SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________

Form 10-Q

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

For the quarterly period ended ~~December~~March 31, ~~2006~~2007

_____ 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 of incorporation or organization)		(IRS Employer Identification No.)

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~~Indicate ~~name,~~by ~~former~~check ~~address~~mark ~~and~~whether ~~former~~the ~~fiscal~~registrant ~~year~~(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), ifand ~~changed~~(2) ~~since~~has ~~last~~been subject to such filing requirements ~~report~~for the past 90 days. Yes X No _____

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. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer _____ Accelerated filer _____ 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~~March 31, ~~2006~~2007: Voting Common Stock, 12,~~298~~301,~~073~~071 shares.

CRITICARE SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

~~DECEMBER~~MARCH 31, 2007 ~~2006~~ AND JUNE 30, 2006

(UNAUDITED)

ASSETS	December 31, 2006			June 30, 2006
	March 31, 2007			June 30, 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	34,~~947~~038,~~297~~871		$	3,793,781
Accounts receivable, less allowance for doubtful accounts
of $698,372 and $829,700, respectively		6,161,894			6,187,351
of $586,388 and $829,700, respectively		5,642,413			6,187,351
Other receivables		~~420~~349,~~843~~740			591,008
Short-term note receivable		50,000			50,000
Inventories		8,~~077~~326,~~732~~103			9,464,037
Prepaid expenses		~~119~~199,~~288~~524			227,606
Total current assets		18,~~777~~606,~~054~~651			20,313,783
Property, plant and equipment - net		2,~~401~~287,~~237~~258			2,452,314
License rights and patents - net		5957,~~480~~730			62,981
Long-term note receivable		~~100~~87,~~000~~500			150,000
Total other assets		~~159~~145,~~480~~230			212,981
TOTAL ASSETS	$	21,~~337~~039,~~771~~139		$	22,979,078
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	3,~~148~~002,~~887~~653		$	5,408,746
Accrued liabilities:
Compensation and commissions		~~937~~740,~~699~~128			914,889
Product warranties		~~388~~370,000			425,000
Obligations under capital lease		7172,~~114~~616			68,205
Other		~~112~~130,~~774~~133			174,667
Total current liabilities		4,~~658~~315,~~474~~530			6,991,507
LONG-TERM LIABILITIES:
Obligations under capital lease		9778,~~526~~799			133,826
Other long-term obligations		—			659
Total long-term liabilities		9778,~~526~~799			134,485
TOTAL LIABILITIES		4,~~756~~394,~~000~~329			7,125,992
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, 12,399,631 and
12,398,131 shares issued, and 12,298,073 and 12,291,454 shares outstanding, respectively		495,985			495,925
12,398,131 shares issued, and 12,301,071 and 12,291,454 shares outstanding, respectively		495,985			495,925
Additional paid-in capital		26,~~223~~261,~~139~~311			26,156,864
Common stock held in treasury at cost (101,558 and 106,677 shares, respectively)		(366,278	)		(375,813	)
Common stock held in treasury at cost (98,560 and 106,677 shares, respectively)		(360,693	)		(375,813	)
Retained earnings (accumulated deficit)		(9,~~753~~723,~~186~~059	)		(10,436,794	)
Other comprehensive income (loss)		(1728,~~889~~734	)		12,904
Total stockholders' equity		16,~~581~~644,~~771~~810			15,853,086
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	21,~~337~~039,~~771~~139		$	22,979,078

See notes to consolidated financial statements.

CRITICARE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF INCOME

~~SIX~~NINE MONTHS ENDED ~~DECEMBER~~MARCH 31, ~~2006~~2007 AND ~~2005~~2006

(UNAUDITED)

	2006			2005
	2007			2006
NET SALES	$	1623,~~669~~790,~~334~~883		$	1624,~~443~~254,~~126~~956
COST OF GOODS SOLD		1014,~~132~~376,~~140~~860			914,~~931~~653,~~378~~789
GROSS PROFIT		69,~~537~~414,~~194~~023			69,~~511~~601,~~748~~167
OPERATING EXPENSES:
Sales and marketing		24,~~813~~284,~~618~~603			35,~~292~~005,~~693~~091
Research, development and engineering		1,~~199~~813,~~694~~672			1,~~299~~913,~~666~~355
Administrative		12,~~882~~699,~~345~~106			12,~~613~~450,~~900~~762
Total		58,~~895~~797,~~657~~381			69,~~206~~369,~~259~~208
INCOME FROM OPERATIONS		~~641~~616,~~537~~642			~~305~~231,~~489~~959
OTHER INCOME (EXPENSE):
Interest expense		(711,~~889~~303	)		(1015,~~565~~360	)
Interest income		6294,~~661~~983			4166,~~974~~999
Other (expense) income		~~(12~~13,~~700~~414	)		~~407~~452,~~417~~740
Total		4297,~~072~~094			~~438~~504,~~826~~379
INCOME BEFORE INCOME TAXES		~~683~~713,~~609~~736			~~744~~736,~~315~~338
INCOME TAX PROVISION		—			—
NET INCOME	$	~~683~~713,~~609~~736		$	~~744~~736,~~315~~338
NET INCOME PER COMMON SHARE:
Basic	$	0.06		$	0.06
Diluted	$	0.06		$	0.06
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic		12,~~295~~297,~~483~~011			11,~~935~~997,~~933~~319
Diluted		12,~~362~~361,~~820~~484			12,~~241~~215,~~949~~149

See notes to consolidated financial statements.

CRITICARE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDED ~~DECEMBER~~MARCH 31, ~~2006~~2007 AND ~~2005~~2006

(UNAUDITED)

	2006			2005
	2007			2006
NET SALES	$	87,~~462~~121,~~740~~548		$	87,~~770~~811,~~813~~830
COST OF GOODS SOLD		54,~~046~~244,~~620~~719			54,~~194~~722,~~365~~411
GROSS PROFIT		32,~~416~~876,~~120~~829			3,~~576~~089,~~448~~419
OPERATING EXPENSES:
Sales and marketing		1,~~517~~470,~~496~~988			1,~~805~~712,~~862~~397
Research, development and engineering		~~557~~613,~~411~~978			~~673~~613,~~015~~688
Administrative		1816,~~026,117~~760			~~849~~836,~~153~~863
Total		32,~~101~~901,~~024~~726			3,~~328~~162,~~030~~948
INCOME FROM OPERATIONS		315,096			248,418
LOSS FROM OPERATIONS		(24,897	)		(73,529	)
OTHER INCOME (EXPENSE):
Interest expense		(3,~~770~~414	)		(54,~~122~~794	)
Interest income		2832,~~936~~323			2125,~~718~~024
Other income		1026,~~471~~115			~~341~~45,~~923~~323
Total		3555,~~637~~024			~~358~~65,~~519~~553
INCOME BEFORE INCOME TAXES		350,733			606,937
INCOME (LOSS) BEFORE INCOME TAXES		30,127			(7,976	)
INCOME TAX PROVISION		—			—
NET INCOME	$	350,733		$	606,937
NET INCOME (LOSS)	$	30,127		$	(7,976	)
NET INCOME PER COMMON SHARE:
NET INCOME (LOSS) PER COMMON SHARE:
Basic	$	0.0300		$	(0.0500	)
Diluted	$	0.0300		$	(0.0500	)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic		12,~~297~~300,~~193~~136			12,~~027~~122,~~943~~819
Diluted		12,~~357~~358,~~641~~827			12,~~334~~122,~~894~~819

See notes to consolidated financial statements.

CRITICARE SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

~~SIX~~NINE MONTHS ENDED ~~DECEMBER~~MARCH 31, ~~2006~~2007 AND ~~2005~~2006

(UNAUDITED)

	2006			2005
	2007			2006
OPERATING ACTIVITIES:
Net income	$	~~683~~713,~~609~~736		$	~~744~~736,~~315~~338
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation		~~253~~354,~~126~~817			~~288~~488,~~902~~231
Amortization		35,~~501~~251			35,~~500~~251
Share based compensation		5692,~~545~~421			81129,~~140~~194
Provision for doubtful accounts		17,~~674~~454			—23,510
Provision for obsolete inventory		~~102~~120,~~000~~144			(~~132~~93,300	)
Changes in assets and liabilities:
Accounts receivable		(9494,~~323~~893	)		(~~587~~358,~~076~~703	)
Note receivable		5062,~~000~~500			—
Other receivables		~~170~~241,~~165~~268			2540,~~047~~791
Inventories		1,~~198~~113,~~237~~193			(12,~~651~~340,~~915~~217	)
Prepaid expenses		~~108~~28,~~318~~082			7237,~~421~~966
Accounts payable		(2,~~259~~406,~~859~~093	)		1406,~~020,836~~991
Accrued liabilities		(76274,~~742~~954	)		5(110,~~952~~697	)
Net cash provided by (used in) operating activities		~~281~~552,~~251~~712			(~~129~~1,~~178~~034,645	)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net		(~~115~~285,~~982~~165	)		(~~383~~535,~~358~~236	)
Net cash used in investing activities		(~~115~~285,~~982~~165	)		(~~383~~535,~~358~~236	)
FINANCING ACTIVITIES:
Retirement of obligations under capital lease		(3350,~~391~~616	)		(3046,~~715~~559	)
Proceeds from issuance of common stock		1927,~~325~~206			~~542~~1,~~940~~180,956
Net cash (used in) provided by financing activities		(1423,~~066~~410	)		~~512~~1,~~225~~134,397
EFFECT OF EXCHANGE RATE CHANGES ON CASH		~~2,313~~953			(31,~~691~~079	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		~~153~~245,~~516~~090			(4434,~~002~~405	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		3,793,781			3,680,965
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	34,~~947~~038,~~297~~871		$	3,~~676~~246,~~963~~560
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Income taxes paid-net	$	910,~~325~~547		$	—4,385
Interest	$	711,~~889~~303		$	1015,~~565~~360

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~~nine month results represent past performance, and are not necessarily indicative of results for an entire year. Certain amounts from the fiscal 2006 financial statements have been reclassified to conform to the 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~~March 31, ~~2006~~2007 and June 30, 2006, respectively:

	December 31, 2006		June 30, 2006
	March 31, 2007		June 30, 2006
Component parts	$	2,~~826~~795,~~505~~980	$	2,605,751
Work in process		1,~~591~~282,~~424~~173		1,470,893
Finished units		4,~~121~~575,~~803~~950		5,747,393
Total inventories		8,~~539~~654,~~732~~103		9,824,037
Less: reserve for obsolescence		~~462~~328,000		360,000
Net inventory	$	8,~~077~~326,~~732~~103	$	9,464,037

3. Property, Plant and Equipment

Property, plant and equipment consist of the following:

	December 31, 2006			June 30, 2006
	March 31, 2007			June 30, 2006
Machinery and equipment	$	3,~~226~~342,~~702~~815		$	3,157,328
Furniture and fixtures		942,~~215~~872			952,193
Leasehold improvements		~~243~~269,~~604~~423			243,604
Production tooling		2,~~335~~362,~~132~~382			2,294,360
Demonstration and loaner monitors		2,~~101~~111,~~645~~351			1,997,844
Property, plant and equipment - cost		89,~~849~~028,~~298~~843			8,645,329
Less: accumulated depreciation		(6,~~448~~741,~~061~~585	)		(6,193,015	)
Property, plant and equipment - net	$	2,~~401~~287,~~237~~258		$	2,452,314

4. Stock Options

The Company has adopted the fair value recognition provisions of SFAS No. 123 (R), “Share-Based Payment”. Under the modified 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. 123 been applied from its original effective date. Stock-based employee compensation expense included in reported net income totaled $2735,~~078~~876 and $4148,~~123~~054 for the three months ended ~~December~~March 31, ~~2006~~2007 and ~~2005~~2006, respectively. Stock-based ~~employee~~ employee compensation expense included in reported net income totaled $5692,~~545 and~~421 and $81129,~~140~~194 for the ~~six~~nine months ended ~~December~~March 31, ~~2006~~2007 and ~~2005~~2006, respectively.

~~The~~For ~~Company~~ the three ~~did~~and ~~not~~nine ~~grant~~months ~~any~~ended ~~options~~March ~~for~~31, 2007, the ~~three~~Company ~~and~~granted ~~six~~options ~~months~~totaling 39,000 ~~ended~~shares ~~December 31~~at a weighted average exercise price of $3.47, ~~2006~~which have a fair value of $81,166. The fair value of stock options ~~used to compute net income per share~~ is the estimated fair value at the grant date using the Black-Scholes option-pricing model. The assumptions used when calculating the option-pricing model include the expected volatility of Criticare’s common stock at 45.0%, the risk-free interest rate of 4.2979%, the expected option life of 8.88 years and the forfeiture rate of option grants at 0%.

5. Income Taxes

No income tax provision has been made in the consolidated statements of income due to federal and state net operating loss carry forwards that will be utilized to offset taxable income earned. At ~~December~~March 31, ~~2006~~2007, the Company had federal net operating loss carry forwards of approximately $17,706,000 (which expire from 2008 through 2026) and state net operating loss carry forwards of approximately $11,930,000 (which expire from 2007 through 2021) 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 operating loss carry forwards due to the uncertainty of realizing the benefits of these assets in future years.

6. Line of Credit Facility

At ~~December~~ March 31, ~~2006~~2007, the Company had a $2,000,000 demand line of credit facility ~~with~~ with a commercial bank to meet its short-term borrowing needs. Borrowings ~~against~~ against the line were payable on demand with interest payable monthly at the bank's reference rate, less 0.25% (8.00% as of ~~December~~March 31, ~~2006~~2007). As of ~~December~~ March 31, ~~2006~~ 2007 and June 30, 2006, there were no borrowings against the line. ~~Borrowings~~ Borrowings under the line of credit facility are collateralized by substantially all assets of the Company. The credit facility has covenants, which require minimum income or liquidity levels. The Company was in compliance with the covenants at ~~December~~ March 31, ~~2006~~ 2007.

7. Net Income (Loss) Per Common Share

Basic net income (loss) per share is computed using the weighted average number of common ~~shares~~ shares outstanding during the periods. Diluted net income (loss) 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 80112,~~000~~750 shares for the three and ~~six~~nine months ended ~~December~~March 31, ~~2006~~ 2007 and by 28,000 shares for the three and ~~six~~nine months ended March ~~December~~ 31, ~~2005~~2006 without this anti-dilutive impact.

CRITICARE SYSTEMS, INC.

Management's Discussion and Analysis of

Results of Operations and Financial Condition

~~Six~~Nine Months Ended ~~December~~March 31, ~~2006~~2007 and ~~2005~~2006

Results of Operations

Net sales of $1623,~~669~~790,~~334~~883 for the ~~six~~nine months ended ~~December~~March 31, ~~2006~~2007 ~~increased~~decreased 1.49% from $1624,~~443~~254,~~126~~956 for the same period in fiscal 2006. A 51.2% increase in the number of units shipped ~~and~~was ~~a 4.9% increase in the accessory sales were partially~~ offset by a 51.02% reduction in average sales price, due to variations in the product mix, and a 0.7% decrease in the accessory sales in the current period. The ~~increased~~decreased net sales were the result of a $~~715~~1,~~255 increase in domestic alternate care sales and a $269~~583,~~782~~888 ~~increase~~ decrease in ~~domestic acute~~international ~~care~~ sales, which ~~were~~was partially offset by a $~~622~~1,~~246~~017,315 ~~decrease~~ increase in ~~international~~ domestic alternate care sales.

The gross profit percentage ofremained at 39.26% for the ~~six~~nine months ended ~~December~~March 31, ~~2006 decreased~~2007 ~~slightly~~ and March ~~from~~31, ~~39.6% for the same period in fiscal~~ 2006. ~~The decreased margins in the current period were mainly due to the small variations in the product mix.~~

Operating expenses for the ~~six~~nine months ended ~~December~~March 31, ~~2006~~2007 decreased $~~310~~571,~~602~~827 from the same period in fiscal 2006 due mainly to a decrease of $720,488 ~~despite~~in ~~the~~sales and marketing expenses, which was partially offset by an increase of $~~268~~248,~~445~~344 in administrative expenses. The increase of $248,344 in administrative ~~expenses~~ expenses was due to the $~~362~~442,~~693~~116 of expenses incurred during the ~~year~~period in connection with the two consent solicitation actions initiated by BlueLine Partners. ~~The~~and the ~~decrease~~ subsequent settlement of those actions in the third quarter. The decrease of $~~479~~720,~~075~~488 in sales and marketing expenses was due mainly to a $~~209~~328,~~032~~989 decrease in India operation expenses, a $~~107~~134,~~537~~095 decrease in ~~operating supplies~~advertising and trade show expenses and a $3059,~~364~~148 decrease in commissions earned for the ~~six months~~nine months ended March ~~December~~ 31, 2006. There will be additional expenses incurred in connection with the second BlueLine consent solicitation, which will increase the administrative expenses in the third quarter of fiscal 2007.

Total other income for the ~~six~~nine months ended ~~December~~March 31, ~~2006~~2007 decreased $~~396~~407,~~754~~285 from the same period in fiscal 2006. This decrease was mainly due to the $300,000 received pursuant to a patent license agreement in fiscal 2006 with no corresponding income in fiscal 2007 and a decrease of $94114,~~200~~050 in royalty income received during the first ~~six~~nine months of fiscal 2007.

Income from operations of $~~641~~616,~~537~~642 for the ~~six~~nine months ended ~~December~~March 31, ~~2006~~2007 increased $~~336~~384,~~048~~683 as compared to income from operations of $~~305~~231,~~489~~959 for the same period in fiscal 2006, which was the result of a $25571,~~446~~827 ~~increase~~decrease in ~~gross profit~~operating ~~combined~~ expenses, ~~with~~partially ~~the~~offset ~~decreased~~by ~~operating~~a ~~expenses~~decrease in gross profit of $~~310~~187,~~602~~144. ~~Income~~The increased income from operations was offset by the decrease in other income of $~~396~~407,~~754~~285, resulting in net income of $~~683~~713,~~609~~736 for the ~~six~~nine months ended ~~December~~ March 31, ~~2006~~2007 as compared to net income of $~~744~~736,~~315~~338 for the same period in fiscal 2006.

CRITICARE SYSTEMS, INC.

Management's Discussion and Analysis of

Results of Operations and Financial Condition

Three Months Ended ~~December~~March 31, ~~2006~~2007 and ~~2005~~2006

Results of Operations

Net sales of $87,~~462~~121,~~740~~548 for the three months ended ~~December~~March 31, ~~2006~~2007 decreased 38.58% from $87,~~770~~811,~~813~~830 for the same period in fiscal 2006. A 20.67% increase in ~~the number~~average of sales ~~units~~ price, ~~shipped~~due ~~and~~to avariations ~~1.3% increase~~ in the ~~accessory~~product ~~sales~~mix, ~~were~~was offset by aan 68.3% ~~reduction~~ decrease in the ~~average~~number ~~sales~~of ~~price,~~units ~~due~~shipped toand ~~variations~~a in10.3% ~~the~~decrease ~~product mix,~~ in the ~~current~~ ~~period.~~accessory sales. The ~~small~~ decrease in net sales ~~were~~was the result of a $~~116~~761,~~564~~666 decrease in international ~~increase~~ sales and a $267,903 decrease in domestic ~~alternate~~acute care sales , which was partially offset by a $~~291~~293,~~179 decrease~~928 increase in ~~OEM~~domestic alternate care sales and a $~~107~~252,~~324~~230 increase in ~~international~~OEM sales.

The gross profit percentage of 40.4% for the three months ended ~~December~~March 31, ~~2006 decreased~~2007 ~~slightly~~ increased from 4039.86% for the same period in fiscal 2006. The ~~decreased~~ increased margins in the current period were mainly due to the small variations in the product mix.

Operating expenses for the three months ended ~~December~~March 31, ~~2006~~2007 decreased $~~227~~261,~~006~~222 from the same period in fiscal 2006, ~~despite~~due ~~the~~mainly ~~increase~~to ofa ~~$176,964~~decrease ~~in administrative~~of ~~expenses due to the~~ $~~271~~241,~~153~~409 ~~of expenses incurred during the quarter~~ in ~~connection with the two consent solicitation actions initiated by~~sales ~~BlueLine~~ and marketing ~~Partners~~expenses. The decrease ~~of $288,366~~ in sales and marketing expenses was ~~due~~ due mainly to a $~~134~~119,~~978~~957 decrease in India operation expenses, a $6528,~~163~~ 335 decrease in commissions earned, ~~and~~ a $2526,~~848~~557 decrease in operating supplies ~~expenses~~ ~~for~~and ~~the~~a ~~three months ended December 31~~$26, ~~2006. There will be additional~~555 ~~expenses~~ decrease ~~incurred~~ in ~~connection~~advertising ~~with~~and ~~the~~trade ~~second~~show ~~BlueLine consent solicitation, which will increase the administrative~~ expenses infor the ~~third~~three ~~quarter~~months ~~of fiscal~~ended March 31, 2007.

Total other income for the three months ended ~~December~~March 31, ~~2006~~2007 decreased $~~322~~10,~~882~~529 from the same period in fiscal 2006. This decrease was driven by ~~the~~decreased ~~$300,000~~royalty income received ~~pursuant~~during tothe athird ~~patent~~quarter ~~license agreement~~ in fiscal ~~2006 with no corresponding income in fiscal~~ 2007.

~~Income~~Loss from operations of $~~315~~(24,~~096~~897) for the three months ended ~~December~~March 31, ~~2006 increased~~2007 decreased $6648,~~678~~632 as compared to ~~income~~loss from operations of $~~248~~(73,~~418~~529) for the same ~~period~~ period in fiscal 2006, which was the result of the decreased operating expenses of of $~~227~~261,~~006~~222, partially offset by a $~~160~~212,~~328~~590 decrease in gross profit. ~~Income~~With the decreased loss from operations, ~~was~~despite ~~offset~~a ~~by the~~ decrease in other income of $~~322~~10,~~882~~529, ~~resulting~~ the inCompany had net income of $~~350~~30,~~733~~127 for the three months ended ~~December~~March 31, ~~2006~~ 2007 as compared to a net ~~income~~loss of $~~606~~(7,~~937~~976) for the same period in fiscal 2006.

CRITICARE SYSTEMS, INC.

Management's Discussion and Analysis of

Results of Operations and Financial Condition

Liquidity and Capital Resources

As of ~~December~~ March 31, ~~2006~~2007, the Company had a cash balance of $34,~~947~~038,~~297~~871, which was $1,~~271~~363,~~847~~421 higher than its balance at September 30, 2006 of $2,675,450, ~~and~~$91,574 higher than its balance at December 31, 2006 of $~~153~~3,~~516~~947,297 ~~higher~~and $245,090 higher than its balance at June 30, 2006 of $3,793,781. 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 cash position increased by $~~153~~245,~~516~~090 for the ~~six~~nine months ended ~~December~~March 31, ~~2006~~2007 mainly due to $~~314~~555,~~357~~226 of cash provided by operating activities, which was partially offset by $~~115~~285,~~982~~165 of capital expenditures. Cash provided by operations was $~~314~~555,~~357~~226 for the ~~six~~nine months ended ~~December~~March 31, ~~2006~~2007 as a decrease of $2,~~259~~406,~~859~~093 in accounts payable was offset by a $1,~~198~~113,~~237~~193 decrease in inventory, a $494,893 decrease in accounts receivable, depreciation of $~~253~~354,~~126~~ 817 and net income of $~~683~~713,~~609~~736.

The Company believes all future capital and liquidity requirements 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 major capital equipment expenditures are expected in the Company’s current fiscal year ending June 30, 2007. The Company also has a $2,000,000 line of credit currently in place that could be utilized, if necessary. At both ~~December~~March 31, ~~2006~~2007 and June 30, 2006, there were no borrowings outstanding under this line of credit. The credit facility has covenants that require minimum income or liquidity levels. The Company was in compliance with the covenants at ~~December~~March 31, ~~2006~~ 2007. 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 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 in this report. These statements may be identified by the use of forward-looking words or phrases such as "anticipate," "believe," "could," "expect," "intend," "may," "hope," "plan," "potential," "should," "estimate," "predict," "continue," "future," "will," "would" or the negative of these terms or other words of similar meaning.

Such forward-looking statements are inherently subject to known and unknown risks and uncertainties. The Company's actual results and future developments could differ materially from the results or developments expressed in, or implied by, these forward-looking statements. Factors that may cause actual results to differ 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 below the bank's reference rate. The Company had no borrowings outstanding under this bank facility at ~~December~~ March 31, ~~2006~~ 2007 and June 30, 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~~March 31, ~~2006~~2007. 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~~Chief - Financial ~~Finance~~Officer, 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~~Chief -Financial ~~Finance~~Officer concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information ~~required~~ required to be disclosed by the Company in reports that the Company 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~~ ~~President~~ Chief ~~-Finance~~Financial Officer 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 19, 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 two directors to serve for a term ending at the 2009 annual meeting of stockholders.

	For	Withheld
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 Higgins D. Bailey and Sam B. Humphries (whose terms end at the 2007 annual meeting of stockholders) and Jeffrey T. Barnes and Dr. N.C. Joseph Lai (whose terms end at the 2008 annual meeting of stockholders).

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

	For		Against		Abstain		Broker Non-Votes
	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 Amended and Restated Rights Agreement, dated as of March 27, 2007, between the Company and LaSalle Bank National Association, as rights agent (incorporated by reference to the Company’s Current Report on Form 8-K filed on ~~April~~March 1830, ~~1997~~2007).

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~~Chief ~~President~~Financial -Officer ~~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 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.

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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 5,~~ May 10, 2007 BY /s/ Joel D. Knudson _

Joel D. Knudson

Chief ~~Vice~~ Financial ~~President - Finance~~Officer

(Chief Accounting Officer and

Duly Authorized Officer)

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