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 March
      31, 2007





OR





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





For the transition period from ____________ to ____________





Commission
      file number 1-31943





**CRITICARE
                SYSTEMS, INC.**(Exact
                name of registrant as specified in its
                charter)




Delaware
              
              39-1501563(State
                  or other jurisdiction of incorporation or organization)
              
              (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 March 31, 2007: Voting Common Stock, 12,301,071 shares.





CRITICARE
      SYSTEMS, INC.


CONSOLIDATED
        BALANCE SHEETS
 MARCH
        31,
        2007 AND JUNE 30, 2006
 
 (UNAUDITED)
 March
                  31,
                2007
              
              June
                  30,
                2006ASSETSCURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              4,038,871
              
              $
              3,793,781Accounts
                  receivable, less allowance for doubtful accountsof
                  $586,388 and $829,700, respectively
              
              
              5,642,413
              
              
              6,187,351Other
                  receivables
              
              
              349,740
              
              
              591,008Short-term
                  note receivable
              
              
              50,000
              
              
              50,000Inventories
              
              
              8,326,103
              
              
              9,464,037Prepaid
                  expenses
              
              
              199,524
              
              
              227,606Total
                  current assets
              
              
              18,606,651
              
              
              20,313,783Property,
                  plant and equipment - net
              
              
              2,287,258
              
              
              2,452,314License
                  rights and patents - net
              
              
              57,730
              
              
              62,981Long-term
                  note receivable
              
              
              87,500
              
              
              150,000Total
                  other assets
              
              
              145,230
              
              
              212,981TOTAL
                  ASSETS
              
              $
              21,039,139
              
              $
              22,979,078LIABILITIES
                  AND STOCKHOLDERS' EQUITYCURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              3,002,653
              
              $
              5,408,746Accrued
                  liabilities:Compensation
                  and commissions
              
              
              740,128
              
              
              914,889Product
                  warranties
              
              
              370,000
              
              
              425,000Obligations
                  under capital lease
              
              
              72,616
              
              
              68,205Other
              
              
              130,133
              
              
              174,667Total
                  current liabilities
              
              
              4,315,530
              
              
              6,991,507LONG-TERM
                  LIABILITIES:Obligations
                  under capital lease
              
              
              78,799
              
              
              133,826Other
                  long-term obligations
              
              
              —
              
              
              659Total
                  long-term liabilities
              
              
              78,799
              
              
              134,485TOTAL
                  LIABILITIES
              
              
              4,394,329
              
              
              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 12,301,071 and 12,291,454 shares outstanding,
                  respectively
              
              
              495,985
              
              
              495,925Additional
                  paid-in capital
              
              
              26,261,311
              
              
              26,156,864Common
                  stock held in treasury at cost (98,560 and 106,677 shares,
                  respectively)
              
              
              (360,693
              )
              
              (375,813
              )Retained
                  earnings (accumulated deficit)
              
              
              (9,723,059
              )
              
              (10,436,794
              )Other
                  comprehensive income (loss)
              
              
              (28,734
              )
              
              12,904Total
                  stockholders' equity
              
              
              16,644,810
              
              
              15,853,086TOTAL
                  LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              21,039,139
              
              $
              22,979,078
 
 See
        notes
        to consolidated financial statements.
 2
  CRITICARE
        SYSTEMS, INC.
 CONSOLIDATED
        STATEMENTS OF INCOME
 NINE
        MONTHS ENDED MARCH 31, 2007 AND 2006
  (UNAUDITED)
 ******2007**
              
              ******2006**NET
                  SALES
              
              $
              23,790,883
              
              $
              24,254,956COST
                  OF GOODS SOLD
              
              
              14,376,860
              
              
              14,653,789GROSS
                  PROFIT
              
              
              9,414,023
              
              
              9,601,167OPERATING
                  EXPENSES:Sales
                  and marketing
              
              
              4,284,603
              
              
              5,005,091Research,
                  development and engineering
              
              
              1,813,672
              
              
              1,913,355Administrative
              
              
              2,699,106
              
              
              2,450,762Total
              
              
              8,797,381
              
              
              9,369,208INCOME
                  FROM OPERATIONS
              
              
              616,642
              
              
              231,959OTHER
                  INCOME (EXPENSE):Interest
                  expense
              
              
              (11,303
              )
              
              (15,360
              )Interest
                  income
              
              
              94,983
              
              
              66,999Other
                  (expense) income
              
              
              13,414
              
              
              452,740Total
              
              
              97,094
              
              
              504,379INCOME
                  BEFORE INCOME TAXES
              
              
              713,736
              
              
              736,338INCOME
                  TAX PROVISION
              
              
              —
              
              
              —NET
                  INCOME
              
              $
              713,736
              
              $
              736,338NET
                  INCOME PER COMMON SHARE:Basic
              
              $
              0.06
              
              $
              0.06Diluted
              
              $
              0.06
              
              $
              0.06WEIGHTED
                  AVERAGE NUMBER OF COMMONSHARES
                  OUTSTANDING:Basic
              
              
              12,297,011
              
              
              11,997,319Diluted
              
              
              12,361,484
              
              
              12,215,149
 
 See
        notes
        to consolidated financial statements.
  3
  CRITICARE
        SYSTEMS, INC.
 CONSOLIDATED
        STATEMENTS OF INCOME
 THREE
        MONTHS ENDED MARCH 31, 2007 AND 2006
  (UNAUDITED)
 ******2007**
              
              ******2006**NET
                  SALES
              
              $
              7,121,548
              
              $
              7,811,830COST
                  OF GOODS SOLD
              
              
              4,244,719
              
              
              4,722,411GROSS
                  PROFIT
              
              
              2,876,829
              
              
              3,089,419OPERATING
                  EXPENSES:Sales
                  and marketing
              
              
              1,470,988
              
              
              1,712,397Research,
                  development and engineering
              
              
              613,978
              
              
              613,688Administrative
              
              
              816,760
              
              
              836,863Total
              
              
              2,901,726
              
              
              3,162,948LOSS
                  FROM OPERATIONS
              
              
              (24,897
              )
              
              (73,529
              )OTHER
                  INCOME (EXPENSE):Interest
                  expense
              
              
              (3,414
              )
              
              (4,794
              )Interest
                  income
              
              
              32,323
              
              
              25,024Other
                  income
              
              
              26,115
              
              
              45,323Total
              
              
              55,024
              
              
              65,553INCOME
                  (LOSS) BEFORE INCOME TAXES
              
              
              30,127
              
              
              (7,976
              )INCOME
                  TAX PROVISION
              
              
              —
              
              
              —NET
                  INCOME (LOSS)
              
              $
              30,127
              
              $
              (7,976
              )NET
                  INCOME (LOSS) PER COMMON SHARE:Basic
              
              $
              0.00
              
              $
              (0.00
              )Diluted
              
              $
              0.00
              
              $
              (0.00
              )WEIGHTED
                  AVERAGE NUMBER OF COMMONSHARES
                  OUTSTANDING:Basic
              
              
              12,300,136
              
              
              12,122,819Diluted
              
              
              12,358,827
              
              
              12,122,819
 
 See
        notes
        to consolidated financial statements.
 
  4
   CRITICARE
        SYSTEMS, INC.
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 NINE
        MONTHS ENDED MARCH 31, 2007 AND 2006
 
 (UNAUDITED)
 
 **2007**
              
              **2006**OPERATING
                  ACTIVITIES:Net
                  income
              
              $
              713,736
              
              $
              736,338Adjustments
                  to reconcile net income to net cash provided by (used in)operating
                  activities:Depreciation
              
              
              354,817
              
              
              488,231Amortization
              
              
              5,251
              
              
              5,251Share
                  based compensation
              
              
              92,421
              
              
              129,194Provision
                  for doubtful accounts
              
              
              7,454
              
              
              23,510Provision
                  for obsolete inventory
              
              
              120,144
              
              
              (93,300
              )Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              494,893
              
              
              (358,703
              )Note
                  receivable
              
              
              62,500
              
              
              —Other
                  receivables
              
              
              241,268
              
              
              40,791Inventories
              
              
              1,113,193
              
              
              (2,340,217
              )Prepaid
                  expenses
              
              
              28,082
              
              
              37,966Accounts
                  payable
              
              
              (2,406,093
              )
              
              406,991Accrued
                  liabilities
              
              
              (274,954
              )
              
              (110,697
              )Net
                  cash provided by (used in) operating activities
              
              
              552,712
              
              
              (1,034,645
              )INVESTING
                  ACTIVITIES:Purchases
                  of property, plant and equipment, net
              
              
              (285,165
              )
              
              (535,236
              )Net
                  cash used in investing activities
              
              
              (285,165
              )
              
              (535,236
              )FINANCING
                  ACTIVITIES:Retirement
                  of obligations under capital lease
              
              
              (50,616
              )
              
              (46,559
              )Proceeds
                  from issuance of common stock
              
              
              27,206
              
              
              1,180,956Net
                  cash (used in) provided by financing activities
              
              
              (23,410
              )
              
              1,134,397EFFECT
                  OF EXCHANGE RATE CHANGES ON CASH
              
              
              953
              
              
              1,079NET
                  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              245,090
              
              
              (434,405
              )CASH
                  AND CASH EQUIVALENTS, BEGINNING OF PERIOD
              
              
              3,793,781
              
              
              3,680,965CASH
                  AND CASH EQUIVALENTS, END OF PERIOD
              
              $
              4,038,871
              
              $
              3,246,560SUPPLEMENTAL
                  CASH FLOW INFORMATION:Cash
                  paid for:Income
                  taxes paid-net
              
              $
              10,547
              
              $
              4,385Interest
              
              $
              11,303
              
              $
              15,360
 
 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 nine month results represent past
        performance, and are not necessarily indicative of results for an entire
        year.
        Certain amounts from the fiscal 2006 financial statements have been reclassified
        to conform to the 2007 presentation.
 
 **2.
        Inventory Valuation**
 
 Inventory
        is stated at the lower of cost or market, with cost determined on the first-in,
        first-out method. Components of inventory consisted of the following at March
        31, 2007 and June 30, 2006, respectively:
  March
                  31, 2007
              
              June
                  30, 2006Component
                  parts
              
              $
              2,795,980
              
              $
              2,605,751Work
                  in process
              
              
              1,282,173
              
              
              1,470,893Finished
                  units
              
              
              4,575,950
              
              
              5,747,393Total
                  inventories
              
              
              8,654,103
              
              
              9,824,037Less:
                  reserve for obsolescence
              
              
              328,000
              
              
              360,000Net
                  inventory
              
              $
              8,326,103
              
              $
              9,464,037
 
 **3.
        Property, Plant and Equipment**
 
 Property,
        plant and equipment consist of the following:
 
 March
                  31, 2007
              
              June
                  30, 2006Machinery
                  and equipment
              
              $
              3,342,815
              
              $
              3,157,328Furniture
                  and fixtures
              
              
              942,872
              
              
              952,193Leasehold
                  improvements
              
              
              269,423
              
              
              243,604Production
                  tooling
              
              
              2,362,382
              
              
              2,294,360Demonstration
                  and loaner monitors
              
              
              2,111,351
              
              
              1,997,844Property,
                  plant and equipment - cost
              
              
              9,028,843
              
              
              8,645,329Less:
                  accumulated depreciation
              
              
              (6,741,585
              )
              
              (6,193,015
              )Property,
                  plant and equipment - net
              
              $
              2,287,258
              
              $
              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 $35,876 and $48,054 for the
        three months ended March 31, 2007 and 2006, respectively. Stock-based employee
        compensation expense included in reported net income totaled $92,421 and
        $129,194 for the nine months ended March 31, 2007 and 2006,
        respectively.
 
 For
        the
        three and nine months ended March 31, 2007, the Company granted options totaling
        39,000 shares at a weighted average exercise price of $3.47, which have a
        fair
        value of $81,166. The fair value of stock options 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 4.79%, 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 March 31, 2007, the Company had federal
        net
        operating loss carry forwards of approximately $17,706,000 (which expire
        from
        2008 through 2026) and state net operating loss carry forwards of approximately
        $11,930,000 (which expire from 2007 through 2021) available to offset future
        taxable income. The Company has recorded a valuation allowance to offset
        the
        related deferred income tax assets arising from these net operating loss
        carry
        forwards due to the uncertainty of realizing the benefits of these assets
        in
        future years.
 
 **6.
        Line of Credit Facility**
 
 At
        March
        31, 2007, the Company had a $2,000,000 demand line of credit facility with
        a
        commercial bank to meet its short-term borrowing needs. Borrowings against
        the
        line were payable on demand with interest payable monthly at the bank's
        reference rate, less 0.25% (8.00% as of March 31, 2007). As of March 31,
        2007
        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 March
        31,
        2007.
 
 **7.
        Net Income (Loss) Per Common Share**
 
 Basic
        net
        income (loss) per share is computed using the weighted average number of
        common
        shares outstanding during the periods. Diluted net income (loss) per share
        is
        computed using the weighted average number of common and dilutive common
        equivalent shares outstanding during the periods. Additionally, antidilution
        occurs when the exercise price of the option is higher than the average market
        price of the common stock. The diluted weighted average common shares
        outstanding would be higher by 112,750 shares for the three and nine months
        ended March 31, 2007 and by 28,000 shares for the three and nine months ended
        March 31, 2006 without this anti-dilutive impact.
  7
  CRITICARE
        SYSTEMS, INC.
 Management's
        Discussion and Analysis of
 Results
        of Operations and Financial Condition
 Nine
        Months Ended March 31, 2007 and 2006
 
 **Results
        of Operations**
 
 Net
        sales
        of $23,790,883 for the nine months ended March 31, 2007 decreased 1.9% from
        $24,254,956 for the same period in fiscal 2006. A 1.2% increase in the number
        of
        units shipped was offset by a 1.2% reduction in average sales price, due
        to
        variations in the product mix, and a 0.7% decrease in the accessory sales
        in the
        current period. The decreased net sales were the result of a $1,583,888 decrease
        in international sales, which was partially offset by a $1,017,315 increase
        in
        domestic alternate care sales.
 
 The
        gross
        profit percentage remained at 39.6% for the nine months ended March 31, 2007
        and
        March 31, 2006.
 
 Operating
        expenses for the nine months ended March 31, 2007 decreased $571,827 from
        the
        same period in fiscal 2006 due mainly to a decrease of $720,488 in sales
        and
        marketing expenses, which was partially offset by an increase of $248,344
        in
        administrative expenses. The increase of $248,344 in administrative expenses
        was
        due to the $442,116 of expenses incurred during the period in connection
        with
        the two consent solicitation actions initiated by BlueLine Partners and the
        subsequent settlement of those actions in the third quarter. The decrease
        of
        $720,488 in sales and marketing expenses was due mainly to a $328,989 decrease
        in India operation expenses, a $134,095 decrease in advertising and trade
        show
        expenses and a $59,148 decrease in commissions earned for the nine months
        ended
        March 31, 2007.
 
 Total
        other income for the nine months ended March 31, 2007 decreased $407,285
        from
        the same period in fiscal 2006. This decrease was mainly due to the $300,000
        received pursuant to a patent license agreement in fiscal 2006 with no
        corresponding income in fiscal 2007 and a decrease of $114,050 in royalty
        income
        received during the first nine months of fiscal 2007.
 
 Income
        from operations of $616,642 for the nine months ended March 31, 2007 increased
        $384,683 as compared to income from operations of $231,959 for the same period
        in fiscal 2006, which was the result of a $571,827 decrease in operating
        expenses, partially offset by a decrease in gross profit of $187,144. The
        increased income from operations was offset by the decrease in other income
        of
        $407,285, resulting in net income of $713,736 for the nine months ended March
        31, 2007 as compared to net income of $736,338 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 March 31, 2007 and 2006
 
 **Results
        of Operations**
 
 Net
        sales
        of $7,121,548 for the three months ended March 31, 2007 decreased 8.8% from
        $7,811,830 for the same period in fiscal 2006. A 0.7% increase in average
        sales
        price, due to variations in the product mix, was offset by an 8.3% decrease
        in
        the number of units shipped and a 10.3% decrease in the accessory sales.
        The
        decrease in net sales was the result of a $761,666 decrease in international
        sales and a $267,903 decrease in domestic acute care sales , which was partially
        offset by a $293,928 increase in domestic alternate care sales and a $252,230
        increase in OEM sales.
 
 The
        gross
        profit percentage of 40.4% for the three months ended March 31, 2007 increased
        from 39.6% for the same period in fiscal 2006. The increased margins in the
        current period were mainly due to the small variations in the product mix.
 
 Operating
        expenses for the three months ended March 31, 2007 decreased $261,222 from
        the
        same period in fiscal 2006 due mainly to a decrease of $241,409 in sales
        and
        marketing expenses. The decrease in sales and marketing expenses was due
        mainly
        to a $119,957 decrease in India operation expenses, a $28,335 decrease in
        commissions earned, a $26,557 decrease in operating supplies and a $26,555
        decrease in advertising and trade show expenses for the three months ended
        March
        31, 2007.
 
 Total
        other income for the three months ended March 31, 2007 decreased $10,529
        from
        the same period in fiscal 2006. This decrease was driven by decreased royalty
        income received during the third quarter in fiscal 2007.
 
 Loss
        from
        operations of $(24,897) for the three months ended March 31, 2007 decreased
        $48,632 as compared to loss from operations of $(73,529) for the same period
        in
        fiscal 2006, which was the result of the decreased operating expenses of
        $261,222, partially offset by a $212,590 decrease in gross profit. With the
        decreased loss from operations, despite a decrease in other income of $10,529,
        the Company had net income of $30,127 for the three months ended March 31,
        2007
        as compared to a net loss of $(7,976) 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
        March 31, 2007, the Company had a cash balance of $4,038,871, which was
        $1,363,421 higher than its balance at September 30, 2006 of $2,675,450, $91,574
        higher than its balance at December 31, 2006 of $3,947,297 and $245,090 higher
        than its balance at June 30, 2006 of $3,793,781. The Company continues to
        maintain a long-term bank debt free balance sheet since August 30, 2002 when
        it
        sold its building and used the proceeds from the sale to retire the long-term
        bank debt on the facility.
 
 The
        Company’s cash position increased by $245,090 for the nine months ended March
        31, 2007 mainly due to $555,226 of cash provided by operating activities,
        which
        was partially offset by $285,165 of capital expenditures. Cash provided by
        operations was $555,226 for the nine months ended March 31, 2007 as a decrease
        of $2,406,093 in accounts payable was offset by a $1,113,193 decrease in
        inventory, a $494,893 decrease in accounts receivable, depreciation of $354,817
        and net income of $713,736.
 
 The
        Company believes all future capital and liquidity requirements will be satisfied
        by cash generated from operations, proceeds received from the issuance of
        common
        stock related to the exercise of stock options, and its current cash balances.
        No major capital equipment expenditures are expected in the Company’s current
        fiscal year ending June 30, 2007. The Company also has a $2,000,000 line
        of
        credit currently in place that could be utilized, if necessary. At both March
        31, 2007 and June 30, 2006, there were no borrowings outstanding under this
        line
        of credit. The credit facility has covenants that require minimum income
        or
        liquidity levels. The Company was in compliance with the covenants at March
        31,
        2007. This line expires in June 2007.
 
 **Recently
        Issued Accounting Pronouncements**
 
 FASB
        Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes
        -
        An Interpretation of FASB Statement No. 109, clarifies the accounting for
        uncertainty in income taxes recognized in an enterprise’s financial statements
        in accordance with Statement 109 (Accounting for Income Taxes). FIN 48 also
        prescribes a recognition threshold and measurement attribute for the financial
        statement recognition and measurement of a tax position taken or expected
        to be
        taken in a tax return. The provisions of FIN 48 are effective for fiscal
        years
        beginning after December 15, 2006. The Company is currently evaluating the
        pronouncement and the potential impact of this accounting change on the
        financial statements.
 
  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 March 31,
        2007
        and June 30, 2006. Due historically to the lack of need to borrow from this
        credit facility and due to the Company’s current cash position, the Company is
        not subject to financial risk on this obligation if interest rates in the
        market
        change significantly.
 
 The
        Company’s net sales are primarily denominated in United States dollars, except
        for a small amount of net sales from the Company’s operation in India
        denominated in Indian rupees. As a result, part of the Company’s accounts
        receivable are denominated in rupees and translated into U.S. dollars for
        financial reporting purposes. A 10% change in the exchange rate of the U.S.
        dollar with respect to the Indian rupee would not have a material adverse
        effect
        on the Company’s financial condition or results of operations for the quarter
        ended March 31, 2007. 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 Chief
        Financial Officer, of the Company’s disclosure controls and procedures (as
        defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
        of
        1934, as amended). Based on this evaluation, the Company’s Chief Executive
        Officer and Chief Financial Officer concluded that, as of the end of such
        period, the Company’s disclosure controls and procedures were effective in
        recording, processing, summarizing and reporting, on a timely basis, information
        required 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
        Chief Financial Officer concluded that the Company’s disclosure controls and
        procedures were effective at reaching that level of reasonable
        assurance.
 
 There
        was
        no change in the Company’s internal control over financial reporting (as defined
        in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934,
        as
        amended) during the Company’s most recently completed fiscal quarter that has
        materially affected, or is reasonably likely to materially affect, the Company’s
        internal control over financial reporting.
 
  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 6. Exhibits.
 
 3.1
              Restated
                  Certificate of Incorporation of the Company (incorporated by reference
                  to
                  the Registration Statement filed on Form S-1, Registration No.
                  33-13050).
 
 3.2
              By-Laws
                  of the Company (incorporated by reference to the Registration Statement
                  filed on Form S-1, Registration No.
                  33-13050).
 
 4.1
              Specimen
                  Common Stock certificate (incorporated by reference to the Registration
                  Statement filed on Form S-1, Registration No.
                  33-13050).
  4.2
              Amended
                  and Restated Rights Agreement, dated as of March 27, 2007, between
                  the
                  Company and LaSalle Bank National Association, as rights agent
                  (incorporated by reference to the Company’s Current Report on Form 8-K
                  filed on March 30, 2007).
 
 31.1
              Certification
                  of Emil H. Soika, President and Chief Executive Officer (Principal
                  Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley
                  Act of
                  2002.
 
 31.2
              Certification
                  of Joel D. Knudson, Chief Financial Officer and Secretary (Principal
                  Financial Officer) pursuant to Section 302 of the Sarbanes-Oxley
                  Act of
                  2002.
 
 32*
              Certification
                  of Principal Executive Officer and Principal Financial Officer
                  pursuant to
                  18 U.S.C. Section 1350.
 
 __________________
 *
        This
        Exhibit is not “filed” for purposes of Section 18 of the Securities Exchange Act
        of 1934, as amended, or incorporated by reference into any filing under the
        Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
        as
        amended.
 
 
  13
  SIGNATURES
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 
 CRITICARE
        SYSTEMS, INC.
 (Registrant)
 
 Date:
        May
        10, 2007  BY /s/
        Joel D.
        Knudson                                      
_
 Joel
        D.
        Knudson
 Chief
        Financial Officer
 (Chief
        Accounting Officer and
 Duly
        Authorized Officer)
   
 14