UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      DC 20549





FORM
      10-QSB








Quarterly
      Report under Section 13 or 15 (d)


of
      the
      Securities Exchange Act of 1934








For
      the
      Quarterly Period Ended September 30, 2006







Commission
      File Number 0-13839











CAS
      MEDICAL SYSTEMS, INC.





(Exact
      name of small business issuer as specified in its charter)











Delaware
            06-1123096(State
                or other jurisdiction of
            (I.R.S.
                employerincorporation
                or organization)
            identification
                no.)











44
      East Industrial Road, Branford, Connecticut 06405


(Address
      of principal executive offices)








(203)
      488-6056


(Issuer’s
      telephone number, including area code)








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





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





State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date: Common Stock, $.004 par value 10,484,557
      shares as of November 1, 2006.





Transitional
      Small Business Disclosure Format (check one): Yes o No x







Form
          10-QSBSeptember 30, 2006Page 2


INDEX





PART
                1
            Financial
                Information
            Page
                No.Item
                1
            Financial
                StatementsCondensed
                Consolidated Balance Sheets as of September 30, 2006and
                December 31, 2005
            3Condensed
                Consolidated Statements of Income for the Threeand
                Nine Months Ended September 30, 2006 and 2005
            5Condensed
                Consolidated Statements of Cash Flow for the NineMonths
                Ended September 30, 2006 and 2005
            6Notes
                to Condensed Consolidated Financial Statements
            7Item
                2
            Management’s
                Discussion and Analysis of Financial Conditionand
                Results of Operations
            12Item
                3
            Controls
                and Procedures
            15PART
                II
            Other
                InformationItem
                6
            Exhibits
            16Signatures
            
            17






































Form
          10-QSBSeptember 30, 2006Page 3


PART
      I
      - FINANCIAL INFORMATION





ITEM
      1. FINANCIAL STATEMENTS





CAS
      Medical Systems, Inc.





Condensed
      Consolidated Balance Sheets





(Unaudited)




Assets
            
            September
                  30,2006
            
            December
                  31,2005Current
                Assets:Cash
                and cash equivalents
            
            $
            695,543
            
            $
            1,892,584Accounts
                receivable, less allowance of $85,000 in 2006
              and
                $75,000 in 2005
            
            
            5,322,546
            
            
            3,218,963Inventories
            
            
            6,420,386
            
            
            5,592,807Deferred
                income taxes
            
            
            254,562
            
            
            318,262Other
                current assets
            
            
            375,016
            
            
            494,182Total
                current assets
            
            
            13,068,053
            
            
            11,516,798Property
                and Equipment:Land
                and improvements
            
            
            535,000
            
            
            535,000Buildings
                and improvements
            
            
            1,663,017
            
            
            1,584,159Machinery
                and equipment
            
            
            4,257,522
            
            
            3,698,4576,455,539
            
            
            5,817,616Accumulated
                depreciation and amortization
            
            
            (3,404,554
            )
            
            (
                3,080,160
            )Property
                and equipment, net
            
            
            3,050,985
            
            
            2,737,456Intangible
                and other assets, net
            
            
            459,695
            
            
            360,186Goodwill
            
            
            3,379,021
            
            
            3,079,021Deferred
                income taxes
            
            
            254,520
            
            
            224,620Total
                assets
            
            $
            20,212,274
            
            $
            17,918,081














Form
          10-QSBSeptember 30, 2006Page 4


CAS
      Medical Systems, Inc.





Condensed
      Consolidated Balance Sheets





(Unaudited)




Liabilities
              and Stockholders’
              Equity
            
            September
                  30,2006
            
            December
                  31,2005Current
                Liabilities:Current
                portion of long-term debt
            
            $
            600,561
            
            $
            574,115Notes
                payable
            
            
            50,671
            
            
            206,359Accounts
                payable
            
            
            2,724,426
            
            
            2,167,396Income
                taxes payable
            
            
            331,256
            
            
            18,999Accrued
                expenses
            
            
            1,410,553
            
            
            1,068,035Total
                current liabilities
            
            
            5,117,467
            
            
            4,034,904Long-term
                debt, less current portion
            
            
            3,962,555
            
            
            4,416,202Retirement
                benefit obligation
            
            
            87,391
            
            
            349,567Stockholders’
                Equity:Series
                A cumulative convertible preferred stock, $.001 par value pershare,
                1,000,000 shares authorized, no shares issued or
                outstandingCommon
                stock, $.004 par value per share, 40,000,000 sharesauthorized,
                10,562,357 and 10,113,860 shares issued as ofSeptember
                30, 2006 and December 31, 2005, respectively, includingshares
                held in treasury
            
            
            42,250
            
            
            40,456Common
                stock held in treasury, at cost - 86,000 shares
            
            
            (101,480
            )
            
            (101,480
            )Additional
                paid-in capital
            
            
            3,891,568
            
            
            3,176,911Retained
                earnings
            
            
            7,212,523
            
            
            6,001,521Total
                stockholders’ equity
            
            
            11,044,861
            
            
            9,117,408Total
                liabilities and stockholders’ equity
            
            $
            20,212,274
            
            $
            17,918,081














See
      accompanying notes.








Form
          10-QSBSeptember 30, 2006Page 5


CAS
      Medical Systems, Inc.





Condensed
      Consolidated Statements of Income





(Unaudited)




Three
                  Months EndedSeptember 30,
            
            Nine
                  Months EndedSeptember 30,2006
            
            2005
            
            2006
            
            2005NET
                SALES:
            
            $
            9,425,508
            
            $
            7,476,075
            
            $
            25,011,449
            
            $
            18,307,341OPERATING
                EXPENSES:Cost
                of product sales
            
            
            5,340,278
            
            
            4,382,906
            
            
            14,508,725
            
            
            10,349,014Research
                and development
            
            
            653,221
            
            
            364,939
            
            
            1,886,352
            
            
            900,243Selling,
                general and administrative
            
            
            2,262,016
            
            
            2,017,819
            
            
            6,457,098
            
            
            5,216,8128,255,515
            
            
            6,765,664
            
            
            22,852,175
            
            
            16,466,069Operating
                income
            
            
            1,169,993
            
            
            710,411
            
            
            2,159,274
            
            
            1,841,272Interest
                expense
            
            
            59,562
            
            
            63,517
            
            
            187,272
            
            
            100,258Income
                before income taxes
            
            
            1,110,431
            
            
            646,894
            
            
            1,972,002
            
            
            1,741,014Income
                taxes
            
            
            390,525
            
            
            214,309
            
            
            761,000
            
            
            574,989NET
                INCOME
            
            $
            719,906
            
            $
            432,585
            
            $
            1,211,002
            
            $
            1,166,025Earnings
                per common share:Basic
            
            $
            0.07
            
            $
            0.04
            
            $
            0.12
            
            $
            0.12Diluted
            
            $
            0.06
            
            $
            0.04
            
            $
            0.10
            
            $
            0.10Weighted
                average number of common
              shares
                outstanding:Basic
            
            
            10,461,615
            
            
            9,952,587
            
            
            10,354,621
            
            
            9,916,779Diluted
            
            
            12,094,349
            
            
            11,831,984
            
            
            12,166,806
            
            
            11,648,523







See
      accompanying notes.




Form
          10-QSBSeptember 30, 2006Page 6


CAS
      Medical Systems, Inc.





Condensed
      Consolidated Statements of Cash Flow





(Unaudited)




Nine
                Months Ended
              September
                30,OPERATING
                ACTIVITIES:
            
            2006
            
            2005Net
                income
            
            $
            1,211,002
            
            $
            1,166,025Adjustments
                to reconcile net incometo
                net cash provided by operating activities:Depreciation
                and amortization
            
            
            366,942
            
            
            393,242Provision
                for doubtful accounts
            
            
            10,436
            
            
            —Deferred
                income taxes
            
            
            33,800
            
            
            (32,213
            )Stock
                compensation
            
            
            298,854
            
            
            —Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (2,114,019
            )
            
            (1,271,822
            )Inventories
            
            
            (827,579
            )
            
            (1,785,650
            )Other
                current assets
            
            
            119,166
            
            
            103,836Retirement
                benefit obligation
            
            
            (262,176
            )
            
            42,841Accounts
                payable, accrued expenses, and income taxes payable
            
            
            1,211,805
            
            
            1,698,668Net
                cash provided by operating activities
            
            
            48,231
            
            
            314,927INVESTING
                ACTIVITIES:Purchases
                of property and equipment
            
            
            (637,923
            )
            
            (570,561
            )Business
                acquisition, net of cash acquired of $250,060
            
            
            (300,000
            )
            
            (4,538,814
            )Purchases
                of intangible assets
            
            
            (142,057
            )
            
            (213,305
            )Net
                cash used by investing activities
            
            
            (1,079,980
            )
            
            (5,322,680
            )FINANCING
                ACTIVITIES:Repayments
                of notes payable
            
            
            (401,155
            )
            
            —Proceeds
                from notes payable
            
            
            245,467
            
            
            —Repayments
                of long-term debt
            
            
            (427,201
            )
            
            (171,517
            )Proceeds
                from long-term debt agreement
            
            
            —
            
            
            4,200,000Proceeds
                from issuance of common stock
            
            
            417,597
            
            
            95,491Net
                cash (used) provided by financing activities
            
            
            (165,292
            )
            
            4,123,974Change
                in cash and cash equivalents
            
            
            (1,197,041
            )
            
            (883,779
            )Cash
                and cash equivalents, beginning of period
            
            
            1,892,584
            
            
            1,973,452


Cash
                and cash equivalents, end of period
            
            $
            695,543
            
            $
            1,089,673Supplemental
                Disclosures of Cash Flow Information:Cash
                paid for interest
            
            $
            186,530
            
            $
            118,876Cash
                paid for income taxes, net of refunds
            
            $
            414,943
            
            $
            833,858




See
      accompanying notes.


Form
          10-QSBSeptember 30, 2006Page 7


CAS
      Medical Systems, Inc.


Notes
      to
      Condensed Consolidated Financial Statements


(Unaudited)





September
      30, 2006





(1)
            The
                Company





CAS
      Medical Systems, Inc. (“CAS”) and its wholly-owned subsidiary, Statcorp, Inc.
      (“Statcorp”), operate as one reportable business segment. Together, CAS and
      Statcorp (collectively, the “Company”) develop, manufacture and distribute
      diagnostic equipment and medical products for use in the healthcare and medical
      industry. These products - specifically blood pressure measurement technology,
      vital signs measurement equipment, cardio-respiratory monitoring equipment
      and
      supplies for neonatal intensive care - are sold by the Company through its
      own
      sales force, via distributors and pursuant to original equipment manufacturer
      agreements both internationally and in the United States. The Company has
      several other products in various stages of development that it believes will
      add to and complement its current product lines.





(2)
            Basis
                of Presentation





The
      financial statements included herein have been prepared, without audit, pursuant
      to the rules and regulations of the Securities and Exchange Commission. Certain
      information and disclosures included in financial statements prepared in
      accordance with accounting principles generally accepted in the United States
      of
      America have been condensed or omitted pursuant to such rules and regulations.
      These condensed consolidated financial statements should be read in conjunction
      with the consolidated financial statements and notes thereto included in the
      Company's Annual Report filed on Form 10-KSB for the year ended December 31,
      2005. The condensed consolidated balance sheet as of December 31, 2005 was
      derived from the audited financial statements for the year then ended.





In
      the
      opinion of the Company’s management, all adjustments necessary to present fairly
      the financial position of the Company and the results of its operations and
      its
      cash flows have been included in the accompanying financial statements. The
      results of operations for interim periods are not necessarily indicative of
      the
      expected results for the full year.





(3)
            Acquisition





On
      May
      15, 2005, CAS purchased of all of the outstanding capital stock of Statcorp,
      Inc. Statcorp develops, assembles and sells liquid infusion devices, blood
      pressure cuffs, and blood transfusion filters for worldwide use in the medical
      industry. During the quarter ended September 30, 2006, the Company paid a
      purchase price adjustment of $300,000 based on Statcorp’s achieved sales level
      for the 12 months following the acquisition. For further information, please
      refer to the Notes to Consolidated Financial Statements included in the
      Company’s Annual Report on Form 10-KSB for the year ended December 31,
      2005.





The
      following unaudited pro forma summary financial information presents the
      consolidated results of operations of the Company as if the acquisition of
      Statcorp had occurred as of the beginning of the period presented. The pro
      forma
      results are shown for illustrative purposes only and do not purport to be
      indicative of the results of the Company that would have been reported had
      the
      acquisition actually occurred on the first day of the period presented or
      indicative of results that may occur in the future.





Form
          10-QSBSeptember 30, 2006Page 8





Nine
                Months EndedSeptember
                30, 2005Net
                sales
            
            $
            21,099,900Net
                income
            
            $
            1,411,600Net
                income percommon
                share:Basic
            
            $
            0.14Diluted
            
            $
            0.12




(4)
            Inventories





Inventories
      consisted of:





September
                30,
              2006
            
            December
                31,
              2005Raw
                materials
            
            $
            4,724,331
            
            $
            4,452,407Work-in-process
            
            
            84,671
            
            
            —Finished
                goods
            
            
            1,611,384
            
            
            1,140,400$
            6,420,386
            
            $
            5,592,807








(5)
            Warranty
                Costs





The
      Company warranties its products for up to three years. To date, such costs
      have
      not been material to its financial statements.





(6)
            Post-Retirement
                Health Benefit Plan





The
      Company’s post-retirement health benefit plan (the “Plan”) became effective
      January 2002 for qualifying employees who met certain age and length of service
      requirements. The Plan was modified during February 2005 to significantly reduce
      the Company’s future funding requirements. Effective September 1, 2005, plan
      participants were required to share fifty percent of the premiums for benefit
      costs. As of December 1, 2005, the Plan was also amended to allow only those
      participants retired and receiving benefits as of that date to remain eligible
      to receive future benefits under the Plan. In addition, the Company also advised
      those participants that it would no longer provide benefits after December
      31,
      2006. In connection therewith, the Company recognized a curtailment gain of
      $400,739 during the fourth quarter of 2005.





The
      accrued post-retirement benefit plan obligation of $349,567 at December 31,
      2005
      was comprised of (1) unrecognized prior service cost credits of $195,921
      applicable to current retirees receiving benefits, (2) an unrecognized net
      gain
      of $145,710 and (3) benefit obligations of $7,936. The previously unrecognized
      amounts are being amortized to the date coverage expires on December 31, 2006.
      As such, the Company recognized income of $85,354 and $256,062 respectively,
      during the three and nine months ended September 30, 2006. Expenses of $8,852
      and $62,586, respectively, were recognized during the three and nine-months
      ended September 30, 2005.





Benefit
      payments in 2006 are expected to approximate $8,000. No further benefit payments
      will be made after that date.


Form
          10-QSBSeptember 30, 2006Page 9


Components
      of the net periodic benefit (income) cost of the Company’s post-retirement
      health benefit plan follows:




Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,2006
            
            2005
            
            2006
            
            2005Service
                cost
            
            $
            0
            
            $
            9,980
            
            $
            0
            
            $
            36,596Interest
                cost
            
            
            54
            
            
            7,444
            
            
            162
            
            
            27,150Prior
                service cost recognition
            
            
            (48,980
            )
            
            (8,258
            )
            
            (146,940
            )
            
            (426
            )Gain
                recognition
            
            
            (36,428
            )
            
            (314
            )
            
            (109,284
            )
            
            (734
            )Net
                periodic benefit (income) cost
            
            $
            (85,354
            )
            $
            8,852
            
            $
            (256,062
            )
            $
            62,586




(7)
            Earnings
                per Common Share





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





Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,2006
            
            2005
            
            2006
            
            2005Weighted
                average shares outstanding used to compute basic earnings per
                share
            
            
            10,461,615
            
            
            9,952,587
            
            
            10,354,621
            
            
            9,916,779Dilutive
                effect of warrants and options
            
            
            1,632,734
            
            
            1,879,397
            
            
            1,812,185
            
            
            1,731,744Total
                weighted average shares of dilutive securities outstanding, used
                to
                calculate
              diluted
                earnings per share
            
            
            12,094,349
            
            
            11,831,984
            
            
            12,166,806
            
            
            11,648,523




(8)
            Stock-Based
                Compensation





Effective,
      January 1, 2006, the Company adopted Financial Accounting Standards Board
      Statement No. 123 (Revised 2004) - *Share-Based
      Payment* (“FAS
      123R”) using the modified-prospective method transition alternative. Under this
      method, compensation cost is recognized for all share-based equity payments
      granted, modified or settled after January 1, 2006, as well as for any unvested
      equity awards that were granted prior thereto. Compensation cost for unvested
      awards granted prior to January 1, 2006 is recognized using the same estimate
      of
      the grant-date fair value and the same attribution method used to determine
      the
      pro forma disclosures under FAS 123, *Accounting
      for Stock-Based Compensation* .





Prior
      to
      January 1, 2006, the Company accounted for its stock options under the
      recognition and measurement principles of Accounting Principles Board (APB)
      Opinion No. 25 “Accounting for Stock Issued to Employees”, and related
      interpretations. No stock-based compensation cost was recognized in operations
      since all options granted had an exercise price equal to the market value of
      the
      underlying common stock on the date of grant. The effect of adopting FAS 123R
      was to increase compensation cost and reduce reported net income by $97,687
      and
      $298,854 for the three and nine-months ended September 30, 2006.


As
      of
      September 30, 2006, the unrecognized stock-based compensation cost related
      to
      non-vested stock awards was $457,110. Such amount, reduced for forfeiture
      related estimates, will be recognized in operations over a weighted average
      period of 2.18 years.




Form
          10-QSBSeptember 30, 2006Page 10





The
      following table summarizes the Company’s stock option information as of, and for
      the nine-month period ended September 30, 2006:





Option
              Shares
            
            Weighted-Average
              Exercise
                Price
            
            Aggregate
                  Intrinsic
                Value
            
            Weighted-Average
                  Contractual
                    Life
                Remaining
                  in YearsOutstanding
                at December 31, 2005
            
            
            803,575
            
            
            $
                1.73Granted
                at fair value
            
            
            10,000
            
            
            9.49Exercised
            
            
            (160,975)
            
            
            1.05Cancelled
            
            
            (40,000)
            
            
            4.26Outstanding
                at September 30, 2006
            
            
            612,600
            
            
            1.84
            
            
            $ 5.73
            
            
            7.37Exercisable
                at September 30, 2006
            
            
            471,350
            
            
            $
                1.44
            
            
            $
                6.13
            
            
            6.90








(1) 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
      exercise period for all outstanding stock options may not exceed ten years
      from
      the date of grant. Stock options granted to employees and non-employee directors
      vest ratably over two years from the grant date. The Company attributes
      stock-based compensation cost to operations using the straight-line method
      over
      the applicable vesting period.





The
      weighted-average grant date fair value of stock options granted during the
      nine-month periods ended September 30, 2006 and 2005 was $8.83 and $2.62 per
      share, respectively. The total intrinsic value of stock options exercised during
      the nine-month periods ended September 30, 2006 and 2005 was $1,645,901 and
      $156,019, respectively.





The
      fair
      value of each option granted was estimated on the date of grant using the
      Black-Scholes option-pricing model with the following assumptions:





Nine
                Months EndedSeptember
                30, 2006
            
            September
                30, 2005Weighted-average
                expected stock-price volatility
            32.0%
            
            33.0%Weighted-average
                expected option life
            7.0
                years
            
            7.0
                yearsAverage
                risk-free interest rate
            4.325%
            
            4.066%Average
                dividend yield
            0.0%
            
            0.0%





During
      May and June 2006, the Company issued an aggregate of 55,500 shares of
      restricted stock to employees under its 2003 Equity Incentive Plan. The
      restricted stock vests thirty-six months from date of grant. The weighted
      average value of the stock was $6.04 a share and the aggregate fair value of
      the
      stock issued was $332,100. Stock compensation expense of $26,155 has been
      recognized to September 30, 2006.

















Form
          10-QSBSeptember 30, 2006Page 11




Pro-forma
      information regarding net income and earnings per share required under FAS
      123, *Accounting
      for Stock-Based Compensation* before
      the adoption of FAS 123R follows:





Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30, 2005
            
            September
                30, 2005Net
                income, as reported
            $
                432,585
            
            $
                1,166,025Stock
                based compensation expensebased
                upon fair value methods
            137,823
            
            353,165Pro
                forma net income
            $
                294,762
            
            $
                812,860Earnings
                per shareAs
                reported - Basic
            $
                0.04
            
            $
                0.12Pro
                forma - Basic
            $
                0.03
            
            $
                0.08As
                reported - Diluted
            $
                0.04
            
            $
                0.10Pro
                forma - Diluted
            $
                0.02
            
            $
                0.07




(9)
                New
                    Accounting Pronouncements
  In
          July
          2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
          Income Taxes - an interpretation of FASB Statement No. 109” (FIN 48). FIN 48
          clarifies the accounting and disclosure for uncertain tax positions, as
          defined,
          and seeks to reduce the diversity in practice associated with certain aspects
          of
          the recognition and measurement related to accounting for income taxes.
          This
          interpretation is effective for fiscal years beginning after December 15,
          2006.
          The Company does not believe that the adoption of FIN 48 will have a significant
          impact on its financial statements.
  In
          September 2006, the FASB issued Statement of Financial Accounting Standards
          No.
          157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value,
          establishes a framework for measuring fair value, and expands disclosure
          requirements regarding fair value measurement. This statement simplifies
          and
          codifies fair value related guidance previously issued and is effective
          for
          financial statements issued for fiscal years beginning after November 15,
          2007,
          and interim periods within those fiscal years. The Company does not believe
          that
          SFAS 157 will significantly impact its financial statements.
  In
          September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering
          the Effects of Prior Year Misstatements when Quantifying Misstatements
          in
          Current Year Financial Statements” (SAB 108). SAB 108 provides guidance on the
          consideration of the effects of prior year unadjusted errors in quantifying
          current year misstatements for the purpose of a materiality assessment.
          SAB 108
          requires registrants to apply the new guidance the first time that it identifies
          material errors in existence at the beginning of the first fiscal year
          ending
          after November 15, 2006 by correcting those errors through a one-time cumulative
          effect adjustment to beginning-of-year retained earnings. The Company does
          not
          believe that SAB 108 will significantly impact its financial
          statements.


(10)
            Income
                taxes





The
      provision for income taxes of $761,000 for the nine-months ended September
      30,
      2006 results in an effective tax rate of 39%. This rate reflects the effects
      of
      state income taxes and non-deductible stock compensation expense partially
      offset by R&D tax credits. The 35% effective tax rate for the three months
      ended September 30, 2006 reflects a year-to-date change in accounting estimate.
      The provisions for income taxes for the three and nine months ended September
      30, 2005 resulted in an effective tax rate of 33% due primarily to anticipated
      R&D tax credits.








(11)
            Subsequent
                Event




On
      October 27, 2006, the Company amended its line-of-credit-agreement with its
      current lender to increase the maximum borrowings, subject to certain terms
      and
      conditions, from $3.0 million to $5.0 million. Borrowings under the
      line-of-credit are payable on demand and bear interest at the one-month London
      Interbank Offering Rate (“LIBOR”) plus 225 basis points (7.57% at October 30,
      2006). The agreement expires on May 1, 2008.





ITEM
      2.  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: foreign currency fluctuations, regulations and other
      economic and political factors which affect the Company’s ability to market its
      products internationally, new product introductions by the Company’s
      competitors, increased price competition, dependence upon significant customers,
      availability and cost of components for the Company’s products, marketplace
      acceptance for the Company’s new products, FDA and other governmental regulatory
      and enforcement actions, changes to federal research and development grant
      programs presently utilized by the Company and other factors described in
      greater detail in the Company’s most recent annual report on Form 10-KSB.




Form
          10-QSBSeptember 30, 2006Page 12





Results
      of Operations





For
      the
      three months ended September 30, 2006, the Company reported net income of
      $720,000, or $0.06 per diluted common share compared to net income of $433,000
      or $0.04 per diluted common share reported for the three months ended September
      30, 2005. Net income for the three months ended September 30, 2006 was affected
      by $98,000 of non-deductible stock compensation expense. As of January 1, 2006,
      the Company adopted FASB No. 123R, “Share-Based Payment”. This standard requires
      that all stock-based awards be recognized as expenses in the financial
      statements at the fair value of the award over their vesting term. Pre-tax
      income for the three months ended September 30, 2006 was also affected by
      significant increases in research and development (“R&D”) expenses of
      $288,000 over the three months ended September 30, 2005. Pre-tax income for
      the
      three months ended September 30, 2006 was favorably affected by a reduction
      in
      accrued retirement benefit costs of $87,000 related to changes to the Company’s
      post-retirement health benefit plan (the “Plan”) during 2005. Moreover, the
      Company’s retirement benefit obligation pursuant to the Plan at September 30,
      2006 of $87,000 will be amortized to income ratably over the remainder of
      2006.





The
      Company reported net income of $1,211,000 or $0.10 per common share on a diluted
      basis for the nine months ended September 30, 2006 compared to $1,166,000 or
      $0.10 per diluted common share for the nine months ended September 30, 2005.
      Net
      income for the nine months ended September 30, 2006 was affected by $299,000
      of
      non-deductible stock compensation expense. Further, R&D expenses increased
      $986,000 or 110% over the first nine months of the prior year. Pre-tax income
      for the first nine months of 2006 was favorably impacted by a reduction of
      $262,000 in accrued retirement benefit costs for the reasons stated above.





The
      Company generated revenues of $9,426,000 for the three months ended September
      30, 2006, an increase of $1,950,000 or 26%, over revenues of $7,476,000 for
      the
      three months ended September 30, 2005. Increases in blood pressure product
      sales
      of 36%, primarily from sales of vital signs monitors and accessories, original
      equipment (“OEM”) modules and sales of blood pressure cuffs, accounted for the
      increase in revenues. Decreases in sales of apnea monitors and accessories
      and
      neonatal products slightly offset the increase in blood pressure product sales.





The
      Company recorded revenues of $25,011,000 for the nine months ended September
      30,
      2006, an increase of $6,704,000 or 37%, over revenues of $18,307,000 for the
      first nine months of the prior year. Statcorp product sales accounted for
      $3,274,000 of the increase in revenues. The Company acquired Statcorp during
      May
      2005. Increases in blood pressure product sales of 49%, primarily from sales
      of
      vital signs monitors including private label veterinary monitors, OEM modules
      and blood pressure cuffs (including Statcorp), accounted for the increase in
      revenues. Slightly offsetting these increases were decreases in sales of apnea
      and neonatal products.





The
      cost
      of products sold was $5,340,000 or 56.7% of revenues for the three month period
      ended September 30, 2006 compared to $4,383,000 or 58.6% for the same period
      of
      2005. The decrease in cost of products sold as a percentage of revenues is
      primarily related to product mix and increased production throughput from
      increased sales volumes.





The
      cost
      of products sold was $14,509,000 or 58.0% of revenues for the first nine months
      of 2006 compared to $10,349,000 or 56.5% for the first nine months of 2005.
      Cost
      of products sold as a percentage of revenues increased as a result of several
      factors. The full nine month effect during 2006 from the acquisition of Statcorp
      during May 2005 acts to increase cost of sales as a percentage of revenues
      due
      to the lower average gross margins realized on the sales of products sold by
      Statcorp. Offsetting the effect of Statcorp product sales were improvements
      in
      gross margins due to product mix primarily from the increased sales of the
      Company’s vital signs monitors.





R&D
      expenses increased $288,000 or 79% to $653,000 for the three months ended
      September 30, 2006 compared to $365,000 for the three months ended September
      30,
      2005. R&D expenses for the nine months ended September 30, 2006 increased
      $986,000 or 110% to $1,886,000 from $900,000 for the nine months ended September
      30, 2005. The increase in R&D spending for both periods resulted primarily
      from increased salaries and related fringe benefits associated with additional
      headcount required to support the Company’s Near-Infrared Spectroscopy (“NIRS”)
      research efforts. Further, reductions in reimbursements from the National
      Institutes of Health (“NIH”) under




Form
          10-QSBSeptember 30, 2006Page 13




established
      grant programs also contributed to the increase in R&D expense. NIH
      reimbursements for the nine months ended September 30, 2006 were $21,000
      compared to $461,000 for the nine months ended September 30, 2005. Non-cash
      stock compensation expense contributed $34,000 and $99,000, respectively to
      the
      increase in R&D expenses for the three months and nine months ended
      September 30, 2006 compared to the same periods of the prior year.





The
      Company does not expect to receive reimbursements from the NIH for the remainder
      of 2006. However, it is continuing to pursue additional NIH grants to support
      its NIRS research.





Selling,
      general and administrative expenses (“S,G&A”) increased $244,000 or 12% to
      $2,262,000, representing 24.0% of revenues for the three months ended September
      30, 2006 compared to $2,018,000 or 27.0% of revenues for the three months ended
      September 30, 2005. Marketing expenses associated with the NIRS effort,
      commissions earned and payable against higher sales volume, and accrued employee
      bonuses were primarily responsible for the increased S,G&A expenses.





S,G&A
      expenses increased $1,240,000 or 24% to $6,457,000, representing 25.8% of
      revenues for the nine month period ended September 30, 2006 compared to
      $5,217,000 or 28.5% of revenues for the nine month period ended September 30,
      2005. Marketing expenses associated in part with the NIRS effort accounted
      for
      approximately $471,000 of the overall increase in S,G&A primarily from
      salaries and related benefits, travel and entertainment expenses, stock
      compensation charges and outside professional services. General and
      administrative (“G&A”) expenses accounted for approximately $590,000 of the
      overall increase in S,G&A expenses primarily resulting from increases in
      legal costs, investor relations costs, bad debt expenses, salaries and related
      fringe benefits and non-cash stock compensation charges. Partially offsetting
      these increased costs were decreases in insurance expenses and retirement
      benefit expenses associated with the curtailment of the Company’s retirement
      benefit plan.





Interest
      expense increased to $60,000 and $187,000, respectively, for the three and
      nine
      months ended September 30, 2006 compared to $64,000 and $100,000, respectively
      for the three and nine months ended September 30, 2005. The increase in interest
      expense resulted primarily from the Statcorp acquisition loan consummated on
      May
      16, 2005.





The
      provision for income taxes of $761,000 for the nine-months ended September
      30,
      2006 results in an effective tax rate of 39%. This rate reflects the effects
      of
      state income taxes and non-deductible stock compensation expense partially
      offset by R&D tax credits. The 35% effective tax rate for the three months
      ended September 30, 2006 reflects a year-to-date change in accounting estimate.
      The provisions for income taxes for the three and nine months ended September
      30, 2005 resulted in an effective tax rate of 33% due primarily to R&D tax
      credits.





Financial
      Condition, Liquidity and Capital Resources





At
      September 30, 2006, the Company's cash and cash equivalents totaled $696,000
      compared to $1,893,000 at December 31, 2005. Working capital increased by
      $469,000 to $7,951,000 at September 30, 2006, from $7,482,000 on December 31,
      2005. The Company’s current ratio decreased to 2.55 to 1 from 2.85 to
      1.





Cash
      provided by operations for the nine months ended September 30, 2006 was $48,000
      compared to cash provided of $315,000 for the first nine months of the prior
      year. In both periods, the Company continued to make investments in inventories
      and accounts receivable to support increased sales. Non-cash charges and credits
      to operations for stock compensation and retirement benefits substantially
      offset one another. Net cash provided by operations during the first nine months
      of 2005 were supported by greater increases in accounts payable and accrued
      expenses ($487,000) versus the first nine months of 2006.





Cash
      used
      by investing activities was $1,080,000 for the nine months ended September
      30,
      2006 compared to $5,323,000 for the first nine months of the prior year.
      Expenditures for property and equipment of $638,000 during the nine months
      ended
      September 30, 2006 were varied in nature and included building improvements,
      manufacturing equipment and engineering equipment. Prior year expenditures
      reflected $784,000 of spending for equipment and intangible assets and
      $4,539,000 for the purchase of Statcorp. Equipment purchases of $571,000 for


Form
          10-QSBSeptember 30, 2006Page 14




the
      nine
      months ended September 30, 2005 were primarily related to the acquisition and
      installation of the Company’s new enterprise resource planning system and
      related hardware upgrades, leasehold improvements related to a three year
      facilities lease agreement effective December 2004 and manufacturing inspection
      equipment. During July 2006, the Company paid a purchase price adjustment of
      $300,000 to the former Statcorp shareholders based upon Statcorp’s achieved
      sales levels for the twelve months following the date of
      acquisition.





Cash
      used
      by financing activities for the nine months ended September 30, 2006 was
      $165,000 compared to cash provided of $4,124,000 for the first nine months
      of
      the prior year. Financing activities for the first nine months of 2006 included
      $828,000 of repayments of notes payable and long-term debt offset by $245,000
      of
      proceeds from notes payable to finance various insurance coverage and $418,000
      of proceeds from the issuance of common stock primarily related to the exercise
      of stock options and non-employee warrants.





For
      the
      remainder of 2006 and for 2007, the Company intends to increase its spending
      associated with the NIRS cerebral oximeter, scheduled for launch by the end
      of
      this year. Such spending includes additional R&D, on-going clinical studies,
      marketing expenses, manufacturing start-up costs and capital expenditures.
      The
      Company believes that its sources of funds consisting of cash and cash
      equivalents, cash flow from operations and funds available from the revolving
      credit facility will be sufficient to meet its current and expected short-term
      requirements. The Company may also pursue other debt or equity financing
      alternatives to meet its capital needs. On October 27, 2006, the Company amended
      its revolving credit facility with its current lender to expand the borrowing
      limits, subject to certain terms and conditions, from $3.0 million to $5.0
      million. The revolving credit facility expires on May 1, 2008. Management
      believes that, if needed, it would be able to find additional sources of funds
      on commercially acceptable terms which may be required to support the Company’s
      long-term initiatives.




Critical
      Accounting Policies and Estimates





The
        Company’s discussion and analysis of financial condition and results of
        operations are based on the condensed financial statements. The preparation
        of
        these financial statements requires the Company to make estimates and judgments
        that affect the amounts reported in them. The Company’s critical accounting
        policies and estimates include those related to revenue recognition, the
        valuations of inventories and deferred income tax assets, measuring stock
        compensation, post-retirement health benefit, and warranty costs, determining
        useful lives of intangible assets, and making asset impairment valuations.
        The
        Company bases its estimates on historical experience and on various other
        assumptions that management believes to be reasonable under the circumstances.
        Actual results may differ from these estimates under different assumptions
        or
        conditions. For additional information about the Company’s critical accounting
        policies and estimates, see Note 3 to the financial statements included in
        the
        Company’s Form 10-KSB for the year ended December 31, 2005. There were no
        significant changes in critical accounting policies and estimates during
        the
        three months ended September 30, 2006.
 
 New
        accounting pronouncements and the Company’s assessment of their impact on the
        financial statements are disclosed in Note 9 to the notes to condensed
        consolidated financial statements.


ITEM
      3.   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 September 30,




Form
          10-QSBSeptember 30, 2006Page 15




2006.
      Based upon the foregoing evaluation, the Chief Executive Officer and Chief
      Financial Officer 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 September 30, 2006 that have materially affected,
      or
      are reasonably likely to materially affect the Company’s internal control over
      financial reporting.





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





























Form
          10-QSBSeptember 30, 2006Page 16





PART
      II - OTHER INFORMATIION











ITEM
      6. EXHIBITS




31.1
            Certification
                pursuant to Rule 13a-14(a) of Louis P. Scheps, President and Chief
                Executive Officer


31.2
            Certification
                pursuant to Rule 13a-14(a) of Jeffery A. Baird, Chief Financial
                Officer


32.1
                Certification
                    pursuant to 18 U.S.C. 1350 of Periodic Financial Report of Louis
                    P.
                    Scheps, President and Chief Executive Officer and Jeffery A.
                    Baird, Chief
                    Financial Officer




Form
          10-QSBSeptember 30, 2006Page 17





SIGNATURES








In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





**CAS
                MEDICAL SYSTEMS, INC.**
              (Registrant)Date: 
              November 7, 2006
            By:
            /s/ Louis
              P.
              SchepsLouis
              P. SchepsChairman
                of the Board, President and
              Chief
                Executive Officer


Date: 
                November 7, 2006
              By:
              /s/ Jeffery
                A. BairdJeffery
                A. BairdChief
                  Financial Officer