SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________

Form 10-Q

X __X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, ~~2004~~2006

_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 1-31943

CRITICARE SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware		39-1501563
(State or other jurisdiction		(IRS Employer Identification No.)
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
of incorporation or organization)

20925 Crossroads Circle, Suite 100 Waukesha, Wisconsin		53186
20925 Crossroads Circle, Suite 100, Waukesha, Wisconsin		53186
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number including area code : (262) 798-8282

N/A ~~Former name, former address and former fiscal year, if changed since last report.~~

Former name, former address and former fiscal year, if changed since last report.

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 ____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. ~~(as~~See ~~defined~~definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). ~~Yes ____ No X~~

~~Number of~~Large ~~shares~~ accelerated ~~outstanding of each class of the registrant's classes of common stock as~~filer _____ Accelerated ~~of December 31, 2004:~~ filer _____ ~~Class A Common Stock 11,457,111 shares.~~Non-accelerated filer X

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

Number of shares outstanding of each class of the registrant's classes of common stock as of December 31, 2006: Voting Common Stock, 12,298,073 shares.

CRITICARE SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, ~~2004~~2006 AND JUNE 30, ~~2004~~2006

(UNAUDITED)

ASSETS	December 31, ~~2004~~2006			June 30, ~~2004~~2006
CURRENT ASSETS:
Cash and cash equivalents	$	3,~~773~~947,~~491~~297		$	3,~~738~~793,~~825~~781
Accounts receivable, less allowance for doubtful accounts
of $300,000 and $260,000, respectively		6,266,174			6,489,884
of $698,372 and $829,700, respectively		6,161,894			6,187,351
Other receivables		~~352~~420,~~224~~843			~~359~~591,~~806~~008
Inventories		5,164,905			6,418,135
Short-term note receivable		50,000			50,000
Prepaid expenses		137,643			364,375
Inventories		8,077,732			9,464,037
Total current assets		15,694,437			17,371,025
Prepaid expenses		119,288			227,606
Property, plant and equipment - net		1,892,465			2,094,330
Total current assets		18,777,054			20,313,783
License rights and patents - net		73,484			76,985
Property, plant and equipment - net		2,401,237			2,452,314
TOTAL ASSETS	$	17,660,386		$	19,542,340
License rights and patents - net		59,480			62,981
Long-term note receivable		100,000			150,000
Total other assets		159,480			212,981
TOTAL ASSETS	$	21,337,771		$	22,979,078
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	23,~~069~~148,~~469~~887		$	35,~~237~~408,~~405~~746
Accrued liabilities:
Compensation and commissions		~~926~~937,~~659~~699			~~863~~914,~~113~~889
Product warranties		~~487~~388,000			~~444~~425,000
Liability under guarantees		490,000			490,000
Obligations under capital lease		71,114			68,205
Out of court settlement		—			200,000
Other		112,774			174,667
Obligations under capital lease		60,173			57,712
Total current liabilities		4,658,474			6,991,507
Other		125,759			174,395
Total current liabilities		4,159,060			5,466,625
LONG-TERM LIABILITIES:
Obligations under capital lease		~~234~~97,~~056~~526			~~264~~133,~~770~~826
Other long-term obligations		~~13,231~~—			~~21,646~~659
Total long-term liabilities		~~247~~97,~~287~~526			~~286~~134,~~416~~485
TOTAL LIABILITIES		4,~~406~~756,~~347~~000			57,~~753~~125,~~041~~992
STOCKHOLDERS' EQUITY:
Preferred stock - $.04 par value, 500,000 shares authorized
no shares issued or outstanding		—			—
Common stock - $.04 par value, 15,000,000 shares authorized, 11,574,749
Common stock - $.04 par value, 15,000,000 shares authorized, 12,399,631 and
shares issued, and 11,457,111 and 11,450,021 shares outstanding, respectively		462,990			462,990
12,398,131 shares issued, and 12,298,073 and 12,291,454 shares outstanding, respectively		495,985			495,925
Additional paid-in capital		2326,~~966~~223,~~075~~139			2326,~~965~~156,~~900~~864
Common stock held in treasury (117,638 and 124,728 shares, respectively)		(396,232	)		(409,439	)
Common stock held in treasury at cost (101,558 and 106,677 shares, respectively)		(366,278	)		(375,813	)
Retained earnings (accumulated deficit)		(109,~~775~~753,~~312~~186	)		(10,~~226~~436,~~670~~794	)
Cumulative translation adjustment		(3,482	)		(3,482	)
Other comprehensive income (loss)		(17,889	)		12,904
Total stockholders' equity		1316,~~254~~581,~~039~~771			1315,~~789~~853,~~299~~086
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1721,~~660~~337,~~386~~771		$	1922,~~542~~979,~~340~~078

See notes to consolidated financial statements.

CRITICARE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~INCOME

SIX MONTHS ENDED DECEMBER 31, ~~2004~~2006 AND ~~2003~~2005

(UNAUDITED)

	2004			2003
	2006			2005
NET SALES	$	1216,~~706~~669,~~362~~334		$	1516,~~352~~443,~~694~~126
COST OF GOODS SOLD		710,~~733~~132,~~536~~140			9,~~093~~931,~~679~~378
GROSS PROFIT		46,~~972~~537,~~826~~194			6,~~259~~511,~~015~~748
OPERATING EXPENSES:
Sales and marketing		2,~~872~~813,~~833~~618			3,~~372~~292,~~216~~693
Research, development and engineering		1,~~174~~199,~~935~~694			1,~~224~~299,~~313~~666
Administrative		1,~~490~~882,~~328~~345			1,~~725~~613,~~051~~900
Total		5,~~538~~895,~~096~~657			6,~~321~~206,~~580~~259
LOSS FROM OPERATIONS		(565,270	)		(62,565	)
INCOME FROM OPERATIONS		641,537			305,489
OTHER INCOME (EXPENSE):
Interest expense		(177,~~027~~889	)		—(10,565	)
Interest income		2062,~~073~~661			2041,~~749~~974
Other income		13,582			62,510
Other (expense) income		(12,700	)		407,417
Total		1642,~~628~~072			83438,~~259~~826
(LOSS) INCOME BEFORE INCOME TAXES		(548,642	)		20,694
INCOME BEFORE INCOME TAXES		683,609			744,315
INCOME TAX PROVISION		—			—
NET (LOSS) INCOME	$	(548,642	)	$	20,694
NET INCOME	$	683,609		$	744,315
NET (LOSS) INCOME PER COMMON SHARE:
NET INCOME PER COMMON SHARE:
Basic	$	(0.0506	)	$	0.0006
Diluted	$	(0.0506	)	$	0.0006
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic		1112,~~453~~295,~~405~~483			11,~~098~~935,~~339~~933
Diluted		1112,~~453~~362,~~405~~820			1112,~~432~~241,~~539~~949

See notes to consolidated financial statements.

CRITICARE SYSTEMS, INC.

CONSOLIDATED ~~INCOME~~ STATEMENTS OF INCOME

THREE MONTHS ENDED DECEMBER 31, ~~2004~~2006 AND ~~2003~~2005

(UNAUDITED)

	2004			2003
	2006			2005
NET SALES	$	78,~~375~~462,~~005~~740		$	8,~~980~~770,~~277~~813
COST OF GOODS SOLD		45,~~273~~046,~~613~~620			5,~~295~~194,~~668~~365
GROSS PROFIT		3,~~101~~416,~~392~~120			3,~~684~~576,~~609~~448
OPERATING EXPENSES:
Sales and marketing		1,~~558~~517,~~348~~496			1,~~864~~805,~~770~~862
Research, development and engineering		~~633~~557,~~816~~411			~~623~~673,~~721~~015
Administrative		~~740~~1,~~423~~026,117			~~823~~849,~~793~~153
Total		23,~~932~~101,~~587~~024			3,~~312~~328,~~284~~030
INCOME FROM OPERATIONS		~~168~~315,~~805~~096			~~372~~248,~~325~~418
OTHER INCOME (EXPENSE):
Interest expense		(103,~~366~~770	)		—(5,122	)
Interest income		1128,~~465~~936			1121,~~009~~718
Other (expense) income		(18,237	)		29,090
Other income		10,471			341,923
Total		~~(17~~35,~~138~~637	)		40358,~~099~~519
INCOME BEFORE INCOME TAXES		~~151~~350,~~667~~733			~~412~~606,~~424~~937
INCOME TAX PROVISION		—			—
NET INCOME	$	~~151~~350,~~667~~733		$	~~412~~606,~~424~~937
NET INCOME PER COMMON SHARE:
Basic	$	0.0103		$	0.0405
Diluted	$	0.0103		$	0.0405
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic		1112,~~455~~297,~~344~~193			1112,~~121~~027,~~941~~943
Diluted		1112,~~564~~357,~~946~~641			1112,~~475~~334,~~656~~894

See notes to consolidated financial statements.

CRITICARE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED DECEMBER 31, ~~2004~~2006 AND ~~2003~~2005

(UNAUDITED)

	2004			2003
	2006			2005
OPERATING ACTIVITIES:
Net (loss) income	$	(548,642	)	$	20,694
Net income	$	683,609		$	744,315
Adjustments to reconcile net (loss) income to net cash
Adjustments to reconcile net income to net cash provided by (used in)
provided by operating activities:
operating activities:
Depreciation		~~300~~253,~~649~~126			~~282~~288,~~897~~902
Amortization		3,501			3,~~501~~500
Provision for doubtful accounts		40,000			52,442
Share based compensation		56,545			81,140
Provision for obsolete inventory		200,000			353,103
Provision for doubtful accounts		1,674			—
Provision for obsolete inventory		102,000			(132,300	)
Changes in assets and liabilities:
Accounts receivable		~~183~~(9,~~710~~323	)		(1587,~~986,967~~076	)
Other receivables		7,582			131,591
Note receivable		50,000			—
Inventories		1,045,029			17,700
Other receivables		170,165			25,047
Prepaid expenses		226,732			88,869
Inventories		1,198,237			(1,651,915	)
Accounts payable		(1,167,936	)		821,508
Prepaid expenses		108,318			72,421
Accrued liabilities		(150,505	)		232,542
Accounts payable		(2,259,859	)		1,020,836
Net cash provided by operating activities		140,120			17,880
Accrued liabilities		(76,742	)		5,952
Net cash provided by (used in) operating activities		281,251			(129,178	)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net		(90115,~~583~~982	)		(~~244~~383,~~272~~358	)
Net cash used in investing activities		(90115,~~583~~982	)		(~~244~~383,~~272~~358	)
FINANCING ACTIVITIES:
Retirement of obligations under capital lease		(2833,~~253~~391	)		—(30,715	)
Proceeds from issuance of common stock		1319,~~382~~325			~~357~~542,~~034~~940
Net cash (used in) provided by financing activities		(14,~~871~~066	)		~~357~~512,~~034~~225
NET INCREASE IN CASH AND CASH EQUIVALENTS		34,666			130,642
EFFECT OF EXCHANGE RATE CHANGES ON CASH		2,313			(3,691	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		3,738,825			3,716,446
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		153,516			(4,002	)
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,773,491		$	3,847,088
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		3,793,781			3,680,965
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,947,297		$	3,676,963
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Income taxes paid-net	$	—9,325			—
Interest	$	177,~~027~~889		$	—10,565

See notes to consolidated financial statements.

CRITICARE SYSTEMS, INC.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

The accompanying unaudited financial statements have been prepared by Criticare Systems, Inc. (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of the Company, include all adjustments necessary for a fair statement of results for each period shown. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The Company believes that the disclosures made are adequate to prevent the financial information given from being misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report and previously filed Form 10-K. The three and six month results represent past performance, and are not necessarily indicative of results for an entire year. Certain amounts from the fiscal ~~2004~~2006 financial statements have been reclassified to conform to the ~~2005~~2007 presentation.

2. Inventory Valuation

Inventory is stated at the lower of cost or market, with cost determined on the first-in, first-out method. Components of inventory consisted of the following at December 31, ~~2004~~2006 and June 30, ~~2004~~2006, respectively:

	December 31, 2004		June 30, 2004
	December 31, 2006		June 30, 2006
Component parts	$	2,~~070~~826,~~348~~505	$	12,~~988~~605,~~414~~751
Work in process		~~690~~1,~~771~~591,424		~~781~~1,~~156~~470,893
Finished units		34,~~213~~121,~~786~~803		45,~~258~~747,~~565~~393
Total inventories		58,~~974~~539,~~905~~732		79,~~028~~824,~~135~~037
Less: reserve for obsolescence		~~810~~462,000		~~610~~360,000
Net inventory	$	58,~~164~~077,~~905~~732	$	69,~~418~~464,~~135~~037

3. Property, Plant and Equipment

Property, plant and equipment consist of the following:

	December 31, 2004			June 30, 2004
	December 31, 2006			June 30, 2006
Machinery and equipment	$	23,~~716~~226,~~746~~702		$	23,~~675~~157,~~093~~328
Furniture and fixtures		~~938~~942,~~893~~215			~~937~~952,~~906~~193
Leasehold improvements		~~218~~243,~~423~~604			~~218~~243,~~423~~604
Production tooling		2,~~078~~335,~~563~~132			2,~~030~~294,~~618~~360
Demonstration and loaner monitors		~~944~~2,~~999~~101,645			~~945~~1,~~339~~997,844
Property, plant and equipment - cost		68,~~897~~849,~~624~~298			68,~~807~~645,~~379~~329
Less: accumulated depreciation		(56,~~005~~448,~~159~~061	)		(46,~~713~~193,~~049~~015	)
Property, plant and equipment - net	$	12,~~892~~401,~~465~~237		$	2,~~094~~452,~~330~~314

4. ~~Contingencies~~ Stock Options

The ~~import~~ Company ~~and~~has ~~export~~adopted ~~rules~~the ~~applicable~~fair tovalue ~~all~~recognition ~~United~~provisions ~~States~~of ~~companies~~SFAS ~~engaged~~No. in123 (R), ~~international~~ “Share-Based ~~business~~Payment”. ~~transactions~~Under ~~contain~~the ~~compliance~~modified ~~guidelines~~prospective method of adoption selected by the Company, compensation cost recognized is the same as that which would have been recognized had the recognition provisions of SFAS No. ~~Violations~~123 been ~~may~~ applied ~~result~~from its original effective date. Stock-based employee compensation expense included in ~~civil~~reported ornet ~~criminal~~income ~~penalties~~totaled $27,078 orand ~~both~~$41,123 asfor ~~well~~the three asmonths ~~the~~ended ~~potential loss~~December of31, ~~export~~2006 ~~privileges~~and 2005, respectively. Stock-based employee compensation expense included in reported net income totaled $56,545 and $81,140 for the six months ended December 31, 2006 and 2005, respectively.

~~On August~~The 6, Company ~~2002,~~did innot ~~part~~grant ~~due~~any tooptions for the ~~new~~three ~~regulations~~and ~~imposed~~six ~~under~~months ~~the~~ended ~~Sarbanes-Oxley~~December ~~Act~~ 31, ~~the~~2006. ~~Company~~The ~~initiated~~fair anvalue ~~internal~~of ~~review~~stock ofoptions ~~its~~used ~~import~~to ~~and~~compute ~~export procedures.~~net Onincome ~~August~~per ~~28,~~share is ~~2002,~~the ~~senior~~estimated ~~management~~fair ofvalue at the ~~Company~~grant ~~became~~date ~~aware~~using ofthe Black-Scholes ~~previous~~ option-pricing ~~events~~model. ~~that~~The ~~may~~assumptions ~~have~~used ~~violated~~when ~~United~~calculating ~~States~~the ~~import/export~~option-pricing model ~~laws~~include ~~and regulations.~~the ~~Senior~~expected ~~management~~volatility of ~~the~~Criticare’s ~~Company~~common ~~immediately~~stock ~~authorized~~at an45.0%, ~~internal~~the ~~audit~~ risk-free ofinterest ~~these~~rate ~~possible~~of ~~violations~~4.29%, ~~focusing~~the onexpected ~~the~~option ~~sale~~life of ~~medical~~8.88 ~~equipment~~years and ~~directly~~ the forfeiture orrate ~~indirectly~~of ~~into~~option angrants ~~embargoed~~at ~~country and possible marking issues~~0%.

~~The~~5. ~~factual~~ Income ~~investigation pursuant to the internal audit is complete, no additional compliance issues arose, and no material marking issues were identified as a result of the investigation.~~ Taxes

~~Subsequently,~~No ~~the~~ income tax ~~Company~~provision has ~~taken~~been ~~action~~made toin ~~adopt~~the ~~and~~consolidated ~~implement~~statements aof ~~written~~income ~~compliance~~due ~~program~~to ~~with~~ federal ~~respect~~and tostate ~~applicable~~net ~~import/export~~operating ~~rules.~~loss ~~The~~carry ~~Company~~forwards ~~has~~that ~~also~~will ~~undertaken a~~be ~~voluntary~~utilized ~~disclosure~~to offset ~~with~~taxable ~~the~~income ~~relevant U~~earned.S. ~~government~~At ~~agencies~~December 31, ~~and~~2006, ~~has~~the ~~filed~~Company had federal ~~its~~ net operating ~~completed~~loss ~~internal~~carry ~~audit~~forwards ~~report~~of approximately $17,706,000 (which expire from 2008 through 2026) and ~~all~~state ~~requested~~net ~~documents.~~operating Asloss acarry ~~result~~forwards of approximately ~~the~~ $11,930,000 ~~completed~~(which ~~internal~~expire ~~audit~~from ~~and~~2007 ~~voluntary~~through ~~disclosure,~~2021) ~~the~~available ~~Company~~to ~~entered~~offset ~~into~~future ~~and~~ taxable ~~paid~~income. The Company has recorded a ~~settlement~~valuation ~~with~~allowance to offset the related ~~lead~~deferred ~~U.S.~~income ~~government~~tax ~~agency~~assets onarising ~~December~~from 7,these ~~2004, which~~net ~~resolved~~operating ~~all~~loss ofcarry forwards ~~the~~due ~~potential~~to ~~violations~~the ~~disclosed~~uncertainty byof realizing the ~~Company~~benefits ~~with~~of ~~a civil~~these ~~penalty~~assets ofin future ~~$45,000~~years.

56. ~~Stock~~ Line ~~Options~~of Credit Facility

~~The~~At ~~Company~~ December ~~has~~31, ~~adopted~~2006, the ~~disclosure-only~~Company ~~provisions~~had ofa ~~SFAS~~$2,000,000 ~~No.~~demand ~~123,~~line ~~“Accounting for~~of ~~Stock-Based~~credit ~~Compensation”~~facility with ~~and~~a ~~SFAS~~commercial ~~No.~~bank ~~148,~~to ~~“Accounting~~meet ~~for~~its ~~Stock~~short-~~Based Compensation—Transition~~term ~~and~~borrowing ~~Disclosure”~~needs. IfBorrowings against the ~~Company~~line ~~had~~were ~~elected~~payable toon ~~recognize compensation~~demand ~~cost~~with ~~for~~interest payable monthly at the bank's ~~options~~reference ~~granted~~rate, ~~for~~less ~~the~~0.25% ~~three~~(8.00% ~~months~~as ~~and~~of ~~six~~December ~~months ended~~31, 2006). As of December 31, ~~2004~~2006 and ~~2003~~June 30, ~~consistent~~2006, ~~with~~there were no borrowings against the ~~method~~line. Borrowings ~~prescribed~~under the line of credit facility are collateralized by ~~SFAS~~substantially No all assets of the Company. ~~123~~The credit facility has covenants, ~~net~~which ~~loss~~require minimum ~~and~~income ~~net~~or ~~loss~~liquidity ~~per~~levels. ~~share~~The ~~would~~Company ~~have~~was ~~been~~in ~~changed~~compliance towith the ~~pro~~ ~~forma~~ covenants ~~amounts~~at ~~indicated~~December ~~below:~~31, 2006.

	Three Months Ended				Six Months Ended
	2004		2003		2004			2003
Net income (loss) - as reported	$	151,667	$	412,424	$	(548,642	)	$	20,694
Net income (loss) - pro forma	$	42,730	$	393,228	$	(766,516	)	$	(17,698	)
Basic net income (loss) per share - as reported	$	0.01	$	0.04	$	(0.05	)	$	0.00
Diluted net income (loss) per share - as reported	$	0.00	$	0.04	$	(0.07	)	$	0.00
Basic net income (loss) per share - pro forma	$	0.01	$	0.04	$	(0.05	)	$	0.00
Diluted net income (loss) per share - pro forma	$	0.00	$	0.04	$	(0.07	)	$	0.00

7. Net Income Per Common Share

Basic net income per share is computed using the weighted average number of common shares outstanding during the periods. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Additionally, antidilution occurs when the exercise price of the option is higher than the average market price of the common stock. The diluted weighted average common shares outstanding would be higher by 80,000 shares for the three and six months ended December 31, 2006 and by 28,000 shares for the three and six months ended December 31, 2005 without this anti-dilutive impact.

For the three months ended December 31, 2004, the Company granted options totaling 17,000 shares at a weighted average exercise price of $2.76, which are valued at $35,392. For the six months ended December 31, 2004, the Company granted options totaling 67,000 shares at a weighted average exercise price of $2.65, which are valued at $130,323. The fair value of stock options used to compute pro forma net loss and net loss per share is the estimated present value at the grant date using the Black-Scholes option-pricing model.

6. Income Taxes

No income tax provision has been made in the consolidated statements of operations due to federal and state net operating loss carry forwards that will be utilized to offset taxable income earned. At December 31, 2004, the Company had federal net operating loss carry forwards of approximately $16,980,000 (which expire from 2008 through 2024) and state net operating loss carry forwards of approximately $11,476,000 (which expire from 2004 through 2019) available to offset future taxable income. The Company has recorded a valuation allowance to offset the related deferred income tax assets arising from these net loss carry forwards due to the uncertainty of realizing the benefits of these assets in future years.

7. Line of Credit Facility

At December 31, 2004, the Company had a $1,000,000 demand line of credit with a commercial bank, which matures on November 15, 2005, to meet its short-term borrowing needs. Borrowings against the line are payable on demand with interest payable monthly at the bank’s reference rate, plus 25% (5.25% as of December 31, 2004). As of December 31, 2004 and 2003, there were no borrowings against the line. Borrowings under the line of credit facility are collateralized by substantially all assets of the Company. The credit facility has no loan covenant restrictions.

CRITICARE SYSTEMS, INC.

Management's Discussion and Analysis of

Results of Operations and Financial Condition

Six Months Ended December 31, ~~2004~~2006 and ~~2003~~2005

Results of Operations

Net sales of $1216,~~706~~669,~~362~~334 for the six months ended December 31, ~~2004~~2006 ~~were~~increased ~~down 17~~1.24% from $1516,~~352~~443,~~694~~126 for the same period in fiscal ~~2004~~2006. A 335.72% ~~decrease~~increase in the number of units shipped ~~was~~and ~~partially offset by~~ a 204.39% increase in the ~~average~~accessory sales ~~price~~ ~~per~~were ~~unit~~partially ~~and~~offset by a 75.80% ~~increase~~reduction in ~~accessory~~average sales ~~in the current year. The reduced sales were the result of a $1~~price,~~242,255~~ ~~decrease~~due ~~in sales~~ to ~~our~~variations ~~largest OEM partner, a $633,940 decrease~~ in ~~domestic~~the ~~sales, a $355,957 decrease in~~product ~~government sales and a $540~~ mix,~~117~~ ~~decrease~~ in ~~international sales in~~ the ~~six~~current ~~month~~ period. The ~~OEM~~increased sales ~~decrease~~were ~~was~~the ~~partially~~result ~~offset~~of bya $~~240~~715,~~362 in sales to our~~255 ~~new~~ increase ~~OEM partner for medical imaging applications. The decrease~~ in domestic ~~sales was~~alternate ~~due~~care ~~in part to lost~~ sales ~~following the cancellation of two oral surgery shows in Florida~~ and ~~one~~a ~~oral~~$269,782 ~~surgery~~increase ~~show~~ in ~~Louisiana as a result of the~~domestic ~~hurricanes.~~ acute ~~The~~care ~~international~~ sales, ~~decrease~~which ~~was~~were ~~the~~partially ~~result~~offset ofby a $1622,~~130,250 order~~246 ~~shipped~~decrease in ~~December 2003, which boosted the~~ international sales ~~figures for that period in fiscal 2004, without a comparable sale in the six months ended December 31, 2004~~.

The gross profit percentage of 39.12% for the six months ended December 31, ~~2004~~2006 decreased slightly from 4039.86% for the same period in fiscal ~~2004~~2006. The ~~reduced~~decreased margins in ~~the~~ the current period were mainly due to the ~~decreased~~small ~~manufacturing~~variations ~~overhead absorption~~ in the ~~first~~product ~~quarter, due to the decrease in the number of units shipped against relatively fixed overhead costs~~mix.

Operating expenses for the six months ended December 31, ~~2004~~2006 decreased $~~783~~310,~~484~~602 from the same period in fiscal ~~2004.~~2006, ~~The~~despite ~~decrease~~the increase of $~~499~~268,~~383~~445 in ~~sales and marketing~~administrative expenses ~~was~~ due ~~mainly~~ to anthe $~~240~~362,~~329~~693 ~~decrease~~of inexpenses incurred during the ~~commissions~~year ~~earned~~in byconnection ~~dealers~~ with ~~and~~the ~~employees.~~two Inconsent ~~addition,~~solicitation ~~there~~actions ~~was~~initiated aby BlueLine Partners. The decrease of $~~234~~479,~~869~~075 in ~~advertising,~~ ~~trade~~sales ~~shows~~ and ~~sales~~marketing ~~promotion~~expenses ~~spending.~~was ~~The~~due ~~decrease~~mainly ofto a $49209,~~378 in~~032 ~~research,~~decrease ~~development~~in ~~and~~India ~~engineering~~operation expenses, ~~was mainly due to~~ a $63107,~~906 reduction~~537 decrease in ~~depreciation~~operating supplies ~~expense. Administrative~~ expenses ~~decreased~~and bya $~~234~~30,~~723 mainly~~364 ~~due~~decrease toin commissions earned for the ~~cost~~six months ~~containment~~ended ~~efforts~~December ~~such~~31, as2006. ~~reducing~~There ~~consulting~~will be additional expenses incurred by in connection ~~$88,996,~~with ~~reducing~~the ~~accounting~~second ~~fees~~BlueLine byconsent ~~$77~~solicitation,~~872~~ ~~and~~which ~~reducing~~will ~~investor~~increase the administrative expenses by ~~$61,854~~in the third quarter of fiscal 2007.

Total other income for the six months ended December 31, ~~2004~~2006 decreased $66396,~~631~~ 754 from the same period in fiscal ~~2004~~2006. This ~~reduction~~decrease was mainly ~~caused~~due byto ~~interest expense~~the of $17300,~~027~~000 received ~~primarily~~pursuant ~~for~~to a ~~new~~patent ~~capital~~license ~~lease~~agreement ~~(which~~in ~~began~~fiscal in2006 ~~April~~with ~~2004)~~no ~~and~~ corresponding ~~$45,000~~income ~~paid~~in byfiscal ~~the~~2007 ~~Company~~and ~~for~~a ~~the~~decrease ~~settlement~~of ~~with~~$94,200 in royalty income received during the ~~U.S.~~first ~~government~~six ~~for import/export~~months ~~regulation~~of ~~issues~~fiscal 2007.

~~The~~Income from operations of $1641,~~286~~537 for the six months ended December 31,~~189~~ ~~reduction~~2006 inincreased $336,048 ~~gross~~as ~~profit~~compared ~~and~~to income from operations of $305,489 for the ~~decrease~~same period in ~~other~~fiscal ~~income~~2006, which was the result of a $25,446 increase in gross profit combined with the decreased operating expenses of $66310,~~631,~~602. ~~partially~~Income from operations was offset by the ~~reduction~~decrease in ~~operating~~other ~~expenses~~income of $~~783~~396,~~484~~754, ~~resulted~~ resulting in a net ~~loss~~income of $~~(548~~683,~~642)~~609 for the six months ended December 31, ~~2004~~ 2006 as compared to net income of $20744,~~694~~315 for the same period in fiscal ~~2004~~ 2006.

CRITICARE SYSTEMS, INC.

Management's Discussion and Analysis of

Results of Operations and Financial Condition

Three Months Ended December 31, ~~2004~~2006 and ~~2003~~2005

Results of Operations

Net sales of $78,~~375~~462,~~005~~740 for the three months ended December 31, ~~2004~~2006 ~~were~~decreased ~~down 17~~3.95% from $8,~~980~~770,~~277~~813 for the same period in fiscal ~~2004~~2006. A 392.86% ~~decrease~~increase in the number of units shipped ~~was~~and ~~partially offset by~~ a 351.43% increase in the ~~average~~accessory sales ~~price~~ ~~per~~were ~~unit~~offset inby ~~the~~a ~~current year~~6.3% reduction ~~The~~in ~~reduced~~average sales ~~were the result of a $756~~price,~~585~~ ~~decrease~~due ~~in sales~~ to ~~our~~variations ~~largest~~in ~~OEM~~the ~~partner,~~product ~~a $355~~mix,~~957~~ ~~decrease~~ in ~~government~~ the current ~~sales~~period. ~~and~~The asmall ~~$624,323~~ decrease in ~~international~~ sales inwere the ~~current period. The international sales decrease was the~~ result of a $1116,~~130,250 order,~~564 ~~for~~ increase ~~1,650~~in ~~units,~~domestic ~~that~~alternate ~~was~~care ~~shipped in December 2003~~sales, which ~~boosted~~was ~~the international~~offset ~~sales~~by ~~figures for that period in fiscal 2004, without~~ a ~~comparable~~$291,179 ~~sale~~ decrease in ~~the~~OEM ~~three~~sales ~~months~~and ~~ended~~$107,324 ~~December~~in ~~31,~~international ~~2004~~sales.

The gross profit percentage of 4240.14% for the three months ended December 31, ~~2004~~2006 ~~increased~~ decreased slightly from 4140.08% for the same period in fiscal ~~2004~~2006. AThe ~~$160,327~~decreased margins ~~decrease~~ in ~~the~~ ~~charges for~~ the ~~obsolete~~current ~~inventory~~period ~~reserve,~~were mainly due to ~~improved~~the ~~inventory controls~~small ~~and~~variations ~~practices,~~in ~~increased~~ the product ~~gross profit margin~~mix.

Operating expenses for the three months ended December 31, ~~2004~~2006 decreased $~~379~~227,~~697~~006 from the same period in fiscal ~~2004~~2006, despite the increase of $176,964 in administrative expenses due to the $271,153 of expenses incurred during the quarter in connection with the two consent solicitation actions initiated by BlueLine Partners. The decrease of $~~306~~288,~~422~~366 in sales and marketing ~~expenses~~ expenses was due mainly to a $95134,~~595~~978 decrease in ~~the~~India ~~commissions~~operation ~~earned~~expenses, bya $65,163 ~~dealers~~ decrease ~~and~~in ~~employees~~commissions earned and a ~~decrease of~~ $~~161~~25,~~187~~848 decrease in ~~advertising,~~operating ~~trade shows and~~supplies ~~sales~~ expenses ~~promotion~~for ~~spending.~~the ~~Administrative~~three ~~expenses~~months ~~decreased~~ended byDecember ~~$83~~31,~~370~~ ~~mainly due~~2006. toThere ~~cost~~will ~~containment~~be ~~efforts~~additional expenses ~~such~~incurred asin ~~reducing~~connection ~~consulting~~with ~~expenses~~the bysecond ~~$16~~BlueLine consent solicitation,~~774,~~ ~~reducing~~ which ~~accounting~~will ~~fees~~increase bythe ~~$15,190~~administrative ~~and~~expenses ~~reducing~~in ~~investor~~the ~~expenses~~third byquarter of fiscal ~~$59,720~~ 2007.

Total other income for the three months ended December 31, ~~2004~~2006 decreased $57322,~~237 from~~882 from the same period in fiscal ~~2004~~2006. This ~~reduction~~decrease was ~~mainly~~driven ~~caused~~ by ~~interest expense~~the of $10300,~~366~~000 received ~~primarily~~pursuant ~~for~~to a ~~new~~patent ~~capital~~license ~~lease~~agreement ~~(which began~~ in ~~April~~fiscal ~~2004) and~~2006 ~~$45,000 paid by the Company for the settlement~~ with ~~the U.S.~~no ~~government for~~ corresponding ~~import/export~~income ~~regulation~~in ~~issues~~fiscal 2007.

~~The~~Income from operations of $~~583~~315,~~217~~096 ~~reduction~~for inthe ~~gross~~three ~~profit~~months ~~and~~ended ~~the~~December ~~decrease~~31, in2006 increased ~~other~~$66,678 as compared to income from operations of $57248,~~237~~418 for the same period in fiscal 2006, which was the result of the decreased operating expenses of $227,006, partially offset by a $160,328 decrease in gross profit. Income from operations was offset by the ~~reduction~~decrease in ~~operating~~other ~~expenses~~income of $~~379~~322,~~697~~882, resulting ~~resulted~~ in net income of $~~151~~350,~~667~~733 for the three months ended December 31, ~~2004~~ 2006 as compared to net income of $~~412~~606,~~424~~937 for the same period in fiscal ~~2004~~ 2006.

109

CRITICARE SYSTEMS, INC.

Management's Discussion and Analysis of

Results of Operations and Financial Condition

Liquidity and Capital Resources

As of December 31, ~~2004~~2006, the Company had a cash balance of $3,~~773~~947,~~491~~297, which was $341,~~666~~271,847 higher than its balance at September 30, 2006 of $2,675,450 and $153,516 higher than its balance at June 30, ~~2004~~2006 of $3,~~738~~793,~~825~~781. The Company continues to maintain a long-term bank debt free balance sheet since August 30, 2002 when it sold its building and used the proceeds from the sale to retire the long-term bank debt on the facility.

The Company’s ~~increased its~~ cash position increased by $34153,~~666~~516 for the six months ended December 31, ~~2004~~2006 asmainly due to $~~140~~314,~~120~~357 of cash provided by ~~operations~~operating ~~more than offset $90~~activities,~~583~~ ofwhich ~~capital~~ was ~~expenditures~~partially ~~and~~offset by $14115,~~871~~982 of ~~cash~~capital ~~used for financing activities~~expenditures. Cash provided by operations was $~~140~~314,~~120~~357 for the six months ended December 31, ~~2004~~ 2006 as a decrease of $12,~~538~~259,~~053~~859 ~~decrease~~ in ~~receivables,~~accounts ~~prepaid~~payable ~~expenses and inventory~~ was ~~nearly~~ offset by a $1,~~318~~198,~~441~~237 ~~increase~~decrease in inventory, ~~total~~depreciation ~~liabilities~~of $253,126 and net income of $683,609.

The Company believes all future capital and liquidity requirements ~~for the remainder of fiscal 2005~~ will be satisfied by cash generated from operations, proceeds received from the issuance of common stock related to the exercise of stock options, and its current cash balances. No ~~The~~major capital equipment expenditures are expected in the Company'’s current fiscal year ending June 30, 2007. The Company also has a $12,000,000 line of credit ~~expires~~currently in ~~November~~place ~~2005~~that could be utilized, if necessary. At ~~December~~both December 31, ~~2004~~2006 and June 30, 2006, there were no borrowings outstanding under this line of of credit. The credit facility has covenants that require minimum income or liquidity levels. The Company was in compliance with the covenants at December 31, 2006. This line expires in June 2007.

Recently Issued Accounting Pronouncements

FASB Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement 109 (Accounting for Income Taxes). FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the pronouncement and the potential impact of this accounting change on the financial statements.

Forward Looking Statements

A number of the matters and subject areas discussed ~~herein~~in this report that are not historical or current facts deal with potential future circumstances and developments. These include anticipated product introductions, expected future financial results, liquidity needs, financing ability, management's or the Company's expectations and beliefs and similar matters discussed in Management's Discussion and Analysis or elsewhere ~~herein~~in this report. ~~The~~These ~~discussions~~statements ofmay ~~such~~be ~~matters~~identified ~~and~~by ~~subject~~the ~~areas~~use of forward-looking words ~~are~~ or ~~qualified~~phrases bysuch ~~the~~as ~~inherent~~"anticipate," ~~risk~~"believe," ~~and~~"could," ~~uncertainties~~"expect," ~~surrounding~~"intend," ~~future~~"may," ~~expectations~~ "hope," ~~generally~~"plan," ~~and~~"potential," ~~also~~"should," ~~may~~"estimate," ~~materially~~"predict," ~~differ~~"continue," "future," ~~from~~"will," "would" or the ~~Company's~~negative ~~actual~~of these terms or other words of ~~future~~ similar ~~experience~~meaning.

~~The~~Such ~~Company's~~ forward-looking ~~business,~~statements ~~operations and financial performance~~ are inherently subject to ~~certain risks~~known and unknown risks and uncertainties. ~~which~~The ~~could~~Company's ~~result~~actual inresults ~~material~~and ~~differences~~future indevelopments ~~actual~~could differ ~~results~~ materially from ~~management's~~the results or ~~the~~developments ~~Company's~~expressed ~~current~~in, ~~expectations~~or implied by, these forward-looking statements. ~~These~~Factors ~~risks~~that ~~and~~may cause actual results to differ ~~uncertainties~~ materially from those contemplated by such forward-looking statements include, but are not limited to, general economic conditions, demand for the Company's products, costs of operations, the development of new products, the reliance on single sources of supply for certain components in the Company's products, government regulation, health care cost containment programs, the effectiveness of the Company's programs to manage working capital and reduce costs, competition in the Company's markets, compliance with product safety regulations and product liability and product recall risks, risks relating to international sales and compliance with U.S. export regulations, unanticipated difficulties in outsourcing the manufacturing of the majority of its products to foreign manufacturers and risks related to foreign manufacturing, including economic and political instability, trade and foreign tax laws, production delays and cost overruns and quality control. Such uncertainties and other risks that may affect the Company's performance are discussed further in Part I, Item 1A, "Risk Factors," in the Company's Form 10-K for the year ended June 30, 2006. The Company undertakes no obligation to make any revisions to the forward-looking statements contained in this report or to update them to reflect events or circumstances occurring after the date of this report.

Quantitative and Qualitative Disclosures about Market Risk

The Company has a demand line of credit facility with a commercial bank with interest payable monthly at 25 basis points ~~above~~below the bank's reference rate. The Company had no borrowings outstanding under this bank facility at December 31, ~~2004~~ 2006 and June 30, ~~2004~~2006. Due historically to the lack of need to borrow from this credit facility and due to the Company’s current cash position, the Company is not subject to financial risk on this obligation if interest rates in the market change significantly.

The Company’s net sales are primarily denominated in United States dollars, except for a small amount of net sales from the Company’s operation in India denominated in Indian rupees. As a result, part of the Company’s accounts receivable are denominated in rupees and translated into U.S. dollars for financial reporting purposes. A 10% change in the exchange rate of the U.S. dollar with respect to the Indian rupee would not have a material adverse effect on the Company’s financial condition or results of operations for the quarter ended December 31, ~~2004~~2006. The Company does not use any hedges or other derivative financial instruments to manage or reduce exchange rate risk.

Controls and Procedures

As of the end of the period covered by this report, 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 Vice President - Finance, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, the Company’s Chief Executive Officer and Vice President - Finance concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in ~~timely~~recording, processing, ~~alerting~~summarizing ~~them~~and toreporting, ~~material~~on ~~information relating~~a totimely ~~the~~basis, ~~Company~~information required to be ~~included~~disclosed by the Company in reports that the Company’s ~~periodic filings~~files with or submits to the Securities and Exchange Commission. It should be noted that in ~~designing~~ designing and evaluating the disclosure controls and procedures, management ~~recognized~~ recognized 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 was required to apply its judgment in ~~evaluating~~ evaluating the cost-benefit relationship of possible controls and procedures. The Company has designed its disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives and based upon the evaluation described above, the Company’s Chief Executive Officer and ~~Vice~~ Vice President -Finance concluded that the Company’s disclosure controls and procedures were effective at reaching that level of reasonable assurance.

There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1A. Risk Factors.

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, "Risk Factors," of the Company's Form 10-K for the year ended June 30, 2006. Please refer to that section for disclosures regarding the risks and uncertainties relating to the Company's business.

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

The annual meeting of stockholders of the Company was held on December 319, ~~2004~~2006. The matters voted upon, including the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes, as to each such matter were as follows:

Proposal 1: Election of ~~one~~two ~~director~~directors to serve for a term ending at the ~~2007~~2009 annual meeting of stockholders.

	For	Withheld
Higgins D. Bailey	8,630,137	538,117
Stephen K. Tannenbaum	8,626,613	2,545,614
Emil H. Soika	10,024,438	1,147,789

The Company's other directors consist of ~~Jeffrey~~Higgins TD. ~~Barnes~~Bailey and NSam B.C. ~~Joseph Lai~~Humphries (whose terms end at the ~~2005~~2007 annual meeting of stockholders) and ~~Emil~~Jeffrey HT. ~~Soika~~ Barnes and ~~Stephen~~Dr. KN.C. ~~Tannenbaum~~Joseph Lai (whose terms end at the ~~2006~~2008 annual meeting of stockholders).

Proposal 2: Ratification of appointment of BDO Seidman, LLP as ~~auditors~~independent auditors of the Company.

~~For~~	~~Against~~For	~~Abstain~~	~~Broker Non-Votes~~Against	Abstain	Broker Non-Votes
9,082,404	70,800	15,050	0
	9,521,722		121,025	1,529,480	0

Item 6. Exhibits.

3.1

Restated Certificate of Incorporation of the Company (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050).

3.2

By-Laws of the Company (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050).

4.1

Specimen Common Stock certificate (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 33-13050).

4.2	Rights Agreement (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 18, 1997).

31.1	Certification of Emil H. Soika, President and Chief Executive Officer (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Joel D. Knudson, Vice President - Finance and Secretary (Principal Financial Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32*

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350.

__________________

* This ~~Certification~~ Exhibit is not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

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.

CRITICARE SYSTEMS, INC.

(Registrant)

Date: February 115, ~~2005 BY~~ 2007 BY /s/ Joel D. Knudson

Joel D. Knudson

Vice President - Finance

(Chief Accounting Officer and

Duly Authorized Officer)

Filing Compare · CRITICARE SYSTEMS INC /DE/