**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


________________________





**FORM
      10-K**





**FOR
      ANNUAL AND TRANSITION REPORTS**


**PURSUANT
      TO SECTIONS 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





(Mark
      One)





[x]  ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT
      OF 1934.





For
      the
      fiscal year ended June 30, 2005





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





For
      the
      transition period from _____ to
      _____





Commission
      file number 1-31943




CRITICARE
                  SYSTEMS, INC.(Exact
                  Name of Registrant as Specified in Its
                  Charter)




Delaware
            
            39-1501563(State
                or Other Jurisdiction of Incorporation or Organization)
            
            (I.R.S.
                Employer Identification No.)





20925
                Crossroads Circle, Suite 100
              Waukesha,
                Wisconsin
            
            53186(Address
                of Principal Executive Offices)
            
            (Zip
                Code)





Registrant's
      telephone number, including area code: 262-798-8282





Securities
      registered pursuant to Section 12(b) of the Act:





Name
                of Each Exchange onTitle
                of Each Class
            
            Which
                RegisteredVoting
                Common Stock, $.04 par value
              (together
                with associated Preferred Stock Purchase Rights)
            
            American
                Stock Exchange








Securities
      registered pursuant to Section 12(g) of the Act:





None





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 if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.     [   ]





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Exchange Act Rule 12b-2).





Yes
      [    ]    No [ X ]





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).





Yes
      [
         ]    No [ X ]





The
      aggregate market value of the voting common stock held by nonaffiliates of
      the
      registrant as of December 31, 2004 (the last business day of the registrant’s
      most recently completed second fiscal quarter) was $33,055,024. Shares of voting
      common stock held as of December 31, 2004 by any person who was an executive
      officer or director of the Registrant as of December 31, 2004 and any person
      who
      beneficially owned 10% or more of the outstanding voting common stock as of
      December 31, 2004 have been excluded from this computation because such persons
      may be deemed to be affiliates. This determination of affiliate status is not
      a
      conclusive determination for other purposes.





On
      August
      31, 2005, there were 11,823,629 shares of the registrant's $.04 par value voting
      common stock outstanding.





DOCUMENTS
      INCORPORATED BY REFERENCE





Portions
      of the Proxy Statement for the Annual Meeting of the Stockholders of the
      Registrant to be held December 1, 2005 are incorporated by reference into Part
      III of this report.





**[Cover
      page 2 of 2 pages.]**








PART
      I




Item
      1 . BUSINESS .





Criticare
      Systems, Inc. (the "Company" or "Criticare") designs, manufactures and markets
      vital signs and gas monitoring instruments and related noninvasive sensors
      used
      to monitor patients in many healthcare environments. Since a patient's oxygen,
      anesthetic gas and carbon dioxide levels can change dramatically within minutes,
      causing severe side effects or death, continuous monitoring of these parameters
      is increasing. The Company's monitoring equipment improves patient safety by
      delivering accurate, comprehensive and instantaneous patient information to
      the
      clinician. The Company's products also allow hospitals to contain costs
      primarily by substituting cost-effective reusable pulse oximetry sensors for
      disposable sensors, controlling the use of costly anesthetics and increasing
      personnel productivity.





To
      meet
      the needs of end-users in a wide variety of patient environments, the Company
      has developed a broad line of patient monitors which combine one or more of
      its
      patented or other proprietary technologies, for monitoring oxygen saturation,
      carbon dioxide and anesthetic agents, with standard monitoring technologies
      that
      provide electrocardiogram ("ECG"), invasive and noninvasive blood pressures,
      temperature, heart rate and respiration rate. The Company's VitalView telemetry
      system allows one nurse to monitor up to sixteen patients simultaneously from
      a
      convenient central location. This allows hospitals to move out of the intensive
      care unit those patients that require continuous monitoring, but do not need
      all
      of an intensive care unit's extensive and costly personnel and equipment
      resources. In addition, the Company expects to release a new generation Model
      506DX, portable cardiac monitor in the Fall of 2005.





Criticare
      is implementing several new business initiatives as part of its strategy to
      develop products for highly technical, growth oriented niche markets. The first
      of these initiatives involves monitoring products for anesthesia gases. In
      fiscal 2003, the Company introduced a new anesthesia monitoring product line
      for
      sale both under the Criticare brand name and for sale to original equipment
      manufacturers ("OEMs"). A second initiative is the development of a highly
      specialized monitoring system for medical imaging applications in an MRI
      environment. Criticare has entered into an agreement with an OEM, Medrad, Inc.,
      to jointly develop and exclusively sell a highly specialized medical monitoring
      product to Medrad. A third initiative is the development of an Acute Care
      distribution network in the U.S. to sell to markets previously served through
      Alaris Medical Systems, Inc. (“Alaris”). Alaris, a long-time OEM customer, was
      acquired by Cardinal Health in 2004 and Cardinal Health subsequently made the
      decision to exit from vital signs monitor sales activities, since those products
      no longer fit within its core business strategy. Cardinal Health and Criticare
      have signed a transition agreement which will enable Criticare's new Acute
      Care
      distribution network the opportunity to sell to the former Alaris customer
      base.
      Criticare believes this independent distribution network, coupled with its
      new
      portable cardiac monitor approved by the U.S. Food and Drug Administrative
      ("FDA"), will present new opportunities for growth in the highly technical
      Acute
      Care market.








According
      to the guidance set by Statement of Financial Accounting Standards No. 131,
      the Company operates in one business segment in the healthcare environment.
      The
      chief operating decision maker does not utilize segmented financial statements
      in making decisions about resource allocation because the business activities
      that generate revenue do not have expenses specifically associated with them.
      Therefore, no segment data is disclosed in the notes to the financial statements
      in Item 8. However, the Company's customer base is differentiated by region
      (see
      note 10 in the notes to the financial statements in Item 8 for an analysis
      of
      sales by geographic area).





The
      Company was incorporated under the laws of the State of Delaware in October
      1984.





Products





Criticare
      markets a broad range of vital signs and gas monitoring products designed to
      address the needs of a variety of end-users in different patient environments.
      Criticare's monitors display information graphically and numerically. Many
      of
      the Company’s new products, as well as those in development, focus on anesthesia
      related monitoring, as management believes this is a high growth area with
      relatively few competitors. All Criticare monitors incorporate adjustable visual
      and audible alarms to provide reliable patient-specific warnings of critical
      conditions, and most of the Company's monitors record up to 60 hours
      of
      trend data. Criticare monitors are available with printer capability to provide
      permanent records of patient data.





PoetTM
      Plus 8100 Vital Signs Monitors .
      The
      full-featured CSI 8100 Vital Signs Monitor provides maximum flexibility for
      hospital, transport and outpatient care settings. The unit's custom
      configurations include ECG, ComfortCuffTM noninvasive blood pressure, DOXTM
      digital oximetry, heart rate, temperature, respiration rate, and nurse call
      interface. Optional features include CO 2 ,
      CO 2 /O 2 and
      invasive blood pressure monitoring and an integrated printer. The 8100 is well
      suited for busy departments that require basic vital signs monitoring to
      conscious sedation.





PoetTM
      IQ 8500 and PoetTM IQ2 8500Q Anesthetic Gas Monitors. The
      PoetTM IQ 8500 gas monitor is used in conjunction with the PoetTM Plus 8100 Vital
      Signs Monitor to provide a unique combination of leading edge vital signs
      technology and anesthesia gas monitoring in a compact, modular system. The
      PoetTM
      IQ2 8500Q Gas Monitor provides leading edge anesthesia gas monitoring in a
      compact stand alone monitor. The operating systems of both monitors consist
      of
      an integrated, solid state module based upon a proprietary infrared technology
      developed by Criticare. The operating systems automatically monitor up to five
      anesthetic agents plus nitrous oxide, oxygen, and carbon dioxide.  The
      systems also utilize a unique, disposable water trap component that is also
      proprietary to the Company. These products were released in March 2003 and
      are
      being marketed as configurable systems for applications by OEMs and as Criticare
      branded products. The systems’ reliable performance, ease of use, flexible
      design, and affordable cost make them the ideal monitoring solutions for
      anesthesia applications in hospitals and surgical centers.


2


Model
      503DX and 504DX Pulse Oximeters .
      Criticare's complete line of pulse oximeters meets the needs of virtually all
      clinical environments, including: adult, pediatric and neonatal intensive care
      units, operating rooms, emergency rooms, nursing homes, physicians' offices
      and
      ambulances. The line is designed to provide accuracy and convenience at a
      competitive cost to the end-user.





Model
      506DX and 507ELC Patient Monitors .
      The
      506DX and 507ELC series of monitors are comprised of small, compact, portable,
      full-featured vital signs monitors configured to meet specific clinical needs.
      The 506DX combines oxygen saturation, noninvasive blood pressure and temperature
      and is ideal for spot checking or continuously monitoring patients’ vital signs.
      The 507ELC series combines ECG, oxygen saturation, noninvasive blood pressure,
      temperature, and respiration for a complete vital signs monitor for physician
      offices, clinics, and hospital applications.




VitalViewTM
      Central Monitoring Station .
      The
      VitalView central station makes it possible for one nurse or technician to
      monitor up to sixteen patients simultaneously. The VitalView can receive,
      display and store data from a wide variety of Criticare monitors and
      patient-borne multiple parameter telemetry devices for continuous, comprehensive
      vital signs monitoring. In addition, the VitalView can be used as a wireless
      device or hardwired and has ST and arrhythmia analysis
      capabilities.





Pulse
      Oximetry Sensors .
      Criticare has designed proprietary, noninvasive sensors that can be used on
      any
      patient, from a premature infant to a full-grown adult. Criticare's line of
      reusable pulse oximetry sensors offers users significant cost savings compared
      to disposables. Criticare's reusable sensors generally last longer than the
      one-year warranty period and are easily and inexpensively cleaned between uses.
      Criticare's reusable sensors include a finger sensor for routine applications
      and a multisite sensor for increased placement flexibility. The multisite sensor
      is fully immersible, allowing for sterilization between patients. The Company
      also sells a range of disposable sensors designed for single use in cases where
      the facility would prefer to use a patient charge disposable
      product.





WaterChekTM/Chek-Mate
      Filter System .
      The
      Company's patented, disposable Water Chek system separates a patient's
      respiratory secretions from a breath sample before it enters the gas monitor
      for
      analysis. The Company's proprietary, disposable Chek-Mate filter enhances the
      removal of moisture from the sample, while preventing cross-contamination.
      This
      system allows the monitor to operate effectively regardless of humidity or
      patient condition. The self-sealing feature also protects the healthcare
      provider from potential contamination.





Automatic
      External Defibrillator .
      In the
      fourth quarter of fiscal 2003 the Company entered into a distribution agreement
      with a manufacturer of automatic external defibrillators that will allow
      Criticare to sell the manufacturer’s defibrillators in the markets in which
      Criticare has an established presence. This newly developed system is designed
      for people exhibiting symptoms of cardiac arrest, making earlier intervention
      possible. The defibrillator will safely monitor the victim and advise whether
      a
      shock is necessary. After the person is successfully defibrillated, the
      electrodes can remain attached to continuously monitor the person during
      transport in the ambulance to the hospital.


3





Marketing
      and Sales





Domestic
      Sales .
      At
      August 31, 2005, the Company's domestic sales force consisted of three employees
      and 89 independent dealers. The Company's sales force and independent dealers
      market the Company's vital signs monitors and pulse oximeters primarily to
      surgery centers, dental and physician offices, and nursing homes.





The
      Company sells some of its higher-end monitors (anesthetic agent monitors and
      VitalView central stations) to domestic hospitals. With the development of
      an
      Acute Care distribution network, the Company is working to achieve a significant
      presence in U.S. hospitals that generally purchase medical equipment through
      large group purchasing organizations (GPOs). These GPOs contract large medical
      equipment suppliers who can provide not only medical monitors, but also the
      majority of the hospital’s other medical equipment and service needs (such as CT
      scanners and MRI equipment). In addition, Cardinal Health and Criticare have
      signed a transition agreement which will enable Criticare’s new Acute Care
      distribution network the opportunity to sell to the former Alaris customer
      base.
      Alaris, formerly the Company’s largest customer, generated 8.0%, 12.5%, and
      13.0% of the Company’s total net sales in fiscal 2005, 2004, and 2003,
      respectively. Alaris was acquired by Cardinal Health in 2004, and Cardinal
      Health subsequently made the decision to exit from vital signs monitor sales
      activities, since those products no longer fit within its core business
      strategy.





In
      June
      1999 the Company began to focus on selling to OEMs with the hiring of a senior
      manager to lead this effort, and the OEM business has been a significant sales
      channel for the Company with 22.9% of total net sales in fiscal 2005. Modules
      and stand-alone monitors were developed and marketed for blood pressure and
      anesthetic gases for specific OEM customers. OEM business is expected to be
      a
      primary driver of growth in future periods. In particular, sales of the
      Company’s newly developed anesthesia products and a highly specialized
      monitoring system for medical imaging applications are expected to continue
      to
      be mainly for new OEM partners. In July 2004, Criticare shipped the initial
      prototypes of this monitoring product to Medrad, Inc. Medrad, the Company's
      newest OEM partner for medical imaging applications **,** was the
      Company's largest customer in fiscal 2005, accounting for net sales of
      approximately $3,100,000, which represented 12% of the Company's total net
      sales.





International
      Sales .
      One of
      the Company's principal marketing strategies has been to target international
      markets, particularly Europe, Latin America and the Pacific Rim countries.
      During fiscal 2005, Criticare sold its products, principally to hospitals,
      in
      over 77 **** countries
      through over 94 independent dealers.





Most
      of
      the Company's international order processing, invoicing, collection and customer
      service functions are handled directly from the Company's headquarters in
      Waukesha, Wisconsin. Criticare believes demand for the Company's products in
      international markets is primarily driven by cost containment concerns, and
      increased interest in using quality patient monitoring products for improved
      patient management.





4


In
      fiscal
      2005, 44% of Criticare's net sales, or $11.7 million, was attributable to
      international sales, of which approximately 62% was from sales in Europe and
      the
      Middle East, 15% was from sales to Pacific Rim countries and 23% was from sales
      to Canada and Central and South America. In both fiscal 2004 and 2003, 41%
      of
      Criticare's net sales were attributable to international sales. Other than
      inventory and accounts receivable for the Company’s branch office in India
      totaling approximately $1.3 million, there are no material identifiable assets
      of the Company located in foreign markets. The Company primarily sells its
      products in United States dollars and is therefore not subject to currency
      risks
      other than currency fluctuations from its operation in India; however, an
      increase in the value of the United States dollar relative to foreign currencies
      could make the Company's products less price competitive in those markets.
      In
      addition, significant devaluation of certain foreign currencies could adversely
      affect the collectibility of accounts receivable from international customers.
      The Company analyzes this risk before making shipments to countries it views
      as
      unstable.





Service,
      Support and Warranty .
      Criticare believes that customer service is a key element of its marketing
      program. At August 31, 2005, the Company had a customer service and
      technical support staff of 21 people at its Waukesha, Wisconsin facility.
      Customer service support is available 24 hours a day, seven days a week, with
      the majority of customers’ technical problems being resolved over the telephone.
      The customer service staff also provide periodic training and education of
      the
      direct sales force who in turn provide training to the dealers and end-users.





Criticare's
      monitors and sensors are generally warranted against defects for one year.
      If a
      problem develops with a Criticare product while under warranty, the Company
      typically provides a replacement unit until the product can be repaired at
      the
      Company's facility. The Company offers extended warranties and service contracts
      on all of its monitors.





Manufacturing





Historically,
      Criticare had manufactured and assembled its products internally, principally
      at
      the Company's facility in Waukesha, Wisconsin. Due mainly to pricing pressures
      on monitoring systems worldwide, in fiscal 2001 the Company entered into an
      agreement with two offshore contract manufacturing firms located in Taiwan
      and
      Ireland, respectively, that exclusively manufacture medical devices in a
      regulated environment. During fiscal 2005, the Company ended the supply
      agreement with the contract manufacturing firm in Ireland. The contract
      manufacturing firm in Taiwan also has manufacturing capabilities in China and
      the U.S. and a portion of Criticare’s production has been transitioned to China
      to continue to receive favorable pricing and a portion has been transitioned
      to
      the U.S. to satisfy the “made in U.S.A.” requirements of certain customers. The
      Company works closely with this firm to maintain product quality and
      reliability. This firm performs the same rigorous quality control testing at
      its
      facilities that Criticare had done in the past at its own facility. With the
      majority of the Company’s


5


manufacturing
      outsourced as of the end of calendar 2001, Criticare concentrates on product
      enhancements and new product development, customer service, and increased
      involvement with its OEM customers. The Company will manufacture and assemble
      all proprietary medical devices at the Company’s facility in Waukesha,
      Wisconsin. In addition, the Company will continue limited production of new
      products internally during the development phase and for a short period after
      commercial introduction until production can be effectively transitioned to
      offshore manufacturers.





Any
      inability of the offshore manufacturer to deliver products on a timely basis
      could have a material adverse effect on the Company. However, the manufacturer
      has the ability to produce the Company’s products in Taiwan, China, and the U.S.
      Therefore, the Company is not totally reliant on a single plant or single source
      to supply product. This factor, combined with the Company’s ability to continue
      to manufacture at its headquarters in Waukesha, Wisconsin, reduces the Company’s
      risk of supply interruption.





The
      Company has achieved certification under the International Organization for
      Standardization’s (ISO) standards 9001 and 9002. The offshore contract
      manufacturing firm has achieved certification under ISO's standard 9001. See
      "Regulation."





Research,
      Development and Engineering





Criticare
      has focused its research, development and engineering expenditures on products
      designed to meet identified market demands. The Company seeks to apply its
      expertise in gas monitoring, vital signs monitoring, and related sensor
      technology to develop new products and adapt existing products for new markets.
      At August 31, 2005, the Company had an in-house research, development and
      engineering staff of 22 people. The Company's research, development and
      engineering expenditures were $2.6 million in fiscal 2005, $2.5 million
      in
      fiscal 2004 and $2.7 million in fiscal 2003.





Research
      and development efforts for fiscal 2005 has focused on the development and
      release of the Veris MRI compatible vital signs monitor. In addition, research
      and development efforts for fiscal 2004 and 2003 have focused on the development
      and release of the 8500 series monitors which feature automatic identification
      and quantification of all five approved anesthetic agents and the development
      of
      a highly specialized monitoring system for medical imaging applications.





Competition





The
      markets for the Company's products are highly competitive. Many of Criticare's
      competitors, including the principal ones described below, have greater
      financial resources, more established brand identities and reputations, longer
      histories in the medical equipment industry and larger direct and more
      experienced sales forces than Criticare. In these respects, such companies
      have
      a competitive advantage over Criticare. In addition, internationally there
      are
      many in-country manufacturers that supply duty and tariff-free low cost monitors
      that make it difficult for the Company to be price competitive in these
      countries.





6


The
      Company competes primarily on the basis of product features, the quality and
      value of its products ( i.e. ,
      their
      relative price compared to performance features provided), and the effectiveness
      of its sales and marketing efforts. The Company believes that its principal
      competitive advantages are provided by its focus on cost containment, provided
      in part by its outsourcing a large portion of its manufacturing, its patented
      and other proprietary technology and software for noninvasive, continuous
      monitoring of oxygen, anesthetic gases, carbon dioxide and noninvasive blood
      pressure, the efficiency and speed of its research and development efforts,
      and
      its established international presence.





The
      Company believes that the worldwide anesthetic agent and carbon dioxide monitor
      markets are comparatively fragmented, with Datex/Ohmeda, a subsidiary of General
      Electric Company, Andros Incorporated, and Dräger Medical
      as the
      principal competitors. The market for vital signs monitors includes competitors
      such as General Electric Company, Dräger Medical,
      Datascope Corp., Philips Electronics, Welch Allyn Inc., and Spacelabs Medical,
      Inc., a subsidiary of OSI Systems, Inc. Internationally, the market for vital
      signs monitors includes the competitors mentioned above, as well as in-country
      manufacturers that supply low cost monitors that are not required to comply
      with
      the rigorous regulations of the FDA.





Regulation





As
      a
      manufacturer of medical diagnostic equipment, the Company is regulated by the
      FDA and similar foreign governmental agencies. In producing its products, the
      Company must comply with a variety of regulations, including the good
      manufacturing practices regulations of the FDA. In addition, it is subject
      to
      periodic inspections by the FDA. If the FDA believes that its legal requirements
      have not been fulfilled, it has extensive enforcement powers, including the
      ability to ban or recall products from the market and to prohibit the operation
      of manufacturing facilities. The Company believes its products comply with
      applicable FDA regulations in all material respects. In addition, the Company
      received ISO 9002 certification on April 29, 1993 and ISO 9001
      certification on July 8, 1994.





Under
      the
      Federal Food, Drug and Cosmetic Act, as amended, all medical devices are
      classified as Class I, Class II or Class III, depending
      upon the
      level of regulatory control to which they will be subjected. Class III devices,
      which are the most highly controlled devices, are subject to premarket approval
      by the FDA prior to commercial distribution in the United States.





The
      Company's current products have not been subject to the FDA's comprehensive
      Class III premarket approval requirements, but are generally subject to
      premarket notification requirements. If a new device is substantially equivalent
      to a device that did not require premarket approval, premarket review is
      satisfied through a procedure known as a "510(k) submission," under which the
      applicant provides product information supporting its claim of substantial
      equivalence. The FDA may also require that it be provided with clinical trial
      results showing the device's safety and efficacy.





7


The
      Company believes that the products it is currently developing generally will
      be
      eligible for the 510(k) submission procedure and, therefore, will not be subject
      to lengthy premarket approval procedures. However, these products are still
      being developed and there can be no assurance that the FDA will determine that
      the products may be marketed without premarket approval.





Criticare
      seeks, where appropriate, to comply with the safety standards of Underwriters'
      Laboratories and the Canadian Standards Association and the standards of the
      European Community. To date, the Company has not experienced significant
      regulatory expense or delay in the foreign markets in which it sells its
      products. Industry and professional groups such as the American Society of
      Anesthesiologists, to the extent they have the power to mandate certain
      practices or procedures as part of their profession's standard of care, are
      also
      a source of indirect regulation of the Company's business.





Patents
      and Trademarks





The
      Company believes one of its principal competitive advantages is provided by
      its
      patented and other proprietary technology including its sensor technology,
      infrared specific anesthetic gas monitoring technology, UltraSync signal
      processing software and disposable respiratory secretion filter system. The
      Company has 19 **** issued
      U.S. patents and one **** patent
      application pending. The Company's U.S. patents expire between 2006 and 2022.
      Criticare also has 14 issued foreign patents and 9 foreign patent applications
      pending. There is no assurance that any patents held or secured by the Company
      will provide any protection or commercial or competitive benefit to the Company.
      There is also no assurance that the Company's products will not infringe upon
      patents held by others. The Company is the owner of United States trademark
      registrations for "POET", "POET IQ", "MPT", "REMOTEVIEW", "MICROVIEW",
      "VITALVIEW", "SCHOLAR", and "WATERCHEK".





The
      Company also relies upon trade secret protection for certain of its proprietary
      technology. Although the Company requires all employees to sign confidentiality
      agreements, no assurance can be given that such agreements can be effectively
      enforced or that others will not independently develop substantially equivalent
      proprietary information and techniques or otherwise gain access to or disclose
      the Company's trade secrets.





Employees





At
      August
      31, 2005 Criticare, had 95 employees in the U.S., including 22 in research,
      development and engineering, 21 in customer service and support, 24 in
      manufacturing and operations, 13 in administration, 9 in sales and marketing,
      and 6 in quality control. Criticare also utilizes four international country
      managers that work as independent contractors to support its international
      sales
      efforts. The Company also has an operation in India with 20
      employees.





8


Many
      of
      the Company's technical employees are highly skilled. The Company believes
      that
      its continued success depends in part on its ability to continue to attract
      qualified management, marketing and technical personnel. None of the Company's
      employees are subject to a collective bargaining agreement. The Company believes
      that its relations with its employees are good.





Backlog





Criticare's
      backlog on June 30, 2005 and 2004 was $9,788,662 and $742,183, respectively.
      The
      current year backlog is driven by the extended delivery schedule from Medrad,
      which totaled $8,052,614 as of June 30, 2005. Criticare generally delivers
      its
      products out of inventory when specified by the customer. The Company does
      not
      believe that its backlog at any date is indicative of its future
      sales.





Item
      2 . PROPERTIES .





In
      August
      2002, the Company sold its 60,000 square foot building in Waukesha, Wisconsin
      for $4,000,000 and leased back approximately 37,000 square feet of this building
      to serve as the Company’s headquarters, warehouse, manufacturing, research and
      development and service facility. The proceeds from the sale were used to retire
      the mortgage note on the facility. The lease expires on August 30, 2007, with
      an
      option for the Company to extend for an additional three years, with rent
      totaling $22,423 per month for the first year of the lease and annual increases
      approximating 3% in years two, three and five of the lease.





Item
      3 . LEGAL
      PROCEEDINGS .





In
      the
      normal course of business Criticare may be involved in various legal proceedings
      from time to time. Criticare does not believe it is currently involved in any
      claim or action the ultimate disposition of which would have a material adverse
      effect on the Company.





Item
      4 . SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS .





No
      matters were submitted to a vote of security holders during the fourth quarter
      of the fiscal year ended June 30, 2005.





9


PART
      II




Item
      5 .  MARKET
      FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
      OF EQUITY SECURITIES .





The
      Company's common stock has traded on the American Stock Exchange under the
      symbol “CMD” since December 18, 2003. Prior to December 18, 2003, the Company’s
      common stock was traded on the Nasdaq National Market under the symbol “CXIM”.
      As of June 30, 2005, there were approximately 220 holders of record
      of the
      common stock. The Company has never paid dividends on its common stock and
      has
      no plans to pay cash dividends in the foreseeable future. The Company’s credit
      agreement prohibits any redemption of shares of common stock or any distribution
      or dividend to the Company’s stockholders.





Years
                Ended June 30,2005
            
            2004Quarter
                Ended:
            
            
            High
            
            
            Low
            
            
            High
            
            
            LowSeptember
                30
            
            $
            2.95
            
            $
            1.74
            
            $
            3.85
            
            $
            3.08December
                31
            
            $
            3.71
            
            $
            1.97
            
            $
            4.10
            
            $
            3.07March
                31
            
            $
            3.72
            
            $
            3.00
            
            $
            4.45
            
            $
            3.62June
                30
            
            $
            5.16
            
            $
            2.90
            
            $
            4.08
            
            $
            2.85




Item
      6 .  SELECTED
      FINANCIAL DATA .





The
      following table sets forth selected financial data with respect to the Company
      for each of the periods indicated, which should be read along with our
      consolidated financial statements and the notes to those statements and with
      “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.”




Years
                  Ended June 30,2005
              
              2004
              
              2003
              
              2002
              
              2001Net
                  sales
              
              $
              26,781,627
              
              $
              28,591,481
              
              $
              28,562,943
              
              $
              26,219,618
              
              $
              27,736,304Net
                  loss
              
              
              (422,245
              )
              
              (2,100,573
              )
              
              (938,596
              )
              
              (1,425,181
              )
              
              (178,232
              )Net
                    loss per common share--
                  basic
                    and diluted
              
              $
              (0.04
              )
              $
              (0.19
              )
              $
              (0.08
              )
              $
              (0.13
              )
              $
              (0.02
              )
 Average
                  shares outstanding--
                basic
                  and diluted.
              
              
              11,514,786
              
              
              11,240,685
              
              
              11,071,735
              
              
              10,876,818
              
              
              10,171,394Stockholders'
                  equity
              
              $
              14,209,140
              
              $
              13,789,300
              
              $
              15,034,208
              
              $
              18,387,067
              
              $
              21,005,816Long-term
                  obligations
              
              
              210,592
              
              
              286,417
              
              
              38,662
              
              
              3,151,879
              
              
              3,270,131Working
                  capital
              
              
              12,339,332
              
              
              11,756,441
              
              
              12,895,476
              
              
              15,464,899
              
              
              17,995,488Total
                  assets
              
              
              19,060,473
              
              
              19,542,341
              
              
              18,762,327
              
              
              25,474,256
              
              
              29,871,854


10




Item
      7 . MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS .





**Overview**





Criticare
      designs, manufactures and markets vital signs and gas monitoring instruments
      and
      related noninvasive sensors used to monitor patients in many healthcare
      environments. The Company sells its products both in the U.S. and in
      international markets to customers such as hospitals, surgery centers, dental
      and physicians offices, and nursing homes. In June 1999 the Company began to
      focus on selling to OEMs, and the OEM business has been a significant sales
      channel for the Company with 22.9% of total sales in fiscal 2005. During 2003,
      the Company entered into an OEM agreement with a customer to jointly develop
      and
      exclusively sell a highly specialized medical monitoring product for use in
      an
      MRI environment to the OEM. Prototypes of this product were shipped in July
      2004, with production shipments beginning in January 2005.





Criticare
      is implementing several new business initiatives as part of its strategy to
      develop products for highly technical, growth oriented niche markets. The first
      of these initiatives involves monitoring products for anesthesia gases. In
      fiscal 2003, the Company introduced an anesthesia monitoring product line for
      sale both under the Criticare brand name and for sale to OEMs. A second
      initiative is the development of a highly specialized monitoring system for
      medical imaging applications in an MRI environment. In 2003, Criticare entered
      into an agreement with Medrad, the Company's newest OEM customer for medical
      imaging applications **,** to
      jointly develop and exclusively sell a highly specialized medical monitoring
      product to Medrad. In July 2004, Criticare shipped the initial prototypes of
      this monitoring product to Medrad and production shipments began in January
      2005. Medrad was the Company's largest customer in fiscal 2005, accounting
      for
      11.6% of the Company's net sales in fiscal 2005. The third initiative is the
      development of an Acute Care distribution network in the U.S. to sell to markets
      previously served through Alaris. Alaris, a long time OEM customer, was acquired
      by Cardinal Health in 2004, and Cardinal Health subsequently made the decision
      to exit from vital signs monitor sales activities, since those products no
      longer fit within its core business strategy. Cardinal Health and Criticare
      have
      signed a transition agreement which will enable Criticare's new Acute Care
      distribution network the opportunity to sell to the former Alaris customer
      base.
      Criticare believes this independent distribution network, coupled with its
      new
      FDA-approved portable cardiac monitor, will present new opportunities for growth
      in the highly technical Acute Care market.





Fourth
      quarter net sales for fiscal 2005 of $8,020,894 were 20.3% higher than the
      $6,667,617 in net sales for the same period of fiscal 2004, principally due
      to
      the increasing production shipments to Medrad. Fourth quarter net income for
      fiscal 2005 was $371,268 as compared with a $(1,708,659) net loss for the period
      of fiscal 2004. For the full year, fiscal 2005 had net sales of $26,781,627
      and
      a net loss of $(422,245) as compared to net sales $28,591,481 and a net loss
      $(2,100,573) in fiscal 2004.


11




**Results
      of Operations**





The
      following table sets forth, for the periods indicated, certain items from the
      Company's Consolidated Statements of Operations expressed as percentages of
      net
      sales.




**Percentage
                of Net Sales******
              **Years
                Ended June 30,****2005**
            
            **2004**
            
            **2003**Net
                sales
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of goods sold
            
            
            60.9
            
            
            58.8
            
            
            63.5Gross
                profit
            
            
            39.1
            
            
            41.2
            
            
            36.5Operating
                expenses:Sales
                and marketing
            
            
            21.2
            
            
            25.0
            
            
            22.3Research,
                development and engineering
            
            
            9.8
            
            
            8.9
            
            
            9.6Administrative
            
            
            10.8
            
            
            12.8
            
            
            13.4Total
            
            
            41.8
            
            
            46.7
            
            
            45.3Loss
                from operations
            
            
            (2.7
            )
            
            (5.5
            )
            
            (8.8
            )Interest
                expense
            
            
            (0.1
            )
            
            --
            
            
            (0.3
            )Interest
                income
            
            
            0.2
            
            
            0.1
            
            
            0.2Foreign
                currency exchange gain (loss)
            
            
            0.5
            
            
            --
            
            
            0.3Gain
                on sale of stock
            
            
            --
            
            
            --
            
            
            4.5Other
                income
            
            
            0.5
            
            
            (1.9
            )
            
            0.9Loss
                before income taxes
            
            
            (1.6
            )
            
            (7.3
            )
            
            (3.2
            )Income
                tax provision
            
            
            --
            
            
            --
            
            
            --Net
                loss
            
            
            (1.6
            )%
            
            (7.3
            )%
            
            (3.2
            )%





**Fiscal
      Year Ended June 30, 2005 Compared to June 30, 2004**





Net
      sales
      decreased $1,809,854 to $26,781,627 for fiscal 2005 compared to $28,591,481
      for
      fiscal 2004. The decrease resulted from a 30.4% decrease in the number of units
      shipped that was partially offset by a 25.0% increase in the average sales
      price
      per unit and a 26.6% increase in accessory sales in the current year. The
      reduced sales were also the result of a $1,451,260 decrease in sales to Alaris,
      formerly our largest OEM customer, a $2,054,985 decrease in domestic sales
      and a
      $534,322 decrease in international sales during fiscal 2005. The international
      sales decrease was the result of a $1,130,250 order shipped in December 2003,
      which increased international sales for the year ended June 30, 2004, without
      a
      comparable sale in fiscal 2005. The Alaris OEM sales decrease was offset by
      $3,100,199 of sales to Medrad, our newest OEM customer for medical imaging
      applications, in fiscal 2005. The decrease in domestic sales was due to a number
      of factors, including $366,140 of orders that were unable to ship by year end;
      the growing trend in the defibrillator market of direct sales rather than
      through an establish distribution network; the postponed sales of patient
      monitors awaiting the release of our next generation portable patient monitor;
      the overall maturation of the oral surgery market; and to lost sales following
      the cancellation of three oral surgery shows, two oral surgery shows


12


in
      Florida and one oral surgery show in Louisiana, as a result of the hurricanes
      during the first quarter of fiscal 2005. Due to the recent hurricane, the status
      of an upcoming oral surgery show scheduled for October in New Orleans is
      uncertain at this time. The show may be rescheduled for later in fiscal 2006
      or
      it may be cancelled. **** The
      lower
      unit sales and higher average sales price per unit were driven, in part, by
      a
      large shipment of pulse oximeters to supply a government tender in Mexico in
      fiscal 2004. These units monitor pulse oximetry only and therefore carried
      a
      much lower average selling price than the Company’s equipment that monitors
      multiple vital signs parameters. OEM sales in fiscal 2005 were $6,132,000 and
      represented 22.9% of total sales, compared to $4,634,000 (16.5% of total sales)
      in fiscal 2004.




The
      gross
      profit percentage of 39.1% realized in fiscal 2005 decreased from the 41.2%
      generated in the prior year. The reduced margins in the current period were
      mainly a result of the decreased manufacturing overhead absorption due to the
      decrease in the number of units shipped against relatively fixed overhead costs.





Charges
      to cost of goods sold for potentially obsolete inventory totaled $281,003 in
      fiscal 2005 which compared to $509,001 for fiscal 2004. This inventory is
      considered obsolete and will be disposed of and removed from Criticare’s
      warehouse during fiscal 2006.





Total
      operating expenses in fiscal 2005 decreased by $2,147,534 from the prior year
      as
      a $88,005 increase in research, development and engineering expenses partially
      offset a $1,480,362 reduction in sales and marketing expenses and a $755,177
      reduction in administrative expenses. The decrease in sales and marketing
      expenses was primarily due to a $471,065 decrease in the commissions earned
      by
      dealers and employees, a decrease of $339,647 in advertising, trade shows and
      sales promotion spending, a $405,953 decrease in operating supplies and a
      $434,864 decrease in payroll and related benefit expenses. Administrative
      expenses decreased by $755,177 mainly due to the cost containment efforts,
      including a reduction in consulting expenses of $117,311, a reduction in
      investor expenses of $66,676 and a reduction in business insurance premium
      expense of $17,483. In addition, bad debt expense of $421,340 was incurred
      in
      the prior year to write off the receivable due from an international distributor
      as compared to the current year.





Total
      other income for the Company was $303,950 for the fiscal year ended June 30,
      2005 which compared to total other expense of $(526,060) for fiscal 2004. The
      increase in other income was due in part to a foreign currency exchange gain
      of
      $131,885 related to the Company’s operation in India. Moreover, other expense in
      the prior year included a $200,000 charge to settle a dispute with a customer,
      over a 1999 product installation, to avoid litigation. The Company elected
      to
      settle this issue rather than incur the significant legal and administrative
      costs deemed necessary to successfully defend its position. Prior year other
      expenses also included a $400,000 charge for the potential call of a standby
      letter of credit used to guarantee fund borrowings by an international
      distributor and a $90,000 charge to satisfy a claim for duties and Value Added
      Tax associated with importation of products into a foreign country on behalf
      of
      the international distributor.





13


**Fiscal
      Year Ended June 30, 2004 Compared to June 30, 2003**





Net
      sales
      increased $28,538 to $28,591,481 for fiscal 2004 compared to $28,562,943 for
      fiscal 2003. The increase resulted from an 11.9% increase in the number of
      units
      shipped that was partially offset by a 10.3% reduction in the average sales
      price per unit and a 6.9% decrease in accessory sales in fiscal 2004. The higher
      unit sales and lower average sales price per unit were driven by a large
      shipment of pulse oximeters to supply a government tender in Mexico. These
      units
      monitor pulse oximetry only and therefore carry a much lower average selling
      price than the Company’s equipment that monitors multiple vital signs
      parameters. OEM sales in fiscal 2004 were $4,631,000 and represented 16.5%
      of
      total sales, compared to $5,457,000 (19.1% of total sales) in fiscal
      2003.




The
      gross
      profit percentage of 41.2% realized in fiscal 2004 increased from the 36.5%
      generated in fiscal 2003. The lower margins in fiscal 2003 were driven mainly
      by
      $1,752,352 in charges to cost of goods sold to increase the obsolescence reserve
      for inventory associated with discontinued products and for potential obsolete
      inventory. Charges to cost of goods sold for potentially obsolete inventory
      totaled $509,001 in fiscal 2004 and this $1,217,328 reduction in charges in
      fiscal 2004 increased margins from fiscal 2003.





Total
      operating expenses in fiscal 2004 increased by $395,790 from fiscal 2003 as
      a
      $174,581 reduction in administrative expenses and a $204,748 decrease in
      research, development and engineering expenses partially offset a $775,119
      increase in sales and marketing expenses. A $364,240 reduction in legal and
      consulting fees primarily related to the internal review conducted in fiscal
      2003 by the Company of its import and export procedures was the main contributor
      to the lower administrative expenses. In addition, a final payment in fiscal
      2003 of $150,000 made to the Company’s former CEO and founder to satisfy past
      severance obligation issues increased administrative expenses in fiscal 2003
      compared to fiscal 2004. These reductions were offset by the increase in bad
      debt expense of $331,240 related to the reserve of an international distributor
      receivable. The lower research, development and engineering expenses were mainly
      due to funding received from an OEM business partner to jointly develop a new
      line of highly specialized monitoring system for medical imaging applications
      that was partially offset by higher spending to support the project. The higher
      sales and marketing expenses were mainly driven by increased spending to promote
      the Company’s new line of anesthesia monitoring products and to enter the
      veterinary market, including the hiring of four direct salespeople to support
      these efforts. Also contributing to the increase in sales and marketing spending
      were clinical trials conducted to test enhancements made to one of the Company’s
      vital signs parameters.





14


The
      Company generated other expense of $526,060 in fiscal 2004 compared to other
      income of $1,578,176 that was recognized in fiscal 2003. Other income in fiscal
      2003 included the recognition of a $1,290,252 gain on the sale of the Company’s
      Immtech International, Inc. stock, $93,000 in profits from the completion of
      a
      medical equipment integration project with an international distributor, an
      $82,403 foreign currency exchange gain related to the Company’s operation in
      India, and a $41,208 gain on the sale of the Company’s building. Total other
      expense in fiscal 2004 included a $200,000 charge to settle a dispute with
      a
      customer, over a 1999 product installation, to avoid litigation. The Company
      elected to settle this issue rather than incur the significant legal and
      administrative costs deemed necessary to successfully defend its position.
      Total
      other expenses included a $400,000 charge for the potential call of a standby
      letter of credit used to guarantee fund borrowings by an international
      distributor. Total other expenses also included a $90,000 charge to satisfy
      a
      claim for duties and Value Added Tax associated with importation of products
      into a foreign country on behalf of the international distributor.





**Accounting
      Pronouncements**





The
      Company will implement SFAS No. 123 (Revised), "Accounting for Stock-Based
      Compensation," as of the fiscal year 2006, beginning July 1, 2005. 
      If the
      Company had elected to recognize compensation cost for the options granted
      during the years ended June 30, 2005 and 2004, consistent with the method
      prescribed by SFAS No. 123 (Revised), the net loss would have been increased
      by
      $(211,498) and $(285,566), respectively.





**Critical
      Accounting Policies**





The
      Company’s discussion and analysis of its financial condition and results of
      operations are based upon the Company’s consolidated financial statements, which
      have been prepared in accordance with accounting principles generally accepted
      in the United States. The preparation of these financial statements requires
      the
      Company to make estimates and judgments that affect the reported amounts of
      assets, liabilities, revenues and expenses, and related disclosure of contingent
      assets and liabilities. On an on-going basis, the Company evaluates its
      estimates, including those related to bad debts, sales returns, inventories,
      and
      warranty obligations. The Company bases its estimates on historical experience
      and on various other assumptions that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates. The Company
      believes the following accounting policies require its more significant
      judgments and estimates used in the preparation of its financial
      statements.





**Revenue
      Recognition**





Revenues
      and the costs of products sold are recognized as the related products are
      shipped or installed, if there are significant installation costs. This revenue
      recognition policy is utilized for shipment of product to customers including
      both distributors and end-users.


15


Revenues
      for integration contracts where Criticare Integration acts as an intermediary
      to
      supply medical equipment and supplies to medical facilities in countries in
      the
      Black Sea Economic Zone are recognized on a net basis for services rendered
      upon
      completion of the transaction giving rise to the service. Since there was no
      activity in fiscal 2005 or fiscal 2004 for these integration services and the
      activity for fiscal 2003 was not material, they are included in the accompanying
      statement of operations for fiscal 2003 as other income.





**Estimating
      Allowances for Doubtful Accounts and Sales Returns**





The
      Company maintains allowances for doubtful accounts for estimated losses
      resulting from the inability of its customers to make required payments.
      Management analyzes specific accounts receivable as well as historical bad
      debts, customer concentrations, customer credit-worthiness, current economic
      trends, foreign currency movements, and changes in its customer payment terms
      when evaluating the allowance for doubtful accounts. If the financial condition
      of any of the Company’s customers were to deteriorate, resulting in impairment
      of their ability to make payments, additional allowances may be
      required.





The
      Company also maintains a sales returns reserve in order to estimate potential
      future product returns related to current period revenue. Management analyzes
      historical returns, current economic trends, changes in customer demand, and
      acceptances of the Company’s products when evaluating the adequacy of the sales
      returns reserve. Significant management judgments and estimates must be made
      and
      used in connection with establishing the sales returns reserve in any accounting
      period. Material differences may result in the timing of the Company’s revenue
      if management made different judgments or utilized different
      estimates.





**Valuation
      of Inventories**





Inventories
      are stated at the lower of cost or market, with cost determined on the first-in,
      first-out method. The Company maintains a reserve for obsolete inventory that
      it
      utilizes to write down inventories for estimated obsolescence or unmarketable
      inventory equal to the difference between the carrying value of the inventory
      and the estimated market value. The Company determines the adequacy of the
      obsolescence reserve by considering historical annual usage of component parts
      and finished goods as well as assumptions about market conditions and forecasted
      demand. When items are physically disposed of the amounts are written off
      against the reserve. If future product demand is lower than expected or if
      market conditions are less favorable than those projected by the Company,
      additional charges to increase the obsolescence reserve may be
      required.





During
      fiscal 2005, the reserve for obsolete inventory was decreased $171,700 to
      $438,300 at June 30, 2005 due mainly to the disposal of obsolete inventory
      that
      had been reserved for in prior years. During fiscal 2004, the reserve for
      obsolete inventory was decreased $790,000 to $610,000 at June 30, 2004 due
      mainly to the disposal of obsolete inventory that had been reserved for in
      prior
      years.


16




**Product
      Warranty**





The
      Company provides for the estimated cost of product warranties at the time
      products are shipped based upon its historical experience providing warranty
      coverage. The Company’s warranty obligations are affected by product failure
      rates, material usage and service delivery costs incurred in correcting a
      product failure. If actual product failure rates, material usage or service
      delivery costs differ from current projections, revisions to the estimated
      warranty reserve would be required.





**Liquidity
      and Capital Resources**





As
      of
      June 30, 2005, the Company had a cash balance of $3,680,965 as compared with
      its
      fiscal 2004 year-end cash balance of $3,738,825. The Company has continued
      to
      maintain a bank debt free balance sheet since August of 2002 when it sold its
      building and used the proceeds from the sale to retire the bank debt on the
      facility.





The
      Company has been able to increase its cash position by $157,895 over the last
      three fiscal years despite generating losses of $(3,461,414) during this period.
      Non-cash expenses consisting primarily of depreciation expense and provisions
      for obsolete inventory decreased the Company’s profitability $4,195,237 during
      the last three fiscal years, but did not impact the Company’s cash flows. Over
      the last three fiscal years the Company has been able to fund $1,943,895 of
      cash
      used in operations and capital spending of $1,305,605 primarily with $1,723,477
      of cash provided from the exercise of stock options and $1,290,252 from the
      sale
      in fiscal 2003 of the Company’s shares of Immtech International,
      Inc.





In
      fiscal
      2005, $688,724 of cash was generated from the exercise of 280,337 shares of
      expiring stock options and an additional $131,250 of cash was generated from
      the
      exercise of 70,000 shares of expiring stock warrants. This cash provided
      partially offset the $726,064 of cash used in operations and the $116,167 of
      capital spending in fiscal 2005. In fiscal 2004, $855,664 of cash provided
      from
      the exercise of 470,725 shares under expiring stock options more than offset
      $413,063 of capital spending and $408,864 of cash used in operations. In fiscal
      2003, the Company generated cash of $1,290,252 through the sale of its shares
      in
      Immtech International, Inc. and another $598,039 of net cash through the sale
      of
      its building and the retirement of the debt on the facility. These cash inflows
      more than offset the $808,967 of cash used in operations and $776,375 of capital
      spending in fiscal 2003.





17


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 next
      fiscal year ending June 30, 2006. The Company also has a $2,000,000 line of
      credit currently in place that could be utilized, if necessary. At June 30,
      2005, there were no borrowings outstanding under this line of credit. The credit
      facility has covenants which require minimum income or liquidity levels. The
      Company was in compliance with the covenants at June 30, 2005. This line expires
      in June 2006.





The
      following table summarizes the Company’s contractual cash obligations at June
      30, 2005 in the categories set forth below, and the effect such obligations
      are
      expected to have on its liquidity and cash flow in future fiscal
      periods:





Total
            
            2006
            
            2007
            
            2008
            
            2009
            
            2010
                andThereafterOperating
                leases
            
            $
            772,042
            
            $
            335,937
            
            $
            327,366
            
            $
            79,418
            
            $
            27,283
            
            $
            2,038Capital
                leases
            
            
            310,320
            
            
            82,560
            
            
            82,560
            
            
            82,560
            
            
            52,140
            
            
            10,500Contract
                Mfg obligations
            
            
            555,000
            
            
            555,000
            
            
            --
            
            
            --
            
            
            --
            
            
            --Other
                long-term obligations
            
            
            23,708
            
            
            15,147
            
            
            7,902
            
            
            659
            
            
            --
            
            
            --Total
                contractual obligations
            
            $
            1,661,070
            
            $
            988,644
            
            $
            417,828
            
            $
            162,637
            
            $
            79,423
            
            $
            12,538





**Forward-Looking
      Statements**





A
      number
      of the matters and subject areas discussed herein that are not historical or
      current facts deal with potential future circumstances and developments. These
      include anticipated product introductions, expected future financial results,
      liquidity needs, financing ability, management's or the Company's expectations
      and beliefs and similar matters discussed in Management's Discussion and
      Analysis or elsewhere herein. The discussions of such matters and subject areas
      are qualified by the inherent risk and uncertainties surrounding future
      expectations generally, and also may materially differ from the Company's actual
      future experience.





The
      Company's business, operations and financial performance are subject to certain
      risks and uncertainties which could result in material differences in actual
      results from management's or the Company's current expectations. These risks
      and
      uncertainties include, but are not limited to, general economic conditions,
      demand for the Company's products, costs of operations, the development of
      new
      products, the reliance on single sources of supply for certain components in
      the
      Company's products, government regulation, health care cost containment
      programs, the effectiveness of the Company's programs to manage working capital
      and reduce costs, competition in the Company's markets, compliance with product
      safety regulations and product liability and product recall risks, risks
      relating to international sales and compliance with U.S. export regulations,
      unanticipated difficulties in outsourcing the manufacturing of the majority
      of
      its products to foreign manufacturers and risks related to foreign
      manufacturing, including economic and political instability, trade and foreign
      tax laws, production delays and cost overruns and quality control.





18


Item
      7A .  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 June 30,
      2005, 2004, and 2003. Due historically to the lack of need to borrow from this
      credit facility and due to the Company’s current cash position, the Company is
      not subject to financial risk on this obligation if interest rates in the market
      change significantly.





The
      Company’s net sales are primarily denominated in United States dollars, except
      for a small amount of net sales from the Company’s operations in India which are
      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 fiscal
      year ended June 30, 2005. The Company does not use any hedges or other
      derivative financial instruments to manage or reduce exchange rate
      risk.




19


Item
        8 .  FINANCIAL
        STATEMENTS AND SUPPLEMENTARY DATA .
 
 FINANCIAL
        STATEMENTS


**CRITICARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**JUNE
      30, 2005 AND 2004**





2005
            
            2004ASSETS
                (Note 6)CURRENT
                ASSETS:Cash
                and cash equivalents (Notes 1 and 10)
            
            $
            3,680,965
            
            $
            3,738,825Accounts
                receivable, less allowance for doubtful accountsof
                $300,000 and $260,000, respectively (Note 1)
            
            
            6,847,432
            
            
            6,489,885Other
                receivables (Note 1)
            
            
            645,479
            
            
            359,806Inventories
                (Notes 1 and 2)
            
            
            5,551,093
            
            
            6,270,177Prepaid
                expenses
            
            
            255,104
            
            
            364,375Total
                current assets
            
            
            16,980,073
            
            
            17,223,067PROPERTY,
                PLANT AND EQUIPMENT (Note 1):Machinery
                and equipment
            
            
            2,800,269
            
            
            2,675,093Furniture
                and fixtures
            
            
            947,726
            
            
            937,906Leasehold
                improvements
            
            
            220,407
            
            
            218,423Demonstration
                and loaner monitors
            
            
            1,352,267
            
            
            1,093,297Production
                tooling
            
            
            2,009,809
            
            
            2,030,618Property,
                plant and equipment - cost
            
            
            7,330,478
            
            
            6,955,337Less
                accumulated depreciation
            
            
            5,320,061
            
            
            4,713,049Property,
                plant and equipment - net
            
            
            2,010,417
            
            
            2,242,288OTHER
                ASSETS (Notes 1 and 3):License
                rights and patents - net
            
            
            69,983
            
            
            76,985Total
                other assets
            
            
            69,983
            
            
            76,985TOTAL
                ASSETS
            
            $
            19,060,473
            
            $
            19,542,341





See
      notes
      to consolidated financial statements.





20





LIABILITIES
                AND STOCKHOLDERS' EQUITY
            
            2005
            
            2004CURRENT
                LIABILITIES:Accounts
                payable
            
            $
            3,033,559
            
            $
            3,237,406Accrued
                liabilities:Compensation
                and commissions
            
            
            900,636
            
            
            863,113Product
                warranties (Notes 1 and 4)
            
            
            452,000
            
            
            444,000Liability
                under guarantees (Note 13)
            
            
            --
            
            
            490,000Out
                of court settlement
            
            
            --
            
            
            200,000Obligations
                under capital lease (Note 12)
            
            
            62,739
            
            
            57,712Other
            
            
            191,807
            
            
            174,395Total
                current liabilities
            
            
            4,640,741
            
            
            5,466,626LONG-TERM
                LIABILITIES:Obligations
                under capital lease (Note 12)
            
            
            202,031
            
            
            264,770Other
                long-term obligations
            
            
            8,561
            
            
            21,646Total
                long-term liabilities
            
            
            210,592
            
            
            286,416COMMITMENTS
                AND CONTINGENCIES (Notes 7, 9 and 12)TOTAL
                LIABILITIES
            
            
            4,851,333
            
            
            5,753,042STOCKHOLDERS'
                EQUITY (Notes 1 and 8):Preferred
                stock - $.04 par value, 500,000 shares authorized,no
                shares issued or outstanding
            
            
            --
            
            
            --Common
                stock - $.04 par value, 15,000,000 shares authorized, 11,925,086
                and11,574,749
                shares issued, and 11,812,493 and 11,450,021 outstanding,
                respectively
            
            
            477,003
            
            
            462,990Additional
                paid-in capital
            
            
            24,775,995
            
            
            23,965,900Common
                stock held in treasury (112,593 and 124,728 shares, respectively)
            
            
            (386,834
            )
            
            (409,439
            )Retained
                earnings (accumulated deficit)
            
            
            (10,648,912
            )
            
            (10,226,670
            )Cumulative
                translation adjustment
            
            
            (8,112
            )
            
            (3,482
            )Total
                stockholders' equity
            
            
            14,209,140
            
            
            13,789,299TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            19,060,473
            
            $
            19,542,341





See
      notes
      to consolidated financial statements.


21





**CRITICARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**YEARS
      ENDED JUNE 30, 2005, 2004 AND 2003**








**2005**
            
            **2004**
            
            **2003****NET
                SALES (**Notes
                10 and 11**)**
            
            $
            26,781,627
            
            $
            28,591,481
            
            $
            28,562,943**COST
                OF GOODS SOLD**
            
            
            16,311,144
            
            
            16,821,782
            
            
            18,131,293**GROSS
                PROFIT**
            
            
            10,470,483
            
            
            11,769,699
            
            
            10,431,650**OPERATING
                EXPENSES:**Sales
                and marketing (Note 1)
            
            
            5,670,505
            
            
            7,150,867
            
            
            6,375,748Research,
                development and engineering (Note 1)
            
            
            2,620,134
            
            
            2,532,129
            
            
            2,736,877Administrative
                (Note 9)
            
            
            2,906,039
            
            
            3,661,216
            
            
            3,835,797Total
            
            
            11,196,678
            
            
            13,344,212
            
            
            12,948,422**LOSS
                FROM OPERATIONS**
            
            
            (726,195
            )
            
            (1,574,513
            )
            
            (2,516,772
            )**OTHER
                (EXPENSE) INCOME:**Interest
                expense (Note 12)
            
            
            (28,848
            )
            
            (9,282
            )
            
            (91,533
            )Interest
                income
            
            
            58,710
            
            
            37,176
            
            
            51,197Foreign
                currency exchange gain (Note 1)
            
            
            131,885
            
            
            --
            
            
            82,403Gain
                on sale of stock (Note 1)
            
            
            --
            
            
            --
            
            
            1,290,252Other
                income (expense)
            
            
            142,203
            
            
            (553,954
            )
            
            245,857Total
            
            
            303,950
            
            
            (526,060
            )
            
            1,578,176**LOSS
                BEFORE INCOME TAXES**
            
            
            (422,245
            )
            
            (2,100,573
            )
            
            (938,596
            )**INCOME
                TAX PROVISION (**Notes
                1 and 5**)**
            
            
            --
            
            
            --
            
            
            --**NET
                LOSS**
            
            $
            (422,245
            )
            $
            (2,100,573
            )
            $
            (938,596
            )**NET
                LOSS PER COMMON SHARE (**Note
                1**):**Basic
                and diluted
            
            $
            (0.04
            )
            $
            (0.19
            )
            $
            (0.08
            )**WEIGHTED
                AVERAGE NUMBER OF COMMON****SHARES
                OUTSTANDING (**Note
                1**):**Basic
                and diluted
            
            
            11,514,786
            
            
            11,240,685
            
            
            11,071,735





See
      notes
      to consolidated financial statements.


22




**CRITICARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**


**YEARS
      ENDED JUNE 30, 2005, 2004 AND 2003**





RetainedAdditional
            
            Common
                Stock
            
            
            
            Earnings
            
            Cumulative
            
            Unrealized
            
            TotalCommon
                Stock
            
            Paid-In
            
            Treasury
            
            Subscriptions
            
            (Accumulated
            
            Translation
            
            Gain
                on
            
            Stockholders’Shares
            
            Amount
            
            Capital
            
            Shares
            
            Cost
            
            Receivable
            
            Deficit)
            
            Adjustment
            
            Investment
            
            Equity**Balance,
                June 30, 2002**
            
            
            11,199,524
            
            $
            447,981
            
            $
            23,350,124
            
            
            100,890
            
            $
            (309,059
            )
            $
            (225,000
            )
            $
            (7,187,501
            )
            $
            5,832
            
            $
            2,304,689
            
            $
            18,387,066Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (938,596
            )
            
            
            
            
            
            
            
            (938,596
            )Unrealized
                holding (loss) arisingduring
                period
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,014,437
            )
            
            (1,014,437
            )Reclassification
                (gain) includedin
                net income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,290,252
            )
            
            (1,290,252
            )Cumulative
                translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (9,314
            )
            
            
            
            
            (9,314
            )Comprehensive
                income/(loss)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,252,599
            )Exercise
                of options
            
            
            4,500
            
            
            180
            
            
            7,133
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,313Employee
                common stockpurchased
                from treasury
            
            
            
            
            
            
            
            
            2,987
            
            
            (5,798
            )
            
            10,800
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,787Repurchase
                of Company stock
            
            
            
            
            
            
            
            
            
            
            
            35,100
            
            
            (121,359
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (121,359
            )**Balance,
                June 30, 2003**
            
            
            11,204,024
            
            $
            448,161
            
            $
            23,360,244
            
            
            130,192
            
            $
            (419,618
            )
            $
            (225,000
            )
            $
            (8,126,097
            )
            $
            (3,482
            )
            $
            0
            
            $
            15,034,208Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,100,573
            )
            
            
            
            
            
            
            
            (2,100,573
            )Comprehensive
                income/(loss)Exercise
                of options
            
            
            370,725
            
            
            14,829
            
            
            600,455
            
            
            
            
            
            
            
            
            225,000
            
            
            
            
            
            
            
            
            
            
            
            840,284Employee
                common stockpurchased
                from treasury
            
            
            
            
            
            
            
            
            5,201
            
            
            (5,464
            )
            
            10,179
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            15,380**Balance,
                June 30, 2004**
            
            
            11,574,749
            
            $
            462,990
            
            $
            23,965,900
            
            
            124,728
            
            $
            (409,439
            )
            $
            0
            
            $
            (10,226,670
            )
            $
            (3,482
            )
            $
            0
            
            $
            13,789,299Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (422,242
            )
            
            
            
            
            
            
            
            (422,242
            )Cumulative
                translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,630
            )
            
            
            
            
            (4,630
            )Comprehensive
                income/(loss)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (426,872
            )Exercise
                of options
            
            
            280,337
            
            
            11,213
            
            
            677,511
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            688,724Exercise
                of warrants
            
            
            70,000
            
            
            2,800
            
            
            128,450
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            131,250Employee
                common stockpurchased
                from treasury
            
            
            
            
            
            
            
            
            4,134
            
            
            (12,135
            )
            
            22,605
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            26,739**Balance,
                June 30, 2005**
            
            
            11,925,086
            
            $
            477,003
            
            $
            24,775,995
            
            
            112,593
            
            $
            (386,834
            )
            $
            0
            
            $
            (10,648,912
            )
            $
            (8,112
            )
            $
            0
            
            $
            14,209,140





See
      notes
      to consolidated financial statements.


23


**CRITICARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**YEARS
      ENDED JUNE 30, 2005, 2004 AND 2003**




**2005**
            
            **2004**
            
            **2003****OPERATING
                ACTIVITIES:**Net
                loss
            
            $
            (422,245
            )
            $
            (2,100,573
            )
            $
            (938,596
            )Adjustments
                to reconcile net loss to net cash(used
                in) provided by operating activities:Depreciation
            
            
            588,559
            
            
            635,322
            
            
            881,703Amortization
            
            
            7,002
            
            
            7,001
            
            
            7,001Gain
                on sale of fixed assets
            
            
            --
            
            
            --
            
            
            (41,208
            )Provision
                for doubtful accounts
            
            
            40,000
            
            
            393,758
            
            
            38,566Provision
                for obsolete inventory
            
            
            (171,700
            )
            
            509,001
            
            
            1,752,352Gain
                on sale of Immtech stock
            
            
            --
            
            
            --
            
            
            (1,290,252
            )Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (397,548
            )
            
            (1,256,444
            )
            
            (425,683
            )Other
                receivables
            
            
            (285,673
            )
            
            193,341
            
            
            191,072Inventories
            
            
            650,266
            
            
            (469,269
            )
            
            (934,389
            )Prepaid
                expenses
            
            
            109,271
            
            
            (23,441
            )
            
            112,413Accounts
                payable
            
            
            (203,846
            )
            
            964,452
            
            
            (58,543
            )Accrued
                liabilities
            
            
            (640,150
            )
            
            737,988
            
            
            (103,403
            )Net
                cash used in operating activities
            
            
            (726,064
            )
            
            (408,864
            )
            
            (808,967
            )**INVESTING
                ACTIVITIES:**Purchases
                of property, plant and equipment, net
            
            
            (116,167
            )
            
            (413,063
            )
            
            (776,375
            )Proceeds
                from sale of fixed assets
            
            
            --
            
            
            --
            
            
            3,795,164Proceeds
                from sale of Immtech stock
            
            
            --
            
            
            --
            
            
            1,290,252Net
                cash (used in) provided by investing activities
            
            
            (116,167
            )
            
            (413,063
            )
            
            4,309,041**FINANCING
                ACTIVITIES:**Repurchase
                of Company common stock
            
            
            --
            
            
            --
            
            
            (121,359
            )Retirement
                of long-term debt
            
            
            --
            
            
            --
            
            
            (3,197,125
            )Retirement
                of obligation under capital lease
            
            
            (57,712
            )
            
            (11,358
            )
            
            --Proceeds
                from issuance of common stock
            
            
            846,713
            
            
            855,664
            
            
            21,100Net
                cash provided by (used in) financing activities
            
            
            789,001
            
            
            844,306
            
            
            (3,297,384
            )**EFFECT
                OF EXCHANGE RATE CHANGES ON CASH**
            
            
            (4,630
            )
            
            --
            
            
            (9,314
            )**NET
                (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS**
            
            
            (57,860
            )
            
            22,379
            
            
            193,376**CASH
                AND CASH EQUIVALENTS, BEGINNING OF YEAR**
            
            
            3,738,825
            
            
            3,716,446
            
            
            3,523,070**CASH
                AND CASH EQUIVALENTS, END OF YEAR**
            
            $
            3,680,965
            
            $
            3,738,825
            
            $
            3,716,446**SUPPLEMENTAL
                CASH FLOW INFORMATION:**Cash
                paid for:Income
                taxes paid—net
            
            $
            2,506
            
            $
            3,053
            
            $
            6,013Interest
            
            
            26,596
            
            
            11,535
            
            
            110,322Noncash
                investing and financing activities:Cost
                of fixed asset disposals
            
            
            61,522
            
            
            1,898,210
            
            
            3,754,245Property,
                Plant, and Equipment acquired under capital lease
            
            
            --
            
            
            333,840
            
            
            --Holding
                (loss) on investment in Immtech
            
            
            --
            
            
            --
            
            
            (1,014,437
            )





See
      notes
      to consolidated financial statements.


24





**NOTES
      TO FINANCIAL STATEMENTS**





**CRITICARE
      SYSTEMS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**YEARS
      ENDED JUNE 30, 2005, 2004 AND 2003**





**1.** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





**Nature
      of Business** --
      Criticare Systems, Inc. designs, manufactures and markets patient monitoring
      equipment and related accessories to the health care community worldwide and
      is
      headquartered in Waukesha, Wisconsin. The Company sells domestically primarily
      to oral and stand-alone general surgery centers and hospitals through regional
      sales managers and a dealer network. Internationally, the Company sells mainly
      to hospitals through country managers and a worldwide dealer network. In
      addition, the Company sells modules and stand-alone monitors worldwide to
      original equipment manufacturers (“OEMs”).





**Principles
      of Consolidation** -- The
      consolidated financial statements include the accounts of Criticare Systems,
      Inc. (the "Company") and its wholly owned subsidiaries: Criticare International
      GmbH Marketing Services ("Criticare International"), CSI Trading, Inc. ("CSI
      Trading"), Criticare Service GmbH ("Criticare Service"), Criticare Biomedical,
      Inc. ("Criticare Biomedical"), Sleep Care, Inc. ("Sleep Care"), and Criticare
      Integration, Inc. (“Criticare Integration”). CSI Trading was incorporated in
      November 1996 to assist with European marketing activities and includes an
      operation in India. All significant intercompany accounts and transactions
      have
      been eliminated.





**Cash
      Equivalents** -- The
      Company considers all investments with purchased maturities of less than three
      months to be cash equivalents.





**Accounts
      Receivable and Allowance for Doubtful Accounts --** Accounts
      receivable are customer obligations due under normal trade terms. The Company
      sells its products to distributors, original equipment manufacturers, and end
      users in medical facilities such as hospitals, surgery centers, nursing homes,
      and physician offices. The Company performs continuing credit evaluations of
      its
      customers’ financial condition and although it generally does not require
      collateral, letters of credit may be required from customers in certain
      circumstances.





25


Management
      reviews accounts receivable on a monthly basis to determine if any receivables
      will potentially be uncollectible. The Company includes any accounts receivable
      balances that are determined to be uncollectible, along with a general reserve,
      in its overall allowance for doubtful accounts. The general reserve in the
      allowance for doubtful accounts is a calculation based upon the accounts
      receivable balance and the historical effectiveness of Criticare’s collection of
      those receivables. The general reserve as of June 30, 2005 and 2004 is $89,602
      and $53,748, respectively. After all attempts to collect a receivable have
      failed, the receivable is written off against the allowance. Based on the
      information available, the Company believes its allowance for doubtful accounts
      as of June 30, 2005 and 2004 is adequate. However, actual write-offs might
      exceed the recorded allowance.





**Inventories** --
      Inventories are stated at the lower of cost or market, with cost determined
      on
      the first-in, first-out method.





**Investments** -- In
      accordance with Financial Accounting Standards No. 115, "Accounting for Certain
      Investments in Debt and Equity Securities", debt and equity securities not
      classified as either held-to-maturity securities or trading securities are
      classified as available-for-sale securities and reported at fair value, with
      unrealized gains and losses excluded from earnings and reported in a separate
      component of stockholders’ equity. The Company’s investments were in marketable
      equity securities and were classified as available-for-sale securities. The
      Company’s investment in stock of Immtech International, Inc. was sold at a gain
      in 2003. There were no held-to-maturity or trading securities as of June 30,
      2005.





**Other
      Receivables** -- **** Other
      receivables in fiscal 2005 and 2004 consist mainly of tender deposits in the
      amount of $145,090 and $122,218, respectively, and receivables to be paid via
      letters of credit amounting to $256,627 and $81,862, respectively.





**Property,
      Plant and Equipment** --
      Property, plant and equipment is recorded at cost. Each member of the Company's
      sales force is provided with demonstration monitors to assist them in their
      sales efforts. The Company also has loaner monitors which are used to
      temporarily replace a customer's unit when it is being repaired or upgraded.
      Depreciation is provided over the estimated useful lives of the assets. The
      building, which was sold in August 2002, was being depreciated over 40 years
      prior to the sale. The estimated useful lives of other property and equipment
      are as follows:





EstimatedClassification
            
            Useful
                LivesMachinery
                and equipment
            
            5-7
                yearsFurniture
                and fixtures
            
            5
                yearsLeasehold
                improvements
            
            4-5
                yearsDemonstration
                and loaner monitors
            
            4
                yearsProduction
                tooling
            
            5-7
                years





26


The
      Company periodically assesses the recoverability of long-lived assets, including
      property and equipment and intangibles, in accordance with the Statement of
      Financial Accounting Standards No. 144, “Accounting for the Impairment of
      Long-Lived Assets and for Long-Lived Assets to be Disposed Of” (“SFAS No. 144”),
      when indications of potential impairment exist. The amount of any impairment
      is
      calculated by comparing the estimated fair market value with the carrying value
      of the related asset. Management considers such factors as current operating
      results, trends, and future prospects, in addition to other economic factors
      in
      performing this analysis. No such impairments exist at June 30, 2005 and
      2004.





**License
      Rights and Patents** -- The
      Company adopted SFAS 142, “Goodwill and Other Intangible Assets,” during the
      period ended June 30, 2003 to account for its license rights and patents.
      License rights and patents are carried at cost and are amortized using the
      straight-line method over their estimated useful life as follows:




Classification
            
            Estimated
              Useful
                LifeLicense
              rights and patents
            
            17
                years






License
      rights and patents are evaluated for impairment when events or changes in
      circumstances indicate that the carrying amounts of the assets may not be
      recoverable through the estimated undiscounted future cash flows resulting
      from
      the use of these assets. When any such impairment exists, the related assets
      will be written down to fair value.





**Revenue
      Recognition** --
      Revenues and the costs of products sold are recognized as the related products
      are shipped or installed, if there are significant installation costs. This
      revenue recognition policy is utilized for shipment of product to customers,
      including both distributors and end-users.





**Shipping
      Costs** - **** Any
      shipping costs that are billable to the customer are included in revenue and
      all **** shipping
      costs are included in cost of goods sold in the accompanying consolidated
      statements of operations.





**Product
      Warranties** --
      Estimated costs for product warranties are accrued for and charged to operations
      as the related products are shipped and installed.





**Marketing
      Expenses** --
      Marketing expenses include all of the Company's sales related costs. Bad debt
      expense totaled $87,695, $393,758 and $38,566 in fiscal 2005, 2004 and 2003,
      respectively.


27


**Advertising
      Costs** --
      Advertising costs are expensed as incurred. Advertising costs totaled $68,120,
      $101,174, and $76,950 for the years ended June 30, 2005, 2004, and 2003,
      respectively.





**Research
      and Development Expenses** --
      Research and development costs are charged to operations as incurred. Such
      expenses totaled $2,561,386, $2,271,476 and $2,503,137 in fiscal 2005, 2004,
      and
      2003, respectively.





**Income
      Taxes** -- The
      Company accounts for income taxes using an asset and liability approach.
      Deferred income tax assets and liabilities are computed annually for differences
      between the financial statements and tax bases of assets and liabilities that
      will result in taxable or deductible amounts in the future based on enacted
      tax
      laws and rates applicable to the periods in which the differences are expected
      to affect taxable income. The Company pays income taxes in certain states that
      require an annual minimum tax. These taxes are included in administrative
      expenses in the consolidated statements of operations.





**Translation
      of Foreign Currency** --
      The
      Company follows the translation policy as provided by Financial Accounting
      Standards No. 52, “Foreign Currency Translation” in translating the financial
      statements of its operation in India from Indian rupees to U.S. dollars.
      Accordingly, assets and liabilities are translated at the rate of exchange
      at
      the balance sheet date. Income and expense items are translated at the average
      exchange rate prevailing throughout the year.





**Net
      Loss Per Common Share** -- Basic
      loss per share is computed using the weighted average number of common shares
      outstanding during the periods. Diluted income per share is computed using
      the
      weighted average number of common and dilutive common equivalent shares
      outstanding during the periods. The basic and diluted weighted average number
      of
      common shares outstanding in the financial statements are the same in fiscal
      years 2005, 2004, and 2003 because including a diluted calculation in a loss
      position would produce an anti-dilutive per share amount. The number of diluted
      weighted average common shares outstanding would be higher by 131,230 shares
      in
      2005, 335,215 shares in 2004, and 328,172 shares in 2003 without this
      anti-dilutive impact.





**Stock
      Options** -
      The
      Company grants options to purchase Criticare Systems, Inc. common shares under
      stock option plans that are described more fully in Note 8. The Company has
      adopted the disclosure-only provisions of SFAS No. 123, "Accounting
      for
      Stock-Based Compensation," and the additional disclosures required by SFAS
      No.
      148, “Accounting for Stock Based Compensation - Transition and Disclosure”, but
      applies Accounting Principles Board Opinion No. 25, "Accounting for
      Stock
      Issued to Employees" and related interpretations in accounting for its stock
      option plans. The Company will implement SFAS No. 123 (Revised),
      "Accounting for Stock-Based Compensation," as of the fiscal year 2006, beginning
      July 1, 2005. If the Company had elected to recognize compensation cost for
      the
      options granted during the years ended June 30, 2005, 2004 and 2003, consistent
      with the method prescribed by SFAS No. 123, net loss and net loss per
      share
      would have been changed to the pro forma amounts indicated
      below:


28





**Years
                Ended June 30,****2005**
            
            **2004**
            
            **2003**Net
                loss--as reported
            
            $
            (422,245
            )
            $
            (2,100,573
            )
            $
            (938,596
            )Less
                compensation expense for options granted
            
            
            211,498
            
            
            285,566
            
            
            173,152Net
                loss--pro forma
            
            $
            (633,743
            )
            $
            (2,386,139
            )
            $
            (1,111,748
            )Net
                loss per common share--as reported
            
            $
            (0.04
            )
            $
            (0.19
            )
            $
            (0.08
            )Less
                compensation expense for options granted
            
            
            0.02
            
            
            0.02
            
            
            0.02Net
                loss per common share--pro forma (basic anddiluted)
            
            $
            (0.06
            )
            $
            (0.21
            )
            $
            (0.10
            )





**Fair
      Value of Financial Instruments** -- The
      Company's financial instruments under SFAS No. 107 "Disclosure About
      Fair
      Value of Financial Instruments," includes cash, accounts receivable, accounts
      payable, borrowings under line of credit facility and long-term debt. The
      Company believes that the carrying amounts of these accounts are a reasonable
      estimate of their fair value because of the short-term nature of such
      instruments or, in the case of long-term debt because of interest rates
      available to the Company for similar obligations.





**Comprehensive
      Income** -- In
      1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
      This statement establishes rules for the reporting of comprehensive income
      and
      its components. Comprehensive income consists of net income, foreign currency
      translation adjustments and unrealized gains on investments, and is presented
      in
      the consolidated statements of stockholders' equity.





**Use
      of Estimates** -- The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reporting period.
      Actual results could differ from those estimates.





**Reclassifications** -
      Certain
      amounts from the fiscal 2004 financial statements have been reclassified to
      conform to the fiscal 2005 presentation.





**2.**
            **INVENTORIES**





Inventories
                consist of the following as of June
                30:





**2005**
            
            **2004**Component
                parts
            
            $
            3,573,396
            
            $
            1,988,414Work
                in process
            
            
            1,085,172
            
            
            781,156Finished
                units
            
            
            1,330,825
            
            
            4,110,607Total
                inventories
            
            
            5,989,393
            
            
            6,880,177Less:
                reserve for obsolescence
            
            
            438,300
            
            
            610,000Net
                inventory
            
            $
            5,551,093
            
            $
            6,270,177





29





**3.  
      LICENSE R** **IGHTS
      AND PATENTS**





The
      components of and changes in the carrying amount of license rights and patents
      are as follows:





**2005**
            
            **2004**License
                rights and patents
            
            $
            196,777
            
            $
            196,777Accumulated
                amortization
            
            
            (126,794
            )
            
            (119,792
            )Net
                license rights and patents
            
            $
            69,983
            
            $
            76,985





Future
      amortization of license and patents is as follows at June 30, 2005:





Year
                ended June 30,2006
            $
                7,0012007
            7,0012008
            7,0012009
            7,0012010
            7,001Thereafter
            34,978Total
            $69,983





Approximately
      $7,000 of amortization was charged to operations in each of the fiscal years
      ended June 30, 2005, 2004, and 2003.





**4.  
      PRODUCT WARRANTY**





The
      Company’s products are subject to warranties, and therefore liabilities are
      established for the estimated future costs of repair or replacement and included
      in cost of sales at the time the related sale is recognized. These liabilities
      are adjusted based on management’s best estimates of future warranty costs after
      considering historical and projected product failure rates and product repair
      costs. In the event that actual experience differs from these best estimates,
      changes in the Company’s warranty liabilities might become
      necessary.





Changes
      in the Company’s warranty liability for fiscal years 2005 and 2004 are as
      follows:





**2005**
            
            **2004**Balance,
                beginning of year
            
            $
            444,000
            
            $
            312,000Warranties
                issued
            
            
            297,955
            
            
            453,212Settlements
            
            
            (289,955
            )
            
            (321,212
            )Changes
                in estimated pre-existing warranties
            
            
            --
            
            
            --Balance,
                end of year
            
            $
            452,000
            
            $
            444,000





The
                Company’s warranty settlements for fiscal 2003 totaled
                $352,865.


30





**5.**
            **INCOME
                TAXES**





The
      Company accounts for income taxes using an asset and liability approach which
      generally requires the recognition of deferred income tax assets and liabilities
      based upon the expected future income tax consequences of events that have
      previously been recognized in the Company's financial statements or tax returns.
      In addition, a valuation allowance is recognized if it is more likely than
      not
      that some or all of the deferred income tax asset will not be realized. A
      valuation allowance is used to offset the related net deferred income tax assets
      due to uncertainties of realizing the benefits of certain net operating loss
      and
      tax credit carryforwards.





The
      valuation allowance was increased $360,000 in 2005 and $1,095,000 in
      2004.





Significant
      components of the Company's deferred income tax assets and deferred income
      tax
      liabilities are as follows:




**June
                  30,**
              
              **June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2003**Deferred
                  income tax assets:Accounts
                  receivable and sales allowances
              
              $
              148,000
              
              $
              133,000
              
              $
              148,000Inventory
                  allowances
              
              
              196,000
              
              
              269,000
              
              
              580,000Product
                  warranties
              
              
              177,000
              
              
              174,000
              
              
              122,000Other
                  accrued liabilities
              
              
              146,000
              
              
              135,000
              
              
              122,000Severance
                  pay accrual
              
              
              9,000
              
              
              14,000
              
              
              21,000Federal
                  net operating loss carryforwards
              
              
              6,004,000
              
              
              5,772,000
              
              
              4,543,000State
                  net operating loss carryforwards
              
              
              601,000
              
              
              574,000
              
              
              502,000Federal
                  tax credit carryforwards
              
              
              198,000
              
              
              198,000
              
              
              198,000Excess
                  of book over tax depreciation and amortization
              
              
              116,000
              
              
              0
              
              
              0Investment
                  losses not deducted
              
              
              118,000
              
              
              118,000
              
              
              118,000Total
                  deferred income tax assets
              
              
              7,713,000
              
              
              7,387,000
              
              
              6,354,000


Deferred
                    income tax liabilities:Excess
                    of tax over book depreciation and amortization
                
                
                0
                
                
                (22,000
                )
                
                (106,000
                )Prepaid
                    expenses
                
                
                (42,000
                )
                
                (54,000
                )
                
                (32,000
                )Total
                    deferred income tax liabilities
                
                
                (42,000
                )
                
                (76,000
                )
                
                (138,000
                )Valuation
                    allowance
                
                
                (7,671,000
                )
                
                (7,311,000
                )
                
                (6,216,000
                )Net
                    deferred income taxes recognized in the
                  consolidated
                    balance sheets
                
                $
                0
                
                $
                0
                
                $
                0


At
      June
      30, 2005, the Company had federal net operating loss carryforwards of
      approximately $17,661,000 which expire in 2008 through 2025. At June 30, 2005,
      the Company had available for federal income tax purposes approximately $87,000
      of alternative minimum tax credit carryforwards which carry forward indefinitely
      and approximately $111,000 of tax credit carryforwards which expire in the
      years
      2007 through 2009. The Company also has approximately $12,022,000 of state
      net
      operating loss carryforwards, which expire in 2005 through 2020, available
      to
      offset certain future state taxable income.





31


The
      income tax provision consists of the following:





**2005**
            
            **2004**
            
            **2003**CurrentFederal
            
            $
            0
            
            $
            0
            
            $
            0State
            
            
            0
            
            
            0
            
            
            0Total
                income tax provision
            
            $
            0
            
            $
            0
            
            $
            0





A
                reconciliation of the provision for income taxes (benefit) at the
                federal
                statutory income tax rate to the effective income tax rate
                follows:





**2005**
            
            **2004**
            
            **2003**Federal
                statutory income tax rate
            
            
            (34.0
            )%
            
            (34.0
            )%
            
            (34.0
            )%Losses
                for which no benefit was provided
            
            
            77.2
            
            
            49.1
            
            
            33.0Stock
                  options and warrants
            
            
            (46.0
            )%
            
            (15.5
            )%
            
            (0.3
            )%Other—net
            
            
            2.8
            
            
            0.4
            
            
            1.3Effective
                income tax rate
            
            
            0
            %
            
            0
            %
            
            0
            %





**6.**
            **LINE
                OF CREDIT FACILITY**





At
                June 30, 2005, 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% (6.00% as of June 30, 2005).
                As of
                June 30, 2005, 2004, and 2003 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 June 30,
                2005.





**7.**
            **CONTINGENCIES**





From
      time
      to time, various lawsuits arise out of the normal course of business. These
      proceedings are handled by outside counsel. Currently management is not aware
      of
      any claim or action pending against the Company that would have a material
      adverse effect on the Company.





**8.**
            **STOCKHOLDERS'
                EQUITY**





**Stock
      Options** -At the
      annual stockholders meeting held on November 14, 2003, the Company’s
      stockholders approved the Criticare Systems, Inc. 2003 Stock Option Plan (the
      “2003 Plan”). This 2003 Plan replaced the 1992 Employee Stock Option Plan and
      the 1992 Non-Employee Stock Option Plan (collectively, the “1992 Plans”) and
      179,380 reserved shares of common stock available under the 1992 Plans were
      moved to the 2003 Plan. The stockholders also approved 250,620 shares being
      available for future grants in addition to the 179,380 shares currently
      available, for a total of 430,000 shares authorized for issuance under the
      2003
      Plan. The Company also has


32


options
      outstanding under two plans which existed prior to the approval of the
      1992 Plans, the 1987 Employee Stock Option Plan and the 1987 Non-Employee
      Stock Option Plan (collectively with the 1992 Plans, the "Old Plans"). As a
      result of the approval of the 2003 Plan, no new stock options can be granted
      under the Old Plans, although the Company can regrant existing stock options
      under the Old Plans to extend the terms of such options. The Board of Directors
      has authorized in connection with these stock option plans the issuance of
      2,710,620 reserved shares of common stock, of which 45,624 reserved shares
      remain available for future issuance at June 30, 2005. The Board of Directors
      increased the number of reserved shares for issuance under the Plans from
      1,720,000 to 2,220,000 during 2001, from 2,220,000 to 2,460,000 during 2002,
      and
      from 2,460,000 to 2,710,620 during 2003. The activity during 2003, 2004 and
      2005
      for the above plans is summarized as follows:





**Number
                of**
            
            **Stock
                Options**
            
            **Weighted
                Avg.****Shares**
            
            **Price
                Range**
            
            **Exercise
                Price**Outstanding
                at June 30, 2002
            
            
            1,209,620
            
            $
            1.50-4.40
            
            $
            2.26Granted
            
            
            273,950
            
            
            2.88-3.11
            
            
            2.91Cancelled
            
            
            (52,700
            )
            
            2.97-3.62
            
            
            3.18Exercised
            
            
            (4,500
            )
            
            1.63
            
            
            1.63Outstanding
                at June 30, 2003
            
            
            1,426,370
            
            
            1.50-4.40
            
            
            2.35Granted
            
            
            414,000
            
            
            3.05-4.37
            
            
            3.19Cancelled
            
            
            (39,750
            )
            
            1.63-4.30
            
            
            3.21Exercised
            
            
            (370,725
            )
            
            1.50-2.97
            
            
            1.66Outstanding
                at June 30, 2004
            
            
            1,429,895
            
            
            1.88-4.40
            
            
            2.75Granted
            
            
            96,000
            
            
            2.25-5.13
            
            
            2.97Cancelled
            
            
            (189,200
            )
            
            2.88-3.75
            
            
            3.16Exercised
            
            
            (280,337
            )
            
            1.88-4.30
            
            
            2.46Outstanding
                at June 30, 2005
            
            
            1,056,358
            
            
            1.88-5.13
            
            
            2.77





The
                following table summarizes information about stock options outstanding
                as
                of June 30, 2005:




**Options
                  Outstanding**
              
              **Options
                  Exercisable**Weighted
                  AverageShares
              Remaining
              Weighted
              
              SharesRange
                  of
              Outstanding
              Contractual
              Average
                  Exercise
              
              Exercisable
              Weighted
                  AverageExercise
                  Prices
              At
                  June 30, 2005
              Life-Years
              Price
              
              at
                  June 30, 2005
              Exercise
                  Price$
                  1.88-2.88
              451,250
              2.39
              $
                  2.34
              
              310,625
              $
                  2.152.97-4.40
              605,108
              5.16
              3.10
              
              347,728
              3.05$
                  1.88-4.40
              1,056,358
              3.97
              $ 2.77
              
              658,353
              $
                  2.62




The
      weighted average exercise price of exercisable options at June 30, 2005, 2004,
      and 2003 was $2.62, $2.56, and $2.18, respectively.





Outstanding
      options have fixed terms and are exercisable over a period determined by the
      Compensation Committee of the Company's Board of Directors but no longer than
      ten years after the date of grant.





33


The
      Company has adopted the disclosure-only provisions of SFAS No. 123,
      "Accounting for Stock-Based Compensation," and the additional disclosures
      required by SFAS No. 148, “Accounting for Stock Based Compensation - Transition
      and Disclosure”, but applies Accounting Principles Board Opinion No. 25,
      "Accounting for Stock Issued to Employees" and related interpretations in
      accounting for its plans. The fair value of stock options is the estimated
      present value at the grant date using the Black-Scholes option-pricing model.
      The weighted average fair market value of the options granted during fiscal
      2005, 2004, and 2003, along with the assumptions used, follows
      below:





**Years
                Ended June 30,****2005**
            **2004**
            **2003**Weighted
                average fair market value of options
              granted
                during the fiscal year ended June 30
            $1.62
            $0.95
            $0.69





Assumptions
                used:Expected
                volatility
            55.0%
            80.0%
            80.0%Risk-free
                interest rate
            3.74%
            4.39%
            2.87%Expected
                option life (in years)
            6.25
            9.40
            4.40





**Stock
      Warrants** -- In
      February 1998, the Company executed a warrant agreement with a consultant.
      The
      warrant agreement provided for the issuance of warrants to purchase up to
      150,000 shares of common stock at a price of $3.00 per share. The warrant was
      exercisable as to 30,000 shares upon execution of the agreement and the warrants
      to purchase the remaining 120,000 shares were to be exercisable if certain
      performance parameters were achieved by February 1999. No such parameters were
      achieved. These warrants expired in February 2003, but were amended. The 30,000
      warrants were extended for an additional five years with an exercise price
      of
      $2.88 per share which represents the closing price of the Company’s stock on the
      date the warrants were amended. The fair value of the extended warrants, based
      on the estimated present value at the grant date using the Black-Scholes pricing
      model, totaled $24,990 and was expensed during the year in which they were
      extended, fiscal 2003.





In
      December 2000, the Company executed another warrant agreement with the
      consultant. The warrant agreement provides for the issuance of warrants to
      purchase up to 70,000 shares of common stock at a price of $1.875 per share.
      The
      warrant vests over a four year period in four equal increments each year on
      the
      anniversary date of the warrant. The warrant terminates as to any shares that
      are unvested at the time the consultant ceases to provide consulting services
      to
      the Company. As of December 21, 2004, the warrant had fully vested. During
      fiscal 2005, this warrant was exercised in full to purchase 70,000 shares.
      The
      fair value of this warrant is the estimated present value at the grant date
      using the Black-Scholes pricing model. The fair value is then expensed evenly
      over the vesting period of each of the grants. Based upon the pricing model
      and
      vesting period, Criticare recognized consulting expense of $0, $0 and $766,
      respectively, for fiscal 2005, 2004 and 2003 in accounting for this
      warrant.





34


**Preferred
      Stock** - The
      Company's Board of Directors has the authority to determine the relative rights
      and preferences of any series it may establish with respect to the 500,000
      shares of $.04 par value authorized preferred shares. As of June 30, 2005,
      no
      preferred stock was issued or outstanding.





On
      March
      27, 1997, the Board of Directors of the Company declared a dividend of one
      preferred share purchase right (a "Right") for each outstanding share of common
      stock of the Company. The dividend was made on April 24, 1997 to the
      stockholders of record on that date to purchase Preferred Stock ("Preferred")
      upon the occurrence of certain events. The Rights will be exercisable the tenth
      business day after a person or group acquires 20% of the Company's common stock,
      or makes an offer to acquire 30% or more of the Company's common stock. When
      exercisable, each right entitles the holder to purchase for $25, subject to
      adjustment, one-hundredth of a share of Preferred for each share of common
      stock
      owned. Each share of Preferred will be entitled to a minimum preferential
      quarterly dividend of $25 per share, but not less than an aggregate dividend
      of
      100 times the common stock dividend. Each share will have 100 votes, voting
      together with the common stock. In the event of any merger, each share of
      Preferred will be entitled to receive 100 times the amount received per share
      of
      common stock. The Rights expire on April 1, 2007.





**Common
      Stock Held in Treasury -**At June 30, 2005 and 2004, the Company held in
      Treasury 112,593 and 124,728 shares of common stock, respectively. On February
      28, 2002, the Criticare Board of Directors approved the purchase in the open
      market of up to 500,000 shares of Criticare common stock. At June 30, 2005
      and
      2004, the Company held in Treasury 76,223 shares of common stock purchased
      in
      accordance with this stock buyback program.





**9.**  **EMPLOYEE
      BENEFIT PLAN**





The
      Company has a 401(k) plan which covers substantially all employees. Company
      contributions to the plan are discretionary and determined annually by the
      Company's Board of Directors. The Company's contributions were approximately
      $97,000, $96,000, and $92,000 in 2005, 2004 and 2003, respectively.





**10.**  **BUSINESS
      AND CREDIT CONCENTRATIONS**





Financial
      instruments which potentially subject the Company to concentrations of credit
      risk consist of cash, certificates of deposit, and accounts receivable. These
      financial instruments are carried at approximate fair value, less appropriate
      allowance, due to their short maturities.





35


The
      Company maintains cash balances which at times may exceed federally insured
      limits. As of June 30, 2005 and 2004, the Company held $3,380,965 and
      $3,425,816, respectively, in excess of federally insured limits. The Company’s
      management evaluates the creditworthiness of the financial institutions in
      which
      it places its cash. The Company has not experienced any losses in such accounts
      and does not believe it is exposed to any significant credit risk for cash
      accounts.





The
      Company is a manufacturer of medical monitors and telemetry products whose
      customers include hospitals and alternative health care sites throughout the
      world. Although the Company's products are sold primarily to health care
      providers, concentrations of credit risk with respect to trade accounts
      receivable are limited due to the Company's large number of customers, their
      geographic dispersion, and the Company’s credit evaluation process. The Company
      currently coordinates substantially all international sales and distribution
      activities through its headquarters in Waukesha, Wisconsin. Other than inventory
      and accounts receivable for the Company’s operation in India totaling
      approximately $1.3 million, identifiable assets located outside of the United
      States are insignificant in relation to the Company's total assets. Net export
      sales by geographic area are as follows:





**2005**
            
            **2004**
            
            **2003**Europe
                and Middle East
            
            $
            7,182,000
            
            $
            7,164,000
            
            $
            7,812,000Pacific
                Rim
            
            
            1,787,000
            
            
            1,389,000
            
            
            1,614,000Canada
                and Central and South America
            
            
            2,689,000
            
            
            3,246,000
            
            
            2,218,000Export
                net sales
            
            $
            11,658,000
            
            $
            11,799,000
            
            $
            11,644,000U.S.
                net sales
            
            
            15,124,000
            
            
            16,792,000
            
            
            16,919,000Total
                net sales
            
            $
            26,782,000
            
            $
            28,591,000
            
            $
            28,563,000





Note:  
      Sales in Europe and the Middle East have been combined above due to joint sales
      responsibility in these areas. No foreign country made up more than 10% of
      the
      Company’s total net sales.





**11.**  **OTHER
      BUSINESS CONCENTRATIONS**





During
      2003, the Company entered into an OEM agreement with a customer to jointly
      develop and exclusively sell a highly specialized medical monitoring product
      to
      the OEM. In July 2004, Criticare shipped the initial prototypes of this
      monitoring product to this OEM and in January 2005 production shipments began.
      Sales to this customer approximated $3,100,000 in fiscal 2005, which represented
      approximately 12% of the Company's total net sales. The Company had a receivable
      balance from this customer of $1,373,836 on June 30, 2005, which represented
      20%
      of the Company's total receivables as of this date.





During
      1999, the Company entered into an OEM agreement with a customer. Sales to this
      customer approximated $2,129,000, $3,580,000, and $3,723,000 in fiscal 2005,
      2004, and 2003, respectively, which represented approximately 8%, 13% and 13%
      of
      the Company's total net sales in each of these fiscal years. The Company had
      a
      receivable balance from this customer of $218,891, $295,463, and $396,775 on
      June 30, 2005, 2004, and 2003, respectively, which represented 3%, 4%, and
      6% of
      the Company's total receivables as of these dates.





36


In
      fiscal
      2001, the Company entered into agreements with two offshore contract
      manufacturing firms to supply finished products. During fiscal 2005, the Company
      ended the supply partnership agreement with one of the contract manufacturing
      firms. A summary of the purchases and outstanding payables to these two
      companies for the years ended June 30, 2005, 2004, and 2003 follows
      below:





**2005**
            
            **2004**
            
            **2003******Supplier
                I - Purchases
            
            $
            6,193,106
            
            $
            6,756,279
            
            $
            6,710,734%
                of total purchases
            
            
            29.5
            %
            
            30.0
            %
            
            25.6
            %Accounts
                payable balance
            
            $
            610,479
            
            $
            1,227,116
            
            $
            1,034,427%
                of total payables
            
            
            20.1
            %
            
            37.9
            %
            
            45.5
            %Supplier
                II - Purchases
            
            $
            270,058
            
            $
            1,115,484
            
            $
            2,958,231%
                of total purchases
            
            
            1.3
            %
            
            5.0
            %
            
            11.3
            %Accounts
                payable balance
            
            $
            0
            
            $
            200,978
            
            $
            114,975%
                of total payables
            
            
            0.0
            %
            
            6.2
            %
            
            5.1
            %








**12.**  **COMMITMENTS**





The
      Company leases various equipment under both operating leases and a capital
      lease, which expire at various dates through fiscal 2010.





On
      January 19, 2004 the Company entered into a lease agreement for the hardware
      and
      software for a new business system. This lease has been accounted for as a
      capital lease in accordance with SFAS No. 13, “Accounting for Leases”. The
      following is an analysis of this capital lease:





June
                30, 2005
            
            June
                30, 2004Machinery
                and equipment
            
            $
            333,840
            
            $
            333,840Less
                accumulated depreciation
            
            
            (71,537
            )
            
            (23,846
            )Net
            
            $
            262,303
            
            $
            309,994





Depreciation
      expense was $47,691 and $23,846, respectively, in fiscal 2005 and
      2004.





In
      August
      2002 the Company sold its facility headquartered in Waukesha, Wisconsin and
      leased back approximately 62% of the building’s square footage through August
      2007. Rent expense was $337,281 in 2005 and $328,268 in 2004 for the five year
      building lease and all other lease commitments.





The
      following is a schedule by years of the future minimum lease payments under
      this
      capital lease and future minimum rental payments required under operating
      leases, together with the present value of the net minimum lease payments at
      June 30, 2005:


37





Capital
            
            OperatingFiscal
                year ending June 30
            
            Lease
            
            Leases2006
            
            $
            82,560
            
            $
            335,9372007
            
            
            82,560
            
            
            327,3662008
            
            
            82,560
            
            
            79,4182009
            
            
            52,140
            
            
            27,2832010
                and thereafter
            
            
            10,500
            
            
            2,038Total
                minimum lease payments
            
            $
            310,320
            
            $
            772,042Less
                amount representing interest
            
            
            (45,550
            )Present
                value of net minimum lease payments
            
            $
            264,770Less
                current portion at June 30, 2005
            
            
            62,739Long-term
                portion at June 30, 2005
            
            $
            202,031








During
      fiscal 2001, the Company entered into supply partnership agreements with two
      offshore contract manufacturing firms that exclusively manufacture medical
      devices in a regulated environment. These two firms manufacture specific
      products designated by the Company in accordance with formal purchase orders.
      The initial term of the agreements is for a period of three years and is
      automatically extended for additional periods of two years each, unless either
      party gives written notice at least sixty days prior to the end of the initial
      term or the then current extension term. During fiscal 2005, the Company ended
      the supply partnership agreement with one of the contract manufacturing firms.
      To ensure an adequate supply of products manufactured by this company is
      maintained, the remaining agreement requires that this firm keeps on hand in
      its
      finished goods inventories one full month of supply of all products under
      current purchase orders. At June 30, 2005 and 2004, a one month supply of
      product maintained at the firm would total approximately $555,000. In the event
      the Company would cancel a purchase order under the agreement, the Company
      would
      be required to purchase at cost all raw materials, work-in-progress and finished
      goods inventories for that purchase order. The total work-in-process and raw
      material inventories for the agreement is approximately $555,000. In addition,
      any property or equipment that this firm purchased specifically for the
      production of the Company's products would be purchased at mutually agreed
      upon
      prices. There have not been any purchase order cancellations under this
      agreement.





38


**13. 
      GUARANTEES**





Criticare
      Integration, a wholly owned U.S. subsidiary of the Company, was incorporated
      on
      April 8, 2003 to supply medical equipment and supplies to medical facilities
      in
      countries in the Black Sea Economic Zone (Albania, Armenia, Azerbaijan,
      Bulgaria, Georgia, Romania, and the Ukraine). The Company had set up a standby
      letter of credit for $400,000 on behalf of a Romanian company it was working
      with in connection with this new venture. In fiscal 2004, Criticare recognized
      a
      charge to other expenses in the amount of $400,000 to reserve for the impending
      call of this guarantee. In addition, Criticare also had an outstanding
      receivable due from the international distributor relating to equipment sold
      by
      Criticare to the international distributor. In fiscal 2004, Criticare believed
      that it would be unlikely to be able to collect the receivable due from the
      international distributor or recover the equipment shipped. Accordingly,
      Criticare set up an allowance for the expected write off in the amount of
      $421,000. A reserve in the amount of $90,000 was also been established to
      satisfy a claim for duties and Value Added Tax associated with importation
      of
      products into a foreign country on behalf of the international
      distributor.





**14.** **QUARTERLY
      RESULTS** -
      Unaudited





The
      following table contains quarterly information, which includes all adjustments,
      consisting only of normal recurring adjustments, that the Company considers
      necessary for a fair presentation.





**June
                30,**
            
            **March
                31,**
            
            **Dec.
                31,**
            
            **Sept.
                30,**
            
            **June
                30,**
            
            **March
                31,**
            
            **Dec.
                31,**
            
            **Sept.
                30,****2005**
            
            **2005**
            
            **2004**
            
            **2004**
            
            **2004**
            
            **2004**
            
            **2003**
            
            **2003****(in
                thousands, except per share data)**Net
                sales
            
            $
            8,021
            
            $
            6,055
            
            $
            7,375
            
            $
            5,331
            
            $
            6,668
            
            $
            6,571
            
            $
            8,980
            
            $
            6,372Gross
                profit
            
            
            3,068
            
            
            2,430
            
            
            3,101
            
            
            1,871
            
            
            2,702
            
            
            2,809
            
            
            3,685
            
            
            2,574Net
                income (loss)
            
            
            371
            
            
            (245
            )
            
            152
            
            
            (700
            )
            
            (1,708
            )
            
            (413
            )
            
            412
            
            
            (392
            )Net
                income (loss) percommon
                share:—Basic
                and diluted
            
            
            0.03
            
            
            (0.02
            )
            
            0.01
            
            
            (0.06
            )
            
            (0.15
            )
            
            (0.04
            )
            
            0.04
            
            
            (0.04
            )





The
      Company typically receives a substantial volume of its quarterly sales orders
      at
      or near the end of each quarter. In anticipation of meeting this expected
      demand, the Company usually builds a significant inventory of finished products
      throughout each quarter. If the expected volume of sales orders is not received
      during the quarter, or is received too late to allow the Company to ship the
      products ordered during the quarter, the Company's quarterly results and stock
      of finished inventory can be significantly affected.





39


**Report
      of Independent Registered Public Accounting Firm**





To
      the
      Board of Directors and Stockholders of Criticare Systems, Inc.:


Waukesha,
      Wisconsin





We
      have
      audited the accompanying consolidated balance sheets of Criticare Systems,
      Inc.
      as of June 30, 2005 and 2004, and the related consolidated statements of
      operations, stockholders' equity, and cash flows for each of the three years
      in
      the period ended June 30, 2005. These financial statements are the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audits included consideration of internal control
      over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit includes examining,
      on a test basis, evidence supporting the amounts and disclosures in the
      financial statements. An audit also includes assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. We believe that our audits provide
      a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Criticare Systems, Inc.
      at
      June 30, 2005 and 2004, and the results of its operations and its cash flows
      for
      each of the three years in the period ended June 30, 2005, in conformity with
      accounting principles generally accepted in the United States of
      America.





/s/
      BDO
      Seidman, LLP


Milwaukee,
      Wisconsin


August
      12, 2005








40


Item
      9.  CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE .




Not
      applicable.




Item
      9A. 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 upon 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.





Item
      9B . OTHER
      INFORMATION .





Not applicable.


41




PART
      III





Item
      10 .  DIRECTORS
      AND EXECUTIVE OFFICERS OF THE REGISTRANT .





Information regarding the executive officers and directors of the Company is
      incorporated herein by reference to the discussions under "Election of
      Directors," "Section 16(a) Beneficial Ownership Reporting Compliance,"
      "Executive Officers," "Audit Committee Matters—Audit Committee Financial Expert"
      and "Corporate Governance Matters—Code of Business Ethics" in the Company's
      Proxy Statement for the 2005 Annual Meeting of Stockholders which will be filed
      on or before October 28, 2005 (the "Criticare Proxy Statement").





The Audit Committee of the Company's Board of Directors is an "audit committee"
      for purposes of Section 3(a)(58)(A) of the Securities Exchange Act of 1934.
      The
      members of the Audit Committee are Dr. Higgins D. Bailey, Dr. N.C. Joseph Lai
      and Stephen K. Tannenbaum (Chairman).





Item
      11 .  EXECUTIVE
      COMPENSATION .





Information regarding executive compensation is incorporated herein by reference
      to the discussion under "Executive Compensation" and "Compensation of Directors"
      in the Criticare Proxy Statement.




Item
      12 .  SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS.


Information regarding security ownership of certain beneficial owners and
      management is incorporated herein by reference to the discussion under "Security
      Ownership" in the Criticare Proxy Statement.





The following table summarizes share information for the Company’s equity
      compensation plans as of June 30, 2005, including the 2003 Stock Option Plan,
      the 1992 Employee Stock Option Plan, the 1992 Non-Employee Stock Option Plan,
      the 1987 Employee Stock Option Plan, the 1987 Non-Employee Stock Option Plan
      and
      the Company’s Employee Stock Purchase Plan.





42




**Equity
      Compensation Plan Information**





Number
                of securitiesremaining
                available forNumber
                of securities to be
            Weighted
                average
            future
                issuance underissued
                upon exercise of
            exercise
                price of
            equity
                compensationoutstanding
                options,
            outstanding
                options,
            plans
                (excluding securitiesPlan
                category
            warrants
                and rights
            warrants
                and rights
            in
                first column)Equity
                compensationplans
                approved bysecurity
                holders
            1,056,358
                shares
            $2.77
                per share
            477,897
                sharesEquity
                compensationplans
                not approved bysecurity
                holders
            30,000 shares
            $2.88
                per share
            0 sharesTotal
            1,086,358
                shares
            $2.78
                per share
            477,897
                shares





As noted in the table above, the Company has issued warrants to a consultant
      which have not been approved by the Company’s stockholders. The Company extended
      warrants for the purchase of 30,000 shares of Common Stock issued to the
      consultant expiring in February 2003 for an additional five years with an
      exercise price of $2.88 per share.




Item
        13 . 
        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.


Information regarding certain relationships and related party transactions
      is
      incorporated herein by reference to the discussion under "Executive
      Compensation—Employment Agreements” in the Criticare Proxy Statement.





Item
      14.  PRINCIPAL
      ACCOUNTANT FEES AND SERVICES.





Information regarding the fees and services of the independent registered public
      accounting firm is incorporated herein by reference to the discussion under
      “Audit Committee Matters—Fees of Independent Registered Public Accounting Firm”
      in the Criticare Proxy Statement.





43





PART
      IV







Item
      15 . 
      EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES.




(a) The
      following documents are filed as part of this report:





1. Financial
      Statements .
      The
      following consolidated financial statements of the Company are included in
      Item
      8 of this report.





Consolidated
      Balance Sheets - as of June 30, 2005 and 2004.





Consolidated
      Statements of Operations - for the years ended June 30, 2005, 2004 and
      2003.





Consolidated
      Statements of Stockholders' Equity - for the years ended June 30, 2005,
      2004 and 2003.





Consolidated
      Statements of Cash Flows - for the years ended June 30, 2005, 2004 and
      2003.





Notes
      to
      consolidated financial statements.





Report
      of
      Independent Registered Public Accounting Firm.





2. Financial
      Statement Schedules :





Report
      of
      Independent Registered Public Accounting Firm.





Financial
      Statement Schedule for the years ending June 30, 2005, 2004 and
      2003:





ScheduleNumber
            Description
            PageII
            Valuation
                and Qualifying
            51Accounts
                and Reserves





All other schedules for which provision is made in the applicable accounting
      regulations of the Securities and Exchange Commission are not required under
      the
      related instructions, are inapplicable or the required information is shown
      in
      the financial statements or notes thereto, and therefore have been
      omitted.





44





3. Exhibits :





3.1 Restated
      Certificate of Incorporation of the Company (incorporated by reference to the
      Registration Statement 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* 2003
      Stock Option Plan (and form of stock option grant agreement) (incorporated
      by
      reference to the Company's Annual Report on Form 10-K for the year ended
      June 30, 2004)..





10.2* 1999
      Employee Stock Purchase Plan (incorporated by reference to the Company's Annual
      Report on Form 10-K for the year ended June 30, 1999).





10.3* 1992
      Employee Stock Option Plan (incorporated by reference to the Company's
      Registration Statement on Form S-8, Registration
      No. 33-60644).





10.4* 1992
      Nonemployee Stock Option Plan (incorporated by reference to the Company's
      Registration Statement on Form S-8, Registration
      No. 33-60214).





10.5* 1987
      Employee Stock Option Plan (incorporated by reference to the Company's
      Registration Statement on Form S-8, Registration
      No. 33-33497).





10.6* 1987
      Nonemployee Stock Option Plan (incorporated by reference to the Company's
      Registration Statement on Form S-8, Registration
      No. 33-40038).





10.7* Form
      of
      Executive Officer and Director Indemnity Agreement (incorporated by reference
      to
      the Company's Registration Statement on Form S-1, Registration
      No. 33-13050).





10.8* Employment
      Agreement of Emil H. Soika (incorporated by reference to the Company's Annual
      Report on Form 10-K for the year ended June 30, 1999).





45


10.9* Employment
      Agreement of Drew M. Diaz (incorporated by reference to the Company's Annual
      Report on Form 10-K for the year ended June 30, 1999).





10.10 Supply
      Partnership Agreement, dated as of August 1, 2000, between the Company and
      BioCare Corporation (incorporated by reference to the Company’s Annual Report on
      Form 10-K for the year ended June 30, 2001).





10.11 Supply
      Agreement, dated as of October 26, 2000, between the Company and TriVirix
      International Limited (incorporated by reference to the Company’s Annual Report
      on Form 10-K for the year ended June 30, 2001).




10.12* Employment
      Agreement of Joseph P. Lester (incorporated by reference to the Company’s
      Quarterly Report on Form 10-Q for the quarter ended September 30,
      2002).





10.13* Employment
      Agreement of Deborah A. Zane.





10.14* Employment
      Agreement of Joel D. Knudson.





10.15* Employment
      Agreement of Michael Larsen.





21 Subsidiaries.





23.1 Consent
      of BDO Seidman, LLP.




24 Power
      of
      Attorney (incorporated by reference to the signature page hereof).




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.





__________________


*
      Management contract or compensatory plan or arrangement.





**
      This
      Certification is not “filed” for purposes of Section 18 of the Securities
      Exchange Act of 1934, as amended, or incorporated by reference into any filing
      under the Securities Act of 1933, as amended, or the Securities Exchange Act
      of
      1934, as amended.





46





(b) Exhibits.





The response to this portion of Item 15 is submitted as a separate section
      of
      this report.





(c) Financial
      Statement Schedules.





The response to this portion of Item 15 is submitted as a separate section
      of
      this report.





47


SIGNATURES








Pursuant
      to the requirements of Section 13 or 15(d) 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.





By /s/
      Emil H.
      Soika


Emil
      H.
      Soika, President


and
      Chief
      Executive Officer





Date:
       September 9, 2005








POWER
      OF
      ATTORNEY





KNOW
      ALL
      MEN BY THESE PRESENTS, that each person whose signature appears below
      constitutes and appoints Emil H. Soika and Joel D. Knudson, and each of them,
      as
      his true and lawful attorneys-in-fact and agents, with full power of
      substitution and resubstitution, for him and in his name, place and stead,
      in
      any and all capacities, to sign any and all amendments to this Report on
      Form 10-K and to file the same, with all exhibits thereto and other
      documents in connection therewith, with the Securities and Exchange Commission,
      granting unto said attorneys-in-fact and agents, and each of them full power
      and
      authority to do and perform each and every act and thing requisite and necessary
      to be done in connection therewith, as fully to all intents and purposes as
      he
      might or could do in person, hereby ratifying and confirming all that said
      attorneys-in-fact and agents, or any of them, or their or his substitute or
      substitutes, may lawfully do or cause to be done by virtue hereof.





Pursuant
      to the requirements of the
      Securities Exchange Act of 1934, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.





Signature
            Title
            Date/s/
              Emil H. Soika
            President,
                Chief Executive Officer
            September
                9, 2005Emil
                H. Soika
            and
                Director (Principal ExecutiveOfficer)


48





/s/
              Joel D. Knudson
            Vice
                President-Finance and Secretary
            September
                9, 2005Joel
                D. Knudson
            (Principal
                Financial and AccountingOfficer)/s/
              Higgins Bailey
            Chairman
                of the Board and Director
            September
                9, 2005Dr.
                Higgins Bailey/s/
              N.C. Joseph Lai
            Director
            September
                9, 2005N.C.
                Joseph Lai, Ph.D./s/
              Jeffrey T. Barnes
            Director
            September
                9, 2005Jeffrey
                T. Barnes/s/
              Stephen K. Tannenbaum
            Director
            September
                9, 2005Stephen
                K. Tannenbaum








49


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Stockholders of


Criticare
      Systems, Inc.:


Waukesha,
      Wisconsin





The
      audits referred to in our report dated August 12, 2005 relating to the
      consolidated financial statements of Criticare Systems, Inc., which is contained
      in Item 8 of this Form 10-K included the audit of the financial statement
      schedules listed in Item 15. These financial statement schedules are the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these financial statement schedules based upon our
      audits.





In
      our
      opinion such financial statement schedules present fairly, in all material
      respects, the information set forth therein.











/s/
      BDO
      Seidman, LLP


Milwaukee,
      Wisconsin


August
      12, 2005





50


SCHEDULE II





CRITICARE
      SYSTEMS, INC.





VALUATION
      AND QUALIFYING ACCOUNTS


FOR
      THE
      YEARS ENDED JUNE 30, 2005, 2004 AND 2003








Column
                A
            
            Column
                B
            
            Column
                C
            
            Column
                D
            
            Column
                EDescription
            
            Balance
                at
              Beginning
              of
                Period
            
            Charged
                to
              Costs
                and
              Expenses
            
            Deductions
            
            Balance
                at
              End
                of
              PeriodYEAR
                ENDED JUNE 30, 2003:Allowance
                for doubtful accounts
            
            $
            300,000
            
            $
            38,566
            
            $
            38,566
            
            $
            300,000Reserve
                for sales returns and
              allowances
            
            $
            72,945
            
            $
            5,000
            
            $
            --
            
            $
            77,945Reserve
                for obsolete inventory
            
            $
            946,000
            
            $
            1,752,352
            
            $
            1,298,352
            
            $
            1,400,000YEAR
                ENDED JUNE 30, 2004:Allowance
                for doubtful accounts
            
            $
            300,000
            
            $
            393,758
            
            $
            433,758
            
            $
            260,000Reserve
                for sales returns and
              allowances
            
            $
            77,945
            
            $
            --
            
            $
            --
            
            $
            77,945Reserve
                for obsolete inventory
            
            $
            1,400,000
            
            $
            509,001
            
            $
            1,299,001
            
            $
            610,000YEAR
                ENDED JUNE 30, 2005:Allowance
                for doubtful accounts
            
            $
            260,000
            
            $
            87,695
            
            $
            47,695
            
            $
            300,000Reserve
                for sales returns and
              allowances
            
            $
            77,945
            
            $
            --
            
            $
            --
            
            $
            77,945Reserve
                for obsolete inventory
            
            $
            610,000
            
            $
            281,003
            
            $
            452,703
            
            $
            438,300


51