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 Sepember
        30, 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/AFormer
                  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 September 30, 2006: Voting Common Stock, 12,295,306 shares.


CRITICARE
      SYSTEMS, INC.


CONSOLIDATED
        BALANCE SHEETS
 SEPTEMBER
        30, 2006 AND JUNE 30, 2006
 
 (UNAUDITED)
 ASSETS
              
              September
                  30,
                2006
              
              June
                  30,
                2006CURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              2,675,450
              
              $
              3,793,781Accounts
                  receivable, less allowance for doubtful accountsof
                  $803,024 and $829,700, respectively
              
              
              8,441,194
              
              
              6,187,351Other
                  receivables
              
              
              425,412
              
              
              591,008Short-term
                  note receivable
              
              
              50,000
              
              
              50,000Inventories
              
              
              9,311,435
              
              
              9,464,037Prepaid
                  expenses
              
              
              248,472
              
              
              227,606Total
                  current assets
              
              
              21,151,963
              
              
              20,313,783Property,
                  plant and equipment - net
              
              
              2,372,824
              
              
              2,452,314License
                  rights and patents - net
              
              
              61,231
              
              
              62,981Long-term
                  note receivable
              
              
              112,500
              
              
              150,000Total
                  other assets
              
              
              173,731
              
              
              212,981TOTAL
                  ASSETS
              
              $
              23,698,518
              
              $
              22,979,078LIABILITIES
                  AND STOCKHOLDERS' EQUITYCURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              5,900,109
              
              $
              5,408,746Accrued
                  liabilities:Compensation
                  and commissions
              
              
              857,116
              
              
              914,889Product
                  warranties
              
              
              388,000
              
              
              425,000Obligations
                  under capital lease
              
              
              69,644
              
              
              68,205Other
              
              
              147,413
              
              
              174,667Total
                  current liabilities
              
              
              7,362,282
              
              
              6,991,507LONG-TERM
                  LIABILITIES:Obligations
                  under capital lease
              
              
              115,866
              
              
              133,826Other
                  long-term obligations
              
              
              (658
              )
              
              659Total
                  long-term liabilities
              
              
              115,208
              
              
              134,485TOTAL
                  LIABILITIES
              
              
              7,477,490
              
              
              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, 12,399,256
                  and12,398,131
                  shares issued, and 12,295,306 and 12,291,454 shares outstanding,
                  respectively
              
              
              495,970
              
              
              495,925Additional
                  paid-in capital
              
              
              26,192,414
              
              
              26,156,864Common
                  stock held in treasury at cost (103,950 and 106,677 shares,
                  respectively)
              
              
              (370,733
              )
              
              (375,813
              )Retained
                  earnings (accumulated deficit)
              
              
              (10,103,918
              )
              
              (10,436,794
              )Cumulative
                  translation adjustment
              
              
              7,295
              
              
              12,904Total
                  stockholders' equity
              
              
              16,221,028
              
              
              15,853,086TOTAL
                  LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              23,698,518
              
              $
              22,979,078
 
 See
        notes
        to consolidated financial statements.
 2
 CRITICARE
        SYSTEMS, INC.


CONSOLIDATED
        STATEMENTS OF OPERATIONS
 THREE
        MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
  (UNAUDITED)
 ******2006**
              
              ******2005**NET
                  SALES
              
              $
              8,206,593
              
              $
              7,672,313COST
                  OF GOODS SOLD
              
              
              5,085,520
              
              
              4,737,013GROSS
                  PROFIT
              
              
              3,121,073
              
              
              2,935,300OPERATING
                  EXPENSES:Sales
                  and marketing
              
              
              1,296,119
              
              
              1,486,832Research,
                  development and engineering
              
              
              642,282
              
              
              626,650Administrative
              
              
              856,228
              
              
              764,747Total
              
              
              2,794,629
              
              
              2,878,229INCOME
                  FROM OPERATIONS
              
              
              326,444
              
              
              57,071OTHER
                  INCOME (EXPENSE):Interest
                  expense
              
              
              (4,119
              )
              
              (5,443
              )Interest
                  income
              
              
              33,723
              
              
              20,256Other
                  income (expense)
              
              
              (23,172
              )
              
              65,494Total
              
              
              6,432
              
              
              80,307INCOME
                  BEFORE INCOME TAXES
              
              
              332,876
              
              
              137,378INCOME
                  TAX PROVISION
              
              
              —
              
              
              —NET
                  INCOME
              
              $
              332,876
              
              $
              137,378NET
                  INCOME PER COMMON SHARE:Basic
              
              $
              0.03
              
              $
              0.01Diluted
              
              $
              0.03
              
              $
              0.01WEIGHTED
                  AVERAGE NUMBER OF COMMONSHARES
                  OUTSTANDING:Basic
              
              
              12,293,773
              
              
              11,843,923Diluted
              
              
              12,368,293
              
              
              12,192,149
 
 See
        notes
        to consolidated financial statements.
  3
 
 CRITICARE
        SYSTEMS, INC.
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 THREE
        MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 
 (UNAUDITED)
 
 **2006**
              
              **2005**OPERATING
                  ACTIVITIES:Net
                  income
              
              $
              332,876
              
              $
              137,378Adjustments
                  to reconcile net income to net cash used inoperating
                  activities:Depreciation
              
              
              131,658
              
              
              146,155Amortization
              
              
              1,750
              
              
              1,751Share
                  based compensation
              
              
              29,467
              
              
              40,017Provision
                  for doubtful accounts
              
              
              1,674
              
              
              —Provision
                  for obsolete inventory
              
              
              42,000
              
              
              (125,440
              )Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              (2,255,517
              )
              
              (863,419
              )Note
                  receivable
              
              
              37,500
              
              
              —Other
                  receivables
              
              
              165,596
              
              
              (8,925
              )Inventories
              
              
              121,578
              
              
              (949,483
              )Prepaid
                  expenses
              
              
              (20,866
              )
              
              (9,084
              )Accounts
                  payable
              
              
              491,363
              
              
              1,387,064Accrued
                  liabilities
              
              
              (121,905
              )
              
              (92,098
              )Net
                  cash used in operating activities
              
              
              (1,042,826
              )
              
              (336,084
              )INVESTING
                  ACTIVITIES:Purchases
                  of property, plant and equipment, net
              
              
              (63,144
              )
              
              (163,132
              )Net
                  cash used in investing activities
              
              
              (63,144
              )
              
              (163,132
              )FINANCING
                  ACTIVITIES:Retirement
                  of obligations under capital lease
              
              
              (17,960
              )
              
              (15,197
              )Proceeds
                  from issuance of common stock
              
              
              11,208
              
              
              423,280Net
                  cash (used in) provided by financing activities
              
              
              (6,752
              )
              
              408,083EFFECT
                  OF EXCHANGE RATE CHANGES ON CASH
              
              
              (5,609
              )
              
              —NET
                  DECREASE IN CASH AND CASH EQUIVALENTS
              
              
              (1,118,331
              )
              
              (91,133
              )CASH
                  AND CASH EQUIVALENTS, BEGINNING OF PERIOD
              
              
              3,793,781
              
              
              3,680,965CASH
                  AND CASH EQUIVALENTS, END OF PERIOD
              
              $
              2,675,450
              
              $
              3,589,832SUPPLEMENTAL
                  CASH FLOW INFORMATION:Cash
                  paid for:Income
                  taxes paid-net
              
              $
              9,325
              
              $
              2,825Interest
              
              $
              4,119
              
              $
              5,443
 
 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. The three 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
          September 30, 2006 and June 30, 2006, respectively:
  September
                    30, 2006
                
                June
                    30, 2006Component
                    parts
                
                $
                4,183,936
                
                $
                2,605,751Work
                    in process
                
                
                1,949,271
                
                
                1,470,893Finished
                    units
                
                
                3,580,228
                
                
                5,747,393Total
                    inventories
                
                
                9,713,435
                
                
                9,824,037Less:
                    reserve for obsolescence
                
                
                402,000
                
                
                360,000Net
                    inventory
                
                $
                9,311,435
                
                $
                9,464,037
 
 **3.
           Property, Plant and Equipment**
 
 Property,
          plant and equipment consist of the following:
 
 September
                    30, 2006
                
                June
                    30, 2006Machinery
                    and equipment
                
                $
                3,191,090
                
                $
                3,157,328Furniture
                    and fixtures
                
                
                954,051
                
                
                894,451Leasehold
                    improvements
                
                
                243,604
                
                
                243,604Production
                    tooling
                
                
                2,321,885
                
                
                2,294,360Demonstration
                    and loaner monitors
                
                
                2,005,434
                
                
                1,997,844Property,
                    plant and equipment - cost
                
                
                8,716,064
                
                
                8,645,329Less:
                    accumulated depreciation
                
                
                (6,343,240
                )
                
                (6,193,015
                )Property,
                    plant and equipment - net
                
                $
                2,372,824
                
                $
                2,452,314
 
  5
  **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 $29,467 and $40,017 for
          the
          three months ended September 30, 2006 and 2005, respectively.
 
 The
          Company did not grant any options for the three months ended September
          30, 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 Critcare’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 operations
          due to
          federal and state net operating loss carry forwards that will be utilized
          to
          offset taxable income earned. At September 30, 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
          September 30, 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 September 30, 2006). As
          of
          September 30, 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 September 30, 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 76,250 shares for the three months ended September 30, 2006 and
          by
          27,000 shares for the three months ended September 30, 2005 without this
          anti-dilutive impact.
  6
  CRITICARE
          SYSTEMS, INC.
 Management's
          Discussion and Analysis of
 Results
          of Operations and Financial Condition
 Three
          Months Ended September 30, 2006 and 2005
 
 **Results
          of Operations**
 
 Net
          sales
          of $8,206,595 for the three months ended September 30, 2006 increased 7.0%
          from
          $7,672,313 for the same period in fiscal 2006. A 35.4% increase in the
          accessory
          sales and an 8.2% increase in the number of units shipped were partially
          offset
          by a 3.4% reduction in average sales price, due to variations in the product
          mix, in the current period. The increased sales were the result of a $859,569
          increase in domestic alternate care sales and $318,363 in domestic acute
          care
          sales, which was partially offset by a $514,922 decrease in international
          sales.
 
 The
          gross
          profit percentage of 38.0% for the three months ended September 30, 2006
          decreased slightly from 38.2% 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 September 30, 2006 decreased $83,600
          from
          the same period in fiscal 2006. The decrease of $190,713 in sales and marketing
          expenses was due mainly to a $104,619 decrease in the advertising, trade
          shows
          and sales promotion expenses and a $74,054 decrease in India operation
          expenses
          for the three months ended September 30, 2006. Administrative expenses
          increased
          by $91,481 due to the $91,540 of expenses incurred during the quarter in
          connection with the BlueLine consent solicitation. There will be additional
          expenses incurred in connection with the BlueLine consent solicitation
          which
          will increase the administrative expenses in the second quarter of fiscal
          2007.
 
 Total
          other income for the three months ended September 30, 2006 decreased $73,875
          from the same period in fiscal 2006. This decrease was mainly due to decreased
          royalty income received during the quarter.
 
 The
          net
          income of $332,876 for the three months ended September 30, 2006 as compared
          to
          net income of $137,378 for the same period in fiscal 2006, was the result
          of a
          $185,773 increase in gross profit combined with the decreased operating
          expenses
          of $83,600, partially offset by the decrease in other income of
          $73,875. ****
  7
  CRITICARE
          SYSTEMS, INC.
 Management's
          Discussion and Analysis of
 Results
          of Operations and Financial Condition
 
 **Liquidity
          and Capital Resources**
 
 As
          of
          September 30, 2006, the Company had a cash balance of $2,675,450, which
          was
          $1,118,331 lower 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 decreased by $1,118,331 for the three months ended
          September 30, 2006 mainly due to $1,042,826 of cash used in operations
          activities and $63,144 of capital expenditures. Cash used in operations
          was
          $1,042,826 for the three months ended September 30, 2006 as an increase
          of
          $2,255,517 in receivables (mainly due to increased sales near quarter end)
          was
          partially offset by a $491,363 increase in accounts payable, a $121,578
          decrease
          in inventory, depreciation of $131,658 and net income of $332,876.
 
 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
          September 30, 2006 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
          September 30, 2006. This line expires in June 2007.
 
 **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.
 
 8
  **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 September
          30,
          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 September 30, 2006. The Company does not use any hedges or other
          derivative financial instruments to manage or reduce exchange rate
          risk.
 
 **Controls
          and Procedures**
 
 As
          of the
          end of the period covered by this report, the Company carried out an evaluation,
          under the supervision and with the participation of the Company’s management,
          including the Company’s Chief Executive Officer and the Company’s Vice President
          - Finance, of the Company’s disclosure controls and procedures (as defined in
          Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
          as
          amended). Based on this evaluation, the Company’s Chief Executive Officer and
          Vice President - Finance concluded that, as of the end of such period,
          the
          Company’s disclosure controls and procedures were effective in 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.
   9
  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
          5.  Other Information.
 
 On
          October 19, 2006, the Company issued a press release announcing its preliminary
          unaudited revenue for the first quarter of fiscal 2007, but has not previously
          furnished a Form 8-K with respect to such press release pursuant to Item
          2.02 of
          Form 8-K. A copy of the press release is attached as Exhibit 99.1 to this
          report. The attached Exhibit 99.1 shall not be deemed "filed" for purposes
          of
          Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed
          incorporated by reference in any filing under the Securities Act of 1933
          or the
          Securities Exchange Act of 1934, except as shall be expressly set forth
          by
          specific reference in such filing.
 
 Effective
          November 10, 2006, the Company entered into an amended and restated
          employment agreement with Deborah A. Zane, Vice President-Marketing and
          Business Development. The following discussion of the employment agreement
          is
          qualified in its entirety by reference to the employment agreement, which
          is
          attached as Exhibit 10.1 to this report.
 
 The
          agreement provides that Ms. Zane will continue to receive her current
          compensation, with an annual review of the compensation within 30 days
          prior to the end of each fiscal year. Ms. Zane is entitled to receive
          health and life insurance coverage and disability insurance. The Company
          may
          terminate Ms. Zane's employment at any time and Ms. Zane may resign at
          any time. If the Company terminates her employment without cause at any
          time
          either prior to or after a change in control of the Company, Ms. Zane is
          entitled to receive payment of her base salary, commissions and her other
          employee benefits for 15 months from the date of termination. If Ms. Zane's
          employment is terminated for cause, or if she resigns, before a change
          in
          control of the Company, she will not be entitled to receive any base salary
          or
          other benefits for periods after the termination date.
 
 Ms. Zane
          has agreed not to compete with the Company during employment and not to
          solicit
          customers or employees for a period of 12 months after any voluntary termination
          of employment or any termination by the Company with or without cause.
          Ms. Zane has agreed to maintain the confidentiality of the Company's
          financial statements and other financial information.
 
  10
  Ms.
          Zane's employment agreement provides that if the Company experiences a
          change in
          control, and Ms. Zane voluntarily terminates her employment for any reason
          after
          the change in control, Ms. Zane is entitled to receive payment of her base
          salary, commissions and her other employee benefits for 15 months after the
          date of termination or until Ms. Zane secures alternative employment, whichever
          period is shorter. Ms. Zane's new employment agreement includes the new,
          more
          complete definition of a "change in control" approved for the Company's
          employment agreements with its executive officers effective September 28,
          2006. This definition of a "change in control" includes the following changes:
          (i) a change in control now includes a change in the composition of a majority
          of the board of directors of the Company (except with the approval of at
          least a
          majority of the incumbent directors); and (ii) a change in control will
          occur
          upon a change in the ownership of 50% or more (in lieu of the prior threshold
          of
          51% or more) of the outstanding stock or voting power of the
          Company.
  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).
 
 10.1
                Employment
                    Agreement, dated as of November 10, 2006, between the Company and
                    Deborah A. Zane.
 
 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.
 
 99.1*
                Press
                    Release of Criticare Systems, Inc., issued October 19,
                    2006.
 
 __________________
 *
          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.
 
  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,
        2006 BY /s/
        Joel D.
        Knudson
 Joel D. Knudson
 Vice President - Finance
 (Chief
        Accounting Officer and
 Duly Authorized Officer)
   12