UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

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

For the fiscal year ended NOVEMBER 30, 2004 OR

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

For the transition period from ___TO _______    Commission File No. 0-19095

                             SOMANETICS CORPORATION
             (Exact name of Registrant as specified in its charter)

                MICHIGAN
      (State or other jurisdiction                      38-2394784
   of incorporation or organization)        (I.R.S. Employer Identification No.)
                                                        48083-4208
  1653 EAST MAPLE ROAD, TROY, MICHIGAN                  (Zip Code)
(Address of principal executive offices)                           

       Registrant's telephone number, including area code: (248) 689-3050

        Securities registered pursuant to Section 12(b) of the Act: NONE

          Securities registered pursuant to Section 12(g) of the Act:
                                               
                     COMMON SHARES, PAR VALUE $.01 PER SHARE
       ------------------------------------------------------------------
                                (Title of Class)

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. [X]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

The aggregate market value of the common shares held by non-affiliates of the
Registrant as of May 28, 2004 (the last business day of the Registrant's most
recently completed second fiscal quarter), computed by reference to the closing
sale price as reported by Nasdaq on such date, was approximately $141,700,000.

    The number of the Registrant's common shares outstanding as of February
                            22, 2005 was 10,145,382

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2005 Annual Meeting of Shareholders,
scheduled to be held April 21, 2005, are incorporated by reference in Part III,
if the Proxy Statement is filed no later than March 30, 2005.


                             SOMANETICS CORPORATION

                           ANNUAL REPORT ON FORM 10-K

                   FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2004

                                TABLE OF CONTENTS



                                                    PART I
                                                                                                          PAGE
                                                                                                          ----
                                                                                                       
Item 1.  Business...................................................................................        2
Item 2.  Properties.................................................................................       21
Item 3.  Legal Proceedings..........................................................................       21
Item 4.  Submission of Matters to a Vote of Security Holders........................................       21
Supplemental Item.  Executive Officers of the Registrant............................................       22

                                                    PART II

Item 5.  Market for Registrant's Common Equity, Related Shareholder Matters and Issuer
         Purchases of Equity Securities.............................................................       24
Item 6.  Selected Financial Data....................................................................       25
Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations......       26

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................       37
 Item 8. Financial Statements and Supplementary Data................................................       38
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......       57
Item 9A. Controls and Procedures....................................................................       57
Item 9B. Other Information..........................................................................       57

                                                    PART III

Item 10. Directors and Executive Officers of Registrant.............................................       58
Item 11. Executive Compensation.....................................................................       58
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
         Stockholder Matters........................................................................       58
Item 13. Certain Relationships and Related Transactions.............................................       58
Item 14. Principal Accountant Fees and Services.....................................................       58

                                                    PART IV

Item 15. Exhibits and Financial Statement Schedules.................................................       59




                                     PART I

ITEM 1. BUSINESS

THE COMPANY

      We were incorporated in 1982. We develop, manufacture and market the
INVOS(R) Cerebral Oximeter, the only non-invasive patient monitoring system
commercially available in the United States that continuously measures changes
in the blood oxygen level in the brain. We also develop and market the
CorRestore(R) System for use in cardiac repair and reconstruction, including
heart surgeries called surgical ventricular restoration, or SVR.

      We developed the Cerebral Oximeter to meet the need for information about
oxygen in the brain, the organ least tolerant of oxygen deprivation. Without
sufficient oxygen, brain damage may occur within a few minutes, which can result
in paralysis, severe and complex disabilities or death. Brain oxygen
information, therefore, is important, especially in surgical procedures
requiring general anesthesia and in other critical care situations with a high
risk of the brain getting less oxygen than it needs.

      Our objective is to establish the Cerebral Oximeter as a standard of care
in surgical procedures requiring general anesthesia and in other critical care
situations. We target the sale of the INVOS Cerebral Oximeter for use in
surgical procedures with a high risk of brain oxygen imbalances, initially adult
and pediatric cardiac surgeries, carotid artery surgeries, and other major
surgeries involving elderly patients, such as orthopedic surgeries, abdominal
surgeries and head and neck surgeries.

      Surgeons, anesthesiologists, perfusionists and other medical professionals
use the Cerebral Oximeter to identify brain oxygen imbalances and take
corrective action. Clinical research with the INVOS Cerebral Oximeter suggests
its use improves patient outcomes and reduces the cost of care.

      The Cerebral Oximeter is a relatively inexpensive, portable and
easy-to-use neurological monitoring system. It is predominately used in hospital
critical care areas, especially operating rooms and intensive care units. It is
comprised of

      - a portable monitor,

      - dual single-use, disposable sensors, called SomaSensors(R), 

      - proprietary software, and

      - a preamplifier cable.

      SomaSensors are placed on both sides of a patient's forehead to offer
bi-lateral monitoring and are connected to the monitor through the preamplifier
cable. The monitor uses our proprietary software to analyze information received
from the SomaSensors and provides a continuous digital and trend display on the
monitor of an index of the oxygen saturation in the area of the brain under the
SomaSensors. Users of the Cerebral Oximeter purchase disposable SomaSensors on a
regular basis because of their single-use nature.

      We began shipping the model 4100 Cerebral Oximeter in the first quarter of
fiscal 1998. We began international shipments of the model 5100 Cerebral
Oximeter in August 1999. The model 5100 Cerebral Oximeter has the added
capability of being able to monitor pediatric patients. In September 2000, we
received clearance from the FDA to market the model 5100 Cerebral Oximeter in
the United States and began shipping the model 5100 Cerebral Oximeter in the
United States.

                                       2


      We develop and market the CorRestore System, which includes a cardiac
implant, the CorRestore Patch, designed by CorRestore LLC, for use in cardiac
repair and reconstruction, including heart surgeries called surgical ventricular
restoration, or SVR. During SVR, the surgeon restores an enlarged, poorly
functioning left ventricle to more normal size and function by inserting an
implant, in most instances, or closing the defect directly.

      We entered into a License Agreement as of June 2, 2000 giving us
exclusive, worldwide, royalty-bearing licenses to specified rights relating to
the CorRestore System, subject to the terms and conditions of the license
agreement.

      Our objective is to have the CorRestore System used in SVR surgeries. Our
initial target market is SVR surgeries on patients with dilated ischemic
cardiomyopathy due to a previous myocardial infarction involving the anterior
wall of the ventricle. Ischemic cardiomyopathy is a damaged heart muscle caused
by the obstruction of the inflow of blood from the arteries, resulting in an
enlarged ventricle. Myocardial infarction is the death of an area of the middle
muscle layer in the heart wall.

      In November 2001 we received clearance from the FDA to market the
CorRestore Patch in the United States and the first surgical procedure using the
CorRestore System was performed in January 2002. We began shipping the
CorRestore System in the United States in the first quarter of fiscal 2002.

      In April 2003, we met the requirements under the European Medical Device
Directive to use the CE Mark, thereby allowing us to market the CorRestore
System in the European Economic Community. In October 2003, we began shipping
the CorRestore System in Europe. In September 2004, the European Economic
Community changed its regulations, limiting approval authority for animal tissue
implant products sold in Europe to some independent registration agencies that
do not include our registrar. We are currently evaluating new registrars to
obtain approval to allow us to use the CE Mark and resume sales of the
CorRestore System in Europe.

THE INVOS CEREBRAL OXIMETER

MARKET OVERVIEW

      The brain is the human organ least tolerant of oxygen deprivation. Without
sufficient oxygen, brain damage may occur within a few minutes, which can result
in paralysis, severe and complex disabilities, or death. Undetected brain
hypoxia, which is the insufficiency of oxygen delivery, and ischemia, which is
tissue oxygen starvation due to the obstruction of the inflow of arterial blood,
are common causes of brain damage and death during and after many surgical
procedures and in other critical care situations.

      A December 1996 article in The New England Journal of Medicine and a March
1998 article in The Lancet reported separately on the results of multi-center
studies involving surgeries. The New England Journal of Medicine article
concluded that adverse cerebral outcomes after coronary artery bypass graft
surgery are relatively common and serious, and are associated with substantial
increases in death, length of hospitalization and use of intermediate- or
long-term care facilities. Adverse cerebral outcomes occurred in 6.1% of the
patients included in the study. The Lancet article reported that approximately
26% of patients over age 60 who had major abdominal or orthopedic surgery under
general anesthesia experienced a neurological injury. Additional studies have
estimated that a higher percentage of patients experience some neurological
decline after heart surgery and that insufficient oxygen delivery to the brain
is a frequent cause of this problem. The Lancet article reported that injured
patients require more assistance with everyday actions, and The New England
Journal of Medicine article concluded that new diagnostic and therapeutic
strategies must be developed to lessen these injuries.

                                       3


      Oxygen is carried to the brain by hemoglobin in the blood. Hemoglobin
passes through the lungs, bonds with oxygen and is pumped by the heart through
arteries and capillaries to the brain. Brain cells extract oxygen and the blood
carries away carbon dioxide through the capillaries and veins back to the lungs.

      Brain oxygen imbalances can be caused by several factors, including
changes in arterial blood oxygen saturation, which is the percentage of
oxygenated hemoglobin contained in a given amount of blood which carries oxygen
in the arteries to the tissues of the body, blood flow to the brain, hemoglobin
concentration and oxygen consumption by the brain.

      Brain oxygen information is important in surgical procedures requiring
general anesthesia, in other critical care situations with a high risk of brain
oxygen imbalances, as well as in the treatment of patients with head injuries or
strokes. We believe that medical professionals need immediate and continuous
information about changes in the oxygen levels in the blood in the brain to
identify brain oxygen imbalances. After they are alerted to these imbalances,
medical professionals have the information to take corrective action through the
introduction of medications, anesthetic agents or mechanical intervention,
potentially improving patient outcome and reducing the costs of care. Immediate
and continuous information about changes in brain oxygen levels also provides
immediate feedback regarding the adequacy of the selected therapy. Equally
important, without information about brain oxygen levels, therapy that may not
be necessary might be initiated to assure adequate brain oxygen levels.
Unnecessary therapy can have an adverse impact on patient safety and increase
hospital costs.

      In the United States in 2003, industry sources estimate there were
approximately 4.6 million surgeries involving patients that, due to the type of
surgery, age of the patient, or other factors, represent a higher risk for
post-operative neurological complications. Such surgeries include adult and
pediatric cardiac surgeries, carotid endarterectomies and other major general
surgeries involving elderly patients. The INVOS Cerebral Oximeter is a
practical, non-invasive, reliable and relatively inexpensive neurological
monitoring system used to monitor changes in regional brain blood oxygen
saturation in patients undergoing these surgical procedures.

      Currently, several different methods are used to detect one or more of the
factors affecting brain oxygen levels or the effects of brain oxygen imbalances.
These methods include invasive jugular bulb catheter monitoring, transcranial
Doppler, electroencephalograms, or EEGs, intracranial pressure monitoring, and
neurological examination. These methods have not been widely adopted to monitor
brain oxygen levels in critical care situations for a variety of reasons. The
use of these methods is limited because they are either expensive, difficult or
impractical to use, invasive, not reliable under some circumstances, not organ
specific, not able to measure more than one factor affecting oxygen imbalances
in the brain, or not able to provide continuous information.

MARKET TRENDS

      We believe the market for our products is driven by the following market
trends:

      Demand to Reduce Health Care Costs. Hospitals in the United States are
increasingly faced with direct economic incentives to control health care costs
through improved labor productivity, shortened hospital stays and more selective
performance of medical procedures and use of facilities and equipment. Hospitals
often receive a fixed fee from Medicare, managed care organizations and private
insurers based on the disease diagnosed, rather than based on the services
actually performed. Therefore, hospitals are increasingly focused on avoiding
unexpected costs, such as those associated with increased hospital stays
resulting from patients with brain damage or other adverse outcomes following
surgery. This focus on avoiding unexpected costs is especially pronounced in the
operating room and other hospital critical care

                                       4


areas due to their high operating costs. The economic and human costs of brain
damage can be tremendous. Even short extensions of hospital stays resulting from
brain damage can be expensive. In addition, over-treating a patient as a result
of lack of knowledge about brain oxygen levels can result in unnecessary costs.

      Aging Population. According to the Administration on Aging, United States
Department of Health and Human Services, approximately 36 million persons in the
United States were age 65 or older in 2003, representing more than 12% of the
population. The number of Americans age 65 or older increased by approximately
3.3 million, or more than 10%, between 1992 and 2002. The Administration on
Aging predicts that the number of Americans age 65 or older will nearly double
to approximately 71.5 million by the year 2030. Because most older persons have
at least one chronic condition, and many have multiple conditions, we believe
that older patients require a higher level of medical care using more procedures
in which the patient or the procedure involves a risk of brain oxygen
imbalances.

      Organ-Specific Monitoring; Current Emphasis on the Brain. We believe that
physicians and hospitals are increasingly interested in monitoring the status of
specific organs in the body, especially the brain. We also believe there is an
increased interest in understanding how the brain functions and in finding ways
to prevent injury to the brain and finding cures to diseases affecting the
brain. We believe that this interest has led to a greater focus on monitoring
the brain, both to determine how it functions and to monitor the effects of
various actions on the brain.

BUSINESS STRATEGY

      Our objective is to establish the Cerebral Oximeter as a standard of care
in surgical procedures requiring general anesthesia and in other critical care
situations. Key elements of our strategy are as follows:

      Target Surgical Procedures with a High Risk of Brain Oxygen Imbalances. We
target surgical procedures with a high risk of brain oxygen imbalances, and some
of our target markets are adult and pediatric cardiac surgeries, carotid artery
surgeries, other major surgeries involving elderly patients and some intensive
care unit applications. We believe that the medical professionals involved in
these surgeries are the most aware of the risks of brain damage resulting from
brain oxygen imbalances. Therefore, we believe that it will be easier to
demonstrate the clinical benefits of the Cerebral Oximeter and potentially gain
market acceptance for our products in connection with these surgeries.

      Promote Expanded Acceptance of the Cerebral Oximeter. We continue to
sponsor clinical studies using the Cerebral Oximeter to provide additional
evidence of its benefits. We use the resulting publication of any favorable
peer-reviewed papers to help convince the medical community of the clinical
benefits of the Cerebral Oximeter. We also sponsor peer-to-peer educational
opportunities, and promote use of the Cerebral Oximeter in regional centers of
influence that we believe will influence the adoption by others.

      Invest in Marketing and Sales Activities. We continue to increase our
investment in our distribution network consisting of our direct sales employees,
independent sales representative firms and distributors. We have also entered
into a co-promotion relationship with Fresenius' North American Extracorporeal
Alliance. We are supporting this distribution network with the needed marketing
programs and materials. We participate in trade shows and medical conferences,
ongoing peer-to-peer educational programs and targeted public relations
opportunities. Outside the United States, the Cerebral Oximeter is marketed
primarily by Tyco Healthcare in Europe, the Middle East, South Africa and
Canada, and Edwards Lifesciences Ltd. in Japan.

                                       5


      Interface and Integrate Our Technology into Other Manufacturers'
Multi-Function Monitors. We have interfaced the Cerebral Oximeter with the
Philips VueLink System to provide data, alarm events and status messages from
the INVOS System on any monitor that accepts the VueLink module. This enables
cerebral oximetry data to be displayed on the VueLink screen, and to be
integrated with other vital patient information. We plan to support the
interface and integration of our Cerebral Oximeter technology with other medical
device manufacturers to expand the installed base of Cerebral Oximeters and
increase the demand for SomaSensors as the opportunities arise. Such
arrangements provide another distribution channel for our Cerebral Oximeter.

      Develop Additional Applications of the Cerebral Oximeter. We are
developing product-line extensions of the Cerebral Oximeter for use with
newborns, for monitoring non-brain tissues and other advances to the design and
performance features of the Cerebral Oximeter and disposable SomaSensor. We
believe that these natural extensions of our technology will increase our market
potential without the more significant risks and development costs associated
with developing entirely new products.

PRODUCTS AND TECHNOLOGY

INVOS Technology

      Our proprietary In Vivo Optical Spectroscopy, or INVOS, technology is
based primarily on the physics of optical spectroscopy. Optical spectroscopy is
the interpretation of the interaction between matter and light. Spectrometers
and spectrophotometers function primarily by shining light through matter and
measuring the extent to which the light is transmitted through, or scattered or
absorbed by, the matter. Physicians and scientists can use spectrophotometers to
examine human blood and tissue. Although most human tissue is opaque to ordinary
light, some wavelengths penetrate tissue more easily than others. Therefore, by
shining appropriate wavelengths of light into the body and measuring its
transmission, scattering and absorption, or a combination, physicians can obtain
information about the matter under analysis. Optical spectroscopy generates no
ionizing radiation and produces no known hazardous effects.

      By identifying the hemoglobin and the oxygenated hemoglobin and measuring
the relative amounts of each, oxygen saturation of hemoglobin can be measured.
However, optical spectroscopy was generally not useful when the substances to be
measured were surrounded by, were behind, or were near bone, muscle or other
tissue, because they produce extraneous data that interferes with analysis of
the data from the area being examined.

The INVOS Cerebral Oximeter

      The Cerebral Oximeter, based on our INVOS technology, is used to analyze
and measure changes in regional oxygen saturation of the blood in the brain. We
have developed a method of reducing extraneous spectroscopic data caused by
surrounding bone, muscle and other tissue. This method allows us to gather
information about portions of the body that previously could not be analyzed
using traditional optical spectroscopy.

      The INVOS Cerebral Oximeter measurement is made by transmitting
low-intensity visible and near-infrared light through a portion of the body,
with sensors, called SomaSensors, and detecting the manner in which the
molecules of the exposed substance interact with light at specific wavelengths.

      Each SomaSensor contains a light source and two light detectors. The dual
detector design of the SomaSensor enables us to measure scattered light
intensities from the intermediate tissues of skin, muscle and skull in a
separate process. While both detectors receive similar information about the
tissue outside

                                       6


the brain, the detector further from the light source detects
light that has penetrated deeper into the brain, and, therefore, receives more
information specific to the brain than does the detector closer to the light
source. By subtracting the two measurements, INVOS technology is able to
suppress the influence of the tissues outside the brain to provide a measurement
of changes in brain oxygen saturation.

      Our Cerebral Oximeter is the only non-invasive patient monitoring system
commercially available in the United States that provides continuous information
about changes in the blood oxygen saturation level in the brain. It is a
portable and easy-to-use monitoring system that is predominantly used in
hospital critical care areas, especially operating rooms and ICUs.

      Unlike some existing monitoring methods, the Cerebral Oximeter functions
even when the patient is unconscious, lacks a strong peripheral pulse or has
suppressed neural activity. The measurement made by the Cerebral Oximeter is
dominated by the blood in the veins. Therefore, it responds to the changes in
factors that affect the balance between cerebral oxygen supply and demand,
including changes in arterial oxygen saturation, cerebral blood flow, hemoglobin
concentration and cerebral oxygen consumption. The Cerebral Oximeter responds to
global changes in brain oxygen levels and to events that affect the brain oxygen
levels in the region beneath the SomaSensor.

      Surgeons, anesthesiologists, perfusionists and other medical professionals
use the information provided by the Cerebral Oximeter to identify brain oxygen
imbalances and take corrective action, potentially improving patient outcome and
reducing the cost of care. Once the cause of a cerebral oxygen imbalance is
identified and therapy is initiated, the Cerebral Oximeter provides immediate
feedback regarding the adequacy of the selected therapy. It can also provide
medical professionals with an additional level of assurance when they make
decisions regarding the need for therapy.

      The portable unit includes menus that make it easy for users to set high
and low audible alarms, customize the display and retrieve data. Single-function
keys provide a convenient means to turn on the Cerebral Oximeter, silence
alarms, mark important events, store data for up to 30 surgical procedures, and
retrieve data by disk or computer. The Cerebral Oximeter measures approximately
9 inches wide, 8 inches high, and 8 inches deep and weighs approximately 14
pounds.

      Our suggested retail list prices in the United States are as follows: the
Cerebral Oximeter $25,000, the pediatric SomaSensor $140.00, the adult
SomaSensor $110.00, and the small adult SomaSensor, launched in 2003 and
designed for use on patients with smaller foreheads or lower hairlines, $125.00.
Users of the Cerebral Oximeter purchase disposable SomaSensors on a regular
basis because of their single-use nature. The SomaSensor may only be used once
because after one use it may become contaminated and we do not warrant its
effectiveness after one use. We provide a one-year warranty on the Cerebral
Oximeter, which we will satisfy by repairing or exchanging those units in need
of repair, and we offer service for the Cerebral Oximeter for a fee after the
warranty expires.

                                       7


      The following table summarizes the principal features and related benefits
of the Cerebral Oximeter:




               FEATURES                                                 BENEFITS
               --------                                                 --------
                                         
FDA-cleared                                 - Access to United States and certain foreign markets
Non-invasive
                                            - Consistent with market trend toward less invasive medical
                                              procedures

                                            - No risk to patients and medical professionals

                                            - No added patient recovery costs

Continuous Information                      - Immediate information regarding brain oxygen imbalances

                                            - Real-time guide to therapeutic interventions

Organ-Specific Information                  - Provides information about oxygen imbalances in both sides
                                              of the brain

Relatively Inexpensive                      - Low cost relative to other brain monitors and medical devices

                                            - Small portion of the cost of the procedures in which it is used

                                            - New information can potentially improve patient outcome and
                                              reduce the cost of care

Easy to Use                                 - Does not require a trained technician to operate or interpret

                                            - Automatic SomaSensor calibration

                                            - Simple user interface and controls

                                            - Audible alarm limits

Effective in Difficult Circumstances        - Provides information when the patient is unconscious, lacks a
                                              strong peripheral pulse or has suppressed neural activity,
                                              specifically during cardiac arrest, hypothermia, hypertension,
                                              hypotension and hypovolemia
                                               
                                            - Indicates oxygen imbalances in the brain, not just blood
                                              flow, oxygenation of the arteries or the effects of
                                              imbalances

Portable                                    - Placed at patient's bedside


RESEARCH AND DEVELOPMENT

      We are developing product-line extensions of the Cerebral Oximeter for use
with newborns, for monitoring non-brain tissues and other advances to the design
and performance features of the Cerebral Oximeter and disposable SomaSensor. We
are also working to interface our Cerebral Oximeter with multi-functional
monitors provided by other manufacturers.

      We spent $369,106 during fiscal 2004 on research, development and
engineering, $412,953 during fiscal 2003, and $571,126 during fiscal 2002.

MARKETING, SALES AND DISTRIBUTION

MARKETING

      We market the Cerebral Oximeter primarily to cardiac, cardiovascular and
vascular surgeons, neurosurgeons, anesthesiologists and perfusionists. We
believe that these specialists are the medical professionals most aware of the
risks of brain damage resulting from brain oxygen imbalances.

      We believe that favorable peer review is a key element to a product's
success in the medical equipment industry. Accordingly, we support clinical
research programs with third-party clinicians and researchers intended to
demonstrate the need for the Cerebral Oximeter and its clinical benefits with
the specific objective of publishing the results in peer-reviewed journals. The
research primarily consists of studies comparing patients managed based on
information provided by cerebral oximetry with other

                                       8


patients, based on measures of patient outcome and hospital costs, including
patient length of stay, length of time on the ventilator, cognitive dysfunction
and incidence of stroke.

      During fiscal 2004, the results of the first prospective, randomized,
blinded intervention trial were presented. The study showed that when the INVOS
Cerebral Oximeter was used to monitor and help manage the regional brain blood
oxygen saturation of cardiac surgery patients the occurrence of adverse clinical
outcomes was reduced from 12.5 percent to 2 percent, including stroke and other
severe adverse outcomes that can significantly add to hospital costs.

      Also during 2004, the results of a large retrospective review showed a 50
percent reduction in the incidence of permanent stroke, from two percent to less
than one percent, reduced time to extubation, reduced incidence of prolonged
ventilation, and reduced length of hospital stay when the Cerebral Oximeter was
used with cardiac surgery patients.

      We attend trade shows and medical conferences to promote the Cerebral
Oximeter and to meet medical professionals with an interest in performing
research and reporting their results in peer-reviewed medical journals and at
major international meetings. We also sponsor peer-to-peer educational
opportunities, promote use of the Cerebral Oximeter in regional centers of
influence that we believe will influence the adoption by others, and participate
in targeted public relations opportunities.

SALES AND DISTRIBUTION

      In the United States, we sell the Cerebral Oximeter through our 17 direct
salespersons, which approximately doubled from a year ago, and 13 independent
sales representative firms. We have also entered into a co-promotion
relationship with Fresenius' North American Extracorporeal Alliance. We expect
to increase our direct sales headcount in fiscal 2005. We believe the selling
cycle for the Cerebral Oximeter averages approximately six to nine months.

      Outside the United States, we have distribution agreements with three
independent distributors covering 56 countries for the Cerebral Oximeter. Our
distributors for the Cerebral Oximeter include Tyco Healthcare, part of Tyco
International Ltd., in Europe, the Middle East, South Africa and Canada, and
Edwards Lifesciences Ltd., formerly Baxter Limited, in Japan. We also have one
international sales consultant.

      We offer a no-cap sales program in the United States whereby we ship the
Cerebral Oximeter to the customer at no charge, and the customer agrees to
purchase SomaSensors. It has been our experience that hospitals in the United
States prefer to use this method to acquire Cerebral Oximeters.

      We did not have any backlog of firm orders as of January 10, 2005 or as of
January 10, 2004. We generally do not have a backlog of firm orders because we
generally ship product upon receipt of customer order.

      For a description of sales to major customers, see Note 9 of Notes to
Financial Statements included in Item 8 of this Report. Edwards Lifesciences was
our largest customer in fiscal 2004, and Tyco Healthcare was our largest
customer in fiscal 2003 and 2002. We are dependent on our sales to Edwards
Lifesciences and Tyco Healthcare, and the loss of either of them as a customer
would have an adverse effect on our business, financial condition and results of
operations in the near-term, until such time as they could be replaced as our
distributor in the respective market.

      Our export sales were approximately $2,092,000 for the fiscal year ended
November 30, 2004, $1,945,000 for the fiscal year ended November 30, 2003, and
$1,348,000 for the fiscal year ended

                                       9


November 30, 2002. See Note 9 of Notes to Financial Statements. For a
description of the breakdown of sales between Cerebral Oximeters, SomaSensors,
and CorRestore Systems, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."

MANUFACTURING

      We assemble the Cerebral Oximeter in our facilities in Troy, Michigan,
from components purchased from outside suppliers. We assemble the Cerebral
Oximeter to control its quality and costs and to permit us to make changes to
the Cerebral Oximeter faster than we could if third-parties assembled it. We
believe that each component is generally available from several potential
suppliers. The unit enclosure, the printed circuit boards and other mechanical
components are the primary components that must be manufactured according to
specifications provided by us. We are currently dependent on one manufacturer of
the SomaSensor, and we believe that it would require approximately four to five
months to change SomaSensor suppliers. We do not currently intend to manufacture
on a commercial scale the disposable SomaSensor or the components of the
Cerebral Oximeter.

      On June 11, 1998, we received ISO 9001 certification and met the
requirements under the European Medical Device Directive to use the CE Mark,
thereby allowing us to continue to market our Cerebral Oximeter and SomaSensor
in the European Economic Community. Our most recent ISO 9001 compliance
surveillance audit occurred in August 2004.

COMPETITION

      In the United States, we believe there is currently no direct commercial
competition for the Cerebral Oximeter, although we are aware that several
companies and individuals are engaged in the research and development of
cerebral oximeters. Outside the United States, Japanese manufacturers offer
competitive products for sale in that country and primarily for research in
other parts of the world.

      The medical products industry is characterized by intense competition and
extensive research and development. Other companies and individuals are engaged
in research and development of non-invasive cerebral oximeters, and we believe
there are many other potential entrants into the market. Some of these potential
competitors have well established reputations, customer relationships and
marketing, distribution and service networks, and have substantially longer
histories in the medical products industry, larger product lines and greater
financial, technical, manufacturing, research and development and management
resources than ours. Many of these potential competitors have long-term product
supply relationships with our potential customers. These potential competitors
might develop products that are at least as reliable and effective as our
products, that make additional measurements, or that are less costly than our
products. These potential competitors might be more successful than we are in
manufacturing and marketing their products and might be able to take advantage
of the significant time and effort we have invested to gain medical acceptance
of cerebral oximetry.

      We believe that a manufacturer's reputation for producing accurate,
reliable and technically advanced products, references from users, features
(speed, safety, ease of use, patient convenience and range of applicability),
product effectiveness and price are the principal competitive factors in the
medical products industry.

PROPRIETARY RIGHTS INFORMATION

      We have twelve United States patents and three patents in various foreign
countries. These patents expire on various dates from February 2006 to October
2019. We currently do not have any

                                       10


patent applications pending in the United States, although we do have patent
applications in various foreign countries with respect to aspects of our
technology relating to the interaction of light with tissue.

      In September 2003, we were issued a new patent by the United States Patent
and Trademark Office, titled "Multi-Channel, Noninvasive, Tissue Oximeter,"
covering the application of non-invasive, near-infrared spectroscopy to measure
continuously and substantially concurrently a blood metabolite (oxygen
saturation) in at least two separate internal regions of the brain. This patent
will expire in October 2019. The corresponding Australian patent for
"Multi-Channel, Noninvasive, Tissue Oximeter" issued in December 2003, and also
expires in October 2019. This patent is pending in other markets outside the
United States. We believe the design concepts covered in this patent are
important to providing a clinically viable cerebral oximeter.

      Our other patents cover methods and apparatus for introducing light into a
body part and receiving, measuring and analyzing the resulting light and its
interaction with tissue. These methods also involve receiving, measuring and
analyzing the light transmissivity of various body parts of a single subject, as
well as of body parts of different subjects, which provides a standard against
which a single subject can be compared. Eleven of the issued patents expressly
refer to examination of the brain or developments involving the Cerebral
Oximeter.

      Many other patents have previously been issued to third parties involving
optical spectroscopy and the interaction of light with tissue, some of which
relate to the use of optical spectroscopy in the area of brain metabolism
monitoring, the primary use of the Cerebral Oximeter. No patent infringement
claims have been asserted against us.

      In addition to our patent rights, we have obtained United States Trademark
registrations for our trademarks "SOMANETICS," "INVOS," "SOMASENSOR" and "WINDOW
TO THE BRAIN." We have also obtained registrations of our basic mark,
"SOMANETICS," in eleven foreign countries.

      We also rely on trade secret, copyright and other laws and on
confidentiality agreements to protect our technology, but we believe that
neither our patents nor other legal rights will necessarily prevent third
parties from developing or using similar or related technology to compete
against our products. Moreover, our technology primarily represents improvements
or adaptations of known optical spectroscopy technology, which might be
duplicated or discovered through our patents, reverse engineering or both.

GOVERNMENT REGULATION

      The testing, manufacture and sale of our products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign agencies. Pursuant to the Federal Food, Drug,
and Cosmetic Act, and the related regulations, the FDA regulates the preclinical
and clinical testing, manufacture, labeling, distribution and promotion of
medical devices. If we do not comply with applicable requirements, we can be
subject to, among other things, fines, civil penalties, injunctions, recall or
seizure of products, withdrawal of marketing clearances or approvals, failure of
the government to grant premarket clearance or premarket approval for devices,
total or partial suspension of production, or criminal prosecution.

      A medical device may be marketed in the United States only if the FDA
gives prior authorization, unless it is subject to a specific exemption. Our
INVOS Cerebral Oximeter and CorRestore System have been categorized as Class II
devices and were granted authorization under "510(k) clearance." 510(k)
clearance generally is granted when submitted information establishes that a
proposed device is

                                       11


"substantially equivalent" in intended use and other factors, such as
technological characteristics, to a Class I or II device already legally on the
market, which requires clinical data in many cases.

      For any devices that are cleared through the 510(k) process, modifications
or enhancements that could significantly affect safety or effectiveness, or
constitute a major change in the intended use of the device, will require new
510(k) submissions. When we modify or enhance our products, we must determine
whether the modifications or enhancements could significantly affect safety or
effectiveness or constitute a major change in the intended use of the device and
require new 510(k) submissions. The FDA could disagree with our determination
not to submit a new 510(k) notice. If the FDA requires us to submit a new 510(k)
notice for our Cerebral Oximeter or SomaSensor or for any device modification or
enhancement, we might be prohibited from marketing the modified or enhanced
devices until the 510(k) notice is cleared by the FDA. We believe that the
product line extensions of the Cerebral Oximeter for monitoring non-brain
tissues will require 510(k) clearance before we can market and sell these
products in the United States. We believe that it now usually takes from three
to six months from the date of submission to obtain 510(k) clearance, but it can
take substantially longer. We cannot assure you that any of our devices or
device modifications will receive 510(k) clearance in a timely fashion, or at
all. We do not currently have any 510(k) applications pending.

      A device requiring prior marketing authorization that does not qualify for
510(k) clearance is categorized as class III, which is reserved for devices
classified by the FDA as posing the greatest risk, such as life-sustaining,
life-supporting or implantable devices, or devices that are not substantially
equivalent to a legally marketed class I or class II device. A class III device
generally must receive approval of a premarket approval, or PMA, application,
which requires proving the safety and effectiveness of the device to the FDA.
The process of obtaining PMA approval is expensive and uncertain. We believe
that it usually takes from one to three years after filing, but it can take
longer, and some are never approved.

      If human clinical trials of a device are required, whether for a 510(k) or
a PMA application, and the device presents a "significant risk," the sponsor of
the trial, which is usually the manufacturer or the distributor of the device,
will have to file an investigational device exemption, or IDE, application
before beginning human clinical trials. The IDE application must be supported by
data, typically including the results of animal and laboratory testing. If the
IDE application is approved by the FDA and one or more appropriate Institutional
Review Boards, or IRBs, human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor
may begin the clinical trial after obtaining approval for the study by the IRB
at each clinical site without the need for FDA approval.

      In October 1997, we obtained FDA clearance for new advances in our INVOS
technology that are incorporated in our model 4100 Cerebral Oximeter. We made
additional minor changes to the model 3100A Cerebral Oximeter which resulted in
the model 4100. We also made additional minor changes to the SomaSensor. In
September 2000, we received 510(k) clearance from the FDA to market the model
5100 Cerebral Oximeter in the United States. The model 5100 Cerebral Oximeter
has the added capability of being able to monitor pediatric patients. We have
made additional minor changes to the model 5100. We do not believe that these
changes could significantly affect the safety or efficacy of the Cerebral
Oximeter or the SomaSensor and, therefore, we believe that these changes do not
require the submission of a new 510(k) notice. The FDA, however, could disagree
with our determination not to submit a new 510(k) notice for the Cerebral
Oximeter or SomaSensor and could require us to submit a new 510(k) notice for
any changes made to the device. If the FDA requires us to submit a new 510(k)
notice for our Cerebral Oximeter or SomaSensor or for any device modification,
we might be prohibited from marketing the modified device until the 510(k)
notice is cleared by the FDA.

                                       12


      In November 2001 we received clearance from the FDA to market the
CorRestore Patch in the United States.

      Manufacturers of medical devices marketed in the United States must comply
with detailed Quality System Regulation, or QSR, requirements, which include
design, testing, control, documentation and other quality assurance procedures.
Manufacturers must also comply with Medical Device Reporting requirements. These
requirements require a manufacturer to report to the FDA any incident in which
its product may have caused or contributed to a death or serious injury, or in
which its product malfunctioned and, if the malfunction were to recur, it would
likely cause or contribute to a death or serious injury. Labeling and
promotional activities are subject to scrutiny by the FDA and, in some
circumstances, by the Federal Trade Commission. Current FDA enforcement policy
prohibits promoting approved medical devices for unapproved uses.

      We are subject to routine inspection by the FDA and some state agencies
for compliance with QSR requirements and other applicable regulations. Our most
recent FDA QSR inspection occurred in June 2004. We are also subject to numerous
federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances.

      If any of our current or future FDA clearances or approvals are rescinded
or denied, sales of our applicable products in the United States would be
prohibited during the period we do not have such clearances or approvals. In
such cases we would consider shipping the product internationally and/or
assembling it overseas if permissible and if we determine such product to be
ready for commercial shipment. The FDA's current policy is that a medical device
that is not in commercial distribution in the United States, but which needs
510(k) clearance to be commercially distributed in the United States, can be
exported without submitting an export request and prior FDA clearance under
certain conditions.

      Congress has enacted the Medical Device User Fee Modernization Act of
2002. Among other things, this law has provisions which permit the assessment of
user fees for product approvals and clearances. Given the recent enactment of
this law, the effect of the law as it relates to us and our products is still
unknown, other than that we will have to pay the FDA to review our 510(k)
submissions. We do not currently have any 510(k) applications pending. If we
file any 510(k) applications during fiscal 2005, our fees would be approximately
$3,000 for each 510(k) review.

SEASONALITY

      Our business is seasonal. Our fourth quarter has typically been our
strongest quarter due to a larger number of patients undergoing procedures using
the Cerebral Oximeter and SomaSensors and higher Cerebral Oximeter monitor
revenues associated with hospital budgeting cycles.

THE CORRESTORE SYSTEM

Market Overview

      Congestive heart failure is when the heart is unable to pump enough blood
to meet the circulation needs of the body. It is the number one cause of death
for persons over age 65. Approximately 5,000,000 persons in the United States
have been diagnosed with congestive heart failure, and each year an estimated
550,000 additional persons in the United States are diagnosed with this
condition. An estimated 30% of those with congestive heart failure are in Class
III or IV, based on the New York Heart Association classifications. These
classifications divide patients into four classes based on how debilitating
their condition is. Of these patients in Classes III and IV, only approximately
61% survive

                                       13


one year after they are diagnosed with congestive heart failure, and, for all
classes, there is a 40% annualized rate of admission to the hospital for
congestive heart failure.

      One of the many causes of congestive heart failure is dilated
cardiomyopathy, which is generally a disease that damages the heart muscle,
resulting in an enlarged ventricle. The left ventricle is the chamber of the
heart that pumps the blood through the body. Most cases of congestive heart
failure result from the failure of the left ventricle and the resulting backup
of fluid in the lungs. As a result of dilated cardiomyopathy, the muscles in the
ventricle become thinner and weaker, the ventricle becomes enlarged, and it is
not able to pump blood through the body with enough force. Often the body reacts
with short-term solutions that further damage the muscle. Drug therapies can be
used to treat congestive heart failure, but they often only relieve symptoms or
reduce the body's reactions to the problem with the pump.

      Surgical ventricular restoration is a surgical technique that can be used
to treat some patients suffering from congestive heart failure. It involves
reducing the size of the ventricle to restore more normal function. During SVR,
the surgeon restores an enlarged, poorly functioning left ventricle to more
normal size and function by inserting an implant, in most instances, or closing
the defect directly.

      Before the availability of the CorRestore Patch, the surgeon formed the
implant by hand from bovine pericardium tissue or medical grade fabrics. These
patches take time for the surgeon to form, can be difficult to insert, and can
leak around the edges. Two heart surgeons and their company, CorRestore LLC,
have designed and patented a patch for use in SVR that they believe is easier to
implant and provides a better seal against leaks at the perimeter than existing
patches. We believe it will be possible to demonstrate the clinical benefits of
SVR and the CorRestore System and to gain market acceptance for this product in
connection with these surgeries.

      We believe that the trends in aging of the population and the demand to
reduce health care costs, and the increased survival rate after initial heart
problems, will increase the number of persons diagnosed with congestive heart
failure and will increase the demand for procedures that can increase the
survival rate and decrease the hospital re-admission rate for these patients.

Business Strategy

      Our objective is to have the CorRestore System used in SVR surgeries. Key
elements of our strategy are as follows:

      Promote the Benefits of SVR with the CorRestore System. Our initial target
market is SVR surgeries on Class III and IV congestive heart failure patients
with dilated ischemic cardiomyopathy due to a previous myocardial infarction in
the anterior wall of the left ventricle. Dilated ischemic cardiomyopathy is a
damaged heart muscle caused by the obstruction of the inflow of blood from the
arteries and resulting in an enlarged ventricle. Myocardial infarction is death
of an area of the middle muscle layer in the heart wall. We promote SVR by
sponsoring education programs teaching the concepts of ventricular geometry, the
benefits of SVR and the operative technique of SVR with the CorRestore System to
cardiac surgeons and cardiologists.

      We promote the acceptance of the CorRestore System in the medical
community by encouraging cardiac surgeons in leading hospitals, whose opinions
and practices we believe are valued by other hospitals and physicians, to
educate their referring cardiologists about SVR and to use the CorRestore System
during their SVR operations. We believe that randomized, prospective clinical
data, such as that expected to be developed by the NIH-funded STICH trial, is
required to gain broad acceptance of the SVR surgical option by cardiologists.
Currently, we demonstrate the clinical benefits of SVR with data

                                       14


developed by the RESTORE Group, an international group of cardiac surgeons and
cardiologists, which shows five-year survival of 69% and a five-year hospital
readmission rate of 22% for SVR patients. In comparison, the annual hospital
admission rate for severe, Class III and IV, heart failure patients is more than
40 percent, while 24% are admitted two or more times each year and nearly 40% of
severe heart failure patients die within 12 months following their initial
hospital admission for heart failure.

      Invest in Marketing and Sales Activities. We sell the CorRestore System in
the United States through our direct sales force and independent sales
representative firms. We are currently evaluating new registrars to obtain
approval to allow us to use the CE Mark and resume sales of the CorRestore
System in Europe. Internationally, we have distribution agreements with two
independent distributors covering two countries for the CorRestore System. We
invest in marketing and sales efforts to increase the medical community's
exposure to SVR and the CorRestore System, including participation in trade
shows and conducting training seminars. We have realized some synergies with our
Cerebral Oximeter selling efforts because our sales personnel call on some of
the same customers to sell both products. In addition, our SVR training programs
have enabled us to establish relationships that benefit both the CorRestore
System and the Cerebral Oximeter.

Product

      We develop and market the CorRestore System for use in cardiac repair and
reconstruction, including heart surgeries called surgical ventricular
restoration, or SVR. During SVR, the surgeon restores an enlarged, poorly
functioning left ventricle to more normal size and function by inserting an
implant, in most instances, or closing the defect directly. Before the
availability of the CorRestore System, SVR was generally performed using a patch
formed by the surgeon during the surgery out of medical grade fabrics or bovine
pericardium tissue. These hand-formed patches take time for the surgeon to make,
can be difficult to insert, and can leak around the edges.

      As a result of these problems, the inventors developed a non-circular
bovine pericardium, or cow heart-sac, tissue patch with an integrated
pericardial suture ring. It was developed to make SVR easier for the surgeon, to
standardize the operation and to provide a better seal on the edges of the patch
to minimize leaking.

      The inventors and their company, CorRestore LLC, filed for a patent with
respect to their patch, which was issued in the United States in February 2000
and expires in May 2018. The claims allowed relate primarily to the product
design of a soft suture ring integrated with a patch. Subsequently, three other
United States patents have been issued to the inventors, also with the claims
allowed relating primarily to the product design of a soft suture ring
integrated with a patch. Two of those issued patents also expire in May 2018,
and one expires July 2018. In addition, other United States and foreign patent
applications are pending. We have also obtained United States Trademark
registration for the trademark "CorRestore."

      We offer the CorRestore System, which contains the Patch and the
accessories for aiding the implantation of the Patch, to hospitals performing
SVR. The retail price of the CorRestore System is approximately $4,000. See
"Competition." Prices to distributors are significantly discounted from the
retail price. Because of the requirements for sterility and pursuant to our
license agreement, the Patches and accessories are being manufactured for us by
PM Devices, Inc. We are dependent on PM Devices, Inc. to manufacture our entire
requirements for the Patches and the accessories. We entered into a Contract
Development and Manufacturing Agreement with PM Devices, Inc. in September 2000.
Although we are currently dependent on PM Devices, Inc. as a manufacturer, we
believe that several potential suppliers are available. However, we are
uncertain as to the length of time it would take to change suppliers.

                                       15


Marketing

      We believe that favorable peer-reviewed clinical data is a key element to
a product's success in the medical equipment industry. In October 2004, the
results of a 13-center, 1,198-patient study evaluating the safety and
effectiveness of SVR reported a dramatic improvement in ejection fraction and
ventricular volume. In addition, there was low (5 percent) operative mortality
and an overall five-year survival rate of 69 percent. In addition, there was
very low re-hospitalization rate in a high-risk population, as 78 percent of the
patients were not readmitted to the hospital for congestive heart failure during
the five years after their SVR surgery. By comparison, the annual hospital
admission rate for Class III and IV heart failure patients is more than 40
percent and 24 percent are admitted two or more times each year.
Pre-operatively, 67 percent of the patients in the study were severe New York
Hospital Association Class III and Class IV congestive heart failure patients.
For those patients whose New York Hospital Association Class was reported at
last follow-up, 85 percent were functionally Class I or Class II.

      The study was published in the October 2004 issue of the Journal of the
American College of Cardiology.

Sales and Distribution

      We sell the CorRestore System through our 17 direct salespersons and 11
independent sales representative firms in the United States. In September 2004,
the European Economic Community changed its regulations, limiting approval
authority for animal tissue implant products sold in Europe to some independent
registration agencies that do not include our registrar. We are currently
evaluating new registrars to obtain approval to allow us to use the CE Mark and
resume sales of the CorRestore System in Europe. Internationally, we have
distribution agreements with two independent distributors covering two countries
for the CorRestore System.

License Agreement

      We entered into a license agreement as of June 2, 2000 with the inventors
and their company, CorRestore LLC. The license grants us exclusive, worldwide,
royalty-bearing licenses to specified rights relating to the CorRestore System
and related products and accessories for SVR, subject to the terms and
conditions of the license agreement. The license also grants us the right to use
the names of the inventors and CorRestore on CorRestore System products, as
trademarks and in advertising, as long as they do not object to such use within
20 days after the proposed use is submitted to them. We also have specified
rights to future developments relating to the CorRestore System products if we
incorporate the developments in the products, begin testing them, receive
clearances to market them and actually begin marketing them within specified
time periods. Transfer and sublicensing of our licenses are restricted by the
license agreement.

      Pursuant to the license agreement, CorRestore LLC has agreed to provide us
with various consulting services for up to 10 days during each of our fiscal
years during the term of the licenses. These services include the following
relating to the CorRestore System:

      -     assisting us in designing and executing the clinical tests necessary
            to demonstrate the safety and efficacy of the CorRestore System or
            to obtain regulatory approvals;

      -     assisting us in preparing and defending applications for regulatory
            approvals and patent and other intellectual property applications;

      -     training our personnel and customers in the use of the CorRestore
            System;

      -     providing ongoing technical and general consulting and advice;

                                       16


      -     assisting with product designs; and

      -     consulting with us in connection with regulatory applications and
            marketing efforts.

We have agreed to pay all of the expenses of such consultation, of clinical
testing of the CorRestore System and of the existing patent and future patent
applications or registrations after the date of the license. We are dependent on
the inventors for further development of the CorRestore System, training doctors
in SVR and training our personnel and customers in the use of the CorRestore
System.

      In exchange for the licenses and consulting services, we agreed to the
following compensation for CorRestore LLC and its agent, Joe B. Wolfe:

      -     A royalty of 10% of our net sales of products subject to the
            licenses, for the term of the patent relating to the CorRestore
            System, or for 10 years from the date of the first commercial sale
            if the patent is determined to be invalid.

      -     Five-year warrants to purchase up to 400,000 common shares at $3.00
            a share. The warrants became exercisable to purchase 300,000 shares
            immediately, became exercisable to purchase an additional 50,000
            shares when we received clearance from the FDA to market the
            CorRestore Patch in the United States, and became exercisable to
            purchase another 50,000 shares when we received CE certification for
            the CorRestore System. The warrants expire when the licenses
            terminate, except that the vested portion of the warrants remain
            exercisable for an additional 90 days or, if the licenses terminate
            because of specified breaches by us, for the remaining term of the
            warrants. In April 2004, CorRestore LLC exercised its warrant to
            purchase 380,000 of our newly-issued common shares, at $3.00 per
            share, for proceeds of $1,140,000.

      -     Five-year warrants to purchase 2,100,000 common shares at $3.00 a
            share, granted when we received clearance from the FDA to market the
            CorRestore Patch in the United States. The warrants will become
            exercisable based on our cumulative net sales of the CorRestore
            System products as follows:



                                              Additional Portion
                Net Sales                         of Shares
               -----------                    -------------------
                                         
               $ 5,000,000                        233,330
               $10,000,000                        233,330
               $20,000,000                        233,340
               $35,000,000                        350,000
               $55,000,000                        466,000
               $80,000,000                        584,000


            The warrants expire when the licenses terminate, except that the
            vested portion of the warrants remain exercisable for an additional
            90 days or, if the licenses terminate because of specified breaches
            by us, for the remaining term of the warrants.

      -     A consulting fee of $25,000 a year to each of the inventors until we
            sell 1,000 CorRestore Patches.

      We also agreed to increase the size of our Board of Directors and add
CorRestore LLC's designee as a director. Joe B. Wolfe is CorRestore LLC's
designee and he was added as a Class I director. Mr. Wolfe will not continue as
a director after the end of his term on April 21, 2005. We have also agreed to
cooperate with CorRestore LLC to establish a mutually acceptable medical
advisory board to provide us with information and advice regarding the
CorRestore System. The inventors and CorRestore LLC also

                                       17


agreed to specified confidentiality, non-competition and non-solicitation
provisions in the license agreement and we agreed to specified confidentiality
provisions in the license agreement.

      CorRestore LLC and the inventors may terminate the licenses as follows:

      -     In their sole discretion, if Bruce J. Barrett ceases to be our chief
            executive officer or ceases to be responsible for our activities
            relating to the licenses, but only if (1) one of these events
            happens before June 2, 2005, and (2) CorRestore LLC or either of the
            inventors exercises the right to terminate within 120 days after the
            event occurs.

      -     In their sole discretion, if we materially breach specified
            covenants in the license agreement and fail to cure the breach
            within 90 days (30 days for payment obligations) after CorRestore
            LLC notifies us of the breach, but only if CorRestore LLC exercises
            its right to terminate within 120 days after the 90-day cure period
            expires.

      -     In their sole discretion, if our common shares are delisted from The
            Nasdaq Stock Market and are not re-listed within 90 days, but only
            if CorRestore LLC exercises its right to terminate within 120 days
            after the 90-day period expires.

      -     In their sole discretion, if we make an assignment for the benefit
            of our creditors or voluntarily commence any bankruptcy,
            receivership, insolvency or liquidation proceedings and the action
            is not reversed or terminated within 90 days, but only if CorRestore
            LLC exercises its right to terminate within 120 days after the
            90-day period expires.

      CorRestore LLC and the inventors may limit the licenses as follows:

      -     CorRestore LLC may exclude specified countries from the geographic
            scope of the license if we have not begun marketing the CorRestore
            System products or begun the process of obtaining necessary
            regulatory approval to sell CorRestore System products in that
            country within one year after the date we file a 510(k) clearance
            application or PMA approval application with the FDA with respect to
            the CorRestore Patch. We filed a 510(k) clearance application with
            the FDA with respect to the CorRestore Patch on May 15, 2001. The
            countries may be excluded from the license only if we fail to cure
            the breach of this provision within 90 days after CorRestore LLC
            notifies us of the breach. We have not received any such notice.

      -     CorRestore LLC may change our licenses to be non-exclusive for
            developments that we do not incorporate in the CorRestore System
            products, begin marketing or testing, receive clearances to market
            or IDE approvals and actually begin marketing within specified time
            periods.

      We may terminate the licenses as follows:

      -     In our sole discretion, within 120 days after we sign a definitive
            agreement for specified types of business combination transactions
            with another entity and the holders of our common shares immediately
            before the transaction hold less than 50% of the surviving entity's
            or its ultimate parent's outstanding voting securities immediately
            after the transaction. If we use this provision to terminate the
            licenses, we must pay $1,000,000 to CorRestore LLC and the
            inventors.

      -     In our sole discretion, if CorRestore LLC or either of the inventors
            materially breaches specified covenants in the license agreement and
            fails to cure such breach within 90 days after we notify the
            applicable party of the breach, but only if we exercise our right to
            terminate within 120 days after the 90-day cure period expires.

                                       18


Competition

      The CorRestore System competes against existing patches, which are formed
by the surgeon during SVR surgeries out of medical grade fabrics or bovine
pericardium tissue. These patches take time for the surgeon to form, can be
difficult to insert, and can leak around the edges. Although we believe the
CorRestore System has important advantages over hand-formed patches, including
its ease of use and better seal against leaks at the edge, hand-formed patches
are significantly less expensive. In addition to promoting SVR in general as a
treatment for congestive heart failure, we must convince users that the
advantages of the CorRestore System outweigh its additional cost. At least one
study using medical grade fabric patches indicates that they are effective. SVR
is in the early stages of its development and, if it develops, the market for
patches used in SVR might become highly competitive. There are many larger
companies in this industry that have significantly larger research and
development budgets than ours. Competitors may be able to develop additional or
better treatments for congestive heart failure.

      We believe that a manufacturer's reputation for producing effective,
sterile, reliable and technically advanced and patented products, clinical
literature, association with leaders in the field, references from users,
surgeon convenience and price are the principal competitive factors in the
medical supply industry.

INSURANCE

      Because the Cerebral Oximeter and the CorRestore System are intended to be
used in hospital critical care units with patients who may be seriously ill or
may be undergoing dangerous procedures, we might be exposed to serious potential
products liability claims. We have obtained products liability insurance with a
liability limit of $5,000,000. We also maintain coverage for property damage or
loss, general liability, business interruption, travel-accident, directors' and
officers' liability and workers' compensation. We do not maintain key-man life
insurance.

EMPLOYEES

      As of February 18, 2005, we employed 35 full-time individuals, including
19 in sales and marketing, four in research and development, five in general and
administration and seven in manufacturing, quality and service. We also employed
two part-time individuals, one in general and administration and one in
manufacturing, quality and service. In addition, we use one contract
manufacturing employee, and we use two consultants. We believe that our future
success is dependent, in large part, on our ability to attract and retain highly
qualified managerial, sales, marketing and technical personnel. We expect to add
additional sales and marketing employees in fiscal 2005. Our employees are not
represented by a union or subject to a collective bargaining agreement. We
believe that our relations with our current employees are good.

FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

      We are located in Troy, Michigan and have no other locations. Our export
sales were approximately $2,092,000 for the fiscal year ended November 30, 2004,
$1,945,000 for the fiscal year ended November 30, 2003 and $1,348,000 for the
fiscal year ended November 30, 2002, including approximately $944,000 in fiscal
2004, $1,166,000 in fiscal 2003 and $820,000 in fiscal 2002 to Tyco Healthcare,
our distributor in Europe and Canada, and approximately $970,000 in fiscal 2004,
$616,000 in fiscal 2003, and $352,000 in fiscal 2002 to Edwards Lifesciences
Ltd., our distributor in Japan. See Note 9 of Notes to Financial Statements
included in Item 8 of this Report.

                                       19


WHERE YOU CAN GET INFORMATION WE FILE WITH THE SEC

      We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You can read and copy any materials we file with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet
site that contains reports, proxy and information statements and other
information regarding issuers, such as us, that file electronically with the
SEC. The address of the SEC's Web site is http://www.sec.gov.

      We also maintain a Web site at http://www.somanetics.com. We make
available free of charge on or through our Web site, our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. We will voluntarily provide electronic
or paper copies of our filings free of charge upon request.

                                       20


ITEM 2. PROPERTIES

      We lease 23,392 square feet of office, manufacturing and warehouse space
in Troy, Michigan. Approximately 12,000 square feet is office space for sales
and marketing, engineering, accounting and other administrative activities. The
lease agreement was extended in April 2004, with the extension commencing August
1, 2004 and expiring December 31, 2009. The minimum monthly lease payment was
approximately $15,100 for fiscal 2004, $16,800 for fiscal 2003, and $16,500 for
fiscal 2002. The minimum monthly lease payment will be approximately $11,700 for
fiscal 2005 and fiscal 2006, $11,900 for fiscal 2007, $12,200 for fiscal 2008,
and $12,400 for fiscal 2009, excluding other occupancy costs. We believe that,
depending on sales of the Cerebral Oximeter and the CorRestore System, our
current facility is more than suitable and adequate for our current needs,
including our assembly of the Cerebral Oximeter, storing inventories of
CorRestore System products and conducting our operations in compliance with
prescribed FDA QSR guidelines, and will allow for substantial expansion of our
business and number of employees.

ITEM 3. LEGAL PROCEEDINGS

      We are not a party to any pending legal proceedings.

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

      No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended November 30, 2004.

                                       21


SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT

   Our current executive officers and the positions held by them are as
follows:



                      Executive
                       Officer
       Name             Since        Age                               Position
       ----           ----------     ---                               --------
                                  
Bruce J. Barrett        6/94         45    President and Chief Executive Officer
William M. Iacona       12/00        34    Vice President, Finance, Controller, and Treasurer
Richard S. Scheuing     1/98         49    Vice President, Research and Development
Dominic J. Spadafore    8/02         45    Vice President, Sales and Marketing
Mary Ann Victor         1/98         47    Vice President, Communications and Administration, and Secretary
Ronald A. Widman        1/98         54    Vice President, Medical Affairs
Pamela A. Winters       1/98         46    Vice President, Operations


Our officers serve at the discretion of the Board of Directors.

BIOGRAPHICAL INFORMATION

      Mr. Bruce J. Barrett has served as our President and Chief Executive
Officer and as one of our directors since June 1994. Earlier in his career, Mr.
Barrett served as the Director, Hospital Products Division for Abbott
Laboratories, Ltd., a health care equipment manufacturer and distributor, and as
the Director, Sales and Marketing for Abbott Critical Care Systems, a division
of Abbott Laboratories, Inc., a health care equipment manufacturer and
distributor. While at Abbott Critical Care Systems, Mr. Barrett managed Abbott's
invasive oximetry products for approximately four years. Prior to joining Abbott
Laboratories, he served as the group product manager of hemodynamic monitoring
products of Baxter Edwards Critical Care, an affiliate of Baxter International,
Inc., another health care equipment manufacturer and distributor. Mr. Barrett
received a B.S. degree in marketing from Indiana State University and an M.B.A.
degree from Arizona State University. Mr. Barrett is a party to an employment
agreement with us that requires us to elect him to the offices he currently
holds.

      Mr. William M. Iacona has served as our Vice President, Finance since
December 2000, as our Treasurer since February 2000 and as our Controller since
April 1997. Before joining us, he was in the Finance Department of Ameritech
Advertising Services, a telephone directory company and a division of Ameritech
Corporation (now SBC Communications), and was on the audit staff of Deloitte &
Touche LLP, independent auditors. He is a certified public accountant and
received a B.S. degree in accounting from the University of Detroit.

      Mr. Richard S. Scheuing has served as our Vice President, Research and
Development since January 1998 and prior to that was our Director of Research
and Development and Director of Mechanical Engineering. He is an inventor on
five of our issued patents. Before joining us, he was Director of Mechanical
Engineering for Irwin Magnetic Systems, Inc. was a Development Engineer with the
Sarns division of Minnesota Mining and Manufacturing Company, or 3M. He received
a B.S. degree in mechanical engineering from the University of Michigan.

      Mr. Dominic J. Spadafore has served as our Vice President, Sales and
Marketing since August 2002. Mr. Spadafore previously served, from July 2000
until July 2002, as National Sales and Clinical Director of the Cardiac Assist
Division of Datascope Corporation, a medical device company that manufactures
and markets healthcare products including medical devices used in high-risk
cardiac

                                       22


patients. In this position, Mr. Spadafore supervised approximately 50
sales and clinical personnel, and approximately $80 million in domestic
revenues. From July 1997 until July 2000 he served as Western Area Manager of
the Patient Monitoring Division of Datascope Corporation, and prior to that held
field sales representative and regional manager positions with progressive
responsibilities with Datascope Corporation. Earlier in his career Mr. Spadafore
was a sales representative with the Upjohn Company, a pharmaceutical
manufacturer, and a sales representative with White and White Incorporated, a
medical supply distributor. He received a BA degree in pre-medicine from Oakland
University. Mr. Spadafore is a party to an employment agreement with us that
requires us to elect him to the office he currently holds.

      Ms. Mary Ann Victor has served as our Vice President, Communications and
Administration and Secretary since January 1998 and prior to that was our
Director, Communications and Administration. Her prior experience includes
various investor relations and public relations positions with publicly-held
companies. She also is an attorney and practiced with the law firm Varnum
Riddering Schmidt & Howlett. Ms. Victor received a B.S. in political science
from the University of Michigan and a J.D. from the University of Detroit.

      Mr. Ronald A. Widman has served as our Vice President, Medical Affairs
since January 1998 and prior to that was our Director of Medical Affairs and
Marketing Manager. Prior to joining us in 1991, he was employed by Mennen
Medical, Inc., a manufacturer and marketer of medical monitoring and diagnostic
devices, where he held various positions in domestic and international medical
product marketing. He is the author of several papers and articles related to
medical care and monitoring devices.

      Ms. Pamela A. Winters has served as our Vice President, Operations since
January 1998 and since joining Somanetics in 1991 has served as Director of
Operations and Manager of Quality Assurance. Ms. Winters received a B.S. degree
in management from the University of Phoenix.

                                       23


                                     PART II

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

   Our common shares trade on The Nasdaq SmallCap Market under the trading
symbol "SMTS." The following table sets forth, for the periods indicated, the
range of high and low sales prices as reported by Nasdaq.



                                                     HIGH         LOW
                                                   --------    ---------
                                                         
Fiscal Year Ended November 30, 2003

 First Quarter..................................   $   2.18    $    1.48
 Second Quarter.................................       3.50         1.54
 Third Quarter..................................       5.80         3.06
 Fourth Quarter.................................       9.43         5.30

Fiscal Year Ended November 30, 2004

 First Quarter..................................   $   9.69    $    6.00
 Second Quarter ................................      15.86         8.77
 Third Quarter .................................      16.70         9.23
 Fourth Quarter ................................      14.98        10.65


As of February 17, 2005, we had 644 shareholders of record.

      We have never paid cash dividends on our common shares and do not expect
to pay such dividends in the foreseeable future. We currently intend to retain
any future earnings for use in our business. The payment of any future dividends
will be determined by the Board in light of the conditions then existing,
including our financial condition and requirements, future prospects,
restrictions in financing agreements, business conditions and other factors
deemed relevant by the Board.

                                       24


ITEM  6. SELECTED FINANCIAL DATA

      The following selected financial data as of November 30, 2004, 2003, 2002,
2001 and 2000, and for each of the years in the five-year period ended November
30, 2004 have been derived from our audited financial statements, some of which
appear in Item 8 of this Report. In fiscal 2002 we began selling the CorRestore
System in the United States, and in fiscal 2003 we began selling the CorRestore
System in Europe. See Item 1. "Business - The CorRestore System."

      This selected financial data might not be a good indicator of our expected
results for fiscal 2005. You should read the selected financial data together
with the Financial Statements and Notes to Financial Statements included in Item
8 of this Report and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Item 7 of this Report.



                                                               FISCAL YEAR ENDED NOVEMBER 30,
                                                ---------------------------------------------------------
                                                  2004        2003        2002        2001         2000
                                                --------    --------    --------    --------     --------
                                                     (in thousands, except per share data)
                                                                                  
STATEMENT OF OPERATIONS DATA:
Net revenues (1) ............................   $  12,609   $  9,361    $  6,706    $  5,656     $   5,103
Cost of sales ...............................       2,050      2,140       2,049       2,094         2,370
Gross margin ................................      10,558      7,221       4,657       3,561         2,733
Research, development and  engineering 
     expenses ...............................         369        413         571         778           514
Selling, general, and administrative expenses       8,237      6,759       5,344       5,133         5,722
Net income (loss) (2) .......................       8,707         73      (1,207)     (2,331)       (3,622)
Net income (loss) per common share -
     basic (3) ..............................         .89        .01        (.13)       (.31)         (.57)
Net income (loss) per common share -
     diluted (3) ............................         .77        .01        (.13)       (.31)         (.57)
Weighted average number of common  shares
     outstanding - basic (3) ................       9,780      9,114       8,951       7,606         6,310
Weighted average number of common  shares
     outstanding - diluted (3) ..............      11,323      9,467       8,951       7,606         6,310




                                                                      AT NOVEMBER 30,
                                                ---------------------------------------------------------
                                                  2004        2003        2002        2001         2000
                                                --------    --------    --------    ---------    --------
                                                                        (in thousands)
                                                                                  
BALANCE SHEET DATA:
Cash and marketable securities...............   $   7,070   $  2,239    $  2,382    $    168     $     122
Working capital..............................       9,311      4,480       4,047       1,724         1,393
Total assets.................................      18,785      7,156       6,164       3,587         3,659
Total liabilities............................       1,232        991         664         575           776
Accumulated deficit..........................     (44,882)   (53,589)    (53,661)    (52,455)      (50,124)
Shareholders' equity (4).....................      17,553      6,165       5,501       3,013         2,883


(1)   Net revenues recorded in fiscal years 2001 and 2000 relate primarily to
      the sale of Cerebral Oximeters and SomaSensors for commercial use. Fiscal
      years 2004, 2003, and 2002 net revenues include sales of CorRestore
      Systems.

(2)   See Note 5 of Notes to Financial Statements included in Item 8 of this
      Report for information with respect to the reversal of a portion of our
      income tax valuation allowance as of November 30, 2004.

(3)   See Note 3 of Notes to Financial Statements included in Item 8 of this
      Report for information with respect to the calculation of per share data.

(4)   See Statements of Shareholders' Equity of the Financial Statements
      included in Item 8 of this Report for an analysis of common share
      transactions for the period from December 1, 2001 through November 30,
      2004.

                                       25



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

      Some of the statements in this report are forward-looking statements.
These forward-looking statements include statements relating to our performance
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations. In addition, we may make forward-looking statements in future
filings with the Securities and Exchange Commission and in written material,
press releases and oral statements issued by us or on our behalf.
Forward-looking statements include statements regarding the intent, belief or
current expectations of us or our officers, including statements preceded by,
followed by or including forward-looking terminology such as "may," "will,"
"should," "believe," "expect," "anticipate," "estimate," "continue," "predict"
or similar expressions, with respect to various matters.

      Our actual results might differ materially from those projected in the
forward-looking statements depending on various important factors. These
important factors include economic conditions in general and in the healthcare
market, the demand for and market for our products in domestic and international
markets, our history of losses, our current dependence on the Cerebral Oximeter
and SomaSensor, the challenges associated with developing new products and of
obtaining regulatory approvals if necessary, research and development
activities, the uncertainty of acceptance of our products by the medical
community, the lengthy sales cycle for our products, third party reimbursement,
competition in our markets, including the potential introduction of competitive
products by others, our dependence on our distributors, physician training,
enforceability and the costs of enforcement of our patents, potential
infringement of our patents and the other factors discussed under the caption
"Risk Factors" and elsewhere in our Registration Statement on Form S-1 (file no.
333-74788) effective January 11, 2002 and elsewhere in this report, all of which
constitute cautionary statements identifying important factors with respect to
the forward-looking statements, including certain risks and uncertainties, that
could cause actual results to differ materially from those in such
forward-looking statements.

      All forward-looking statements in this report are based on information
available to us on the date of this report. We do not undertake to update any
forward-looking statements that may be made by us or on our behalf in this
report or otherwise.

RESULTS OF OPERATIONS

Overview

      We develop, manufacture and market the INVOS Cerebral Oximeter, the only
non-invasive patient monitoring system commercially available in the United
States that continuously measures changes in the blood oxygen level in the
brain. We also develop and market the CorRestore System for use in cardiac
repair and reconstruction, including heart surgeries called surgical ventricular
restoration, or SVR. In June 2000, we entered into a license agreement for the
CorRestore System. In November 2001 we received clearance from the FDA to market
the CorRestore Patch in the United States, and in April 2003 we met the
requirements under the European Medical Device Directive to use the CE Mark,
thereby allowing us to market the product in the European Economic Community. In
September 2004, the European Economic Community changed its regulations,
limiting approval authority for animal tissue implant products sold in Europe to
some independent registration agencies that do not include our registrar. We are
currently evaluating new registrars to obtain approval to allow us to use the CE
Mark and resume sales of the CorRestore System in Europe.

      During fiscal 2004, 2003 and 2002, our primary activities consisted of
sales and marketing of the Cerebral Oximeter, the related disposable SomaSensor,
and the CorRestore System.

                                       26



      We derive our revenues from sales of Cerebral Oximeters, SomaSensors and
CorRestore Systems to our distributors and to hospitals in the United States
through our direct sales employees and independent sales representative firms.
We offer to our customers in the United States a no-cap sales program whereby we
ship the Cerebral Oximeter to the customer at no charge, in exchange for the
customer agreeing to purchase SomaSensors. We recognize revenue when there is
persuasive evidence of an arrangement with the customer, the product has been
delivered, the sales price is fixed or determinable, and collectibility is
reasonably assured. The product is considered delivered to the customer once we
have shipped it, as this is when title and risk of loss have transferred.
Payment terms are generally net 30 days for United States sales and net 60 days
or longer for international sales. Our primary expenses, excluding the cost of
our products, are selling, general and administrative and research, development
and engineering.

      As described in more detail below, we achieved net income before income
taxes for fiscal 2004 of approximately $2,007,000. Our net income before income
taxes for the year ended November 30, 2004 was primarily a result of our 35%
increase in net revenues and a seven percentage point increase in gross margin
percentage. Our increase in net revenues was primarily a result of increased
unit sales and increased average selling prices for our disposable SomaSensor in
the United States. Our increase in gross margin percentage was also primarily
attributable to the increase in average selling prices for our disposable
SomaSensors, as well as the reduction in the cost of our disposable SomaSensor
by approximately 40%, effective May 2004, as a result of changes in our
manufacturing process. Our operating expenses increased approximately 20% for
the fiscal year ended November 30, 2004 primarily due to increased commissions
paid to our independent sales representative firms and direct sales employees as
a result of increased sales, and increased salaries as a result of our hiring
additional direct sales personnel in fiscal 2004. As of November 30, 2004, we
adjusted our deferred tax asset valuation allowance resulting in the recognition
of a deferred tax asset of approximately $6,700,000 due to expected future tax
benefits related to our net operating loss carryforwards. Recognition of this
deferred tax asset resulted in a non-cash tax benefit on our statement of
operations for fiscal 2004, and increased our net income for fiscal 2004 to
approximately $8,707,000, or $.77 per diluted common share. We had approximately
$2,233,000 of cash provided by operations in fiscal 2004, and a net increase in
cash and cash equivalents of approximately $4,830,000, primarily as a result of
the exercise of stock options and warrants, in addition to our net income before
taxes.

      For 2005, we project an increase in net revenues of approximately 40% to
45%, and an increase in our gross margin percentage to approximately 87%. In
addition, we project an increase in net income before income taxes of
approximately 70% to 80%, to approximately $3.4 million to $3.6 million. We
expect our operating expenses to increase in fiscal 2005, primarily as a result
of our hiring additional direct sales personnel and increasing our expenses
associated with the sales and marketing of our products. We project our year-end
fiscal 2005 cash balance will be approximately $10,000,000. While we do not
expect to pay income taxes for fiscal 2005, beginning in the first quarter of
2005, we will be recognizing income tax expense at the statutory rate of 34% on
our statement of operations. As 2005 progresses and we assess our plans for
future years, we will review the appropriateness of adjusting our deferred tax
asset valuation allowance and recognizing additional deferred tax assets.

Fiscal Year Ended November 30, 2004 Compared to Fiscal Year Ended November 30,
2003

      Our net revenues increased $3,247,722, or 35%, from $9,360,893 in the
fiscal year ended November 30, 2003 to $12,608,615 in the fiscal year ended
November 30, 2004. The increase in net revenues is primarily attributable to

      -     an increase in United States sales of approximately $3,101,000, or
            42%, from approximately $7,416,000 in fiscal 2003 to approximately
            $10,517,000 in fiscal 2004. The increase in United States sales was
            primarily due to an increase in sales of the disposable

                                       27



            SomaSensor of approximately $2,967,000, or 49%, as a result of a 22%
            increase in SomaSensor unit sales and a 22% increase in SomaSensor
            average selling prices. In addition, sales of the Cerebral Oximeter
            in the United States increased approximately $333,000, or 49%, as a
            result of increased purchases by pediatric hospitals. These
            increases were partially offset by a decrease in CorRestore System
            revenues of approximately $199,000, or 29%, and

      -     an increase in international sales of approximately $147,000, or 8%,
            from approximately $1,945,000 in fiscal 2003 to approximately
            $2,092,000 in fiscal 2004, primarily due to increased purchases of
            the Cerebral Oximeter and disposable SomaSensor by Edwards
            Lifesciences in Japan, partially offset by decreased purchases by
            Tyco Healthcare in Europe.

      As described above, during fiscal 2004 we achieved a 22% increase in the
average selling price of SomaSensors in the United States. This increase in our
average selling prices is attributable to

      -     the addition of new customers at our higher suggested retail prices,
            which were effective September 1, 2003,

      -     increased sales of our small adult SomaSensor that was launched in
            the third quarter of fiscal 2003 and sells for a premium price
            compared to the adult SomaSensor,

      -     increased sales of our pediatric SomaSensor which also sells for a
            higher price than the adult SomaSensor, and

      -     the upgrade of certain customers to our most recent model Cerebral
            Oximeter in exchange for the customer agreeing to pay a higher price
            for the disposable SomaSensor.

In addition, as described above, we had a 22% increase in SomaSensor unit sales
in the United States to 111,406 units. We expect that the average selling price
of SomaSensors in the United States will increase by approximately 10% in fiscal
2005, as a result of the factors described above.

      We placed 197 Cerebral Oximeters in the United States and 133
internationally in fiscal 2004, and our installed base of Cerebral Oximeters in
the United States is approximately 770, in 380 hospitals, as of November 30,
2004.

      Approximately 17% of our net revenues in fiscal 2004 were export sales,
compared to approximately 21% of our net revenues in fiscal 2003. One
international distributor accounted for approximately 12% of net revenues in
fiscal 2003. For fiscal 2005, we expect international net revenues will continue
to represent approximately 15% to 20% of our total net revenues.

      Sales of our products as a percentage of net revenues were as follows:



                                               PERCENT OF NET REVENUE
                                            FISCAL YEAR ENDED NOVEMBER 30,
     PRODUCT                                  2004                2003
     -------                                  ----                ----
                                                           
     SomaSensors........................       78%                 71%
     Cerebral Oximeters.................       18%                 21%
     CorRestore Systems.................        4%                  8%
                                             ----                ----
         Total..........................      100%                100%
                                             ====                ====


For fiscal 2005, we expect sales of SomaSensors to account for 75% to 80% of net
revenues, sales of Cerebral Oximeters 15% to 20%, and sales of CorRestore
Systems less than 5%.

                                       28



      Gross margin as a percentage of net revenues was approximately 84% for the
fiscal year ended November 30, 2004 and approximately 77% for the fiscal year
ended November 30, 2003. The increase in gross margin as a percentage of net
revenues is primarily attributable to

            -     a change in the sales mix with increased sales of the
                  disposable SomaSensor, which has a higher gross margin than
                  the Cerebral Oximeter or CorRestore System,

            -     the increase in the average selling price of SomaSensors
                  described above,

            -     a reduction in the cost of our SomaSensor by approximately
                  40%, in May 2004, as a result of changes in our manufacturing
                  process, and

            -     the change in sales mix with increased sales in the United
                  States, which have higher gross margins than our international
                  sales to distributors.

We expect our gross margin percentage in fiscal 2005 to increase to
approximately 87%, primarily due to our expected increase in the average selling
price of the disposable SomaSensor in the United States described above, and
sales of our new cost reduced SomaSensor for all of fiscal 2005, compared with
approximately half of fiscal 2004.

      Our research, development and engineering expenses decreased approximately
$44,000, or 11%, from $412,953 in fiscal 2003 to $369,106 in fiscal 2004. The
decrease is primarily attributable to approximately $47,000 in decreased costs
associated with the development of the CorRestore System and approximately
$25,000 in decreased costs associated with the development of the Cerebral
Oximeter, partially offset by increased costs associated with the development of
the disposable SomaSensor and increased engineering salaries.

      Selling, general and administrative expenses increased approximately
$1,479,000, or 22%, from $6,758,637 for the fiscal year ended November 30, 2003
to $8,237,401 for the fiscal year ended November 30, 2004. The increase in
selling, general and administrative expense is primarily attributable to

      -     a $399,000 increase in salaries, wages and related expenses,
            primarily as a result of an increase in the number of employees,
            principally sales and marketing (from an average of 28 employees for
            the fiscal year ended November 30, 2003 to an average of 32
            employees for the fiscal year ended November 30, 2004),

      -     a $393,000 increase in employee sales commissions as a result of
            increased sales and increased sales headcount during fiscal 2004,

      -     a $353,000 increase in commissions paid to our independent sales
            representative firms as a result of increased sales,

      -     a $227,000 increase in accrued incentive compensation expense due to
            our fiscal 2004 financial performance, primarily increased sales and
            net income, in accordance with the 2004 Incentive Compensation Plan,

      -     a $117,000 increase in travel and selling-related expenses as a
            result of our increased sales headcount and increased sales and
            marketing activities,

      -     $97,000 in costs associated with a 401(k) matching contribution
            program that we implemented in fiscal 2004, and

      -     $96,000 in costs associated with the termination of some of our
            independent sales representative firms in the second quarter of
            fiscal 2004.

These increases were partially offset by a $170,000 decrease in customer
education expenses for the CorRestore System.

                                       29



We expect our selling, general and administrative expenses to increase in fiscal
2005, primarily as a result of our hiring additional direct sales personnel in
fiscal 2004 and 2005, increased sales commissions payable to our independent
sales representative firms and increased sales and marketing expenses.

      As of November 30, 2004, we adjusted our deferred tax asset valuation
allowance resulting in the recognition of a deferred tax asset of approximately
$6,700,000 as a result of expected future tax benefits related to our net
operating loss carryforwards. Recognition of this deferred tax asset resulted in
a non-cash tax benefit on our statement of operations for fiscal 2004, and
increased our net income for fiscal 2004 to approximately $8,700,000, or $.77
per diluted common share.

Fiscal Year Ended November 30, 2003 Compared to Fiscal Year Ended November 30,
2002

      Our net revenues increased approximately $2,655,000, or 40%, from
$6,705,647 in the fiscal year ended November 30, 2002 to $9,360,893 in the
fiscal year ended November 30, 2003. The increase in net revenues is primarily
attributable to

      -     an increase in United States sales of approximately $2,059,000, or
            38%, from approximately $5,357,000 in fiscal 2002 to approximately
            $7,416,000 in fiscal 2003, primarily due to an increase in sales of
            the disposable SomaSensor of approximately $1,648,000, or 38%, and
            an increase in CorRestore System revenues of approximately $430,000,
            or 160%,

      -     an increase in international sales of approximately $596,000, or
            44%, from approximately $1,348,000 in fiscal 2002 to approximately
            $1,945,000 in fiscal 2003, primarily due to increased purchases of
            the Cerebral Oximeter and disposable SomaSensor by Tyco Healthcare
            in Europe and Edwards Lifesciences in Japan, and

      -     a 16% increase in the average selling price of SomaSensors in the
            United States, primarily as a result of the increase in the
            suggested retail price of the SomaSensor effective December 1, 2002,
            the addition of new customers during 2003 at the higher suggested
            retail prices, and increased sales of SomaSensors to larger United
            States hospitals at a premium price pursuant to our no-cap sales
            program. This increase was partially offset by increased SomaSensor
            sales to international distributors, which have lower average
            selling prices.

      Sales of our products as a percentage of net revenues were as follows:



                                                PERCENT OF NET REVENUE
                                             FISCAL YEAR ENDED NOVEMBER 30,
     PRODUCT                                    2003              2002
                                                ----              ----
                                                            
     SomaSensors........................          71%               72%
     Cerebral Oximeters.................          21%               24%
     CorRestore Systems.................           8%                4%
                                                ----              ----
         Total..........................         100%              100%
                                                ====              ====


Approximately 21% of our net revenues in fiscal 2003 were export sales, compared
to approximately 20% of our net revenues in fiscal 2002. One international
distributor accounted for approximately 12% of net revenues for each of the
fiscal years ended November 30, 2003 and November 30, 2002.

      Effective September 1, 2003, we increased the suggested list price for the
adult SomaSensor and the pediatric SomaSensor in the United States to $110.00
and $140.00, respectively. In addition, we launched our new small adult
SomaSensor, designed for use on patients with smaller foreheads or lower
hairlines, with a suggested list price of $125.00.

                                       30



      Gross margin as a percentage of net revenues was approximately 77% for the
fiscal year ended November 30, 2003 and approximately 69% for the fiscal year
ended November 30, 2002. The increase in gross margin as a percentage of net
revenues is primarily attributable to

            -     the increase in the average selling price of SomaSensors in
                  the United States described above,

            -     increased sales of our latest model SomaSensor, which is less
                  costly to manufacture than the prior model SomaSensor sold in
                  fiscal 2002,

            -     sales of our latest model Cerebral Oximeter, which was
                  launched in 2003, and is less costly to manufacture than the
                  model sold in fiscal 2002, and

            -     increased sales of the CorRestore system in fiscal 2003.

      Our research, development and engineering expenses decreased approximately
$158,000, or 28%, from $571,126 in fiscal 2002 to $412,953 in fiscal 2003. The
decrease is primarily attributable to approximately $124,000 in decreased costs
associated with the development of the CorRestore System and approximately
$47,000 in decreased costs associated with the development of the Cerebral
Oximeter.

      Selling, general and administrative expenses increased approximately
$1,415,000, or 26%, from $5,343,513 for the fiscal year ended November 30, 2002
to $6,758,637 for the fiscal year ended November 30, 2003. The increase in
selling, general and administrative expense is primarily attributable to

      -     a $477,000 increase in commissions paid to our independent sales
            representative firms as a result of increased sales and additional
            independent representative firms,

      -     a $305,000 increase in incentive compensation expense due to
            increased sales, net income, and our executive officers receiving
            awards under the 2003 Incentive Compensation Plan after forgoing
            awards under the 2002 Incentive Compensation Plan,

      -     a $278,000 increase in salaries, wages, commissions and related
            expenses, primarily as a result of increased salaries, principally
            sales and marketing, and increased employee insurance costs,

      -     a $216,000 increase in trade show, promotional, and selling-related
            expenses as a result of our increased sales and marketing
            activities, and

      -     a $44,000 increase in royalty expense due to increased sales of the
            CorRestore System.

Effects of Inflation

      We do not believe that inflation has had a significant impact on our
financial position or results of operations in the past three years.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations during fiscal 2004 was approximately $2,233,000.
Cash was provided primarily by

      -     our net income before income taxes of approximately $2,007,000, and
            depreciation and amortization expense of approximately $283,000, and

      -     a $354,000 increase in accrued liabilities, primarily as a result of
            the increased accrued incentive compensation and accrued 401(k)
            matching contribution described above.

Cash provided by operations was partially offset by

                                       31



      -     a $159,000 increase in inventories, primarily due to the acquisition
            of SomaSensors and components associated with our Cerebral Oximeter
            due to anticipated sales; inventories on our balance sheet declined
            because we capitalized Cerebral Oximeters to property and equipment
            that are being used as demonstration units and no-cap sales
            equipment, as described below,

      -     a $135,000 increase in prepaid expenses, primarily due to the timing
            of the renewal of our products liability insurance, and

      -     a $112,000 decrease in accounts payable, primarily as a result of
            more timely payments made to vendors.

      We expect our working capital requirements to increase as sales increase.

      We capitalized approximately $566,000 of costs from inventory for Cerebral
Oximeters being used as demonstration units and no-cap sales equipment at
customers during fiscal 2004, compared to approximately $371,000 in fiscal 2003.
As of November 30, 2004, we have capitalized approximately $1,628,000 in costs
for Cerebral Oximeters being used as demonstration and no-cap sales equipment,
and these assets have a net book value of approximately $901,000. We depreciate
these assets over five years.

In addition, we had capital expenditures in fiscal 2004 of approximately
$84,000. These expenditures were primarily for computer equipment and tooling
for our SomaSensor.

      Our principal sources of operating funds have been the proceeds of equity
investments from sales of our common shares and, in 2004, cash provided by
operating activities. See Statements of Shareholders' Equity of our Financial
Statements included in Item 8 of this Report.

      On March 6, 2000, we entered into the Private Equity Line Agreement with
Kingsbridge Capital Limited, a private institutional investor, which was
subsequently terminated on April 10, 2001. In connection with the Private Equity
Line Agreement, we issued to Kingsbridge Capital warrants which entitled the
holder to purchase 205,097 common shares, after adjustment for the April 2001
private placement and the January 2002 public offering, at a purchase price of
$4.25 per share. The exercise price of the warrants was payable either in cash
or by a cashless exercise.

      In November 2003, Kingsbridge purchased 100,000 common shares under the
warrants by a cashless exercise. As a result of this cashless exercise, we
issued 53,603 common shares to Kingsbridge, retaining 46,397 common shares in
payment of the exercise price. In March 2004, Kingsbridge Capital Limited
purchased 40,000 common shares under its warrants by a cashless exercise. As a
result of this cashless exercise, we issued 24,097 common shares to Kingsbridge,
retaining 15,903 common shares in payment of the exercise price. In May 2004,
Kingsbridge Capital Limited purchased the remaining 65,097 common shares under
its warrants by a cashless exercise. As a result of this cashless exercise, we
issued 47,475 common shares to Kingsbridge, retaining 17,622 common shares in
payment of the exercise price. Kingsbridge now has no warrants remaining to
purchase common shares.

      On April 9, 2001, we completed a private placement of newly-issued common
shares for which Brean Murray & Co., Inc., as our exclusive placement agent,
received warrants to purchase 25,000 common shares at $2.10 per share. In
October 2003, Brean Murray & Co., Inc. transferred the 25,000 warrants to
persons who are or were employees of Brean Murray & Co., Inc., and in November
2003, those persons exercised the warrants to purchase all 25,000 common shares
under the warrants by a cashless exercise. As a result of this cashless
exercise, we issued 18,832 restricted common shares to those individuals,
retaining 6,168 common shares in payment of the exercise price, and no more
common shares remain subject to these warrants.

                                       32



      On January 16, 2002, we completed a public offering of newly-issued common
shares for which Brean Murray & Co., Inc., as our exclusive placement agent,
received warrants to purchase 100,000 common shares at $5.10 per share. In June
2004, Brean Murray & Co., Inc. purchased 100,000 common shares under its
warrants by a cashless exercise. As a result of this cashless exercise, we
issued 66,265 common shares to Brean Murray & Co., Inc., retaining 33,735 common
shares in payment of the exercise price. Brean Murray & Co., Inc. now has no
warrants remaining to purchase common shares.

      In April 2004, CorRestore LLC exercised its warrant to purchase 380,000 of
our newly-issued common shares, at $3.00 per share, for proceeds of $1,140,000.

      During fiscal 2004, we issued 321,276 common shares as a result of stock
option exercises by employees, directors and former employees, for proceeds of
approximately $1,541,000. During fiscal 2003, we issued 148,371 common shares as
a result of stock option exercises by employees, directors and former employees,
for proceeds of approximately $539,000.

      As of November 30, 2004, we had working capital of $9,310,683, cash and
cash equivalents of $7,069,542, total current liabilities of $1,232,206 and
shareholders' equity of $17,552,666. We had an accumulated deficit of
$44,882,147 through November 30, 2004.

      We expect that our primary needs for liquidity in fiscal 2005 will be

      -     to fund our operations, including funding for

            -     marketing costs for the Cerebral Oximeter and the CorRestore
                  System, and

            -     research and development efforts for the Cerebral Oximeter
                  related to newborns, for monitoring non-brain tissues and
                  other advances to the design and performance features of the
                  Cerebral Oximeter and disposable SomaSensor, and

      -     for working capital, primarily accounts receivable and inventory, as
            our sales increase.

In addition, we have budgeted approximately $1,000,000 during fiscal 2005 for
capitalizing Cerebral Oximeters and capital expenditures, primarily for new
demonstration and no-cap sales equipment at customers, and tooling for the
Cerebral Oximeter and disposable SomaSensor.

      We believe that the cash and cash equivalents on hand at November 30, 2004
will be adequate to satisfy our operating and capital requirements for more than
the next twelve months.

      The estimated length of time current cash and cash equivalents will
sustain our operations is based on estimates and assumptions we have made. These
estimates and assumptions are subject to change as a result of actual
experience. Actual funding requirements necessary to market the Cerebral
Oximeter, the disposable SomaSensor, and the CorRestore System, to undertake
other product development activities, and for working capital might be
substantially greater than current estimates.

      Our ability to use our accumulated net operating loss carryforwards to
offset future income, if any, for income tax purposes, is limited due to the
initial public offering of our securities in March 1991. See Note 5 of Notes to
Financial Statements included in Item 8 of this Report.

NEW ACCOUNTING PRONOUNCEMENTS

      In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised), Share Based
Payment. This Statement, which is effective for interim or annual reporting
periods that begin after June 15, 2005, revises Statement No. 123, "Accounting
for Stock-Based Compensation," and requires that compensation costs related to
share-based

                                       33



payment transactions, including stock options, be recognized in the financial
statements. This Statement will be effective for our fiscal quarter ending
November 30, 2005. We expect the equity compensation to be recognized in our
statement of operations for fiscal 2005, related to unvested stock options as of
our required adoption date, will be the equivalent of $.01 per diluted common
share, and we expect the impact for fiscal 2006 will be approximately $.03 per
diluted common share. The future approval of any additional equity incentive
plans would have an additional impact on our financial statements.

CRITICAL ACCOUNTING POLICIES

      We believe our most significant accounting policies relate to the
recording of an intangible asset for license acquisition costs related to our
acquisition of exclusive, worldwide, royalty-bearing licenses to specified
rights relating to the CorRestore System and related products and accessories,
our accounting treatment of stock options issued to employees, our accounting
treatment for income taxes, and our revenue recognition associated with our
no-cap sales program.

      In fiscal years 2000, 2001, and 2003, we recorded an intangible asset
related to our acquisition of exclusive, worldwide, royalty-bearing licenses to
specified rights relating to the CorRestore System and related products and
accessories. License acquisition costs include our estimate of the fair value of
ten-year vested stock options to purchase common shares granted to one of our
then current directors in connection with negotiating and assisting us in
completing the transaction, and our estimate of the fair value of the vested
portion of five-year warrants to purchase common shares issued in the
transaction.

      We estimated the value of the stock options to purchase common shares and
the warrants to purchase common shares using the Black-Scholes valuation model.
The Black-Scholes valuation model requires the following assumptions: expected
life period of the security, expected volatility of our stock price during the
period, risk-free interest rate, and dividend yield. Given the assumptions
inherent in the Black-Scholes valuation model, it would have been possible to
calculate a different value for our intangible asset by changing one or more of
the valuation model variables or by using a different valuation model. However,
we believe that the model is appropriate, that the judgments and assumptions
that we have made at the time of valuation were also appropriate, and that the
reported results would not be materially different had one or more of the
variables been different or had a different valuation model been used.

      We have adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets." This statement establishes accounting
and reporting standards for goodwill and other intangible assets. The effect of
adopting this Statement has been to discontinue amortizing our license
acquisition costs related to our acquisition of exclusive, worldwide,
royalty-bearing licenses to specified rights relating to the CorRestore System
and related products and accessories described above because we believe these
licenses have an indefinite life. Therefore, we recorded no amortization expense
related to these license acquisition costs in fiscal 2004, 2003 or 2002. It is
possible to determine a different life for these licenses, and if they had a
definite life we would amortize the intangible asset over the remaining useful
life. However, we believe it is appropriate to use an indefinite life for these
licenses. Indefinite lived intangible assets are reviewed annually for
impairment at the end of our fiscal year, and whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recovered. We evaluate impairment by comparing the fair value of the intangible
asset, determined using a cash flow method, with its carrying value.

      In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," was issued. In December 2004, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised), Share Based Payment. This Statement, which is
effective for interim or annual reporting periods that begin after June 15,
2005, revises Statement

                                       34



No. 123, "Accounting for Stock-Based Compensation," and requires that
compensation costs related to share-based payment transactions, including stock
options, stock appreciation rights and restricted stock be recognized in the
financial statements. This Statement will be effective for our fiscal quarter
ending November 30, 2005.

      We currently account for stock-based compensation of employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation costs for stock options granted to employees are
measured as the excess, if any, of the market price of our stock at the date of
the grant over the amount an employee must pay to acquire the stock. No
compensation expense has been charged against income for stock option grants to
employees because our stock option grants are priced at the market value as of
the date of grant. Stock-based compensation of consultants and advisors is
determined based on the fair value of the options or warrants on the grant date
pursuant to the methodology of SFAS No. 123, estimated using the Black-Scholes
model. The resulting amount is recognized as compensation expense and an
increase in additional paid-in capital over the vesting period of the options or
warrants. As a result, we recorded $8,471 of compensation expense, and an equal
increase in additional paid in capital, for stock options issued to
non-employees in fiscal 2003, and $5,597 of compensation expense in fiscal 2002.
We recorded no such expense in fiscal 2004. During fiscal 2004, we granted
53,500 stock options to our employees and directors, in fiscal 2003 we granted
471,000 stock options to our employees and directors, and in fiscal 2002 we
granted 509,500 stock options to our employees and directors.

      Had we recognized compensation expense for our stock options granted to
employees and directors in fiscal 2004, using the fair value method of
accounting based on the fair value of the options on the grant date using the
Black-Scholes valuation model, we would have recorded approximately $796,000 in
compensation expense and realized pro forma net income of approximately
$7,911,000, or $.70 per diluted common share. For fiscal 2003, had we recognized
compensation expense for stock options granted to employees and directors, using
the fair value method of accounting based on the fair value of the options on
the grant date using the Black-Scholes valuation model, we would have recorded
approximately $962,000 in compensation expense and incurred a pro forma net loss
of approximately $889,000, or $.09 per diluted common share. For fiscal 2002,
had we recognized compensation expense for stock options granted to employees
and directors, using the fair value method of accounting based on the fair value
of the options on the grant date using the Black-Scholes valuation model, we
would have recorded approximately $760,000 in compensation expense and increased
our pro forma net loss to $1,967,000, or $.08 per diluted common share.

      We have adjusted our deferred tax asset valuation allowance resulting in
the recognition of a deferred tax asset of $6,700,000 related to the expected
future benefits of our net operating loss carryforwards, in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." We have performed the required assessment of positive and negative
evidence regarding realization of our deferred tax assets in accordance with
SFAS No. 109, including our past operating results, the existence of cumulative
losses over our history up to the most recent two fiscal years, and our forecast
for future net income. Our assessment of our deferred tax assets, and the
reversal of part of our valuation allowance, included evaluating our financial
plans and our future projected earnings, making allowance for the uncertainties
surrounding, among other things, our future rate of growth in net revenues, the
rate of adoption of our products in the marketplace, and the potential for
competition to enter the marketplace. In reversing a portion of our valuation
allowance, we have concluded that it is more likely than not that such assets
will be realized.

      The effect of recognizing this asset on our balance sheet, and associated
tax benefit on our statement of operations, is to increase our net income for
fiscal 2004 to approximately $8,707,000, or $.77 per diluted common share. Given
the assumptions inherent in our financial plans, it is possible to calculate a

                                       35



different value for our deferred tax asset by changing one or more of the
variables in our assessment. However, we believe that our evaluation of our
financial plans was reasonable, and that the judgments and assumptions that we
made at the time of developing the plan were appropriate.

      We offer to our customers in the United States a no-cap sales program
whereby we ship the Cerebral Oximeter to the customer at no charge, in exchange
for the customer agreeing to purchase SomaSensors. We recognize SomaSensor
revenue when we receive purchase orders and ship the product to the customer. We
do not recognize any revenue upon the initial shipment of the Cerebral Oximeter
to the customer at no charge. At the time of shipment, we capitalize the
Cerebral Oximeter as an asset and depreciate this asset over five years. We
believe this is consistent with our stated revenue recognition policy, which is
compliant with Staff Accounting Bulletin No. 104 and Emerging Issues Task Force
No. 00-21, "Revenue Arrangements with Multiple Deliverables."

CONTRACTUAL OBLIGATIONS

      The following information is provided as of November 30, 2004 with respect
to our known contractual obligations specified in the following table,
aggregated by type of contractual obligation:



                                            Payments due by period
                              ---------------------------------------------------
                                          Less                             More
                                          than 1      1-3        3-5      than 5
  Contractual Obligations      Total       year       years      years     years
  -----------------------     --------   --------   --------   --------   -------
                                                           
Long-term debt obligations..  $      0   $      0   $      0   $      0   $     0
                              --------   --------   --------   --------   -------
Capital lease obligations...  $      0   $      0   $      0   $      0   $     0
                              --------   --------   --------   --------   -------
Operating lease obligations.  $730,600   $140,400   $283,300   $294,500   $12,400
                              --------   --------   --------   --------   -------
Purchase obligations .......  $818,600   $818,600   $      0   $      0   $     0
                              --------   --------   --------   --------   -------
Other long-term liabilities.  $      0   $      0   $      0   $      0   $     0
                              --------   --------   --------   --------   -------


Purchase obligations consist primarily of purchase orders executed for inventory
components.

                                       36



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Not applicable.

                                       37



ITEM  8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Somanetics Corporation
Troy, Michigan

We have audited the accompanying balance sheets of Somanetics Corporation (the
"Company") as of November 30, 2004 and 2003, and the related statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended November 30, 2004. 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. An audit includes 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 also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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, such financial statements present fairly, in all material
respects, the financial position of Somanetics Corporation at November 30, 2004
and 2003, and the results of its operations and its cash flows for each of the
three years in the period ended November 30, 2004, in conformity with accounting
principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP
-------------------------
Detroit, Michigan

February 11, 2005

                                       38



                             SOMANETICS CORPORATION

                                 BALANCE SHEETS



                                                                                             November 30,
                                                                                    ------------------------------
                                                                                        2004             2003
                                                                                    -------------    -------------
                                                                                               
ASSETS
CURRENT ASSETS:
    Cash and cash equivalents (Note 2)..........................................    $   7,069,542    $   2,239,192
    Accounts receivable.........................................................        2,022,544        2,018,615
    Inventory (Note 2)..........................................................          682,910        1,090,261
    Prepaid expenses............................................................          257,893          123,203
    Deferred tax asset - current (Note 5).......................................          510,000               --
                                                                                    -------------    -------------
        Total current assets....................................................       10,542,889        5,471,271
                                                                                    -------------    -------------
PROPERTY AND EQUIPMENT: (Note 2)
    Demonstration and no-cap sales equipment at customers.......................        1,628,431        1,309,144
    Machinery and equipment.....................................................          704,581          762,614
    Furniture and fixtures......................................................          255,044          248,657
    Leasehold improvements......................................................          171,882          171,882
                                                                                    -------------    -------------
        Total...................................................................        2,759,938        2,492,297
    Less accumulated depreciation and amortization..............................       (1,675,881)      (1,782,559)
                                                                                    -------------    -------------
        Net property and equipment..............................................        1,084,057          709,738
                                                                                    -------------    -------------
OTHER ASSETS:
    Deferred tax asset - non-current (Note 5)...................................        6,190,000               --
    Intangible assets, net (Note 2).............................................          952,926          959,838
    Other.......................................................................           15,000           15,000
                                                                                    -------------    -------------
        Total other assets......................................................        7,157,926          974,838
                                                                                    -------------    -------------
TOTAL ASSETS....................................................................    $  18,784,872    $   7,155,847
                                                                                    =============    =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
    Accounts payable............................................................    $     529,097    $     641,232
    Accrued liabilities (Notes 4 and 6).........................................          703,109          349,547
                                                                                    -------------    -------------
        Total current liabilities...............................................        1,232,206          990,779
                                                                                    -------------    -------------
COMMITMENTS AND CONTINGENCIES (Note 6)..........................................
SHAREHOLDERS' EQUITY: (Note 3)
    Preferred shares; authorized, 1,000,000 shares of $.01 par value; no shares 
        issued or outstanding...................................................               --               --
    Common shares; authorized, 20,000,000 shares of $.01 par value; issued and 
        outstanding, 10,137,782 shares at November 30, 2004, and 9,298,669 
        shares at November 30, 2003.............................................          101,378           92,987
    Additional paid-in capital..................................................       62,333,435       59,660,804
    Accumulated deficit.........................................................      (44,882,147)     (53,588,723)
                                                                                    -------------    -------------
        Total shareholders' equity..............................................       17,552,666        6,165,068
                                                                                    -------------    -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................................    $  18,784,872    $   7,155,847
                                                                                    =============    =============


                        See notes to financial statements

                                       39



                             SOMANETICS CORPORATION

                            STATEMENTS OF OPERATIONS



                                                For the Years Ended November 30,
                                            --------------------------------------
                                               2004          2003          2002
                                            -----------   ----------   -----------
                                                              
NET REVENUES (Notes 2 and 9) ............   $12,608,615   $9,360,893   $ 6,705,647
COST OF SALES ...........................     2,050,253    2,139,827     2,048,758
                                            -----------   ----------   -----------
    Gross margin ........................    10,558,362    7,221,066     4,656,889
                                            -----------   ----------   -----------
OPERATING EXPENSES:
    Research, development and engineering
        (Note 2) ........................       369,106      412,953       571,126
    Selling, general and administrative .     8,237,401    6,758,637     5,343,513
                                            -----------   ----------   -----------
        Total operating expenses ........     8,606,507    7,171,590     5,914,639
                                            -----------   ----------   -----------

OPERATING INCOME (LOSS) .................     1,951,855       49,476    (1,257,750)
                                            -----------   ----------   -----------
OTHER INCOME (EXPENSE):
    Interest income .....................        54,721       23,110        51,892
    Interest expense and other ..........            --           --          (794)
                                            -----------   ----------   -----------
        Total other income (expense) ....        54,721       23,110        51,098
                                            -----------   ----------   -----------
INCOME (LOSS) BEFORE INCOME TAXES .......   $ 2,006,576   $   72,586   $(1,206,652)

INCOME TAX BENEFIT ......................     6,700,000           --            --
                                            -----------   ----------   -----------

NET INCOME (LOSS) .......................   $ 8,706,576   $   72,586   $(1,206,652)
                                            ===========   ==========   ===========
NET INCOME (LOSS) PER COMMON
    SHARE - BASIC (Note 2) ..............   $       .89   $      .01   $      (.13)
                                            ===========   ==========   ===========
NET INCOME (LOSS) PER COMMON
    SHARE - DILUTED (Note 2) ............   $       .77   $      .01   $      (.13)
                                            ===========   ==========   ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
    OUTSTANDING -- BASIC (Note 2) .......     9,780,104    9,113,854     8,951,266
                                            ===========   ==========   ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
    OUTSTANDING -- DILUTED (Note 2) .....    11,323,272    9,466,838     8,951,266
                                            ===========   ==========   ===========


                        See notes to financial statements

                                       40



                             SOMANETICS CORPORATION

                       STATEMENTS OF SHAREHOLDERS' EQUITY



                                                             ADDITIONAL                       TOTAL
                                               SHARE          PAID-IN      ACCUMULATED     SHAREHOLDERS'   COMPREHENSIVE
                                               VALUE          CAPITAL        DEFICIT          EQUITY       INCOME (LOSS)
                                            -------------   ------------   ------------    -------------   -------------
                                                                                            
Balance at December 1, 2001..............   $      80,751   $ 55,386,453   $(52,454,657)   $   3,012,547

For cash, less issuance costs of 
  $570,418...............................          10,000      3,669,582                       3,679,582
For cash, exercise of stock options......              28          9,490                           9,518
Stock options issued to non-employees....                          5,597                           5,597
Net loss and comprehensive loss..........                                    (1,206,652)      (1,206,652)  $  (1,206,652)
                                            -------------   ------------   ------------    -------------   =============
Balance at November 30, 2002.............   $      90,779   $ 59,071,122   $(53,661,309)   $   5,500,592

For cash, exercise of stock options......           1,484        537,142                         538,626
Warrants issued to acquire license.......                         44,793                          44,793
Stock options issued to non-employees....                          8,471                           8,471
Cashless exercise of warrants............             724           (724)                             --
Net income and comprehensive income......                                        72,586           72,586   $      72,586
                                            -------------   ------------   ------------    -------------   =============
Balance at November 30, 2003.............   $      92,987   $ 59,660,804   $(53,588,723)   $   6,165,068

For cash, exercise of stock options......           3,213      1,537,809                       1,541,022
For cash, exercise of warrants...........           3,800      1,136,200                       1,140,000
Cashless exercise of warrants............           1,378         (1,378)                             --
Net income and comprehensive income......                                     8,706,576        8,706,576   $   8,706,576
                                            -------------   ------------   ------------    -------------   =============
Balance at November 30, 2004.............   $     101,378   $ 62,333,435   $(44,882,147)   $  17,552,666
                                            =============   ============   ============    =============


                        See notes to financial statements

                                       41



                             SOMANETICS CORPORATION
                                                  
                            STATEMENTS OF CASH FLOWS



                                                                           For the Years Ended November 30,
                                                             ---------------------------------------------------------
                                                                   2004                2003                  2002
                                                             ---------------      ---------------      ---------------
                                                                                              
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)......................................   $     8,706,576      $        72,586      $    (1,206,652)
   Adjustments to reconcile net income (loss) to net
          cash used in operations:
       Income tax benefit.................................        (6,700,000)                  --                   --
       Depreciation and amortization......................           282,558              235,537              225,898
       Compensation expense for non-employee stock 
          options.........................................                --                8,471                5,597
       Changes in assets and liabilities:
          Accounts receivable (increase) decrease.........            (3,929)            (790,830)              35,254
          Inventory (increase)............................          (158,611)            (456,579)            (449,422)
          Prepaid expenses (increase).....................          (134,690)             (26,895)             (22,053)
          Other assets decrease...........................                --                   --               12,078
          Accounts payable increase (decrease)............          (112,135)             170,352              (11,257)
          Accrued liabilities increase....................           353,562              156,781              100,337
                                                             ---------------      ---------------      ---------------
       Net cash provided by (used in) operating 
          activities......................................         2,233,331             (630,577)          (1,310,220)
                                                             ---------------      ---------------      ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition of property and equipment (net)............           (84,003)             (50,665)            (164,946)
                                                             ---------------      ---------------      ---------------
       Net cash (used in) investing activities............           (84,003)             (50,665)            (164,946)
                                                             ---------------      ---------------      ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of Common Shares................         2,681,022              538,626            3,689,101
                                                             ---------------      ---------------      ---------------
       Net cash provided by financing activities..........         2,681,022              538,626            3,689,101
                                                             ---------------      ---------------      ---------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......         4,830,350             (142,616)           2,213,935

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............         2,239,192            2,381,808              167,873
                                                             ---------------      ---------------      ---------------

CASH AND CASH EQUIVALENTS, END OF PERIOD..................   $     7,069,542      $     2,239,192      $     2,381,808
                                                             ===============      ===============      ===============

Supplemental Disclosure of Non cash investing activities:
   Demonstration and no-cap sales equipment capitalized
       from inventory (Note 2)............................   $       565,962      $       370,623      $       238,874

   Issuance of warrants and stock options in connection
       with license acquisition (Note 2)..................   $            --      $        44,793      $            --


                        See notes to financial statements

                                       42



                             SOMANETICS CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

1.    ORGANIZATION AND OPERATIONS

      We are a Michigan corporation that was formed in 1982. We develop,
manufacture and market the INVOS(R) Cerebral Oximeter, the only non-invasive
patient monitoring system commercially available in the United States that
continuously measures changes in the blood oxygen level in the brain. The
principal markets for our products are the United States, Europe, and Japan. The
Cerebral Oximeter, based on our In Vivo Optical Spectroscopy, or INVOS,
technology, is used to analyze and measure changes in regional blood oxygen
saturation in the brain. The INVOS Cerebral Oximeter measurement is made by
transmitting low-intensity visible and near-infrared light through a portion of
the body with sensors, called SomaSensors, and detecting the manner in which the
exposed substance interacts with light at specific wavelengths.

      In June 1996 we received clearance from the FDA to market our model 3100A
Cerebral Oximeter in the United States, and in October 1997 we received
clearance from the FDA to market enhancements to our Cerebral Oximeter in the
United States. In September 2000 we received FDA clearance to market our latest
model Cerebral Oximeter in the United States, which has the added capability of
being able to monitor pediatric patients.

      We also develop and market the CorRestore(R) System, including the
CorRestore Patch, for use in cardiac repair and reconstruction, including heart
surgeries called surgical ventricular restoration, or SVR. We entered into a
License Agreement as of June 2, 2000 with the inventors and their company,
CorRestore LLC. The license grants us exclusive, worldwide, royalty-bearing
licenses to specified rights relating to the CorRestore System and related
products and accessories for SVR, subject to the terms and conditions of the
license agreement (Note 2).

      In November 2001 we received clearance from the FDA to market the
CorRestore Patch in the United States. In April 2003, we met the requirements to
use the CE Mark for the CorRestore Patch, which allows us to market the
CorRestore System in the European Economic Community. In September 2004, the
European Economic Community changed its regulations, limiting approval authority
for animal tissue implant products sold in Europe to some independent
registration agencies that do not include our registrar. We are currently
evaluating new registrars to obtain approval to allow us to use the CE Mark and
resume sales of the CorRestore System in Europe.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Cash Equivalents consist of short-term, interest-bearing investments
maturing within three months of our acquisition of them.

      Inventory is stated at the lower of cost or market on a first-in,
first-out (FIFO) basis. Inventory consists of:

                                       43



                             SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)



                                                             NOVEMBER 30,
                                                       -------------------------
                                                          2004           2003
                                                       -----------   -----------
                                                               
Finished goods.....................................    $   358,815   $   354,024
Purchased components...............................        323,053       563,044
Work in process....................................          1,042       173,193
                                                       -----------   -----------
       Total.......................................    $   682,910   $ 1,090,261
                                                       ===========   ===========


      Property and Equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets, which range from two to five years. We offer to our United States
customers a no-cap sales program whereby we ship the Cerebral Oximeter to the
customer at no charge, in exchange for the customer agreeing to purchase
SomaSensors. The Cerebral Oximeters that are shipped to our customers are
classified as no-cap sales equipment and are depreciated over five years. As of
November 30, 2004, we have capitalized approximately $1,628,000 in costs for
Cerebral Oximeters being used as demonstration and no-cap sales equipment, and
these assets had a net book value of approximately $901,000. As of November 30,
2003, we have capitalized approximately $1,309,000 in costs for Cerebral
Oximeters being used as demonstration and no-cap sales equipment, and these
assets had a net book value of approximately $530,000. Property and equipment
are reviewed for impairment whenever events or changes in circumstances indicate
that the net book value of the asset may not be recovered.

      Intangible Assets consist of patents and trademarks, and license
acquisition costs. Patents and trademarks are recorded at cost and are being
amortized on the straight-line method over 17 years. The carrying amount and
accumulated amortization of these patents and trademarks is as follows:



                                                              NOVEMBER 30,
                                                       -------------------------
                                                          2004          2003
                                                       -----------   -----------
                                                               
Patents and trademarks.............................    $   111,733   $   111,733
Less: accumulated amortization.....................        (87,900)      (80,988)
                                                       -----------   -----------
       Total.......................................    $    23,833   $    30,745
                                                       ===========   ===========


      Amortization expense was $6,912 for the fiscal years ended November 30,
2004, November 30, 2003, and November 30, 2002. Amortization expense for each of
the next three fiscal years is expected to be approximately $6,900 per year, and
approximately $3,100 in fiscal 2008.

      License acquisition costs are related to our acquisition of exclusive,
worldwide, royalty-bearing licenses to specified rights relating to the
CorRestore System, and related products and accessories. On June 2, 2000, we
entered into a License Agreement with the inventors and their company,
CorRestore LLC. The license grants us exclusive, worldwide, royalty-bearing
licenses to specified rights relating to the CorRestore System and related
products and accessories for SVR, subject to the terms and conditions of the
license agreement. Pursuant to the license agreement, CorRestore LLC has agreed
to provide various consulting services to us. We have agreed to pay all of the
expenses of such consultation, of clinical testing of the CorRestore System,
training doctors in SVR and training our personnel and customers in the use of
the CorRestore System.

                                       44



                             SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

      In exchange for the licenses and consulting services, we agreed to the
following compensation for CorRestore LLC and its agent, Joe B. Wolfe: (1) a
royalty of 10% of our "net sales" of products subject to the licenses, (2)
five-year warrants to purchase up to 400,000 common shares at $3.00 a share,
exercisable to purchase 300,000 shares immediately and to purchase an additional
50,000 shares upon our receipt of clearance or approval from the FDA to market
the CorRestore Patch in the United States and another 50,000 shares upon our
receipt of CE certification for the CorRestore System, (3) additional five-year
warrants to purchase up to 2,100,000 common shares at $3.00 a share, granted
when we received clearance from the FDA to market the CorRestore Patch in the
United States, exercisable based on our cumulative net sales of the CorRestore
System products, and (4) a consulting fee of $25,000 a year to each of the
inventors until we sell 1,000 CorRestore Patches. In April 2004, CorRestore LLC
exercised its warrant to purchase 380,000 of our newly-issued common shares, at
$3.00 per share, for proceeds of $1,140,000.

      License acquisition costs consist of professional service fees recorded at
cost, our estimate of the fair value of the ten-year vested stock options to
purchase 50,000 common shares at $3.00 a share granted to one of our then
current directors in connection with negotiating and assisting us in completing
the transaction, and our estimate of the fair value of the 400,000 common share
vested portion of the five-year warrants to purchase common shares at $3.00 a
share issued in the transaction.

      We estimated the value of the stock options to purchase 50,000 common
shares using the Black-Scholes valuation model with the following assumptions:
expected volatility (the measure by which the stock price has fluctuated or is
expected to fluctuate during the period) 111.16%, risk-free interest rate of
7.5%, expected life of 4 years and dividend yield of 0%. We estimated the value
of the warrants to purchase 300,000 common shares that vested immediately in
this transaction using the Black-Scholes valuation model with the following
assumptions: expected volatility (the measure by which the stock price has
fluctuated or is expected to fluctuate during the period) 111.16%, risk-free
interest rate of 7.5%, expected life of 5 years and dividend yield of 0%. We
estimated the value of the warrants to purchase 50,000 common shares that vested
upon receipt of FDA clearance in November 2001 using the Black-Scholes valuation
model with the following assumptions: expected volatility (the measure by which
the stock price has fluctuated or is expected to fluctuate during the period)
100.68%, risk-free interest rate of 4.0%, expected life of 42 months and
dividend yield of 0%. We estimated the value of the warrants to purchase 50,000
common shares that vested upon receipt of CE Mark certification in April 2003
using the Black-Scholes valuation model with the following assumptions: expected
volatility (the measure by which the stock price has fluctuated or is expected
to fluctuate during the period) 64.70%, risk-free interest rate of 2.0%,
expected life of 25 months and dividend yield of 0%.

      In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
This statement establishes accounting and reporting standards for goodwill and
other intangible assets. We adopted this statement in the first quarter of
fiscal 2002. The effect of adopting this statement has been to discontinue
amortizing our license acquisition costs related to our acquisition of
exclusive, worldwide, royalty-bearing licenses to specified rights relating to
the CorRestore System and related products and accessories described above
because we believe these licenses have an indefinite life. The carrying amount
and accumulated amortization of these license acquisition costs is as follows:

                                       45



                             SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)



                                                             NOVEMBER 30,
                                                       -------------------------
                                                          2004          2003
                                                       -----------   -----------
                                                               
License acquisition costs..........................    $ 1,258,163   $ 1,258,163
Less: accumulated amortization.....................       (329,070)     (329,070)
                                                       -----------   -----------
       Total.......................................    $   929,093   $   929,093
                                                       ===========   ===========


      Indefinite lived intangible assets are reviewed annually for impairment at
the end of our fiscal year, and whenever events or changes in circumstances
indicate that the carrying value of the asset may not be recovered. The company
evaluates impairment by comparing the fair value of the intangible asset,
determined using a cash flow method, with its carrying value.

      Revenue Recognition occurs when there is persuasive evidence of an
arrangement with the customer, the product has been delivered, the sales price
is fixed or determinable, and collectibility is reasonably assured. The product
is considered delivered to the customer once we have shipped it, as this is when
title and risk of loss have transferred.

      Research, Development and Engineering costs are expensed as incurred.

      Net Income (Loss) Per Common Share - basic and diluted is computed using
the weighted average number of common shares outstanding during each period.
Weighted average shares outstanding - diluted, for the years ended November 30,
2004 and November 30, 2003, include the potential dilution that could occur for
common stock issuable under stock options or warrants. As of November 30, 2004
and 2003, the difference between weighted average shares - diluted and weighted
average shares - basic is calculated as follows:



                                          2004         2003
                                       ----------    ---------
                                               
Weighted average shares - basic         9,780,104    9,113,854
Add:  effect of dilutive common
shares and warrants                     1,543,168      352,984
                                       ----------    ---------
Weighted average shares - diluted      11,323,272    9,466,838


Common shares issuable under stock options and warrants have not been included
in the computation of net loss per common share - diluted for the fiscal year
ended November 30, 2002 because such inclusion would be antidilutive. At
November 30, 2004, there were approximately 500 stock options outstanding that
were excluded from the computation of net income per common share - diluted, and
at November 30, 2003 there were approximately 99,000 stock options outstanding
that were excluded from the computation of net income per common share -
diluted, as the exercise price of these options exceeded the average price per
share of our common stock. In addition, there were approximately 2,100,000
warrants outstanding that were excluded from the computation, as the warrants
are contingent on achieving specified future sales targets. As of November 30,
2004, we had outstanding 4,436,315 warrants and options to purchase common
shares, as of November 30, 2003, we had outstanding 5,308,819 warrants and
options to purchase common shares, and as of November 30, 2002, we had
outstanding 5,162,850 warrants and options to purchase common shares.

      Accounting Pronouncements In December 2002, the Financial Accounting
Standards Board

                                       46



                             SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

issued Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This Statement, which is
effective for fiscal years ending after December 15, 2002, amends Statement No.
123, "Accounting for Stock-Based Compensation," and provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. In addition, Statement No. 148 amends
the disclosure requirements of Statement No. 123 regardless of the accounting
method used to account for stock-based compensation. We have chosen to continue
to account for stock-based compensation of employees using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. However, we adopted the
enhanced disclosure provisions as defined by Statement No. 148 beginning with
our fiscal quarter ended February 28, 2003 (Note 7).

      In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised), Share Based
Payment. This Statement, which is effective for interim or annual reporting
periods that begin after June 15, 2005, revises Statement No. 123, "Accounting
for Stock-Based Compensation," and requires that compensation costs related to
share-based payment transactions, including stock options, be recognized in the
financial statements. This Statement will be effective for our fiscal quarter
ending November 30, 2005. We expect the equity compensation to be recognized in
our statement of operations for fiscal 2005, related to unvested stock options
as of our required adoption date, will be the equivalent of $.01 per diluted
common share, and we expect the impact for fiscal 2006 will be approximately
$.03 per diluted common share. The future approval of any additional equity
incentive plans would have an additional impact on our financial statements.

      Use Of Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses for each fiscal period. Actual results could differ from
those estimated.

      Reclassifications Certain reclassifications have been made to the
financial statements for 2003 and 2002 to conform to 2004 presentation.

3.    STOCK OFFERINGS AND COMMON SHARES

      On March 6, 2000, we entered into the Private Equity Line Agreement with
Kingsbridge Capital Limited, a private institutional investor, which was
subsequently terminated on April 10, 2001. In connection with the Private Equity
Line Agreement, we issued to Kingsbridge Capital warrants which entitled the
holder to purchase 205,097 common shares, after adjustment for the April 2001
private placement and the January 2002 public offering, at a purchase price of
$4.25 per share. The exercise price of the warrants was payable either in cash
or by a cashless exercise.

      In November 2003, Kingsbridge purchased 100,000 common shares under the
warrants by a cashless exercise. As a result of this cashless exercise, we
issued 53,603 common shares to Kingsbridge, retaining 46,397 common shares in
payment of the exercise price. In March 2004, Kingsbridge Capital Limited
purchased 40,000 common shares under its warrants by a cashless exercise. As a
result of this cashless exercise, we issued 24,097 common shares to Kingsbridge,
retaining 15,903 common shares in payment of the exercise price. In May 2004,
Kingsbridge Capital Limited purchased the remaining 65,097 common shares under
its warrants by a cashless exercise. As a result of this cashless exercise, we
issued 47,475 common shares to Kingsbridge, retaining 17,622 common shares in
payment of the exercise price. Kingsbridge now has no warrants remaining to
purchase common shares.

                                       47



                             SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

      On April 9, 2001, we completed the private placement of newly-issued
common shares for which Brean Murray & Co., Inc., as our exclusive placement
agent, received warrants to purchase 25,000 common shares at $2.10 per share. In
October 2003, Brean Murray & Co., Inc. transferred the 25,000 warrants to
persons who are or were employees of Brean Murray & Co., Inc., and in November
2003, those persons exercised the warrants to purchase all 25,000 common shares
under the warrants by a cashless exercise. As a result of this cashless
exercise, we issued 18,832 restricted common shares to those individuals,
retaining 6,168 common shares in payment of the exercise price, and no more
common shares remain subject to these warrants.

      On January 16, 2002, we completed a public offering of 1,000,000
newly-issued common shares at a price of $4.25 per share, for gross proceeds of
$4,250,000. Our estimated net proceeds, after deducting the placement agent's
commission and the estimated expenses of the offering, were approximately
$3,680,000. Brean Murray & Co., Inc. was our exclusive placement agent for the
offering and received for its services (1) $340,000 as a placement agent fee,
and (2) warrants to purchase 100,000 common shares at $5.10 per share
exercisable during the four-year period beginning January 11, 2003. In June
2004, Brean Murray & Co., Inc. purchased 100,000 common shares under its
warrants by a cashless exercise. As a result of this cashless exercise, we
issued 66,265 common shares to Brean Murray & Co., Inc., retaining 33,735 common
shares in payment of the exercise price. Brean Murray & Co., Inc. now has no
warrants remaining to purchase common shares.

      Pursuant to the CorRestore License Agreement, CorRestore, LLC and its
agent, Joe B. Wolfe, received warrants to purchase 400,000 common shares
exercisable at $3.00 per share until June 2, 2005, and received warrants to
purchase an additional 2,100,000 common shares exercisable at $3.00 per share
until November 21, 2006, dependent upon our cumulative net sales of CorRestore
products. In April 2004, CorRestore LLC exercised its warrant to purchase
380,000 of our newly-issued common shares, at $3.00 per share, for proceeds of
$1,140,000. As of November 30, 2004, Mr. Wolfe's 20,000 warrants remain
outstanding and, additionally, the 2,100,000 warrants remain outstanding, but
the sales requirements for exercise of those warrants have not been met.

      During fiscal 2004, we issued 321,276 common shares as a result of stock
option exercises by employees, directors and former employees, for proceeds of
approximately $1,541,000. During fiscal 2003, we issued 148,371 common shares as
a result of stock option exercises by employees, directors and former employees,
for proceeds of approximately $539,000.

      Common shares reserved for future issuance upon exercise of stock options
and warrants as discussed above at November 30, 2004, are as follows:


                                                                 
1991 Incentive Stock Option Plan..............................          26,618
1993 Director Stock Option Plan...............................             500
1997 Stock Option Plan........................................       2,186,452
Options Granted Independent of Option Plans...................         169,786
License Acquisition Warrants..................................       2,120,000
                                                                    ----------
        Total shares reserved for future issuance............        4,503,356
                                                                    ==========


                                       48



                             SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

4.    ACCRUED LIABILITIES

      Accrued liabilities consist of the following:



                                                              NOVEMBER 30,
                                                       -------------------------
                                                          2004          2003
                                                       -----------   -----------
                                                               
Incentive Compensation.............................    $   390,978   $   166,360
Sales Commissions..................................        153,180       123,356
401(k) Match.......................................         97,071            --
Professional Fees..................................         42,000        10,500
Warranty...........................................         10,750         5,850
Royalty............................................          9,130        13,645
Insurance..........................................             --        29,836
                                                       -----------   -----------
     Total.........................................    $   703,109   $   349,547
                                                       ===========   ===========


5.    INCOME TAX

      Deferred income taxes reflect the estimated future tax effect of (1)
temporary differences between the amount of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations and
(2) net operating loss and tax credit carryforwards. Our deferred tax assets
primarily represent the tax benefit of net operating loss carryforwards and
research and general business tax credit carryforwards. We had deferred tax
assets of approximately $16,657,000 as of November 30, 2004, partially offset by
valuation allowances of approximately $9,957,000, due to the uncertainty of
utilizing such assets against future earnings, prior to their expiration. As of
November 30, 2003, we had deferred tax assets of $17,061,000 which were entirely
offset by valuation allowances, due to the uncertainty of utilizing such assets
against future earnings, prior to their expiration. We have used a statutory
income tax rate of 34% when calculating our deferred tax assets. We have paid no
income taxes for fiscal 2004 or fiscal 2003.

      The components of deferred income tax assets as of November 30, 2004 and
2003 were as follows:



                                                              NOVEMBER 30,
                                                        -------------------------
                                                            2004         2003
                                                        -----------   -----------
                                                              (IN THOUSANDS)
                                                                
Net operating loss carryforwards...................     $    16,216   $    16,549
Other..............................................              90            88
Basis difference of fixed assets and intangibles...             (92)          (19)
Research and general business tax credit 
  carryforwards...................................              443           443
                                                        -----------   -----------
      Subtotal.....................................          16,657        17,061
Valuation allowance................................          (9,957)      (17,061)
                                                        -----------   -----------
      Deferred tax asset...........................     $     6,700   $        --
                                                        ===========   ===========


                                       49


                             SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS-(CONTINUED)

      The items accounting for the difference between income taxes computed at
the federal statutory rate and the provision for income taxes are as follows:



                                                    FOR THE FISCAL YEAR ENDED NOVEMBER 30,
                                                     2004            2003           2002
                                                 -------------   ------------   ------------
                                                                       
Taxes at U.S. statutory rate - 34%..........     $     682,236   $     24,679   $   (410,262)
Nondeductible meals and entertainment.......     $      15,109   $      9,531   $      7,592
Change in valuation allowance...............     $  (7,397,345)  $    (34,210)  $    402,670
                                                 -------------   ------------   ------------
Income tax expense (benefit) from continuing
operations..................................     $  (6,700,000)  $          -   $          -
                                                 =============   ============   ============
Effective tax rate..........................            (333.9)%            0%             0%
                                                 =============   ============   ============


      For the fiscal year ended November 30, 2004, our income tax benefit of
$6,700,000 consisted entirely of deferred tax benefits. We had no current or
deferred income tax expense or benefit for the fiscal years ended November 30,
2003 or 2002.

      We have performed the required assessment of positive and negative
evidence regarding realization of our deferred tax assets in accordance with
SFAS No. 109, "Accounting for Income Taxes," including our past operating
results, the existence of cumulative losses over our history up to the most
recent two fiscal years, and our forecast for future net income. Our assessment
of our deferred tax assets, and the reversal of part of our valuation allowance,
included evaluating our financial plans and our future projected earnings,
making allowance for the uncertainties surrounding, among other things, our
future rate of growth in net revenues, the rate of adoption of our products in
the marketplace, and the potential for competition to enter the marketplace. In
reversing a portion of our valuation allowance, we have concluded that it is
more likely than not that our net deferred tax assets will be realized.

      As of November 30, 2004, net operating loss carryforwards of approximately
$47.7 million were available for Federal income tax purposes for future years.
Our ability to use the net operating loss carryforwards incurred on or before
March 27, 1991 (the date we completed our initial public offering) is limited to
approximately $296,000 per year. Research and business general tax credits of
approximately $443,000 are also available to offset future taxes. These losses
and credits expire, if unused, at various dates from 2004 through 2024.

      Use of our net operating loss carryforwards, tax credit carryforwards and
certain future deductions could be restricted, in the event of future changes in
our equity structure, by provisions contained in the Tax Reform Act of 1986.

6.    COMMITMENTS AND CONTINGENCIES

      We have a lease agreement for a 23,392 square foot, stand-alone office,
assembly and warehouse facility. The current lease, as amended, expires December
31, 2009.

                                       50


                             SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS-(CONTINUED)

      Operating lease expense for the years ended November 30, 2004, 2003 and
2002 was approximately $204,000, $216,000, and $205,000, respectively.
Approximate future minimum lease commitments are as follows:



            YEAR ENDED NOVEMBER 30,
            -----------------------
                                                     
            2005....................................   $    140,400
            2006....................................   $    140,400
            2007....................................   $    142,900
            2008....................................   $    145,800
            2009....................................   $    148,700
            2010....................................   $     12,400
                                                        ------------
            Total...................................   $    730,600
                                                        ============


      In December 1991, we amended and restated our profit sharing plan to
include a 401(k) plan covering substantially all employees. Under provisions of
the plan, participants may contribute, annually, between 1% and 25% of their
compensation. In November 2004, our Board of Directors approved a discretionary
contribution to the 401(k) Plan, as soon as practicable after December 31, 2004,
equal to $2 for every $1 contributed by Company employees to the 401(k) Plan
during calendar 2004, up to a Company contribution of 4% of the employee's
compensation, and also approved matching contributions to the 401(k) Plan equal
to $2 for every $1 contributed by Company employees to the 401(k) Plan at each
payroll date on or after January 1, 2005, up to a Company contribution of 4% of
the employee's compensation, and continuing until terminated by further action
of the Board of Directors. In addition, at the discretion of the Board of
Directors, we may make other annual discretionary contributions to the plan. The
discretionary contribution made in February 2005, for calendar 2004, was
approximately $113,000. We did not make any matching or discretionary
contributions to the plan for the years ended November 30, 2003 or 2002.

      As of November 30, 2004, we had an employment agreement with Bruce J.
Barrett, our President and Chief Executive Officer. Mr. Barrett's employment
agreement, as amended, expires April 30, 2006 unless earlier terminated as
provided in the agreement. Mr. Barrett is entitled to receive an annual base
salary, plus potential discretionary bonuses. Mr. Barrett has agreed not to
compete with us during specified periods.

      As of November 30, 2004, we had an employment agreement with Dominic J.
Spadafore, our Vice President of Sales and Marketing. Mr. Spadafore's employment
agreement terminates as provided in the agreement. Mr. Spadafore is entitled to
receive an annual base salary, plus potential bonuses. Mr. Spadafore has agreed
not to compete with us during specified periods.

      We may become subject to products liability claims by patients or
physicians, and may become a defendant in products liability or malpractice
litigation. We have obtained products liability insurance and an umbrella
policy. We might not be able to maintain such insurance or such insurance might
not be sufficient to protect us against products liability.

7.    STOCK OPTION PLANS

      In February 1991 and January 1997, we adopted stock option plans for our
key employees, directors, consultants and advisors. The plans provide for our
issuance of options to purchase a maximum of 115,000 common shares under the
1991 plan and 2,560,000 common shares under the 1997 plan. In addition, we
granted options to employees independent of the plans. Options granted generally
have a 10-

                                       51


                             SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS-(CONTINUED)

year life, and vest over a three-year period. Awards and expirations under the
1991 plan, 1997 plan, and independent of the plans during the years ended
November 30, 2004, 2003 and 2002 are listed below.

      At November 30, 2004, no additional options may be granted under the 1991
plan, and 67,041 common shares were available for options to be granted under
the 1997 plan.

      In January 1993, we adopted the Somanetics Corporation 1993 Director Stock
Option Plan. The directors plan provided up to 24,000 common shares for the
grant of options to each director who was not one of our officers or employees.
In January 1998, our Board of Directors terminated the directors plan, except as
to options previously granted under the directors plan. Therefore, no additional
options may be granted under the directors plan.

      In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation,"
was issued. In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised), Share Based
Payment. This Statement, which is effective for interim or annual reporting
periods that begin after June 15, 2005, revises Statement No. 123, "Accounting
for Stock-Based Compensation," and requires that compensation costs related to
share-based payment transactions, including stock options, be recognized in the
financial statements. This Statement will be effective for our fiscal quarter
ending November 30, 2005.

      We currently account for stock-based compensation of employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation costs for stock options granted to employees are
measured as the excess, if any, of the market price of our stock at the date of
the grant over the amount an employee must pay to acquire the stock. No
compensation expense has been charged against income for stock option grants to
employees. Stock-based compensation of consultants and advisors is determined
based on the fair value of the options or warrants on the grant date pursuant to
the methodology of SFAS No. 123, estimated using the Black-Scholes model with
the assumptions described in the next paragraph. The resulting amount is
recognized as compensation expense and an increase in additional paid-in capital
over the vesting period of the options or warrants. As a result, we recorded
$8,471 of compensation expense, and an equal increase in additional paid in
capital, for stock options issued to non-employees in fiscal 2003, and $5,597 of
compensation expense in fiscal 2002. We recorded no such expense in fiscal 2004.

      Had compensation expense for our stock options granted to employees been
determined based on the fair value of the options on the grant date pursuant to
the methodology of SFAS No. 123, our results of operations on a pro forma basis
would have been as follows:

                                       52


                             SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS-(CONTINUED)



                                                    FOR THE FISCAL YEAR ENDED NOVEMBER 30,
                                                     2004            2003          2002
                                                 -------------   ------------   ------------
                                                                       
Net income (loss)...........................     $   8,706,576   $     72,586   $ (1,206,652)
Add:  Stock-based employee compensation
included in actual net income (loss)........     $           0   $      8,471   $      5,597
Deduct:  Pro-forma stock-based employee
compensation, had fair value method been
applied.....................................     $    (796,000)  $   (962,000)  $   (760,000)
                                                 -------------   ------------   ------------ 
Pro-forma net income (loss).................     $   7,911,576   $   (880,943)  $ (1,961,055)
                                                 =============   ============   ============
Net income (loss) per common share -
diluted.....................................     $         .77   $        .01   $       (.13)
Pro-forma net income (loss) per common        
share - diluted, had fair value method been
applied.....................................     $         .70   $       (.09)  $       (.22)


The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for 2004, 2003 and 2002: expected volatility (the measure by
which the stock price has fluctuated or is expected to fluctuate during the
period) 61.00% for 2004 (64.32% for 2003 and 89.45% for 2002), risk-free
interest rate of 4.0% for 2004 (4.0% for 2003 and 2002), expected lives of 7
years for fiscal 2004 (7 years for 2003 and 4 years for 2002) and dividend yield
of 0%.

      A summary of our stock option activity and related information for the
years ended November 30, 2004, 2003 and 2002 is as follows:



                                        2004                          2003                         2002
                              -----------------------       -----------------------       ----------------------
                                             WEIGHTED                     WEIGHTED                      WEIGHTED
                                             AVERAGE                       AVERAGE                      AVERAGE
                               COMMON        EXERCISE        COMMON       EXERCISE          COMMON      EXERCISE
                               SHARES         PRICE          SHARES         PRICE           SHARES       PRICE
                              ---------     ---------       ---------     ---------       ---------     --------
                                                                                      
Options outstanding
  December 1,............     2,603,722     $    3.89       2,332,753     $    4.04       1,846,120     $   4.52
  Options granted........        53,500         10.23         471,000          3.75         509,500         2.82
  Options exercised......      (321,276)         4.79        (148,371)         3.63          (2,833)        3.36
  Options canceled.......       (19,631)        13.94         (51,660)        10.08         (20,034)       17.17
                              ---------     ---------       ---------     ---------       ---------     --------
Options outstanding
  November 30,...........     2,316,315          3.83       2,603,722          3.89       2,332,753         4.04
                              =========     =========       =========     =========      ==========     ========
Options exercisable
  November 30,...........     1,827,008     $    3.91       1,784,482     $    4.27       1,606,767     $   4.80
                              =========     =========       =========     =========      ==========     ========


                                       53


                             SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS-(CONTINUED)

      A summary of the price ranges of our stock options outstanding and
exercisable as of November 30, 2004 is as follows:


                                        Options outstanding                 Options exercisable
                             -----------------------------------------    -----------------------
                                             WEIGHTED       WEIGHTED                     WEIGHTED
                                             AVERAGE        AVERAGE                      AVERAGE
                               OPTIONS       EXERCISE      REMAINING        OPTIONS      EXERCISE
RANGE OF EXERCISE PRICES     OUTSTANDING      PRICE       LIFE (YEARS)    EXERCISABLE     PRICE
-------------------------    -----------    ----------    ------------    -----------    --------
                                                                          
$1.70 -  $5.00...........     1,837,904     $     3.18       6.47          1,385,097     $   3.09
$5.01 -  $10.00..........       422,811           5.95       3.46            402,811         5.86
$10.01 - $26.30..........        55,600          12.43       5.67             39,100        12.79
                             -----------    ----------       ----          ---------     --------

Total....................     2,316,315     $     3.91       5.90          1,827,008     $   3.91
                             ==========     ==========       ====         ===========    ========


8.    RELATED PARTY TRANSACTIONS

      In connection with our April 2001 private placement of common shares,
Brean Murray & Co., Inc. was our exclusive placement agent and received for its
services warrants to purchase 25,000 common shares at $2.10 per share
exercisable during the four-year period beginning April 9, 2002. At the time, A.
Brean Murray, one of our then current directors, and his wife controlled Brean
Murray & Co., Inc. In October 2003, Brean Murray & Co., Inc. transferred the
25,000 warrants to persons who are or were employees of Brean Murray & Co.,
Inc., and in November 2003, those persons exercised the warrants to purchase all
25,000 common shares under the warrants by a cashless exercise. As a result of
this cashless exercise, we issued 18,832 restricted common shares to those
individuals, retaining 6,168 common shares in payment of the exercise price, and
no common shares remain subject to these warrants.

      In connection with our CorRestore license, effective November 21, 2001, we
granted Joe B. Wolfe five-year warrants to purchase 180,000 common shares,
exercisable at $3.00 a share. Mr. Joe B. Wolfe is one of our directors.

      In connection with our January 2002 public offering of common shares,
Brean Murray & Co., Inc. was our exclusive placement agent and received for its
services (1) $340,000 as a placement agent fee, and (2) warrants to purchase
100,000 common shares at $5.10 per share exercisable during the four-year period
beginning January 11, 2003. In June 2004, Brean Murray & Co., Inc. purchased
100,000 common shares under its warrants by a cashless exercise. As a result of
this cashless exercise, we issued 66,265 common shares to Brean Murray & Co.,
Inc., retaining 33,735 common shares in payment of the exercise price. Brean
Murray & Co., Inc. now has no warrants remaining to purchase common shares.

9.    MAJOR CUSTOMERS AND FOREIGN SALES

      One international distributor (Europe) accounted for approximately 12% of
net revenues for the fiscal years ended November 30, 2003 and November 30, 2002.

      Additionally, foreign net revenues for the fiscal year ended November 30,
2004 were approximately $2,092,000, for the fiscal year ended November 30, 2003
were approximately $1,945,000, and for the fiscal year ended November 30, 2002
were approximately $1,348,000.

                                       54


                             SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS-(CONTINUED)

10.   SEGMENT INFORMATION

      We operate our business in one reportable segment, the development,
manufacture and marketing of medical devices. Each of our two product lines have
similar characteristics, customers, distribution and marketing strategies, and
are subject to similar regulatory requirements. In addition, in making operating
and strategic decisions, our management evaluates net revenues based on the
worldwide net revenues of each major product line, and profitability on an
enterprise-wide basis due to shared costs. Approximately 96% of our net revenues
in fiscal 2004 were derived from our INVOS Cerebral Oximeter product line,
compared to 92% of our net revenues in fiscal 2003 and 96% of our net revenues
in fiscal 2002.

                                       55


                        QUARTERLY INFORMATION (UNAUDITED)

      The following is a summary of our quarterly operating results for the
fiscal years ended November 30, 2004 and 2003:



                                                              QUARTER
                                   -------------------------------------------------------------
                                     FIRST            SECOND            THIRD           FOURTH
                                   ----------       ----------       ----------       ----------
                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                          
YEAR ENDED NOVEMBER 30, 2004

Net revenues...............        $2,670,265       $3,032,976       $3,076,373       $3,829,001
Gross margin...............         2,149,872        2,513,660        2,632,536        3,262,294
Net income.................           292,744          409,730          539,722        7,464,380*
Net income per common
    share - basic..........        $     0.03       $     0.04       $     0.05       $     0.74
Net income per common
    share - diluted........        $     0.03       $     0.04       $     0.05       $     0.64


----------------
*Includes the effects of a reversal of $6,700,000 of our valuation allowance, as
described in Note 5 of Notes to Financial Statements.



                                                                           
YEAR ENDED NOVEMBER 30, 2003

Net revenues...............        $1,950,946       $2,203,442       $2,303,880       $2,902,625
Gross margin...............         1,500,749        1,642,246        1,784,335        2,293,736
Net income (loss)..........          (195,450)        (129,373)          75,454          321,955
Net income (loss) per
    common share -
    basic..................        $    (0.02)      $    (0.01)      $     0.01       $     0.04
Net income (loss) per
    common share -
    diluted................        $    (0.02)      $    (0.01)      $     0.01       $     0.03


                                       56


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

      None.

ITEM  9A. CONTROLS AND PROCEDURES

      Our management has evaluated, with the participation of our principal
executive and principal financial officers, the effectiveness of our disclosure
controls and procedures as of November 30, 2004, and, based on their evaluation,
our principal executive and principal financial officers have concluded that
these controls and procedures are effective as of November 30, 2004. There was
no change in our internal control over financial reporting identified in
connection with such evaluation that occurred during our fourth fiscal quarter
ended November 30, 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

      Disclosure controls and procedures are our controls and other procedures
that are designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is accumulated and communicated to our
management, including our principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.

ITEM  9B. OTHER INFORMATION

          None.

                                       57


                                    PART III

ITEM  10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information required by this Item 10 regarding our executive officers
is included in the Supplemental Item in Part I of this Report, and is
incorporated in this Item 10 by reference. The information required by this Item
10 regarding our directors will be set forth under the caption "Election of
Director" in our Proxy Statement in connection with the 2005 Annual Meeting of
Shareholders scheduled to be held April 21, 2005, and is incorporated in this
Item 10 by reference. The information required by this Item 10 concerning
compliance with Section 16(a) of the Securities Exchange Act of 1934 will be set
forth under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in our Proxy Statement in connection with the 2005 Annual Meeting of
Shareholders scheduled to be held April 21, 2005, and is incorporated in this
Item 10 by reference.

      The information required by this Item 10 concerning our Code of Business
Conduct and Ethics will be set forth under the caption "Code of Business Conduct
and Ethics" in our Proxy Statement in connection with the 2005 Annual Meeting of
Shareholders scheduled to be held April 21, 2005, and is incorporated in this
Item 10 by reference.

ITEM  11. EXECUTIVE COMPENSATION

      The information required by this Item 11 concerning executive compensation
will be set forth under the caption "Executive Compensation" in our Proxy
Statement in connection with the 2005 Annual Meeting of Shareholders scheduled
to be held April 21, 2005, and is incorporated in this Item 11 by reference.

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

      The information required by this Item 12 concerning security ownership of
certain beneficial owners and management will be set forth under the captions
"Voting Securities and Principal Holders" and "Election of Director" in our
Proxy Statement in connection with the 2005 Annual Meeting of Shareholders
scheduled to be held April 21, 2005, and is incorporated in this Item 12 by
reference. The equity compensation plan information required by this Item 12
will be set forth under the caption "Equity Compensation Plan Information" in
our Proxy Statement in connection with the 2005 Annual Meeting of Shareholders
scheduled to be held April 21, 2005, and is incorporated in this Item 12 by
reference.

ITEM  13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this Item 13 concerning certain relationships
and related transactions, if any, will be set forth under the caption "Certain
Transactions" or "Compensation Committee Interlocks and Insider Participation"
in our Proxy Statement in connection with the 2005 Annual Meeting of
Shareholders scheduled to be held April 21, 2005, and is incorporated in this
Item 13 by reference.

ITEM  14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The information required by this Item 14 concerning principal accountant
fees and services will be set forth under the caption "Independent Accountants"
in our Proxy Statement in connection with the 2005 Annual Meeting of
Shareholders scheduled to be held April 21, 2005, and is incorporated in this
Item 14 by reference.

                                       58


                                     PART IV

ITEM  15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)   (1) Financial Statements

      Our financial statements for the following years are included in response
      to Item 8 of this Report:

           Report of Independent Registered Public Accounting Firm
           Balance Sheets - November 30, 2004 and 2003
           Statements of Operations - For Each of the Three Years in the Period
                 Ended November 30, 2004
           Statements of Shareholders' Equity - For Each of the Three Years in
           the Period Ended November 30, 2004
           Statements of Cash Flows - For Each of the Three Years in the Period
                 Ended November 30, 2004 
           Notes to Financial Statements

      (2)  Financial Statement Schedules

           None.

      (3)  Exhibits

      The Exhibits to this Report are as set forth in the "Index to Exhibits" on
      pages 61 to 63 of this Report. Each management contract or compensatory
      plan or arrangement filed as an exhibit to this Report is identified in
      the "Index to Exhibits" with an asterisk before the exhibit number.

                                       59


                                   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.

                                            Somanetics Corporation

Date: February 18, 2005                     By: /s/ Bruce J. Barrett
                                                --------------------
                                            Bruce J. Barrett
                                            President & Chief Executive Officer

      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/ Bruce J. Barrett           President and Chief Executive Officer    February 18, 2005
----------------------         and a Director (Principal Executive         
Bruce J. Barrett               Officer)
                               

/s/ William M. Iacona          Vice President, Finance, Controller,     February 22, 2005
-----------------------        and Treasurer (Principal Financial
 William M. Iacona             Officer and Principal Accounting
                               Officer) 
                              

/s/ Daniel S. Follis           Director                                 February 18, 2005
----------------------
 Daniel S. Follis

/s/ James I. Ausman            Director                                 February 19, 2005
---------------------
James I. Ausman, M.D., Ph.D.

/s/ Robert R. Henry            Director                                 February 18, 2005
---------------------
 Robert R. Henry

/s/ Joe B. Wolfe               Director                                 February 18, 2005
------------------
 Joe B. Wolfe


                                       60


                                  EXHIBIT INDEX



EXHIBIT                                     DESCRIPTION
-------                ---------------------------------------------------------
                    
 3(i)                  Restated Articles of Incorporation of Somanetics
                       Corporation, incorporated by reference to Exhibit 3(i) to
                       the Company's Quarterly Report on Form 10-Q for the
                       quarter ended February 28, 1998.

 3(ii)                 Amended and Restated Bylaws of Somanetics Corporation,
                       incorporated by reference to Exhibit 3(ii) to the
                       Company's Annual Report on Form 10-K for the fiscal year
                       ended November 30, 2003.

 10.1                  Lease Agreement, dated September 10, 1991, between
                       Somanetics Corporation and WS Development Company,
                       incorporated by reference to Exhibit 10.3 to the
                       Company's Quarterly Report on Form 10-Q for the quarter
                       ended August 31, 1991.

 10.2                  Extension of Lease, between Somanetics Corporation
                       and WS Development Company, dated July 22, 1994,
                       incorporated by reference to Exhibit 10.11 to the
                       Company's Quarterly Report on Form 10-Q for the quarter
                       ended August 31, 1994.

 10.3                  Change in ownership of Lease Agreement for 1653 E. Maple
                       Road, Troy, MI 48083, dated September 12, 1994, between
                       Somanetics Corporation and First Industrial, L.P.,
                       incorporated by reference to Exhibit 10.12 to the
                       Company's Quarterly Report on Form 10-Q for the quarter
                       ended August 31, 1994.

 10.4                  Second Addendum, between Somanetics Corporation and
                       First Industrial Mortgage Partnership, L.P., dated April
                       14, 1997, incorporated by reference to Exhibit 10.1 to
                       the Company's Quarterly Report on Form 10-Q for the
                       quarter ended May 31, 1997.

 10.5                  Third Amendment, between Somanetics Corporation and
                       First Industrial Mortgage Partnership, L.P., dated April
                       23, 1999, incorporated by reference to Exhibit 10.2 to
                       the Company's Quarterly Report on Form 10-Q for the
                       quarter ended May 31, 1999.

 10.6                  Fourth Amendment, between Somanetics Corporation and
                       First Industrial Mortgage Partnership, L.P., dated April
                       13, 2000, incorporated by reference to Exhibit 10.1 to
                       the Company's Quarterly Report on Form 10-Q for the
                       quarter ended May 31, 2000. 

 10.7                  Fifth Amendment, between Somanetics Corporation and First 
                       Industrial Mortgage Partnership, L.P., dated January 22,
                       2003, incorporated  by reference to Exhibit 10.7 to the
                       Company's Annual Report on Form 10-K for the fiscal year 
                       ended November 30, 2002.
 
 10.8                  Sixth Amendment, between Somanetics Corporation and
                       First Industrial Mortgage Partnership, L.P., dated April
                       21, 2004, incorporated by reference to Exhibit 10.1 to
                       the Company's Quarterly Report on Form 10-Q for the
                       quarter ended May 31, 2004.

*10.9                  Somanetics Corporation Amended and Restated 1991
                       Incentive Stock Option Plan, incorporated by reference to
                       Exhibit 10.5 to the Company's Annual Report on Form 10-K
                       for the fiscal year ended November 30, 1991.

*10.10                 Fourth Amendment to Somanetics Corporation 1991 Incentive
                       Stock Option Plan, incorporated by reference to Exhibit
                       10.7 to the Company's Annual Report on Form 10-K for the
                       fiscal year ended November 30, 1992.

*10.11                 Amended and Restated Fifth Amendment to Somanetics
                       Corporation 1991 Incentive Stock Option Plan,
                       incorporated by reference to Exhibit 10.10 to the
                       Company's Annual Report on Form 10-K for the fiscal year
                       ended November 30, 1995.

*10.12                 Somanetics Corporation 1993 Director Stock Option Plan,
                       incorporated by reference to Exhibit 10.8 to the
                       Company's Annual Report on Form 10-K for the fiscal year
                       ended November 30, 1992.

*10.13                 Somanetics Corporation 1997 Stock Option Plan,
                       incorporated by reference to Exhibit 10.9 to the
                       Company's Annual Report on Form 10-K for the fiscal year
                       ended November 30, 1996.

*10.14                 First Amendment to Somanetics Corporation 1997 Stock
                       Option Plan, incorporated by reference to Exhibit 10.11
                       to the Company's Annual Report on Form 10-K for the
                       fiscal year ended November 30, 1997.

*10.15                 Second Amendment to Somanetics Corporation 1997 Stock
                       Option Plan, incorporated by reference to Exhibit 10.12
                       to the Company's Annual Report on Form 10-K for the
                       fiscal year ended November 30, 1998.


                                       61


                                  EXHIBIT INDEX



EXHIBIT                                     DESCRIPTION
-------                ---------------------------------------------------------
                    
*10.16                 Third Amendment to Somanetics Corporation 1997 Stock
                       Option Plan, incorporated by reference to Exhibit 10.14
                       to the Company's Annual Report on Form 10-K for the
                       fiscal year ended November 30, 1999.

*10.17                 Fourth Amendment to Somanetics Corporation 1997 Stock
                       Option Plan, incorporated by reference to Exhibit 10.16
                       to the Company's Annual Report on Form 10-K for the
                       fiscal year ended November 30, 2000.

*10.18                 Fifth Amendment to Somanetics Corporation 1997 Stock
                       Option Plan, incorporated by reference to Exhibit 10.1 to
                       the Company's Quarterly Report on Form 10-Q for the
                       quarter ended February 28, 2002.

*10.19                 Sixth Amendment to Somanetics Corporation 1997 Stock
                       Option Plan, incorporated by reference to Exhibit 10.18
                       to the Company's Annual Report on Form 10-K for the
                       fiscal year ended November 30, 2002.

*10.20                 Somanetics Corporation 2004 Incentive Compensation Plan,
                       dated as of December 12, 2003, incorporated by reference
                       to Exhibit 10.20 to the Company's Annual Report on Form
                       10-K for the fiscal year ended November 30, 2003.

*10.21                 Somanetics Corporation 2005 Incentive Compensation Plan,
                       dated as of November 9, 2004, incorporated by reference
                       to Exhibit 10.1 to the Company's Current Report on Form
                       8-K, dated November 9, 2004 and filed November 12, 2004.

*10.22                 Employment Agreement, dated May 13, 1994, between
                       Somanetics Corporation and Bruce J. Barrett, incorporated
                       by reference to Exhibit 10.1 to the Company's Quarterly
                       Report on Form 10-Q for the quarter ended May 31, 1994.

*10.23                 Amendment to Employment Agreement, dated as of July 21,
                       1994, between Somanetics Corporation and Bruce J.
                       Barrett, incorporated by reference to Exhibit 10.1 to the
                       Company's Quarterly Report on Form 10-Q for the quarter
                       ended August 31, 1994.

*10.24                 Amendment to Employment Agreement, dated as of April 24,
                       1997, between Somanetics Corporation and Bruce J.
                       Barrett, incorporated by reference to Exhibit 10.21 to
                       Amendment No. 1 to the Registration Statement on Form
                       S-1 (file no. 333-25275), filed with the Securities and
                       Exchange Commission on May 30, 1997.

*10.25                 Amendment to Employment Agreement, dated as of April 18,
                       2000, between Somanetics Corporation and Bruce J.
                       Barrett, incorporated by reference to Exhibit 10.3 to the
                       Company's Quarterly report on Form 10-Q for the quarter
                       ended May 31, 2000.

*10.26                 Amendment to Employment Agreement, dated as of March 5,
                       2001, between Somanetics Corporation and Bruce J.
                       Barrett, incorporated by reference to Exhibit 10.2 to the
                       Company's Quarterly report on Form 10-Q for the quarter
                       ended February 28, 2001.

*10.27                 Amendment to Employment Agreement, dated as of January
                       24, 2003, between Somanetics Corporation and Bruce J.
                       Barrett, incorporated by reference to Exhibit 10.26 to
                       the Company's Annual Report on Form 10-K for the fiscal
                       year ended November 30, 2002.

*10.28                 Employment Agreement, dated August 1, 2002, between
                       Somanetics Corporation and Dominic J. Spadafore,
                       incorporated by reference to Exhibit 10.2 to the
                       Company's Quarterly Report on Form 10-Q for the quarter
                       ended August 31, 2002.

*10.29                 Change in Control, Invention, Confidentiality,
                       Non-Compete and Non-Solicitation Agreement, dated January
                       11, 2002, between Somanetics Corporation and Richard S.
                       Scheuing, incorporated by reference to Exhibit 10.28 to
                       the Company's Annual Report on Form 10-K for the fiscal
                       year ended November 30, 2001.

*10.30                 Form of Director Stock Option Agreement.

*10.31                 Form of Officer Non-Qualified Stock Option Agreement.

*10.32                 Form of Employee Non-Qualified Stock Option Agreement.

*10.33                 Form of Incentive Stock Option Agreement.


                                       62


                                  EXHIBIT INDEX



EXHIBIT                                      DESCRIPTION
-------                ---------------------------------------------------------
                    
*10.34                 Form of Stock Option Agreement, dated December 22, 1995,
                       between Somanetics Corporation and various employees,
                       incorporated by reference to Exhibit 10.29 to the
                       Company's Annual Report on Form 10-K for the fiscal year
                       ended November 30, 1995.

*10.35                 Form of Stock Option Agreement, dated December 22, 1995,
                       between Somanetics Corporation and various officers,
                       incorporated by reference to Exhibit 10.30 to the
                       Company's Annual Report on Form 10-K for the fiscal year
                       ended November 30, 1995.

*10.36                 Form of new Stock Option agreement, dated December 22,
                       1995, between Somanetics Corporation and various
                       employees, incorporated by reference to Exhibit 10.31 to
                       the Company's Annual Report on Form 10-K for the fiscal
                       year ended November 30, 1995.

*10.37                 Form of Stock Option Agreement, dated January 5, 1996,
                       between Somanetics Corporation and two officers,
                       incorporated by reference to Exhibit 10.32 to the
                       Company's Annual Report on Form 10-K for the fiscal year
                       ended November 30, 1995.

*10.38                 Form of Stock Option Agreement, dated as of April 24,
                       1997, between Somanetics Corporation and twenty-three
                       employees, incorporated by reference to Exhibit 10.32 to
                       Amendment No. 1 to the Registration Statement on Form S-1
                       (file no. 333-25275), filed with the Securities and
                       Exchange Commission on May 30, 1997.

*10.39                 Stock Option Agreement, dated as of August 1, 2002,
                       between Somanetics Corporation and Dominic J. Spadafore,
                       incorporated by reference to Exhibit 10.3 to the
                       Company's Quarterly Report on Form 10-Q for the quarter
                       ended August 31, 2002.

*10.40                 Consulting Agreement, dated February 28, 1983, as
                       amended, between Somanetics Corporation and Hugh F.
                       Stoddart, incorporated by reference to Exhibit 10.13 to
                       the Company's Annual Report on Form 10-K for the fiscal
                       year ended November 30, 1991.

 10.41                 Current Form of Somanetics Corporation Confidentiality
                       Agreement used for testing hospitals and clinics,
                       incorporated by reference to Exhibit 10.22 to the
                       Company's Annual Report on Form 10-K for the fiscal year
                       ended November 30, 1992.

 10.42                 Current Form of Somanetics Corporation Confidentiality 
                       Agreement used for the Company's employees and agents, 
                       incorporated by reference to Exhibit 10.3 to the 
                       Company's Quarterly Report on Form 10-Q for the quarter 
                       ended August 31, 1992.

 10.43                 Registration Rights Agreement, dated as of April 9,
                       2001, among Somanetics Corporation and the selling
                       shareholders, incorporated by reference to Exhibit 4.3 to
                       the Somanetics Corporation Registration Statement on Form
                       S-3 (file no. 333-59376) filed April 23, 2001 and
                       effective May 3, 2001.

 10.44                 License Agreement, dated as of June 2, 2000, among
                       Somanetics Corporation, CorRestore LLC, Constantine L.
                       Athanasuleas, M.D. and Gerald D. Buckberg, M.D.,
                       including forms of warrants from Somanetics Corporation
                       to CorRestore LLC and Joe B. Wolfe, incorporated by
                       reference to Exhibit 10.2 to the Company's Quarterly
                       Report on Form 10-Q for the quarter ended May 31, 2000.

 10.45                 Amendment No. 1 to License Agreement, dated as of
                       August 1, 2002, among Somanetics Corporation, CorRestore
                       LLC, Constantine L. Athanasuleas, M.D., and Gerald D.
                       Buckberg, M.D., incorporated by reference to Exhibit 10.1
                       to the Company's Quarterly Report on Form 10-Q for the
                       quarter ended August 31, 2002.

 14.1                  Somanetics Corporation Code of Business Conduct and
                       Ethics, adopted December 12, 2003, incorporated by
                       reference to Exhibit 14.1 to the Company's Annual Report
                       on Form 10-K for the fiscal year ended November 30, 2003.

 23.1                  Consent of Deloitte & Touche LLP.

 31.1                  Certifications of Chief Executive Officer Pursuant
                       to Rule 13a-14(a), as Adopted Pursuant to Section 302 of
                       the Sarbanes-Oxley Act of 2002.

 31.2                  Certifications of Chief Financial Officer Pursuant
                       to Rule 13a-14(a), as Adopted Pursuant to Section 302 of
                       the Sarbanes-Oxley Act of 2002.
 
 32.1                  Certifications of Chief Executive Officer and Chief
                       Financial Officer Pursuant to 18 U.S.C. Section 1350, as
                       Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
                       of 2002.


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