SECURITIES
      AND EXCHANGE COMMISSION





Washington,
      D.C. 20549


__________





Form
      10-Q





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


For
      the quarterly period ended December 31,
      2007





OR





_____  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)
            
            (I.R.S.
                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.





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, a non-accelerated filer or a smaller reporting
      company.  See definition of "large accelerated filer," "accelerated
      filer" and "smaller reporting company" in Rule 12b-2 of the Exchange
      Act.


Large
      accelerated
      filer _____                                                                         
Accelerated filer _____





Non-accelerated
      filer _____                                                                           
Smaller reporting company X


(Do
      not
      check if smaller
      reporting company)





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, 2007:  Voting Common Stock, 12,336,695
      shares.










CRITICARE
      SYSTEMS, INC.


CONSOLIDATED
      BALANCE SHEETS


DECEMBER
      31, 2007 AND JUNE 30, 2007





(UNAUDITED)


ASSETS
            
            December
                31,
              2007
            
            
            June
                30,
              2007CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            6,373,909
            
            
            $
            4,635,823Accounts
                receivable, less allowance for doubtful accountsof
                $360,000and
                $497,638, respectively
            
            
            6,527,816
            
            
            
            5,991,999Other
                receivables
            
            
            227,580
            
            
            
            251,950Short-term
                note receivable
            
            
            100,000
            
            
            
            50,000Inventories
            
            
            8,149,284
            
            
            
            8,177,523Prepaid
                expenses
            
            
            308,604
            
            
            
            219,859Total
                current assets
            
            
            21,687,193
            
            
            
            19,327,154Property,
                plant and equipment – net
            
            
            2,225,992
            
            
            
            2,190,389License
                rights and patents – net
            
            
            52,479
            
            
            
            55,980Long-term
                note receivable
            
            
            62,500
            
            
            
            75,000Total
                other assets
            
            
            114,979
            
            
            
            130,980TOTAL
                ASSETS
            
            $
            24,028,164
            
            
            $
            21,648,523LIABILITIES
                AND STOCKHOLDERS' EQUITYCURRENT
                LIABILITIES:Accounts
                payable
            
            $
            4,189,909
            
            
            $
            3,826,834Accrued
                liabilities:Compensation
                and commissions
            
            
            1,182,503
            
            
            
            836,720Product
                warranties
            
            
            352,000
            
            
            
            349,000Other
            
            
            110,335
            
            
            
            191,389Obligations
                under capital lease
            
            
            76,115
            
            
            
            74,148Total
                current liabilities
            
            
            5,910,862
            
            
            
            5,278,091LONG-TERM
                LIABILITIES:Obligations
                under capital lease
            
            
            63,715
            
            
            
            59,678Total
                long-term liabilities
            
            
            63,715
            
            
            
            59,678TOTAL
                LIABILITIES
            
            
            5,974,577
            
            
            
            5,337,769STOCKHOLDERS'
                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, 12,427,255
              and12,409,631
                  shares issued, and 12,336,695and
                  12,313,321 shares outstanding,
                respectively
            
            
            497,090
            
            
            
            496,385Additional
                paid-in capital
            
            
            26,429,966
            
            
            
            26,338,267Common
                stock held in treasury at cost (90,560 and 96,310 shares,
                respectively)
            
            
            (345,791
            )
            
            
            (356,502
            )Retained
                earnings (accumulated deficit)
            
            
            (8,420,884
            )
            
            
            (10,088,767
            )Other
                comprehensive income (loss)
            
            
            (106,794
            )
            
            
            (78,629
            )Total
                stockholders' equity
            
            
            18,053,587
            
            
            
            16,310,754TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            24,028,164
            
            
            $
            21,648,523





See
      notes to consolidated financial
      statements.





2





CRITICARE
      SYSTEMS, INC.


CONSOLIDATED
      STATEMENTS OF INCOME


SIX
      MONTHS ENDED DECEMBER 31, 2007 AND 2006





(UNAUDITED)


2007
            
            
            2006NET
                SALES
            
            $
            19,359,091
            
            
            $
            16,669,334COST
                OF GOODS SOLD
            
            
            11,737,599
            
            
            
            10,132,140GROSS
                PROFIT
            
            
            7,621,492
            
            
            
            6,537,194OPERATING
                EXPENSES:Sales
                and marketing
            
            
            3,363,808
            
            
            
            2,887,549Research,
                development and engineering
            
            
            1,245,030
            
            
            
            1,199,694Administrative
            
            
            1,554,322
            
            
            
            1,882,345Total
            
            
            6,163,160
            
            
            
            5,969,588INCOME
                FROM OPERATIONS
            
            
            1,458,332
            
            
            
            567,606OTHER
                INCOME (EXPENSE):Interest
                expense
            
            
            (7,045
            )
            
            
            (7,889
            )Interest
                income
            
            
            106,080
            
            
            
            62,661Foreign
                currency exchange gain
            
            
            45,848
            
            
            
            73,931Other
                (expense) income
            
            
            64,668
            
            
            
            (12,700
            )Total
            
            
            209,551
            
            
            
            116,003INCOME
                BEFORE INCOME TAXES
            
            
            1,667,883
            
            
            
            683,609INCOME
                TAX PROVISION
            
            
            —
            
            
            
            —NET
                INCOME
            
            $
            1,667,883
            
            
            $
            683,609NET
                INCOME PER COMMON SHARE:Basic
            
            $
            0.14
            
            
            $
            0.06Diluted
            
            $
            0.13
            
            
            $
            0.06WEIGHTED
                AVERAGE NUMBER OF COMMONSHARES
                OUTSTANDING:Basic
            
            
            12,320,152
            
            
            
            12,295,483Diluted
            
            
            12,363,717
            
            
            
            12,362,820





See
      notes
      to consolidated financial statements.





3





CRITICARE
      SYSTEMS, INC.


CONSOLIDATED
      STATEMENTS OF INCOME


THREE
      MONTHS ENDED DECEMBER 31, 2007 AND 2006





(UNAUDITED)


2007
            
            
            2006NET
                SALES
            
            $
            10,221,365
            
            
            $
            8,462,740COST
                OF GOODS SOLD
            
            
            6,045,253
            
            
            
            5,046,620GROSS
                PROFIT
            
            
            4,176,112
            
            
            
            3,416,120OPERATING
                EXPENSES:Sales
                and marketing
            
            
            1,701,138
            
            
            
            1,591,173Research,
                development and engineering
            
            
            694,557
            
            
            
            557,411Administrative
            
            
            827,399
            
            
            
            1,026,117Total
            
            
            3,223,094
            
            
            
            3,174,701INCOME
                FROM OPERATIONS
            
            
            953,018
            
            
            
            241,419OTHER
                INCOME (EXPENSE):Interest
                expense
            
            
            (3,991
            )
            
            
            (3,770
            )Interest
                income
            
            
            61,320
            
            
            
            28,936Foreign
                currency exchange gain
            
            
            13,519
            
            
            
            73,677Other
                income
            
            
            5,375
            
            
            
            10,471Total
            
            
            76,223
            
            
            
            109,314INCOME
                BEFORE INCOME TAXES
            
            
            1,029,241
            
            
            
            350,733INCOME
                TAX PROVISION
            
            
            —
            
            
            
            —NET
                INCOME
            
            $
            1,029,241
            
            
            $
            350,733NET
                INCOME PER COMMON SHARE:Basic
            
            $
            0.08
            
            
            $
            0.03Diluted
            
            $
            0.08
            
            
            $
            0.03WEIGHTED
                AVERAGE NUMBER OF COMMONSHARES
                OUTSTANDING:Basic
            
            
            12,322,825
            
            
            
            12,297,193Diluted
            
            
            12,359,351
            
            
            
            12,357,641





See
      notes
      to consolidated financial statements.





4





CRITICARE
      SYSTEMS, INC.


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


SIX
      MONTHS ENDED DECEMBER 31, 2007 AND 2006





(UNAUDITED)





2007
            
            
            2006OPERATING
                ACTIVITIES:Net
                income
            
            $
            1,667,883
            
            
            $
            683,609Adjustments
                to reconcile net income to net cash provided byoperating
                activities:Depreciation
            
            
            207,307
            
            
            
            253,126Amortization
            
            
            3,501
            
            
            
            3,501Share
                based compensation
            
            
            36,625
            
            
            
            56,545Provision
                for doubtful accounts
            
            
            4,187
            
            
            
            1,674Provision
                for obsolete inventory
            
            
            152,168
            
            
            
            102,000Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (540,874
            )
            
            
            156,569Other
                receivables
            
            
            (13,130
            )
            
            
            54,688Inventories
            
            
            (6,829
            )
            
            
            1,198,237Prepaid
                expenses
            
            
            (88,745
            )
            
            
            108,318Accounts
                payable
            
            
            363,075
            
            
            
            (2,259,859
            )Accrued
                liabilities
            
            
            260,681
            
            
            
            (76,742
            )Net
                cash provided byoperating
                activities
            
            
            2,045,849
            
            
            
            281,666INVESTING
                ACTIVITIES:Purchases
                of property, plant and equipment, net
            
            
            (343,280
            )
            
            
            (115,982
            )Net
                cash used in investing activities
            
            
            (343,280
            )
            
            
            (115,982
            )FINANCING
                ACTIVITIES:Retirement
                of obligations under capital lease
            
            
            (31,843
            )
            
            
            (33,391
            )Proceeds
                from issuance of common stock
            
            
            66,490
            
            
            
            19,325Net
                cash provided by (used in)financing
                activities
            
            
            34,647
            
            
            
            (14,066
            )EFFECT
                OF EXCHANGE RATE CHANGES ON CASH
            
            
            870
            
            
            
            1,898NET
                INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            1,738,086
            
            
            
            153,516CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            4,635,823
            
            
            
            3,793,781CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            6,373,909
            
            
            $
            3,947,297SUPPLEMENTAL
                CASH FLOW INFORMATION:Cash
                paid for:Income
                taxes paid-net
            
            $
            6,025
            
            
            $
            9,325Interest
            
            $
            7,045
            
            
            $
            7,889Fixed
                assets purchased with capital lease
            
            $
            44,895
            
            
            
            --





See
      notes
      to consolidated financial statements.





5





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 2007 financial statements have been reclassified to conform to the fiscal
      2008 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, 2007 and June 30, 2007, respectively:





December
                31, 2007
            
            
            June
                30, 2007Component
                parts
            
            $
            3,084,555
            
            
            $
            2,507,293Work
                in process
            
            
            1,094,435
            
            
            
            1,106,885Finished
                units
            
            
            4,497,294
            
            
            
            4,938,345Total
                inventories
            
            
            8,676,284
            
            
            
            8,552,523Less:  reserve
                for obsolescence
            
            
            527,000
            
            
            
            375,000Net
                inventory
            
            $
            8,149,284
            
            
            $
            8,177,523





3.  
      Property, Plant and Equipment





Property,
      plant and equipment consist of the following:





December
                31, 2007
            
            
            June
                30, 2007Machinery
                and equipment
            
            $
            3,656,814
            
            
            $
            3,415,501Furniture
                and fixtures
            
            
            896,137
            
            
            
            946,668Leasehold
                improvements
            
            
            342,031
            
            
            
            290,084Production
                tooling
            
            
            2,406,312
            
            
            
            2,389,507Demonstration
                and loaner monitors
            
            
            1,939,707
            
            
            
            2,025,924Property,
                plant and equipment – cost
            
            
            9,241,001
            
            
            
            9,067,684Less:  accumulated
                depreciation
            
            
            (7,015,009
            )
            
            
            (6,877,295
            )Property,
                plant and equipment - net
            
            $
            2,225,992
            
            
            $
            2,190,389





6





4.  
      Stock Options





The
      Company has adopted thefair 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 $27,486 and$27,078for
      the three months ended
      December 31, 2007 and 2006, respectively.  Stock-based employee
      compensation expense included in reported net income totaled $36,625and$56,545for
      the six months ended
      December 31, 2007 and 2006, respectively.





The
      Company did not grant any options for the three and six months ended December
      31, 2007.  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 51.0%, the risk-free interest rate of 4.73%, the expected option life of
      9.00
      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 31, 2007, the Company had
      federal net operating loss carry forwards of approximately $17,301,000 (which
      expire from 2008 through 2027) and state net operating loss carry forwards
      of
      approximately $10,187,000 (which expire from 2008 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.





The
      Company and one of its subsidiaries file income tax returns in the U.S. federal
      jurisdiction, and various states and foreign jurisdictions.  The
      Company adopted the provisions of FASB Interpretation No. 48, Accounting for
      Uncertainty in Income Taxes, on July 1, 2007.  As a result of the
      implementation of Interpretation 48, the Company did not recognize an increase
      in the liability for unrecognized tax benefits.  A reconciliation of
      the beginning and ending amount of unrecognized tax benefits is as
      follows:





Balance
                at July 1, 2007
            
            $
            0Additions
                based on tax positions related to the current year
            
            
            --Additions
                for tax positions of prior years
            
            
            --Reductions
                for tax positions of prior years
            
            
            --Settlements
            
            
            --Balance
                at December 31, 2007
            
            $
            0





7


The
      Company recognizes interest accrued related to unrecognized tax benefits in
      interest expense and penalties in operating expenses.  As of December
      31, 2007, the Company had not accrued for any payments of interest and
      penalties.





6.  
      Line of Credit Facility





At
      December 31, 2007, the Company had a $2,000,000 demand line of credit facility
      with a commercial bank to meet its short-term borrowing
      needs.  Borrowings against the line were payable on demand with
      interest payable monthly at the bank's reference rate, less 0.25% (7.00% as
      of
      December 31, 2007).  As of December 31, 2007 and June 30, 2007, 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 covenants, which require minimum
      income or liquidity levels.  The Company was in compliance with the
      covenants at December 31, 2007.





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 by142,750shares
      for the three and
      six months ended December 31, 2007and by80,000shares
      for the three and
      six months ended December 31, 2006 without this anti-dilutive
      impact.




8


CRITICARE
      SYSTEMS, INC.


Management's
      Discussion and Analysis of


Results
      of Operations and Financial Condition


Six
      Months Ended December 31, 2007 and 2006





Results
      of
      Operations





The
      Company had record net sales of $19,359,091 for the six months ended December
      31, 2007, which increased 16.1% from $16,669,334 for the same period in fiscal
      2007.  The record net sales drove income from operations of $1,458,332
      for the six months ended December 31, 2007, which increased 156.9% from $567,606
      for the same period in fiscal 2007.  These served to drive the
      increased net income for the Company to $1,667,883 for the six months ended
      December 31, 2007, which was 144.0% higher than $683,609 for the same period
      in
      fiscal 2007.  A 24.8% increase in the average unit sales price and a
      10.6% increase in the accessory sales were partially offset by a 4.9% reduction
      in number of units shipped, due to variations in the product mix, in the current
      period.  The increased sales were driven by increases of $2,370,720 in
      OEM sales and $2,137,850 in international sales, which were partially offset
      by
      a $1,036,630 decrease in domestic alternate care sales and a $786,546 decrease
      in domestic acute care sales.  The OEM sales increase was driven by
      sales to Medrad, which increased $1,637,295 to $4,641,258, and due to the start
      of the production shipments to our newest OEM partner, Fukuda Denshi, Inc.
      of
      Japan.  The increase in international sales was due in large part to
      the partial shipment of an order to the ministry of health of the Republic
      of
      Iraq of $1,520,257 and a 171.3% growth in the number of units shipped to the
      international market for Criticare’s multi-parameter vital signs monitor
      (nGenuity 8100E).  The decrease in domestic alternate care sales was
      due to a large order to replace vital signs monitors in domestic plasma
      collection centers shipped in the first quarter of fiscal 2007 with no
      corresponding sales in fiscal 2008.  The decrease in domestic acute
      care sales in fiscal 2008 was anticipated as the Company capitalized on
      opportunities within the market during fiscal 2007 to participate in bid
      requests without institutional contract requirements.





The
      gross
      profit percentage of 39.4% for the six months ended December 31, 2007 increased
      slightly from 39.2% for the same period in fiscal 2007. The increased margins
      in
      the current period were mainly due to the small variations in the product
      mix.





Operating
      expenses for the six months ended December 31, 2007 increased $193,572 from
      the
      same period in fiscal 2007 due mainly to an increase of $476,259 in sales and
      marketing expenses, which was partially offset by a decrease of $328,023 in
      administrative expenses.  The increase of $476,259 in sales and
      marketing expenses was driven by a $383,853 increase in commissions earned
      which
      included commissions earned by the Company’s dealer of $263,140 for thepartial shipment of the
      order to the ministry of health of the Republic of Iraq, a $21,538 increase
      in
      travel expenses and a $13,089 increase in advertising and trade show expenses
      for the six months ended December 31, 2007.Administrative
      expenses decreased by $328,023 as $362,693 of expenses were incurred during
      the
      first six months of fiscal 2007 in connection with the BlueLine consent
      solicitation with no corresponding expense in fiscal 2008, more than offsetting
      increased expenses of $35,793 relating to the Company’s preparation for
      compliance with Section 404 of the Sarbanes-Oxley Act.




Total
      other income for the six months ended December 31, 2007 increased $93,548 from
      the same period in fiscal 2007.  This increase was mainly driven by
      increased interest income of $43,419 and increased royalty income of $25,200
      received during the period.





Income
      from operations of $1,458,332 for the six months ended December 31, 2007
      increased $890,726 as compared to income from operations of $567,606 for the
      same period in fiscal 2007, which was the result of a $1,084,298 increase in
      gross profit combined with increased operating expenses of
      $193,572.  The increase in income from operations together with an
      increase in other income of $93,548, resulted in an increase in net income
      of
      $984,274 to net income of $1,667,883 for the six months ended December 31,
      2007
      as compared to net income of $683,609 for the same period in fiscal
      2007.




9


CRITICARE
      SYSTEMS, INC.


Management's
      Discussion and Analysis of


Results
      of Operations and Financial Condition


Three
      Months Ended December 31, 2007 and 2006





Results
      of
      Operations





Record
      quarterly net sales of $10,221,365 for the three months ended December 31,
      2007
      increased 20.8% from $8,462,741 for the same period in fiscal
      2007.  The record net sales drove income from operations of $953,018
      for the three months ended December 31, 2007, which increased 294.8% from
      $241,419 for the same period in fiscal 2007.  These served to drive
      the increased net income for the Company to $1,029,241 for the three months
      ended December 31, 2007, which was 193.5% higher than $350,733 for the same
      period in fiscal 2007.  A 28.5% increase in the average unit sales
      price and an 5.5% increase in the accessory sales were partially offset by
      a
      1.9% reduction in number of units shipped, due to variations in the product
      mix,
      in the current period.The increased sales were
      driven by a $1,815,546 increase in OEM sales and a $513,097 increase in
      international sales, which were partially offset by a $597,034 decrease in
      domestic acute care sales.The increase in OEM sales
      was driven by sales to Fukuda Denshi, Inc. of Japan and
      Medrad.  Medrad sales increased $1,494,374 to $2,930,985 for the three
      months ended December 31, 2007.  The increase in international sales
      has been driven by 100.5% growth in the number of units shipped for Criticare’s
      multi-parameter vital signs monitor (nGenuity 8100E), as the monitor, which
      was
      released in late fiscal 2006, continues to gain acceptance and
      momentum.





The
      gross
      profit percentage of 40.9% for the three months ended December 31, 2007
      increased slightly from 40.4% for the same period in fiscal 2007. The 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 31, 2007 increased $48,393 from
      the
      same period in fiscal 2007 due mainly to an increase of $137,146 in research,
      development and engineering expenses and an increase of $109,965 in sales and
      marketing expenses, which were partially offset by a decrease of $198,718 in
      administrative expenses.  The increase of $137,146 in research,
      development and engineering expenses is mainly due to the specific cycle
      variations of the on-going development projects.  The increase of
      $109,965 in sales and marketing expenses was driven by a $38,791 increase in
      commissions earned, a $29,331 increase in advertising and trade show expenses
      and a $27,922 increase in travel expenses for the three months ended December
      31, 2007.Administrative
      expenses decreased by $198,718 as $271,153 of expenses were incurred during
      the
      second quarter of fiscal 2007 in connection with the BlueLine consent
      solicitation with no corresponding expense in fiscal 2008, more than offsetting
      increased expenses of $35,793 relating to the Company’s preparation for
      compliance with Section 404 of the Sarbanes-Oxley Act.





Total
      other income for the three months ended December 31, 2007 decreased $33,091
      from
      the same period in fiscal 2007.  This decrease was mainly due to a
      decrease in foreign currency exchange gain of $60,158, which was partially
      offset by increased interest income of $32,384 received during the
      quarter.





Net
      income of $1,029,241 for the three months ended December 31, 2007 increased
      by
      $678,508 as compared to net income of $350,733 for the same period in fiscal
      2007, as the result of a $759,992 increase in gross profit and a $48,393
      decrease in operating expenses.




10


CRITICARE
      SYSTEMS, INC.


Management's
      Discussion and Analysis of


Results
      of Operations and Financial Condition





Liquidity
      and Capital
      Resources





As
      of
      December 31, 2007, the Company had a cash balance of $6,373,909, which was
      $1,738,086 higher than its balance at June 30, 2007 of $4,635,823 and $2,426,612
      higher than its balance at December 31, 2006.  The Company continues
      to maintain a long-term bank debt free balance sheet since August 30, 2002
      when
      it sold it’s 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 $1,738,086 for the six months ended
      December 31, 2007 driven by $2,045,849 of cash provided by operating activities,
      which was partially offset by $343,280 of capital expenditures.Cash provided by operations
      was $2,045,849 for the six months ended December 31, 2007 as net income of
      $1,667,883, an increase of $363,075 in accounts payable, an increase of $260,681
      in accruals and depreciation of $207,307 were partially offset by a $540,874
      increase in accounts receivable.





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, 2008.  The Company also has a $2,000,000
      line of credit currently in place that could be utilized, if
      necessary.  At both December 31, 2007 and June 30, 2007, 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 31,
      2007.  This line expires in June 2008.





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 elsewherein
      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, 2007.  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.






11






Quantitive
      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 31, 2007 and June 30, 2007.  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, 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
      - 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
      recording, processing, summarizing and reporting, on a timely basis, information
      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 and evaluating the disclosure controls and procedures,
      management 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 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 –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.





12


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, 2007.  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 November 27,
      2007.  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 five directors to serve for a one-year term ending at
      the 2008 annual meeting of stockholders.





For
            
            
            WithheldJeffrey
                T. Barnes
            
            
            6,278,289
            
            
            
            3,428,949N.C.
                Joseph Lai
            
            
            6,416,279
            
            
            
            3,290,959William
                M. Moore
            
            
            9,454,646
            
            
            
            252,592Robert
                E. Munzenrider
            
            
            9,453,246
            
            
            
            253,992Emil
                H. Soika
            
            
            5,954,290
            
            
            
            3,752,948





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





For
            
            Against
            
            Abstain
            
            Broker
                Non-Votes9,648,797
            
            49,620
            
            8,821
            
            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 March 30, 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 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
      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.





13


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 7,
      2008


BY
/s/
      Joel D.
      Knudson


Joel
      D. Knudson


Vice
      President - Finance


(Chief
      Accounting Officer and


Duly
      Authorized Officer)







14