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
      31, 2006





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)
            
            (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.





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 31, 2006: Voting Common Stock, 12,298,073 shares.







CRITICARE
      SYSTEMS, INC.


CONSOLIDATED
      BALANCE SHEETS


DECEMBER
      31, 2006 AND JUNE 30, 2006





(UNAUDITED)


ASSETS
            
            December
                31,
              2006
            
            June
                30,
              2006CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            3,947,297
            
            $
            3,793,781Accounts
                receivable, less allowance for doubtful accountsof
                $698,372 and $829,700, respectively
            
            
            6,161,894
            
            
            6,187,351Other
                receivables
            
            
            420,843
            
            
            591,008Short-term
                note receivable
            
            
            50,000
            
            
            50,000Inventories
            
            
            8,077,732
            
            
            9,464,037Prepaid
                expenses
            
            
            119,288
            
            
            227,606Total
                current assets
            
            
            18,777,054
            
            
            20,313,783Property,
                plant and equipment - net
            
            
            2,401,237
            
            
            2,452,314License
                rights and patents - net
            
            
            59,480
            
            
            62,981Long-term
                note receivable
            
            
            100,000
            
            
            150,000Total
                other assets
            
            
            159,480
            
            
            212,981TOTAL
                ASSETS
            
            $
            21,337,771
            
            $
            22,979,078LIABILITIES
                AND STOCKHOLDERS' EQUITYCURRENT
                LIABILITIES:Accounts
                payable
            
            $
            3,148,887
            
            $
            5,408,746Accrued
                liabilities:Compensation
                and commissions
            
            
            937,699
            
            
            914,889Product
                warranties
            
            
            388,000
            
            
            425,000Obligations
                under capital lease
            
            
            71,114
            
            
            68,205Other
            
            
            112,774
            
            
            174,667Total
                current liabilities
            
            
            4,658,474
            
            
            6,991,507LONG-TERM
                LIABILITIES:Obligations
                under capital lease
            
            
            97,526
            
            
            133,826Other
                long-term obligations
            
            
            —
            
            
            659Total
                long-term liabilities
            
            
            97,526
            
            
            134,485TOTAL
                LIABILITIES
            
            
            4,756,000
            
            
            7,125,992STOCKHOLDERS'
                EQUITY:Preferred
                stock - $.04 par value, 500,000 shares authorizedno
                shares issued or outstanding
            
            
            —
            
            
            —Common
                stock - $.04 par value, 15,000,000 shares authorized, 12,399,631
                and12,398,131
                shares issued, and 12,298,073 and 12,291,454 shares outstanding,
                respectively
            
            
            495,985
            
            
            495,925Additional
                paid-in capital
            
            
            26,223,139
            
            
            26,156,864Common
                stock held in treasury at cost (101,558 and 106,677 shares,
                respectively)
            
            
            (366,278
            )
            
            (375,813
            )Retained
                earnings (accumulated deficit)
            
            
            (9,753,186
            )
            
            (10,436,794
            )Other
                comprehensive income (loss)
            
            
            (17,889
            )
            
            12,904Total
                stockholders' equity
            
            
            16,581,771
            
            
            15,853,086TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            21,337,771
            
            $
            22,979,078





See
      notes
      to consolidated financial statements.


2


CRITICARE
      SYSTEMS, INC.


CONSOLIDATED
      STATEMENTS OF INCOME


SIX
      MONTHS ENDED DECEMBER 31, 2006 AND 2005




(UNAUDITED)


******2006**
            
            ******2005**NET
                SALES
            
            $
            16,669,334
            
            $
            16,443,126COST
                OF GOODS SOLD
            
            
            10,132,140
            
            
            9,931,378GROSS
                PROFIT
            
            
            6,537,194
            
            
            6,511,748OPERATING
                EXPENSES:Sales
                and marketing
            
            
            2,813,618
            
            
            3,292,693Research,
                development and engineering
            
            
            1,199,694
            
            
            1,299,666Administrative
            
            
            1,882,345
            
            
            1,613,900Total
            
            
            5,895,657
            
            
            6,206,259INCOME
                FROM OPERATIONS
            
            
            641,537
            
            
            305,489OTHER
                INCOME (EXPENSE):Interest
                expense
            
            
            (7,889
            )
            
            (10,565
            )Interest
                income
            
            
            62,661
            
            
            41,974Other
                (expense) income
            
            
            (12,700
            )
            
            407,417Total
            
            
            42,072
            
            
            438,826INCOME
                BEFORE INCOME TAXES
            
            
            683,609
            
            
            744,315INCOME
                TAX PROVISION
            
            
            —
            
            
            —NET
                INCOME
            
            $
            683,609
            
            $
            744,315NET
                INCOME PER COMMON SHARE:Basic
            
            $
            0.06
            
            $
            0.06Diluted
            
            $
            0.06
            
            $
            0.06WEIGHTED
                AVERAGE NUMBER OF COMMONSHARES
                OUTSTANDING:Basic
            
            
            12,295,483
            
            
            11,935,933Diluted
            
            
            12,362,820
            
            
            12,241,949





See
      notes
      to consolidated financial statements.


3


CRITICARE
      SYSTEMS, INC.


CONSOLIDATED
      STATEMENTS OF INCOME


THREE
      MONTHS ENDED DECEMBER 31, 2006 AND 2005




(UNAUDITED)


******2006**
            
            ******2005**NET
                SALES
            
            $
            8,462,740
            
            $
            8,770,813COST
                OF GOODS SOLD
            
            
            5,046,620
            
            
            5,194,365GROSS
                PROFIT
            
            
            3,416,120
            
            
            3,576,448OPERATING
                EXPENSES:Sales
                and marketing
            
            
            1,517,496
            
            
            1,805,862Research,
                development and engineering
            
            
            557,411
            
            
            673,015Administrative
            
            
            1,026,117
            
            
            849,153Total
            
            
            3,101,024
            
            
            3,328,030INCOME
                FROM OPERATIONS
            
            
            315,096
            
            
            248,418OTHER
                INCOME (EXPENSE):Interest
                expense
            
            
            (3,770
            )
            
            (5,122
            )Interest
                income
            
            
            28,936
            
            
            21,718Other
                income
            
            
            10,471
            
            
            341,923Total
            
            
            35,637
            
            
            358,519INCOME
                BEFORE INCOME TAXES
            
            
            350,733
            
            
            606,937INCOME
                TAX PROVISION
            
            
            —
            
            
            —NET
                INCOME
            
            $
            350,733
            
            $
            606,937NET
                INCOME PER COMMON SHARE:Basic
            
            $
            0.03
            
            $
            0.05Diluted
            
            $
            0.03
            
            $
            0.05WEIGHTED
                AVERAGE NUMBER OF COMMONSHARES
                OUTSTANDING:Basic
            
            
            12,297,193
            
            
            12,027,943Diluted
            
            
            12,357,641
            
            
            12,334,894





See
      notes
      to consolidated financial statements.


4


CRITICARE
      SYSTEMS, INC.


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


SIX
      MONTHS ENDED DECEMBER 31, 2006 AND 2005





(UNAUDITED)





**2006**
            
            **2005**OPERATING
                ACTIVITIES:Net
                income
            
            $
            683,609
            
            $
            744,315Adjustments
                to reconcile net income to net cash provided by (used in)operating
                activities:Depreciation
            
            
            253,126
            
            
            288,902Amortization
            
            
            3,501
            
            
            3,500Share
                based compensation
            
            
            56,545
            
            
            81,140Provision
                for doubtful accounts
            
            
            1,674
            
            
            —Provision
                for obsolete inventory
            
            
            102,000
            
            
            (132,300
            )Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (9,323
            )
            
            (587,076
            )Note
                receivable
            
            
            50,000
            
            
            —Other
                receivables
            
            
            170,165
            
            
            25,047Inventories
            
            
            1,198,237
            
            
            (1,651,915
            )Prepaid
                expenses
            
            
            108,318
            
            
            72,421Accounts
                payable
            
            
            (2,259,859
            )
            
            1,020,836Accrued
                liabilities
            
            
            (76,742
            )
            
            5,952Net
                cash provided by (used in) operating activities
            
            
            281,251
            
            
            (129,178
            )INVESTING
                ACTIVITIES:Purchases
                of property, plant and equipment, net
            
            
            (115,982
            )
            
            (383,358
            )Net
                cash used in investing activities
            
            
            (115,982
            )
            
            (383,358
            )FINANCING
                ACTIVITIES:Retirement
                of obligations under capital lease
            
            
            (33,391
            )
            
            (30,715
            )Proceeds
                from issuance of common stock
            
            
            19,325
            
            
            542,940Net
                cash (used in) provided by financing activities
            
            
            (14,066
            )
            
            512,225EFFECT
                OF EXCHANGE RATE CHANGES ON CASH
            
            
            2,313
            
            
            (3,691
            )NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            153,516
            
            
            (4,002
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            3,793,781
            
            
            3,680,965CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            3,947,297
            
            $
            3,676,963SUPPLEMENTAL
                CASH FLOW INFORMATION:Cash
                paid for:Income
                taxes paid-net
            
            $
            9,325
            
            
            —Interest
            
            $
            7,889
            
            $
            10,565





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 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
      31, 2006 and June 30, 2006, respectively:




December
                31,
              2006
            
            June
                30,
              2006Component
                parts
            
            $
            2,826,505
            
            $
            2,605,751Work
                in process
            
            
            1,591,424
            
            
            1,470,893Finished
                units
            
            
            4,121,803
            
            
            5,747,393Total
                inventories
            
            
            8,539,732
            
            
            9,824,037Less:
                reserve for obsolescence
            
            
            462,000
            
            
            360,000Net
                inventory
            
            $
            8,077,732
            
            $
            9,464,037





**3. 
      Property, Plant and Equipment**





Property,
      plant and equipment consist of the following:





December
                31,
              2006
            
            June
                30,
              2006Machinery
                and equipment
            
            $
            3,226,702
            
            $
            3,157,328Furniture
                and fixtures
            
            
            942,215
            
            
            952,193Leasehold
                improvements
            
            
            243,604
            
            
            243,604Production
                tooling
            
            
            2,335,132
            
            
            2,294,360Demonstration
                and loaner monitors
            
            
            2,101,645
            
            
            1,997,844Property,
                plant and equipment - cost
            
            
            8,849,298
            
            
            8,645,329Less:
                accumulated depreciation
            
            
            (6,448,061
            )
            
            (6,193,015
            )Property,
                plant and equipment - net
            
            $
            2,401,237
            
            $
            2,452,314





6





**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 $27,078 and $41,123 for the
      three months ended December 31, 2006 and 2005, respectively. Stock-based
      employee compensation expense included in reported net income totaled $56,545
      and $81,140 for the six months ended December 31, 2006 and 2005,
      respectively.





The
      Company did not grant any options for the three and six months ended December
      31, 2006. 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 4.29%, 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 31, 2006, 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 31, 2006, 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% (8.00% as of December 31, 2006). As of
      December 31, 2006 and June 30, 2006, 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, 2006.





**7. 
      Net Income Per Common Share**





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


7


CRITICARE
      SYSTEMS, INC.


Management's
      Discussion and Analysis of


Results
      of Operations and Financial Condition


Six
      Months Ended December 31, 2006 and 2005





**Results
      of Operations**





Net
      sales
      of $16,669,334 for the six months ended December 31, 2006 increased 1.4% from
      $16,443,126 for the same period in fiscal 2006. A 5.2% increase in the number
      of
      units shipped and a 4.9% increase in the accessory sales were partially offset
      by a 5.0% reduction in average sales price, due to variations in the product
      mix, in the current period. The increased sales were the result of a $715,255
      increase in domestic alternate care sales and a $269,782 increase in domestic
      acute care sales, which were partially offset by a $622,246 decrease in
      international sales.





The
      gross
      profit percentage of 39.2% for the six months ended December 31, 2006 decreased
      slightly from 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 months ended December 31, 2006 decreased $310,602 from
      the
      same period in fiscal 2006, despite the increase of $268,445 in administrative
      expenses due to the $362,693 of expenses incurred during the year in connection
      with the two consent solicitation actions initiated by BlueLine Partners. The
      decrease of $479,075 in sales and marketing expenses was due mainly to a
      $209,032 decrease in India operation expenses, a $107,537 decrease in operating
      supplies expenses and a $30,364 decrease in commissions earned for the six
      months ended 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 months ended December 31, 2006 decreased $396,754
      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 $94,200 in royalty income
      received during the first six months of fiscal 2007.





Income
      from operations of $641,537 for the six months ended December 31, 2006 increased
      $336,048 as compared to income from operations of $305,489 for the same period
      in fiscal 2006, which was the result of a $25,446 increase in gross profit
      combined with the decreased operating expenses of $310,602. Income from
      operations was offset by the decrease in other income of $396,754, resulting
      in
      net income of $683,609 for the six months ended December 31, 2006 as compared
      to
      net income of $744,315 for the same period in fiscal 2006. ****


8


CRITICARE
      SYSTEMS, INC.


Management's
      Discussion and Analysis of


Results
      of Operations and Financial Condition


Three
      Months Ended December 31, 2006 and 2005





**Results
      of Operations**





Net
      sales
      of $8,462,740 for the three months ended December 31, 2006 decreased 3.5% from
      $8,770,813 for the same period in fiscal 2006. A 2.6% increase in the number
      of
      units shipped and a 1.3% increase in the accessory sales were offset by a 6.3%
      reduction in average sales price, due to variations in the product mix, in
      the
      current period. The small decrease in sales were the result of a $116,564
      increase in domestic alternate care sales, which was offset by a $291,179
      decrease in OEM sales and $107,324 in international sales.





The
      gross
      profit percentage of 40.4% for the three months ended December 31, 2006
      decreased slightly from 40.8% 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 three months ended December 31, 2006 decreased $227,006 from
      the same period in fiscal 2006, despite the increase of $176,964 in
      administrative expenses due to the $271,153 of expenses incurred during the
      quarter in connection with the two consent solicitation actions initiated by
      BlueLine Partners. The decrease of $288,366 in sales and marketing expenses
      was
      due mainly to a $134,978 decrease in India operation expenses, a $65,163
      decrease in commissions earned and a $25,848 decrease in operating supplies
      expenses for the three months ended 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 three months ended December 31, 2006 decreased $322,882
      from the same period in fiscal 2006. This decrease was driven by the $300,000
      received pursuant to a patent license agreement in fiscal 2006 with no
      corresponding income in fiscal 2007.





Income
      from operations of $315,096 for the three months ended December 31, 2006
      increased $66,678 as compared to income from operations of $248,418 for the
      same
      period in fiscal 2006, which was the result of the decreased operating expenses
      of $227,006, partially offset by a $160,328 decrease in gross profit. Income
      from operations was offset by the decrease in other income of $322,882,
      resulting in net income of $350,733 for the three months ended December 31,
      2006
      as compared to net income of $606,937 for the same period in fiscal
      2006. ****


9


CRITICARE
      SYSTEMS, INC.


Management's
      Discussion and Analysis of


Results
      of Operations and Financial Condition





**Liquidity
      and Capital Resources**





As
      of
      December 31, 2006, the Company had a cash balance of $3,947,297, which was
      $1,271,847 higher than its balance at September 30, 2006 of $2,675,450 and
      $153,516 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 $153,516 for the six months ended December
      31, 2006 mainly due to $314,357 of cash provided by operating activities, which
      was partially offset by $115,982 of capital expenditures. Cash provided by
      operations was $314,357 for the six months ended December 31, 2006 as a decrease
      of $2,259,859 in accounts payable was offset by a $1,198,237 decrease in
      inventory, depreciation of $253,126 and net income of $683,609.





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
      31, 2006 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
      31, 2006. This line expires in June 2007.





**Recently
      Issued Accounting Pronouncements**





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





10


**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
      31,
      2006 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 31, 2006. The Company does not use any hedges or other derivative
      financial instruments to manage or reduce exchange rate
      risk.


11


**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, 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
            
            WithheldStephen
                K. Tannenbaum
            8,626,613
            
            2,545,614Emil
                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-Votes9,521,722
              
              121,025
              
              1,529,480
              
              0





13


Item
      6. Exhibits.





3.1
            Restated
                Certificate of Incorporation of the Company (incorporated by reference
                to
                the Registration Statement filed on Form S-1, Registration No.
                33-13050).





3.2
            By-Laws
                of the Company (incorporated by reference to the Registration Statement
                filed on Form S-1, Registration No.
                33-13050).





4.1
            Specimen
                Common Stock certificate (incorporated by reference to the Registration
                Statement filed on Form S-1, Registration No.
                33-13050).




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





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





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





32*
            Certification
                of Principal Executive Officer and Principal Financial Officer pursuant
                to
                18 U.S.C. Section 1350.





__________________


*
      This
      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.


14


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,
      2007 BY /s/
      Joel D.
      Knudson


Joel D. Knudson


Vice President - Finance


(Chief Accounting Officer and


Duly Authorized Officer)






15