
              
              (449,049
              )$
              625,761
              
              
              $
              757,378
 
 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. 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 are
amortized over the term of the related debt. Amortization expense was $135,280
in 2009, $142,465 in 2008 and $63,808 in 2007.
 
 
 
 
 Expected
      amortization expense of intangible assets as of December 31, 2009 over the
      next five years follows:
 
 2010
              
              $
              69,0002011
              
              
              29,0002012
              
              
              22,0002013
              
              
              15,0002014
              
              
              13,000$
              148,000
 
 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 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.
 
 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 new accounting standards to account for uncertain income tax
positions. The new accounting standard 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. It 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 this
change in accounting, 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 2005.  Interest and penalties related to
uncertain tax positions are classified with income taxes.
 
 Warranty
costs
 
 The
Company warrants some of its products against defects and failures for up to
three years and records the
 
 
 F-9
 
 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.
 
 A summary
of the changes in the Company’s warranty accrual follows:
 
 
 2009
              
              
              2008Beginning
      balance
              
              $
              50,000
              
              
              $
              50,000Provision
              
              
              141,265
              
              
              
              188,775Warranty
      costs incurred
              
              
              (141,265
              )
              
              
              (188,775
              )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 $696,000 in 2009, $936,000 in 2008 and
$990,000 in 2007.
 
 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, 2009, 2008 and 2007 follow:
 
 2009
              
              
              2008
              
              
              2007Weighted
      average shares outstanding, net of restrictedshares
      – used to compute basic earnings (loss) per share
              
              
              11,260,553
              
              
              
              11,031,855
              
              
              
              10,696,217Dilutive
      effect of restricted shares, and outstandingwarrants
      and options
              
              
              —
              
              
              
              —
              
              
              
              1,515,477Weighted
      average shares of dilutive securitiesoutstanding
      – used to compute dilutedearnings
      (loss) per share
              
              
              11,260,553
              
              
              
              11,031,855
              
              
              
              12,211,694
 
 All
      outstanding stock related grants were excluded from the 2009 and 2008
      diluted loss per share calculations as they would have been
      anti-dilutive.
 
 
 F-10
  Fair
      value of financial instruments
 
 The
      fair value of the Company’s long-term debt as of December 31, 2009
      approximates its carrying value of $1,708,755. Fair value was determined
      using unobservable inputs (i.e. Level III). The fair value of all other
      financial instruments approximates their carrying value using active
      market data (i.e. Level I).
  Subsequent
events
 
 The
Company has performed a review of events subsequent to the balance sheet date
through the date the financial statements were issued.
 
 New
accounting pronouncements
  In June
2009, the Financial Accounting Standards Board (“FASB”) issued FASB ASC 105,
Generally Accepted Accounting Principles, which establishes the FASB Accounting
Standards Codification as the sole source of authoritative generally accepted
accounting principles. Pursuant to the provisions of FASB ASC 105, the Company
has updated references to GAAP in its financial statements issued for the period
ended on or after September 30, 2009. The adoption of FASB ASC 105 did not
impact the Company’s financial position or results of operations.
 
 
 (3)      ALLOWANCE
FOR DOUBTFUL ACCOUNTS
 
 Changes
in the allowance for doubtful accounts during the years ended December 31, 2009
and 2008 follow:
 
 2009
              
              
              2008Balance
      at beginning of year
              
              $
              150,000
              
              
              $
              125,000Provision
              
              
              63,689
              
              
              
              25,350Accounts
      written off
              
              
              (38,689
              )
              
              
              (350
              )Balance
      at end of year
              
              $
              175,000
              
              
              $
              150,000
 
 
 (4)      INVENTORIES
 
 Inventories
at December 31, 2009 and 2008 consist of:
 
 2009
              
              
              2008Raw
      materials
              
              $
              6,185,097
              
              
              $
              7,560,332Work
      in process
              
              
              39,544
              
              
              
              24,560Finished
      goods
              
              
              1,582,271
              
              
              
              2,201,646$
              7,806,912
              
              
              $
              9,786,538
 
 
 
 
 F-11
 
 (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 provided 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 could be
made only if the maximum principal amount outstanding did 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 were 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 contained 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 “First Modification”). The First Modification
amended the Loan Agreement and related Note and extended the maturity date of
the Note to July 1, 2010 and also amended the interest rate for the line of
credit to the Bank’s base rate with a minimum interest rate of 3.25% per annum.
The line-of-credit was further amended by the Second Modification Agreement (the
“Second Modification”) dated April 3, 2009 and effective March 31, 2009 which
reduced the maximum availability under the line of credit from $10,000,000 to
$5,000,000 and also amended the debt service coverage ratio from a quarterly
test to an annual test for the twelve months ended December 31, 2009 and revised
the minimum ratio from 1.5 to 1 to 1.0 to 1. As of the first quarter of 2010 and
thereafter, the ratio was scheduled to return to 1.5 to 1 resumed on a quarterly
basis.
 
 On March
11, 2010, the line-of-credit was amended by the Third Modification Agreement
(the “Third Modification”). The Third Modification amended the Loan Agreement
and the Note each as previously amended. Under the Third Modification, the
maturity date was extended to April 1, 2011 and the interest rate for the
revolving loans under the Loan Agreement was increased from the Bank’s Base Rate
(as defined in the Second Modification) plus 1.0% with a minimum of 4.0% per
annum to the Bank’s Base Rate (as defined in the Third Modification) plus 2.0%
with a minimum interest rate of 5.0% per annum. The interest rate effective upon
execution of the Third Modification was 5.25% per annum. Additionally, the Third
Modification amended the existing debt service coverage ratio covenant from 1.5
to 1.0 to 1.25 to 1.0, tested beginning March 31, 2010 and quarterly thereafter,
measured on a year-to-date basis. In connection with the Third Modification, the
Bank waived the testing of the debt service coverage ratio covenant as of
December 31, 2009.
 
 The
Company also amended it existing term note with the Bank to conform the debt
service coverage ratio covenant to the ratio contained in the Third
Modification.
 
 As of
March 11, 2010, the outstanding balance under the line of credit was $2,129,000
and the availability was approximately $1,442,000. In addition, the Company held
approximately $1,000,000 in cash and cash equivalents as of March 11,
2010.
 
 
 Notes
payable
 
 The
Company financed the premiums for its property casualty and directors and
officers insurance policies and with short-term borrowings of $228,052,
$289,886, and $410,639, in 2009, 2008 and 2007, respectively. The outstanding
balance as of December 31, 2009 was $50,678.
  
 
 F-12
 
 Long-term
debt
 
 Long-term
      debt at December 31, 2009 and 2008consists
      of:
              
              2009
              
              
              2008Note
      payable to a bank in monthly installmentsof
      $61,533, including interest at 6.0%to
      May 2012
              
              $
              1,708,755
              
              
              $
              2,322,560Less
      current portion
              
              
              652,482
              
              
              
              614,067$
              1,056,273
              
              
              $
              1,708,493
 
 
 Scheduled
principal maturities of long-term debt follow:
 
 2010
              
              $
              652,4822011
              
              
              693,3002012
              
              
              362,973$
              1,708,755
 
 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, 2009, the Company was not in compliance with its debt
service covenant. The Company has received a waiver from its lender to this
effect with respect to the December 31, 2009 measurements.
 
 
 (6)       ACCRUED EXPENSES
 
 Accrued expenses at December 31, 2009
and 2008 consist of:
 2009
              
              
              2008Payroll
              
              $
              331,874
              
              
              $
              327,239Severance
              
              
              250,827
              
              
              
              —Professional
      fees
              
              
              308,918
              
              
              
              174,529Warranty
              
              
              50,000
              
              
              
              50,000Travel
      and entertainment
              
              
              64,600
              
              
              
              53,270Other
              
              
              306,945
              
              
              
              230,830$
              1,313,164
              
              
              $
              835,868
 
  (7)       SHARE-BASED
PAYMENT PLANS
 
 Under the
CAS Medical Systems, Inc. 2003 Equity Incentive Plan (the "Incentive Plan"), as
amended, 1,250,000 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 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, 2009, 402,273
shares remain available for issuance under the Incentive Plan.
 
 
 F-13
 
 During
2009, the Company issued an aggregate of 150,000 shares of restricted stock to
employees and 23,528 shares of restricted stock to outside members of the Board
of Directors under the Incentive Plan.  The restricted stock issued to
employees during 2009 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 $1.80 per share and the aggregate fair
value of the stock issued based on the closing market price on the date granted
was $311,698. The fair value of the restricted common shares was calculated
based upon the market value of the common stock on the date
of    issuance.  During 2009, 45,501 shares of
restricted stock were cancelled.
As of December 31, 2009, 191,102shares
of non-vested restricted common stock issued to date remain
outstanding.  Stock compensation expense of $931,278 has been
recognized to December 31, 2009 related to restricted shares granted in 2009 and
in prior years. The unamortized stock compensation expense associated with the
restricted shares at December 31, 2009 was $334,000 and will be recognized
ratably through 2012.
 
 During
2009, under the Incentive Plan, options for 25,000 shares of common stock were
granted to the Company’s employees at a weighted average exercise price of $1.82
per share. The aggregate fair value of the options granted based on the closing
market price on the grant date was $29,900. As of December 31, 2009, 488,175
shares granted under stock options remain outstanding of which 378,175 pertain
to options granted under the 2003 Equity Incentive Plan and 110,000 pertain to
stock options granted under the 1994 Employees 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:
 
 
 2009
              
              
              2008Weighted
              
              
              
              
              
              
              
              
              WeightedAverage
              
              
              Aggregate
              
              
              
              
              
              Average
              
              
              AggregateOption
              
              
              Exercise
              
              
              Intrinsic
              
              
              Option
              
              
              Exercise
              
              
              IntrinsicShares
              
              
              Price
              
              
              Value
              
              
              Shares
              
              
              Price
              
              
              ValueOutstanding
      atbeginning of year
              
              
              590,125
              
              
              $
              2.43
              
              
              
              
              
              
              524,425
              
              
              $
              2.11Granted
              
              
              25,000
              
              
              
              1.82
              
              
              
              
              
              
              125,000
              
              
              
              3.89Exercised
              
              
              (24,700
              )
              
              
              0.96
              
              
              
              
              
              
              (29,300
              )
              
              
              1.40Canceled
              
              
              (102,250
              )
              
              
              3.77
              
              
              
              
              
              
              (30,000
              )
              
              
              4.00Outstanding
      at endof year
              
              
              488,175
              
              
              
              2.19
              
              
              $
              233,619
              
              
              
              590,125
              
              
              
              2.43
              
              
              $
              737,613Exercisable
      at endof year
              
              
              441,507
              
              
              
              2.10
              
              
              $
              233,619
              
              
              
              461,791
              
              
              
              2.00
              
              
              $
              769,580Weighted
      average grant-date fair value of optionsgranted during the
      year
              
              
              
              
              
              $
              1.20
              
              
              
              
              
              
              
              
              
              
              $
              2.90
  
 The total
intrinsic value of stock options exercised was $21,205 in 2009 and $62,731 in
2008. 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.
 
 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.
 
 
 F-14
  The
following weighted-average assumptions were used for grants in 2009, 2008 and
2007: risk-free interest rates of 3.4%, 3.9% and 4.6%; expected lives of 4.2
years; dividend yield of 0%; and expected volatility of 88%, 63% and 115%.
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.
 
 Additional
information about stock options outstanding and exercisable at December 31, 2009
follows:
 
 WeightedRemaining
              
              
              Average
              
              
              
              
              
              AverageRange
      of
              
              
              Number
              
              
              Contractual
              
              
              Exercise
              
              
              Number
              
              
              ExerciseExercise Prices
              
              
              Outstanding
              
              
              Life in Years
              
              
              Price
              
              
              Exercisable
              
              
              Price$0.57
      — $0.82
              
              
              
              110,000
              
              
              
              2.0
              
              
              $
              0.68
              
              
              
              110,000
              
              
              $
              0.681.42  — 
      1.95
              
              
              
              135,675
              
              
              
              5.0
              
              
              
              1.54
              
              
              
              115,675
              
              
              
              1.472.30 
      —  3.10
              
              
              
              177,500
              
              
              
              5.7
              
              
              
              2.82
              
              
              
              164,166
              
              
              
              2.823.59 
      —  5.02
              
              
              
              65,000
              
              
              
              6.4
              
              
              
              4.40
              
              
              
              51,666
              
              
              
              4.24$0.57 — $5.02
              
              
              
              488,175
              
              
              
              4.8
              
              
              $
              2.19
              
              
              
              441,507
              
              
              $
              2.10
 
 
 Warrants
to purchase 964,401 shares of common stock at a weighted average exercise price
of $0.44 per share were outstanding at December 31, 2009. The warrants have no
specific expiration date and have an exercise price range of $0.30 to $1.44 per
share. There were no warrants granted or exercised during 2009 or
2008.
 
 On June
10, 2009, the Company’s stockholders approved the CAS Medical Systems, Inc.
Employee Stock Purchase Plan. Accordingly, 150,000 shares of common stock
have been reserved for issuance under the Stock Purchase Plan. The initial
offering period began on July 1, 2009. To December 31, 2009, amounts had been
withheld from employees’ compensation for an additional 6,009 shares which were
issued during January 2010. The Stock Purchase Plan offers the Company’s
employees an opportunity to participate in a payroll-deduction based program
designed to incentivize them to contribute to the Company’s
success.  The plan approved by the stockholders during June 2009
replaced a plan in effect since June 2004. The current plan contains certain
changes including a reduction of the discount to 95% of the market value at the
end of each offering period under which participants purchase shares of the
Company’s common stock.
 
 (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 Company were $18,091
in 2009, $109,421 in 2008 and $110,586 in 2007. The Company suspended its
discretionary matches during March 2009.
 
 
 (9)      INCOME TAXES
 
 The
components of current and deferred federal and state income tax expense
(benefit) for the years ended December 31, 2009, 2008 and 2007 consist
of:
 
 
 
 F-15
   2009
              
              
              2008
              
              
              2007Current
      (benefit):Federal
              
              $
              (827,162
              )
              
              $
              (28,597
              )
              
              $
              657,438State
              
              
              17,109
              
              
              
              (147,508
              )
              
              
              (133,620
              )(810,053
              )
              
              
              (176,105
              )
              
              
              523,818Deferred
      (benefit):Federal
              
              
              1,004,222
              
              
              
              (155,637
              )
              
              
              (507,348
              )State
              
              
              37,641
              
              
              
              156,011
              
              
              
              (19,069
              )1,041,863
              
              
              
              374
              
              
              
              (526,417
              )Income
      taxes (benefit)
              
              $
              231,810
              
              
              $
              (175,731
              )
              
              $
              (2,599
              )
 
 
 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,
2009, 2008 and 2007 follows:
 
 2009
              
              
              2008
              
              
              2007Income
      taxes at the statutory rate
              
              $
              (1,889,670
              )
              
              $
              (191,667
              )
              
              $
              103,313State
      income taxes, net of federal effect
              
              
              (18,018
              )
              
              
              5,612
              
              
              
              (100,774
              )R&D
      and other tax credits
              
              
              (54,951
              )
              
              
              (25,021
              )
              
              
              (80,700
              )Stock
      options
              
              
              —
              
              
              
              3,523
              
              
              
              33,424Goodwill
      impairment
              
              
              732,967
              
              
              
              —
              
              
              
              —Change
      in valuation allowance
              
              
              1,448,630
              
              
              
              —
              
              
              
              —Other
              
              
              12,852
              
              
              
              31,822
              
              
              
              42,138Income
      taxes (benefit)
              
              $
              231,810
              
              
              $
              (175,731
              )
              
              $
              (2,599
              )
 
 Deferred
income tax assets and (liabilities) at December 31 relate to:
 
 2009
              
              
              2008Inventories
              
              $
              636,159
              
              
              $
              545,930Warranty
      accrual
              
              
              17,495
              
              
              
              17,495Allowance
      for doubtful accounts
              
              
              61,233
              
              
              
              52,492Tax
      credits
              
              
              282,528
              
              
              
              163,830Deferred
      gain on sale and leaseback
              
              
              361,819
              
              
              
              408,928Restricted
      stock
              
              
              225,997
              
              
              
              —Other
              
              
              216,201
              
              
              
              155,8841,801,432
              
              
              
              1,344,559Prepaid
      expenses
              
              
              (134,065
              )
              
              
              (144,137
              )Property
      and equipment
              
              
              (218,737
              )
              
              
              (158,559
              )Deferred
      income tax assets and liabilities
              
              
              1,448,630
              
              
              
              1,041,863Valuation
      allowance
              
              
              (1,448,630
              )
              
              
              —Net
      deferred income tax assets and liabilities
              
              $
              —
              
              
              $
              1,041,863
 
 
 The
Company has performed the required analysis of both positive and negative
evidence regarding the realization of our deferred income tax assets, including
our past results of operations, recent cumulative losses and our forecast for
future taxable income. The assessment required the use of assumptions about
future revenues and pre-tax income making allowance for uncertainties
surrounding the rate of adoption of our products in the marketplace, competitive
influences and the investments required to increase our market share in certain
markets for our products. As of December 31, 2009, we have concluded that it is
more likely than not that such deferred income tax assets will not be realized
and accordingly have established a deferred income tax asset valuation allowance
in the amount of $1,448,630.
 
 
 F-16
 
 The
Company has recorded a federal income tax receivable of $871,206 resulting from
the carry back of 2009 net operating losses to 2004 and 2005.  The
American Recovery and Reinvestment Act of 2009 allows the Company to carry back
its 2009 taxable loss up to five years.
 
 A
reconciliation of unrecognized income tax benefits for 2009 and 2008
follows:
 
 2009
              
              
              2008Balance
      at beginning of year
              
              $
              155,875
              
              
              $
              145,125Increase
      for tax positions taken during a prior period
              
              
              13,500
              
              
              
              10,750Increase
      for tax positions taken in current year
              
              
              107,905
              
              
              
              —Balance
      at end of year
              
              $
              277,280
              
              
              $
              155,875
 
 
 During
2009, $13,500 of interest on uncertain tax positions was recognized as income
tax expense. As of December 31, 2009, $61,875 of interest and penalties were
accrued. The total amount of unrecognized income tax benefits, if recognized,
would affect the Company’s effective income tax rate by approximately $73,000.
Currently, the Company does not believe that the unrecognized income tax
benefits will significantly change in 2010.
 
 
 (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.
 
 Qualifying
research and development costs (“R&D”) of $737,000 in 2009, $582,000 in 2008
and $479,000 in 2007 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, 2009, a maximum of approximately
$1,000,000 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 is being
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 would 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
 
 
 F-17
 
 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/LITIGATION
  Litigation
  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 has not yet been scheduled for trial. 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 this matter or  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 August
7, 2009, Somanetics Corporation (“Somanetics”) filed an action against the
Company in the United States District Court for the Eastern District of Michigan
alleging patent infringement, false advertising,
and    common law unfair competition and libel related to
the Company’s FORE-SIGHT product line.  The complaint requests injunctive
relief and unspecified monetary damages, including treble damages and reasonable
attorneys’ fees.  On October 19, 2009, the Company answered the complaint,
denying all allegations against it. In addition, the Company has asserted
counterclaims against Somanetics for violation of the antitrust laws and for a
declaration that the patents sued upon are invalid, unenforceable, and/or have
not been infringed by the Company.
  Operating
Leases
 
 The
Company currently leases four separate operating facilities and certain
equipment under non-cancellable operating leases. Rent expense under these
leases was $544,000 in 2009, $639,000 in 2008 and $280,000 in
2007.  Future annual minimum rental payments as of December 31, 2009
to the expiration of the leases follow: 2010-$541,000; 2011-$455,000;
2012-$457,000; 2013-$450,000; 2014-$402,000; and thereafter
$766,000.
 
 
 (13)    ARBITRATION
SETTLEMENT
 
 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. The Company made one payment to Analogic of
$90,000.
 
 On
November 24, 2008, Analogic commenced arbitration against the Company contending
that the Company breached the Agreement.  Analogic was seeking damages
of approximately $765,000 for costs it allegedly incurred in performing under
the Agreement including winding down costs and additional remedies which could
have provided for relief totaling double or treble damages, in addition to
attorney fees.  The Company denied Analogic’s claims and asserted a
counterclaim for damages in excess of those sought by Analogic. The arbitration
hearing was conducted on June 15, 2009. In August 2009, the Company reached a
settlement of its
 
 
 F-18
 
 arbitration
pursuant to which Analogic has paid the Company the sum of $811,000 in full
satisfaction of all matters raised in the arbitration.  The Company
and Analogic have negotiated a conclusion to their contractual relationship by
way of an orderly process that will protect the customers of the Company and
Analogic by allowing the Company to continue distributing products until July
31, 2010.
 
 As a result of the settlement, the Company
wrote-off $99,309 of intangible assets associated with the contract and recorded
the $711,691 balance as a reduction of general and administrative expenses to
offset previously reported legal expenses associated with this
matter.
 
 Sales of
Analogic products recorded by the Company for 2009 and 2008 were $913,000 and
$2,173,000, respectively.
 
 
 (14)    UNAUDITED QUARTERLY
INFORMATION
 
 Unaudited
      quarterly financial information
follows:
 
 First
              
              
              Second
              
              
              Third
              
              
              Fourth
              
              
              TotalQuarter
              
              
              Quarter
              
              
              Quarter (2)
              
              
              Quarter(3)
              
              
              YearYear
      ended December 31, 2009Net
      sales
              
              $
              8,405,824
              
              
              $
              8,568,115
              
              
              $
              9,165,561
              
              
              $
              8,095,718
              
              
              $
              34,235,218Cost
      of sales
              
              
              5,940,695
              
              
              
              5,975,792
              
              
              
              5,964,848
              
              
              
              5,469,301
              
              
              
              23,350,636Gross
      profit
              
              
              2,465,129
              
              
              
              2,592,323
              
              
              
              3,200,713
              
              
              
              2,626,417
              
              
              
              10,884,582Net
      (loss) income
              
              
              (902,868
              )
              
              
              (833,658
              )
              
              
              197,138
              
              
              
              (4,250,276
              )
              
              
              (5,789,664
              )Net
      (loss) income per common share (1):Basic
              
              $
              (0.08
              )
              
              $
              (0.07
              )
              
              $
              0.02
              
              
              $
              (0.38
              )
              
              $
              (
      0.51
              )Diluted
              
              $
              (0.08
              )
              
              $
              (0.07
              )
              
              $
              0.02
              
              
              $
              (0.38
              )
              
              $
              (0.51
              )
 
 
 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
              )
 
 (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.
 
 (2)
              During the third quarter of 2009, the Company recorded a
      recovery of legal expenses and reimbursements for asset write-downs
      totaling $712,000 related to a settlement with the Analogic
      Corporation.
 
 (3)
              During
      the fourth quarter of 2009, the Company recognized a goodwill impairment
      charge of $2,155,785   and recorded a deferred income tax
      asset valuation allowance of
$1,448,630.
 
 
 
 Page
30
 
 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, 2009. Based upon the foregoing evaluation, the
Chief Executive Officer and the Chief Financial Officer have concluded that the
Company’s 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, 2009 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, 2009.
  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
 
 None.
 
 
 Page
31
 
 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 23, 2010, 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 23, 2010, 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 23, 2010, 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, 2009:
  Plan Category
              
              
              Number
      of securities to be issued upon exercise of outstanding options and warrants
              
              
              Weighted-average
      exercise price of outstanding options
                and warrants
              
              
              Number
      of securities remaining available for future issuance under equity compensations plansEquity
      compensation plans approved by security holders
              
              
              488,175
              
              
              $
              2.19
              
              
              
              402,273Equity
      compensation plans not approved by security holders
              
              
              964,401
              
              
              
              0.50
              
              
              
              —Total
              
              
              1,452,576
              
              
              $
              1.03
              
              
              
              402,273
 
 
 Securities
remaining available for issuance under equity compensation plans approved by
security holders are from the CAS Medical Systems, Inc. 2003 Equity Incentive
Plan. The equity compensation plans not approved by security holders consist of
warrants granted to 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.
 
 
 
 Page
32
  
 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 23, 2010, 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 23, 2010, and to be filed with the
Securities and Exchange Commission.
 
 
 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, 2009 and 2008
 Consolidated Statements of Operations
for the Years Ended December 31, 2009, 2008 and 2007
 Consolidated Statements of Changes in
Shareholders’ Equity for the Years Ended December 31, 2009, 2008
and 2007
 Consolidated Statements of Cash Flows
for the Years Ended December 31, 2009, 2008 and 2007
 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 29 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
33
 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
(19)
 10.30*
                Employment
      Agreement with Jeffery A. Baird dated August 10, 2009
  (20)
 10.31
                Third
      Modification Agreement dated March 11, 2010
(21)
 10.32
                Trademarks
      and Letters Patent Security Agreement dated as of March 11, 2010
      (21)
 10.33
                Guaranty
      dated as of March 11, 2010 from Statcorp, Inc. to NewAlliance Bank
      (21)
 10.34
                Security
      Agreement between Statcorp and NewAlliance Bank dated March 11, 2010
      (21)
 10.35
                Modification
      to Commercial Loan and Security Agreement dated March 11, 2010
      (21)
 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
34
 
 (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
 (19)
              Incorporated
      by reference to the Company’s Form 10-K filed April 3,
  2009
 (20)
              Incorporated
      by reference to the Company’s Form 10-Q filed August 12,
    2009
 (21)
              Incorporated
      by reference to the Company’s Form 8-K filed March 17,
  2010
 
       
 
 Page
35
 
 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:  March
      29, 2010By:  Andrew
      E. Kersey
                  President and Chief
      Executive Officer
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
  /s/ Louis P.
      Scheps
                
                Date:  March
      29, 2010Louis P. Scheps,
      Chairman of the Board/s/ Lawrence
      Burstein
                
                Date:  March
      29, 2010Lawrence Burstein,
      Director/s/ Jerome
      Baron
                
                Date:  March
      29, 2010Jerome Baron,
      Director/s/ Evan
      Jones
                
                Date:  March
      29, 2010Evan Jones,
      Director/s/ Andrew E.
      Kersey
                
                Date:  March
      29, 2010Andrew
      E. Kersey, President, Chief Executive
                  Officer
      and Director/s/ Jeffery A.
      Baird
                
                Date:  March
      29, 2010Jeffery
      A. Baird, Chief Financial Officer
                  (Chief
      Financial and Accounting Officer)