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 September 30, 2003
 
 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 -0-16061
 
 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 Number)
 
 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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
 Yes ___  No X
 
 Number of shares outstanding of each class of the registrant's classes of common stock as of September 30, 2003: Class A Common Stock 11,075,269 shares.
 
  CRITICARE SYSTEMS, INC.
 CONSOLIDATED BALANCE SHEETS
 SEPTEMBER 30, 2003 AND JUNE 30, 2003
 
 (UNAUDITED)
 ASSETS


September 30,2003


June 30,
2003CURRENT ASSETS:Cash and cash equivalents

$
3,866,322

$
3,716,446Accounts receivable, less allowance for doubtful accounts    of $300,000


5,502,349


5,627,198Other receivables


454,885


553,147Inventories


6,277,910


6,347,208Prepaid expenses


364,817


340,934Total current assets


16,466,283


16,584,933Property, plant and equipment  net


2,065,034


2,093,408License rights and patents  net


82,236


83,986TOTAL ASSETS

$
18,613,553

$
18,762,327LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES:Accounts payable

$
2,425,979

$
2,272,953Accrued liabilities:Compensation and commissions


870,381


850,034Product warranties


353,729


312,000Other


282,669


254,470Total current liabilities


3,932,758


3,689,457OTHER LONG-TERM OBLIGATIONS


34,654


38,662TOTAL LIABILITIES


3,967,412


3,728,119STOCKHOLDERS' 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, 11,204,024   shares issued, and 11,075,269 and 11,073,832 outstanding, respectively


448,161


448,161Additional paid-in capital


23,361,230


23,360,244Common stock held in treasury (128,755 and 130,192 shares, respectively)


(416,941
)

(419,618
)Subscriptions receivable


(225,000
)

(225,000
)Retained earnings (accumulated deficit)


(8,517,827
)

(8,126,097
)Cumulative translation adjustment


(3,482
)

(3,482
)Total stockholders' equity


14,646,141


15,034,208TOTAL LIABILITIES AND STOCKHOLDERS EQUITY

$
18,613,553

$
18,762,327
 See notes to consolidated financial statements.
 
 2   CRITICARE SYSTEMS, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
  (UNAUDITED)
 
 2003


2002NET SALES

$
6,372,417

$
6,304,347COST OF GOODS SOLD


3,798,010


3,907,000GROSS PROFIT


2,574,407


2,397,347OPERATING EXPENSES:Sales and marketing


1,507,446


1,326,960Research, development and engineering


600,593


628,940Administrative


901,258


957,229Total


3,009,297


2,913,129LOSS FROM OPERATIONS


(434,890
)

(515,782
)OTHER INCOME (EXPENSE):Interest expense





(91,533
)Interest income


9,739


15,865Other income


33,421


299,799Total


43,160


224,131LOSS BEFORE INCOME TAXES


(391,730
)

(291,651
)INCOME TAX PROVISION





NET LOSS

$
(391,730
)
$
(291,651
)NET LOSS PER COMMON SHAREBasic and diluted

$
(0.04
)
$
(0.03
)WEIGHTED AVERAGE NUMBER OF COMMON   SHARES OUTSTANDING:Basic and diluted


11,074,738


11,072,682 
 See notes to consolidated financial statements.
 
 3   CRITICARE SYSTEMS, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
 
 (UNAUDITED)
 
 2003


2002OPERATING ACTIVITIES:Net loss

$
(391,730
)
$
(291,651
)Adjustments to reconcile net loss to net cash  provided by (used in) operating activities:Depreciation


143,178


228,655Amortization


1,750


1,750Provision for doubtful accounts


2,352


Provision for obsolete inventory


95,000


364,000Gain on sale of Immtech stock





(241,746
)Gain on sale of building





(41,208
)Changes in assets and liabilities:Accounts receivable


122,497


544,245Other receivables


98,262


(84,914
)Inventories


(43,842
)

(568,513
)Prepaid expenses


(23,883
)

(2,135
)Accounts payable


153,026


94,687Accrued liabilities


86,267


117,731Net cash provided by operating activities


242,877


120,901INVESTING ACTIVITIES:Purchases of property, plant and equipment, net


(96,664
)

(306,073
)Proceeds from sale of Immtech stock





241,746Proceeds from sale of building





3,795,164Net cash (used in) provided by investing activities


(96,664
)

3,730,837FINANCING ACTIVITIES:Retirement of long-term debt





(3,197,125
)Repurchase of Company common stock





(121,359
)Proceeds from issuance of common stock


3,663


9,986Net cash provided by (used in) financing activities


3,663


(3,308,498
)EFFECT OF EXCHANGE RATE CHANGES ON CASH





268NET INCREASE IN CASH AND CASH EQUIVALENTS


149,876


543,508CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD


3,716,446


3,523,070CASH AND CASH EQUIVALENTS, END OF PERIOD

$
3,866,322

$
4,066,578 
 See notes to consolidated financial statements.
 
 4   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. Certain amounts from the fiscal 2002 financial statements have been reclassified to conform to the 2003 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 September 30, 2003 and June 30, 2003, respectively:
 
 September 30, 2003
June 30, 2003Component parts

$
2,981,099

$
2,762,803Work in process


664,566


811,906Finished units


4,127,245


4,172,499Total inventories


7,772,910


7,747,208Less: reserve for obsolescence


1,495,000


1,400,000Net inventory

$
6,277,910

$
6,347,208
 
 
 3. Investments
 
 During fiscal 2003, the Company completely liquidated its position in its Immtech International, Inc. (Immtech) common stock. In the first quarter of fiscal 2003 ended September 30, 2002, the Company sold 50,000 shares and realized a gain of $241,746 that was included in other income in the accompanying consolidated statement of operations. The remaining 406,374 shares of Immtech stock after this sale were sold in the second and third quarters of fiscal 2003.
 
 5 4. Property, Plant and Equipment
 
 Property, plant and equipment consist of the following:
 
 September 30, 2003


June 30,
2003Machinery and equipment

$
2,308,061

$
2,264,697Furniture and fixtures


919,408


919,077Leasehold improvements


212,229


212,229Demonstration and loaner monitors


1,253,148


1,346,459Production tooling


3,670,314


3,617,345Property, plant and equipment  cost


8,363,160


8,359,807Less: accumulated depreciation


6,298,126


6,266,399Property, plant and equipment - net

$
2,065,034

$
2,093,408
 
 On August 30, 2002, the Company sold its building in Waukesha, Wisconsin and leased back approximately 62% of the buildings square footage. The building was sold for $4,000,000 and a gain of $41,208 was realized on the sale after the payment of commissions and fees and the funding of $105,396 in capitalized build out costs needed to split the building into two leasable spaces. The proceeds from the sale were used to retire the $3,182,160 of debt on the Companys balance sheet at August 30, 2002 and increased the Companys cash position by approximately $500,000.
 
 5. Contingencies
 
 The import and export rules applicable to all United States companies engaged in international business transactions contain compliance guidelines. Violations may result in civil or criminal penalties, or both, as well as the potential loss of export privileges.
 
 On August 6, 2002, in part due to the new regulations imposed under the Sarbanes-Oxley Act, the Company initiated an internal review of its import and export procedures. On August 28, 2002, senior management of the Company became aware of previous events that may have violated United States import/export laws and regulations. Senior management of the Company immediately authorized an internal audit of these possible violations, focusing on the sale of medical equipment directly or indirectly into an embargoed country and possible marking issues.
 
 The factual 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.
 
 Subsequently, the Company has taken action to adopt and implement a written compliance program with respect to applicable import/export rules. The Company has also undertaken a voluntary disclosure with the relevant government agencies and has filed its completed internal audit report and all requested documents. Although there is no assurance, based upon the results of the completed internal audit and precedents, the Company believes a negotiated settlement of any violations will not have a material adverse effect on the Company. In addition, the Company does not believe that the audit result supports the denial of export privileges; however, any such penalty would have a material adverse effect on the Company's business. The Company further believes that the voluntary disclosure, along with other internal actions taken, will serve to mitigate any potential adverse consequences that otherwise might accrue.
 6 **6.  Guarantees**
 
 Criticare Integration, Inc., a wholly owned U.S. subsidiary of the Company, was incorporated on April 8, 2003 to supply medical equipment and supplies to medical facilities in countries in the Black Sea Economic Zone (Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Romania, and the Ukraine). The Company had set up a standby letter of credit for $300,000 on behalf of a Romanian company it is working with in connection with this new venture. The standby letter of credit served as a guarantee for a $2,000,000 line of credit that had been extended by a large Austrian bank to the Romanian company to fund this project. The standby letter of credit was to expire on November 15, 2003. The line of credit was no longer deemed necessary to fund the project and was therefore cancelled prior to expiration. The related standby letter of credit from the Company guaranteeing the line of credit was also cancelled on October 20, 2003.
 
 The Company also maintains a second standby letter of credit for $300,000 on behalf of the Romanian company that serves as a guarantee to fund borrowings by the Romanian company used to set up and market this project. This standby letter of credit was to expire on November 1, 2003, but was renewed through November 1, 2004 on October 16, 2003. This standby letter of credit would only be called if the cash flows from the project were not adequate to fund these costs and the Romanian company would not be able to retire the debt. The value of this remaining guarantee that was renewed was not material to the Companys financial statements.
 
 7. Stock Options
 
 The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. If the Company had elected to recognize compensation cost for the options granted for the three months ended September 30, 2003 and 2002, consistent with the method prescribed by SFAS No. 123, net loss and net loss per share would have been changed to the pro forma amounts indicated below:
  Three Months ended September 302003


2002Net loss  as reported

$
(391,730
)
$
(291,651
)Net loss  pro forma

$
(393,564
)
$
(291,651
)Basic and diluted net loss per share  as reported

$
(0.04
)
$
(0.03
)Basic and diluted net loss per share  pro forma

$
(0.04
)
$
(0.03
)
  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.
  7 CRITICARE SYSTEMS, INC.
 Management's Discussion and Analysis of
 Results of Operations and Financial Condition
 Three Months Ended September 30, 2003 and 2002
 
 Results of Operations
 
 Net sales for the three months ended September 30, 2003 were up slightly from the same period in the prior year. The higher sales were driven by a 4.6% increase in the number of units shipped and a 3.1% increase in the average sales price per unit due to sales mix and increased pricing on certain units and more than offset a $368,812 decrease in accessory sales in the current period. Consistent with the Companys strategy to diversify its business from traditional vital signs monitoring, shipments of its recently released anesthesia monitoring products increased sales $198,981 and together with a $179,805 increase in defibrillator sales in the current period more than offset basically flat sales of the Companys traditional vital signs monitors.
 
 The gross profit percentage of 40.4% for the three months ended September 30, 2003 improved from 38.0% for the same period in the prior year. Lower manufacturing overhead spending and improved pricing on sales of the Companys 8100 vital signs monitors were the major contributors to the higher margins in the current period.
 
 Operating expenses for the three months ended September 30, 2003 increased $96,168 from the same period in the prior year as a $180,486 increase in sales and marketing expenses more than offset an $84,318 combined reduction in research, development and engineering expenses and administrative expenses. The higher expenses in sales and marketing were due mainly to an $88,269 increase in advertising and sales promotion spending to continue to aggressively market its new line of anesthesia monitoring products, a $61,184 increase in dealer commissions, and a $38,090 increase in trade show spending. The higher dealer commissions were driven by increased sales at domestic alternate care sites where the Company utilizes a dealer network to distribute its products. The higher trade show spending was a timing issue only, as a large domestic trade show was held in the fiscal first quarter ended September 30, 2003 in the current fiscal year but was held in the fiscal second quarter ended December 31, 2002 in the prior year.
 
 Total other income for the three months ended September 30, 2003 decreased $180,971 from the same period in the prior year. Total other income in the prior year period included the recognition of a $241,746 gain on the sale of 50,000 shares of the Companys Immtech International, Inc. stock and a $41,208 gain on the sale of the Companys building. These gains were partially offset by the elimination of $91,533 in interest expense in the current period due to the retirement of the long-term debt on the Companys facility from the August 30, 2002 sale of its building.
 
 The 3.3% increase in operating expenses and the $180,971 reduction in total other income more than offset the slightly higher sales and improved gross profit performance for the three months ended September 30, 2003, resulting in a $391,730 loss that was approximately $100,000 larger than the $291,651 loss recognized for the same period in the prior year.
 8 Liquidity and Capital Resources
  As of September 30, 2003, the Company had a cash balance of $3,866,322 that was $149,876 higher than its fiscal 2003 year-end balance at June 30, 2003 of $3,716,446. 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 increased its cash position by $149,876 for the three months ended September 30, 2003, despite generating a net loss of $391,730 during the period, as non-cash charges totaling $242,280 and a $220,759 reduction in total receivables more than offset capital spending of $96,664.
 
 The Company believes all capital and liquidity requirements for the remainder of fiscal 2004 will be satisfied by cash generated from operations and its current cash balances. The Company's $4,000,000 line of credit expires in November 2003.  The Company and the bank have agreed to extend the line of credit at a reduced amount of $2,500,000 subject to the completion of final loan documentation. At September 30, 2003 there were no borrowings outstanding under this line of credit.
 
 Forward Looking Statements
 
 A number of the matters and subject areas discussed herein 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. The discussions of such matters and subject areas are qualified by the inherent risk and uncertainties surrounding future expectations generally, and also may materially differ from the Company's actual future experience.
 
 The Company's business, operations and financial performance are subject to certain risks and uncertainties which could result in material differences in actual results from management's or the Company's current expectations. These risks and uncertainties 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.
 
 
 9 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 the bank's reference rate. The Company had no borrowings outstanding under this bank facility at September 30, 2003 and June 30, 2003. 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. 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 the Companys disclosure controls and procedures were effective in timely alerting them to material information relating to the Company required to be included in the Companys periodic filings with 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.
 
 10 PART II - OTHER INFORMATION
 
 Item 6. Exhibits and Reports on Form 8-K.
 
 (a) 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 Michael J. Sallmann, 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 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.
 
 
 (b) Reports on Form 8-K: On September 15, 2003 the Company furnished a current report on Form 8-K pursuant to Items 9 and 12 regarding the Companys press release on September 12, 2003 with respect to the Companys results for its fiscal year ended June 30, 2003.
 
 11 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: November 13, 2003 BY /s/ Michael J. Sallmann
 Michael J. Sallmann
 Vice President - Finance
 (Chief Accounting Officer and
 Duly Authorized Officer)
 
 12