UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC  20549




FORM
10-Q





Quarterly
Report Pursuant to Section 13 or 15 (d)


of the
Securities Exchange Act of 1934





For the
Quarterly Period Ended March 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
              
              (I.R.S.
      employerincorporation
      or organization)
              
              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)








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 Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T 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 whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check one):      Large Accelerated
Filer o    
 Accelerated Filer o     
Non-Accelerated Filer o      
Smaller Reporting Company x





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





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:   Common Stock, $.004
par value  11,376,662 shares as of April 30, 2009.







INDEX









PART I
              Financial Information
              
              Page No.Item
      1
              Financial
      Statements (Unaudited)Condensed
      Consolidated Balance Sheets as of March 31, 2009 and December 31,
      2008
              
              3Condensed
      Consolidated Statements of Operations for the Three Months Ended March 31,
      2009 and 2008
              
              5Condensed
      Consolidated Statements of Cash Flow for the Three Months Ended March 31,
      2009 and 2008
              
              6Notes
      to Condensed Consolidated Financial Statements
              
              7Item
      2
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              10Item
      3
              Quantitative
      and Qualitative Disclosures about Market Risk
              
              14Item
      4
              Controls
      and Procedures
              
              14PART II
              Other InformationItem
      1
              Legal
      Proceedings
              
              15Item
      6
              Exhibits
              
              15Signatures
              
              
              16























2


PART I – FINANCIAL
INFORMATION





ITEM 1.  FINANCIAL
STATEMENTS





CAS
Medical Systems, Inc.





Condensed Consolidated
Balance Sheets


(Unaudited)





Assets
                              
                              March
      31,
                              
                              
                              December
      31,2009
                              
                              
                              2008Current
      Assets:Cash
      and cash equivalents
                              
                              $
                              1,089,482
                              
                              
                              $
                              1,082,619Accounts
      receivable, net of allowance
                              
                              
                              4,301,584
                              
                              
                              
                              3,681,355Recoverable
      income taxes
                              
                              
                              110,647
                              
                              
                              
                              101,185Other
      receivables
                              
                              
                              418,926
                              
                              
                              
                              715,769Inventories
                              
                              
                              9,796,048
                              
                              
                              
                              9,786,538Deferred
      income taxes
                              
                              
                              1,021,901
                              
                              
                              
                              791,493Other
      current assets
                              
                              
                              319,735
                              
                              
                              
                              411,938Total
      current assets
                              
                              
                              17,058,323
                              
                              
                              
                              16,570,897Property
      and equipment:Property
      and equipment
                              
                              
                              5,674,861
                              
                              
                              
                              5,608,347Equipment
      at customers
                              
                              
                              1,171,217
                              
                              
                              
                              1,132,4226,846,078
                              
                              
                              
                              6,740,769Accumulated
      depreciation and amortization
                              
                              
                              (4,287,793
                              )
                              
                              
                              (4,013,900
                              )2,558,285
                              
                              
                              
                              2,726,869Intangible
      and other assets, net
                              
                              
                              740,601
                              
                              
                              
                              757,378Goodwill
                              
                              
                              3,379,021
                              
                              
                              
                              3,379,021Deferred
      income taxes
                              
                              
                              527,487
                              
                              
                              
                              250,370Total
      assets
                              
                              $
                              24,263,717
                              
                              
                              $
                              23,684,535














3


CAS
Medical Systems, Inc.





Condensed Consolidated
Balance Sheets


(Unaudited)







Liabilities
      and Stockholders’ Equity
                    
                    March
      31,
                      2009
                    
                    
                    December
      31,
                      2008Current
      Liabilities:Current
      portion of long-term debt
                    
                    $
                    623,325
                    
                    
                    $
                    614,067Line-of-credit
                    
                    
                    3,135,339
                    
                    
                    
                    1,994,008Accounts
      payable
                    
                    
                    2,503,721
                    
                    
                    
                    2,307,675Accrued
      expenses
                    
                    
                    1,049,779
                    
                    
                    
                    835,868Total
      current liabilities
                    
                    
                    7,312,164
                    
                    
                    
                    5,751,618Long-term
      debt, less current portion
                    
                    
                    1,548,756
                    
                    
                    
                    1,708,493Deferred
      gain on sale and leaseback of property
                    
                    
                    1,135,041
                    
                    
                    
                    1,168,701Income
      taxes payable
                    
                    
                    155,875
                    
                    
                    
                    155,875Stockholders'
      Equity:Series
      A cumulative convertible preferred stock, $.001par
      value per share, 1,000,000 shares authorized, noshares
      issued or outstanding
                    
                    
                    —
                    
                    
                    
                    —Common
      stock, $.004 par value per share, 40,000,000shares
      authorized, 11,442,662 and 11,419,535 sharesissued
      at March 31, 2009 and December 31, 2008,respectively,
      including shares held in treasury
                    
                    
                    45,767
                    
                    
                    
                    45,675Common
      stock held in treasury, at cost  - 86,000 shares
                    
                    
                    (101,480
                    )
                    
                    
                    (101,480
                    )Additional
      paid-in capital
                    
                    
                    7,538,148
                    
                    
                    
                    7,423,340Retained
      earnings
                    
                    
                    6,629,446
                    
                    
                    
                    7,532,313Total
      stockholders' equity
                    
                    
                    14,111,881
                    
                    
                    
                    14,899,848Total
      liabilities and stockholders' equity
                    
                    $
                    24,263,717
                    
                    
                    $
                    23,684,535








See
accompanying notes.







4


CAS
Medical Systems, Inc.





Condensed Consolidated
Statements of Operations


(Unaudited)




Three
      Months Ended
                            March
      31,2009
                          
                          
                          2008Net
      sales
                          
                          $
                          8,405,824
                          
                          
                          $
                          8,961,551Cost
      of sales
                          
                          
                          5,940,695
                          
                          
                          
                          6,281,396Gross
      profit
                          
                          
                          2,465,129
                          
                          
                          
                          2,680,155Operating
      expenses:Research
      and development
                          
                          
                          626,195
                          
                          
                          
                          511,326Selling,
      general and administrative
                          
                          
                          3,211,128
                          
                          
                          
                          3,020,8733,837,323
                          
                          
                          
                          3,532,199Operating
      loss
                          
                          
                          (1,372,194
                          )
                          
                          
                          (852,044
                          )Interest
      expense, net
                          
                          
                          49,644
                          
                          
                          
                          72,097Loss
      before income taxes
                          
                          
                          (1,421,838
                          )
                          
                          
                          (924,141
                          )Income
      tax benefit
                          
                          
                          (518,970
                          )
                          
                          
                          (394,250
                          )Net
      loss
                          
                          $
                          (902,868
                          )
                          
                          $
                          (529,891
                          )Loss
      per common share:Basic
                          
                          $
                          ( 0.08
                          )
                          
                          $
                          ( 0.05
                          )Diluted
                          
                          $
                          ( 0.08
                          )
                          
                          $
                          ( 0.05
                          )Weighted
      average number ofcommon
      shares outstanding:Basic
                          
                          
                          11,212,010
                          
                          
                          
                          10,781,292Diluted
                          
                          
                          11,212,010
                          
                          
                          
                          10,781,292








See
accompanying notes.








5


CAS
Medical Systems, Inc.





Condensed Consolidated
Statements of Cash Flow


(Unaudited)








Three
      Months Ended
                                        March
      31,2009
                                      
                                      
                                      2008OPERATING
      ACTIVITIES:Net
      loss
                                      
                                      $
                                      (902,868
                                      )
                                      
                                      $
                                      (529,891
                                      )Adjustments
      to reconcile net loss to net cash (used) provided by operating
      activities:Depreciation
      and amortization
                                      
                                      
                                      316,021
                                      
                                      
                                      
                                      269,828Deferred
      income taxes
                                      
                                      
                                      (507,525
                                      )
                                      
                                      
                                      (294,556
                                      )Non-cash
      stock compensation
                                      
                                      
                                      77,668
                                      
                                      
                                      
                                      140,493Amortization
      of deferred gain on sale and leaseback of property
                                      
                                      
                                      (33,660
                                      )
                                      
                                      
                                      (33,659
                                      )Changes
      in operating assets and liabilities:Accounts
      receivable
                                      
                                      
                                      (620,229
                                      )
                                      
                                      
                                      545,661Other
      receivables
                                      
                                      
                                      296,843
                                      
                                      
                                      
                                      —Inventories
                                      
                                      
                                      (9,510
                                      )
                                      
                                      
                                      (468,083
                                      )Other
      current assets
                                      
                                      
                                      92,203
                                      
                                      
                                      
                                      30,030Recoverable
      income taxes, net
                                      
                                      
                                      (9,462
                                      )
                                      
                                      
                                      (97,908
                                      )Income
      taxes
                                      
                                      
                                      —
                                      
                                      
                                      
                                      2,750Accounts
      payable and accrued expense
                                      
                                      
                                      409,957
                                      
                                      
                                      
                                      1,056,283Net
      cash (used) provided by operating activities
                                      
                                      
                                      (890,562
                                      )
                                      
                                      
                                      620,948INVESTING
      ACTIVITIES:Purchase
      of property and equipment
                                      
                                      
                                      (105,309
                                      )
                                      
                                      
                                      (414,792
                                      )Purchase
      of intangible assets
                                      
                                      
                                      (25,351
                                      )
                                      
                                      
                                      (137,284
                                      )Net
      cash used by investing activities
                                      
                                      
                                      (130,660
                                      )
                                      
                                      
                                      (552,076
                                      )FINANCING
      ACTIVITIES:Repayments
      of long-term debt
                                      
                                      
                                      (150,479
                                      )
                                      
                                      
                                      (141,308
                                      )Repayments
      of notes payable
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (53,960
                                      )Borrowings
      from line-of-credit, net
                                      
                                      
                                      1,141,331
                                      
                                      
                                      
                                      106,403Tax
      effect from vesting of restricted stock
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (7,347
                                      )Proceeds
      from issuance of common stock
                                      
                                      
                                      37,233
                                      
                                      
                                      
                                      74,308Net
      cash provided (used) by financing activities
                                      
                                      
                                      1,028,085
                                      
                                      
                                      
                                      (21,904
                                      )Change
      in cash and cash equivalents
                                      
                                      
                                      6,863
                                      
                                      
                                      
                                      46,968Cash
      and cash equivalents, beginning of period
                                      
                                      
                                      1,082,619
                                      
                                      
                                      
                                      666,722Cash
      and cash equivalents, end of period
                                      
                                      $
                                      1,089,482
                                      
                                      
                                      $
                                      713,690Supplemental
      Disclosures of Cash Flow Information:Cash
      paid during the period for interest
                                      
                                      $
                                      48,739
                                      
                                      
                                      $
                                      68,432Cash
      (collected) paid during the period for income taxes, net
                                      
                                      $
                                      (1,982
                                      )
                                      
                                      $
                                      2,812








See
accompanying notes.





6


CAS
Medical Systems, Inc.


Notes to
Condensed Consolidated Financial Statements


(Unaudited)





March 31,
2009





(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” or “CASMED”) 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, cerebral oximetry monitoring equipment, and supplies for neonatal
intensive care - are sold by CASMED through its own sales force, via
distributors, manufacturers representatives 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 financial statements and notes
thereto included in the Company's Annual Report filed on Form 10-K for the year
ended December 31, 2008.  The condensed consolidated balance sheet as
of December 31, 2008 was derived from the audited financial statements for the
year then ended.





In the
opinion of the Company, all adjustments (consisting of normal recurring
accruals) 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)     
Inventories; Property and Equipment; Intangible Assets and Goodwill





Inventories
consisted of:





March
      31,
                          2009
                        
                        
                        December
      31,
                          2008Raw
      materials
                        
                        $
                        7,724,322
                        
                        
                        $
                        7,560,332Work-in-process
                        
                        
                        31,499
                        
                        
                        
                        24,560Finished
      goods
                        
                        
                        2,040,227
                        
                        
                        
                        2,201,646$
                        9,796,048
                        
                        
                        $
                        9,786,538





Property
and equipment are stated at cost. 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 March 31, 2009, the Company has capitalized $1,171,217 of costs
pertaining to the monitors which have a net book value of $889,604. Other
property and equipment is depreciated using the straight-line method over the
estimated useful lives of the assets.





7


Intangible
assets consist of patents issued, patents pending, trademarks, purchased
technology and other deferred charges which are recorded at cost. Patents are
amortized on a straight-line basis over 1 to 20 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
useful lives. Deferred financing costs are amortized over the term of the
related debt. Other deferred charges are amortized over their estimated useful
lives.





The
Company reviews its long-lived assets including goodwill for impairment at least
annually or whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company believes that
the carrying amounts of its long-lived assets are fully
recoverable.







(4)     
Principal Products and Services





The
Company has categorized its sales of products and services into the following
categories:





·
            Critical
      care monitoring products – includes sales of the FORE-SIGHT® cerebral
      monitor and accessories.


·
            Bedside
      monitoring products – includes sales of cardio-respiratory monitors and
      accessories used to monitor apnea in home-based and hospital settings; the
      Company’s dual platform of vital signs monitors and accessories
      incorporating various combinations of measurement parameters for both
      human and veterinary use including pulse oximetry, electro-cardiography,
      temperature, non-invasive blood pressure, and capnography; co-branded
      products developed and manufactured by Analogic Corporation including
      vital signs monitors utilizing parameters as described above and
      additionally monitors which measure non-invasive cardiac output and
      hemodynamic status, and fetalgard
monitors.


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


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








(5)     
Loss per Common Share





Weighted
average shares outstanding, net of restricted shares, used to compute basic and
diluted loss per share for the three months ended March 31, 2009 and 2008 were
11,212,010 and 10,781,292, respectively.Diluted common stock
equivalents such as non-vested restricted shares, outstanding warrants and
options are excluded from the computation of diluted earnings per share due to
the net losses reported for both periods as their inclusion would be
anti-dilutive.







(6)     
Stock-Based Compensation





Stock compensation expense was $77,668
and $140,493 for the three-month periods ended March 31, 2009 and 2008,
respectively.





As of March 31, 2009, the unrecognized
stock-based compensation cost related to stock option awards and non-vested
restricted stock was $588,990.  Such amount, net of estimated
forfeitures, will be recognized in operations over a weighted average period of
1.8 years.





The following table summarizes the
Company’s stock option information as of, and for the three-month period ended
March 31, 2009:





8





Aggregate
              Weighted-AverageOption
              Weighted-Average
              Intrinsic
              Contractual
      LifeShares
              Exercise
      Price
              Value
      (1)
              Remaining
      in YearsOutstanding
      at December 31, 2008
              590,125
              $  2.43
              $
      219,264Granted
              —Cancelled
              (1,000)
              1.50Exercised
              —Outstanding
      at March 31, 2009
              589,125
              2.43
              $
      84,404
              5.85Exercisable
      at March 31, 2009
              469,124
              $  2.06
              $
      84,404
              4.96





(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 typically vest ratably not less
than two years from the grant date. Restricted stock granted to non-employee
directors typically vest ratably not less than one year from date of grant. The
Company attributes stock-based compensation cost to operations using the
straight-line method over the applicable vesting period.





There were no grants of stock options
or restricted shares during the first three months of 2009. Further, no stock
options were exercised during this period. During the three months ended March
31, 2008, stock options for 20,000 shares of common stock were granted. The fair
value of each option granted was estimated on the date of grant using the
Black-Scholes option-pricing model assuming a weighted average expected
stock-price volatility of 65.0%, a weighted average expected option life of 4.2
years, an average risk free interest rate of 3.74 and a 0.0% average dividend
yield.





As of March 31, 2009, 133,539
restricted shares issued to employees and members of the board of directors
remain issued and non-vested. The unamortized stock compensation expense
associated with the restricted shares as of March 31, 2009 is $382,207 and will
be recognized ratably through March 31, 2012.








(7)    
 Financing Arrangements





The Company has a line of credit
agreement with its bank lender, NewAlliance Bank, which was amended on April 3,
2009 effective March 31, 2009 pursuant to a Second Modification Agreement (as
amended, the “Agreement”). In accordance with the Second Modification Agreement,
the maximum availability was modified from $10,000,000 to $5,000,000 subject to
a borrowing base formula equal to the sum of (i) 75% of eligible receivables and
(ii) the lesser of $2,500,000 or 30% of eligible inventory. Interest on
outstanding amounts is at the Prime Rate plus 1.0% and is subject to a floor of
4.0%. Borrowings are secured by a first priority lien on all the business assets
of the Company. The Agreement contains customary non-financial covenants and
financial covenants, consisting of a debt service coverage ratio and a debt to
tangible net worth ratio, and expires on July 1, 2010. Under the terms of the
Second Modification Agreement, the debt service coverage ratio was revised from
a quarterly test to an annual test for the twelve months ending December 31,
2009 and the minimum ratio revised from 1.5 to 1 to 1.0 to 1. As of the first
quarter of 2010 and thereafter, the ratio returns to 1.5 to 1 with testing
resumed on a quarterly basis. As of March 31, 2009, there was $3,135,339
outstanding under the Agreement.





The Company also has a note payable to
NewAlliance Bank which provides for monthly installments of $61,533, including
interest at 6%, until May 2012. The balance under that loan at March 31, 2009 is
$2,172,081.




9


(8)     
Income Taxes





The
income tax benefit of $518,970 recorded for the three months ended March 31,
2009 reflects an expected effective income tax rate of approximately 36.5% for
2009 and varies from the statutory rate as a result of anticipated state and
federal R&D tax credits.  The income tax benefit of $394,250 for
the three months ended March 31, 2008 reflects an effective tax rate of 43%
resulting primarily from estimated state and federal R&D tax credits
partially offset by non-deductible stock compensation expense.





Recoverable income taxes consist of
state tax carry forwards exchanged for reduced cash receipts payable to the
Company and estimated federal tax refunds generated from net operating
losses.








(9)     
Contingencies





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





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








(10)   
New Accounting Pronouncements





There
are no new accounting pronouncements that would materially affect the Company’s
financial statements or results of operations for the periods reported
herein.








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, changes in economic conditions that
adversely affect demand for the Company’s products, potential liquidity
constraints, new product introductions by the Company’s competitors, increased
price competition, rapid technological changes, dependence upon significant
customers, availability and cost of components for the Company’s products, the
impact of any product liability or other adverse litigation, marketplace
acceptance for the Company’s new products, FDA and other governmental regulatory
and enforcement actions, changes in reimbursement levels from third-party
payors, 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-K.





10


Results of
Operations





For the three months ended March 31,
2009, the Company reported a net loss of $903,000 or ($0.08) per basic and
diluted common share compared to a net loss of $530,000 or ($0.05) per basic and
diluted common share reported for the three months ended March 31, 2008. The net
loss resulted largely from shortfalls in anticipated sales volumes to both U.S.
and international customers which were significantly influenced by difficult
worldwide economic conditions. The economic climate has affected many of the
Company’s customers including hospitals, distributors, and OEM partners. The
shortfall in sales also impacted gross profit for the first three months of 2009
as the Company incurred fixed manufacturing overhead costs which were not
inventoriable. On-going sales and marketing expenses related to FORE-SIGHT also
contributed to the operating loss for the period. Pre-tax losses for the
three-month periods ended March 31, 2009 and 2008 were also affected by
approximately $78,000 and $140,000 respectively, of stock compensation
expense.





The Company generated revenues of
$8,406,000 for the three months ended March 31, 2009, a decrease of $556,000 or
6%, compared to revenues of $8,962,000 for the three months ended March 31,
2008.  The following table provides information with respect to
revenues by major category:




($000’s)
                                
                                Three
      Months Ended
                                  March
      31, 2009
                                
                                
                                Three
      Months Ended
                                  March
      31, 2008
                                
                                
                                Increase/
                                  (Decrease)Bedside
      Monitoring Products
                                
                                $
                                2,576
                                
                                
                                $
                                3,508
                                
                                
                                $
                                (932
                                )Critical
      Care Monitoring Products
                                
                                
                                885
                                
                                
                                
                                274
                                
                                
                                
                                611Blood
      Pressure Measurement Technology
                                
                                
                                1,483
                                
                                
                                
                                1,360
                                
                                
                                
                                123Supplies
      and Service
                                
                                
                                3,462
                                
                                
                                
                                3,820
                                
                                
                                
                                (358
                                )$
                                8,406
                                
                                
                                $
                                8,962
                                
                                
                                $
                                (556
                                )Domestic
      Sales
                                
                                
                                6,370
                                
                                
                                
                                6,333
                                
                                
                                
                                37International
      Sales
                                
                                
                                2,036
                                
                                
                                
                                2,629
                                
                                
                                
                                (593
                                )$
                                8,406
                                
                                
                                $
                                8,962
                                
                                
                                $
                                (556
                                )






Bedside monitoring product revenues for
the three months ended March 31, 2009 decreased $932,000 or 27% primarily as a
result of decreases in international sales of Analogic products and sales of
vital signs monitors into the U.S. veterinary market under a private label
agreement.





Critical care monitoring product
revenues for the three months ended March 31, 2009 of $885,000 represent sales
of the Company’s FORE-SIGHT cerebral oximetry monitors, sensors and accessories.
Under the Company’s monitor placement arrangements, customers are entitled to
use the Company’s monitors at no cost in exchange for purchase orders for
FORE-SIGHT sensors. During the first quarter ended March 31, 2009, the Company
placed or sold approximately 11 monitors with customers bringing the installed
base of Fore-Sight monitors worldwide to 162
monitors.   Increases in sales for the three months ended March
31, 2009 compared to the prior year first quarter were driven by increased sales
of sensors on an expanded installed base.





Blood pressure measurement technology
sales of $1,483,000 for the three months ended March 31, 2009 increased $123,000
or 9% from the $1,360,000 reported for the same three months of the prior year.
Sales to the Company’s largest OEM customer, Medtronic Physio-Control, accounted
for nearly all of the increase in sales during this period.  While
sales to Medtronic increased, the prior year period sales results were affected
by Medtronic’s voluntary suspension of U.S. product shipments initiated during
January 2007.





11


Supplies and service sales decreased
$358,000 or 9% to $3,462,000 for the three months ended March 31, 2009 from
$3,820,000 for the same three months of the prior year. Sales of blood pressure
cuffs were responsible for the entire shortfall in this product category largely
as a result of lower procurements from one significant customer.




Sales to the U.S. market accounted for
$6,370,000 or 76% of the total revenues reported for the three months ended
March 31, 2009, an increase of $37,000 or 1% from the $6,333,000 in sales
reported for the three months ended March 31, 2008. International sales
accounted for $2,036,000 or 24% of the total revenues reported for the three
months ended March 31, 2009, a decrease of $593,000 or 23% from the $2,629,000
reported for the same period of the prior year. Shortfalls in international
sales were primarily led by Analogic products, blood pressure cuffs and OEM
modules partially offset by increases in FORE-SIGHT product sales.





Cost of sales for the three months
ended March 31, 2009 was $5,941,000 or 71% of revenues compared to $6,281,000 or
70% of revenues for the three months ended March 31, 2008. Both periods
represented conditions where sales were below expectations resulting in higher
fixed indirect manufacturing costs as a percentage of sales.





Operating expenses for the three months
ended March 31, 2009 increased $305,000 or 8.6% to $3,837,000 from $3,532,000
for the three months ended March 31, 2008.





Research and development (“R&D”)
expenses increased $115,000 or 23% to $626,000 or 7.4% of revenues for the three
months ended March 31, 2009 compared to $511,000 or 5.7% of revenues for the
three months ended March 31, 2008. Increases in FORE-SIGHT related engineering
project costs were primarily responsible for the increase in R&D expenses.
The project expenses were largely funded by reimbursements from the National
Institutes of Health (“NIH”) pertaining to the Company’s Near-Infrared
Spectroscopy (“NIRS”) technology. R&D expenses are reported net of
reimbursements from the NIH. Reimbursements were $225,000 and $130,000,
respectively, for the three months ended March 31, 2009 and 2008. As of March
31, 2009, a maximum of approximately $1.5 million remains available under the
$2.8 million multi-year NIH award received during September 2007.





Selling, general and administrative
expenses (“S,G&A”) increased $190,000 or 6% to $3,211,000, for the three
months ended March 31, 2009 compared to $3,021,000 for the three months ended
March 31, 2008. Sales and marketing expenses directly associated with the
FORE-SIGHT cerebral oximetry effort totaled approximately $1,108,000 and
increased approximately $434,000 over the same three months of the prior year
primarily as a result of increased field sales personnel related costs and
marketing related meeting and convention expenses. Other sales and marketing
expenses totaled $1,077,000 and decreased $299,000 from the $1,376,000 of
expenses reported for the three months ended March 31, 2008. General and
administrative expenses (“G&A”) increased $56,000 or 6% to $1,025,000
compared to $969,000 during the three months ended March 31, 2008 primarily as a
result of legal expenses partially offset by reduced Sarbanes Oxley related
costs and stock compensation expense. Legal expenses associated with the
Analogic arbitration accounted for $138,000 of total G&A expenses for the
quarter ended March 31, 2009.





Interest expense decreased to $50,000
for the three months ended March 31, 2009 compared to $72,000 for the three
months ended March 31, 2008.   The decrease in interest expense
resulted primarily from lower borrowing costs associated with the Company’s
line-of-credit.





The income tax benefit of $519,000 for
the three months ended March 31, 2009 reflects a combined estimated federal and
state effective tax benefit of 36.5%, and varies from the statutory rate as a
result of anticipated state and federal R&D tax credits. The income tax
benefit of $394,000 for the three months ended March 31, 2008 reflects a
combined estimated federal and state effective tax rate of 43% and varies from
the statutory rate as a result of anticipated state and federal R&D tax
credits partially offset by non-deductible expenses including stock compensation
expense.





12


Financial Condition,
Liquidity and Capital Resources





At March 31, 2009, the Company's cash
and cash equivalents totaled $1,089,000 compared to $1,083,000 at December 31,
2008. Working capital decreased $1,073,000 to $9,746,000 at March 31, 2009, from
$10,819,000 on December 31, 2008.  The Company’s current ratio
decreased to 2.33 to 1 from 2.88 to 1.





Cash used by operations for the three
months ended March 31, 2009 was $891,000 compared to cash provided of $621,000
for the first three months of the prior year.  Operating losses net of
non-cash stock compensation, depreciation and amortization, combined with
increases in accounts receivable and other receivables of $323,000 and deferred
income taxes of $508,000 were responsible for the use of cash. Partially
offsetting these requirements were $410,000 provided from increases in accounts
payable and accrued expenses.  Increases in inventory of $10,000 for
the three months ended March 31, 2009 were nominal.  Inventory
balances were heightened by lower than expected product shipments for the
period.





Cash used in investing activities was
$131,000 for the three months ended March 31, 2009 compared to cash used of
$552,000 for the first three months of the prior year.  Expenditures
for property and equipment of $105,000 were modest for the three months ended
March 31, 2009 and were driven by FORE-SIGHT cerebral oximeter unit placements
at customer sites and clinical research locations and manufacturing equipment
expenditures.  Prior year expenditures reflected $415,000 of spending
primarily related to FORE-SIGHT monitor placements at customer
locations.  Spending for intangible assets of $25,000 for the first
three months of 2009 were also modest and primarily included deferred finance
charges associated with the Company’s amended line-of-credit agreement and
patent costs.





Cash provided from financing activities
for the three months ended March 31, 2009 was $1,028,000 compared to cash used
of $22,000 for the first three months of the prior year.  During the
three months ended March 31, 2009, the Company borrowed an additional $1,141,000
against its line-of-credit to support its operations and repaid $150,000 of
long-term debt.





The Company has a line of credit
agreement with its bank lender, NewAlliance Bank, which was amended on April 3,
2009 effective March 31, 2009 pursuant to a Second Modification Agreement (as
amended, the “Agreement”). In accordance with the Second Modification Agreement,
the maximum availability was modified from $10,000,000 to $5,000,000 subject to
a borrowing base formula equal to the sum of (i) 75% of eligible receivables and
(ii) the lesser of $2,500,000 or 30% of eligible inventory. Interest on
outstanding amounts is at the Prime Rate plus 1.0% and is subject to a floor of
4.0%. Borrowings are secured by a first priority lien on all the business assets
of the Company. The Agreement contains customary non-financial covenants and
financial covenants, consisting of a debt service coverage ratio and a debt to
tangible net worth ratio, and expires on July 1, 2010. Under the terms of the
Second Modification Agreement, the debt service coverage ratio was revised from
a quarterly test to an annual test for the twelve months ending December 31,
2009 and the minimum ratio revised from 1.5 to 1 to 1.0 to 1. As of the first
quarter of 2010 and thereafter, the ratio returns to 1.5 to 1 with testing
resumed on a quarterly basis. As of March 31, 2009, there was $3,135,339
outstanding under the Agreement.





The Company believes that its sources
of funds consisting of cash and cash equivalents and funds available from the
line of credit facility will be sufficient to meet its current and expected
short-term requirements. However, future cash flows may be impacted by a number
of factors, including changing market conditions or failure to meet financial
covenants under our current or any future loan agreement. Changes in payment
terms to one or more of our 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. There can be no assurance that we
will be successful in securing such funding for major initiatives, obtaining a
new credit agreement or securing additional sources or forms of capital for
major initiatives.











13


Effective May 4, 2009, the Company
initiated efforts to reduce costs and expenses and improve cash flows through
certain personnel reductions and other company-wide wage rate reductions
approximating 5% of base pay levels.








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, 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 2 to the
financial statements included in the Company’s Form 10-K for the year ended
December 31, 2008.  There were no significant changes in critical
accounting policies and estimates during the three months ended March 31,
2009.





New
accounting pronouncements and the Company’s assessment of their impact on the
financial statements are disclosed in Note 10 to the notes to condensed
consolidated financial statements contained herein.










ITEM
3.   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
$3,135,339 at March 31, 2009.  The line-of-credit agreement bears
interest at variable rates based on prime rate indices. The Company holds no
derivative securities for trading purposes and is not subject in any material
respect to currency or other commodity risk.










ITEM
4.   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 March 31, 2009. 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
March 31, 2009 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.








14


PART II – OTHER
INFORMATIION





ITEM
1.   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 pending product liability
action, which is likely to be scheduled for trial in late
2009.  Although 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 that this will be the case with respect to
this 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
May 8, 2007, the Company signed an exclusive distribution agreement (the
“Agreement”) with Analogic Corporation (“Analogic”) under which the Company
obtained worldwide exclusive rights to market the Analogic Lifegard® family of
non-invasive patient monitors. Under the Agreement, Analogic would co-brand the
devices and reconfigure its Lifegard II monitor to include the Company’s MAXNIBP
branded non-invasive blood pressure and    other branded
technologies. Accordingly, the Company would reimburse Analogic approximately
$900,000 upon meeting agreed milestone dates for such efforts. As of December
31, 2008, the Company had made payments to Analogic of $90,000.





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





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








ITEM
6.   EXHIBITS





31.1
            Certification
      pursuant to Rule 13a-14(a) of Andrew E. Kersey, President and Chief
      Executive Officer


31.2
            Certification
      pursuant to Rule 13a-14(a) of Jeffery A. Baird, Chief Financial
      Officer32.1
            Certification
      pursuant to 18 U.S.C. 1350 of Periodic Financial Report of Andrew E.
      Kersey, President and Chief Executive Officer and Jeffery A. Baird, Chief
      Financial Officer













15


SIGNATURES








Pursuant
to the requirements 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:  May 6, 2009By:  Andrew
      E. Kersey
                        President and Chief Executive Officer




/s/ Jeffery
      A. Baird
                        Date:  May 6, 2009By:  Jeffery
      A. Baird
                          Chief Financial Officer



















16