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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended November 30, 2005 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period
from

to
 Commission file number 0-19095
 SOMANETICS CORPORATION
  MICHIGAN
(State or other jurisdiction of
incorporation or organization)
    
    38-2394784
(I.R.S. Employer
Identification No.)
 
 1653 East Maple Road, Troy, Michigan
(Address of principal executive offices)
    
    48083-4208
(Zip Code)
 
 (248) 689-3050
 None
  Common Shares, par value $.01 per share
  o þ
 o þ
 þ o
 þ
  o þ o
 o þ
   Documents Incorporated by Reference
 None.




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##### 



SOMANETICS CORPORATION
 ANNUAL REPORT ON FORM 10-K
 FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2005
 TABLE OF CONTENTS
 PAGEPART I
    
    
    
    
    2ITEM 1. BUSINESS
    
    
    2ITEM 1A. RISK FACTORS
    
    
    20ITEM 1B. UNRESOLVED STAFF COMMENTS
    
    
    33ITEM 2. PROPERTIES
    
    
    33ITEM 3. LEGAL PROCEEDINGS
    
    
    33ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    33SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    34PART II
    
    
    
    
    36ITEM
5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    36ITEM 6. SELECTED FINANCIAL DATA
    
    
    37ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    38ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    48ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    49ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    67ITEM 9A. CONTROLS AND PROCEDURES
    
    
    67ITEM 9B. OTHER INFORMATION
    
    
    69PART III
    
    
    
    
    70ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    70ITEM 11. EXECUTIVE COMPENSATION
    
    
    73ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    76ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    79ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    79PART IV
    
    
    
    
    80ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    80Consent of Deloitte & Touche LLPCertifications of Chief Executive Officer Pursuant to Section 302Certifications of Chief Financial Officer Pursuant to Section 302Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906




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PART I
 
 ITEM 1. BUSINESS
 Overview
     2




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Our Corporate Information
  ® ® ® ® ®
 Industry
 Market Opportunity
   Brain Oxygen Imbalances and Its Effects
   3




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Limitations of Traditional Monitoring Technologies
  Our Solution
    4




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Features
    
    BenefitsNon-invasive
    
    
    
    Reduced risk to patients and medical professionals
    
    Consistent with market trend toward less invasive medical proceduresContinuous Information
    
    
    
    Immediate information regarding brain oxygen imbalances
to help guide therapeutic interventions
    
    Trend information, rather than at a single point in timeCost-Effective
    
    
    
    Low cost relative to traditional brain monitoring
methods
    
    Small portion of the total cost of the procedures in
which it is used
    
    Information can potentially improve patient outcomes
and reduce the overall cost of careEasy to Use
    
    
    
    Does not require a dedicated technician to operate or
interpret
    
    Automatic SomaSensor calibration
    
    Simple user interface and controlsEffective 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 hypovolemiaPortable/Compatible
    
    
    
    Placed at patients bedside
    
    Lightweight
    
    Can be integrated or interfaced with existing
multi-modality systems
 The CorRestore System
  Business Strategy
  
    
    Target Surgical Procedures and Other Critical Care Situations with a High Risk of
Oxygen Imbalances.We target surgical procedures and other critical care situations with a
high risk of oxygen imbalances. Some of our current and potential future markets include
cardiac surgeries, carotid artery surgeries, pediatric and neonatal ICU applications and
other major surgeries involving diabetic or elderly patients. We believe that the medical
professionals involved in these surgeries and ICU treatments are most aware of the risks of
brain and other damage resulting from oxygen imbalances. Therefore, we believe that it
will be easier to demonstrate the clinical importance of the information provided by the
INVOS System to these professionals and potentially gain market acceptance for our products
in connection with these surgeries and ICU treatments.
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
    
    Sponsor Clinical Studies to Promote Expanded Acceptance of the INVOS System.We believe
that our INVOS System has been evaluated in over 400 presentations, study abstracts and published papers. During the second quarter of fiscal 2004, results of both the first prospective,
randomized clinical trial and a larger retrospective review evaluating the INVOS System
were presented, which we believe have contributed to the INVOS System gaining further
market penetration. We plan to sponsor clinical studies using the INVOS System to
demonstrate its benefits. We are currently sponsoring a prospective, randomized, blinded
clinical trial involving diabetic patients over age 50 who are undergoing major general
surgery. The study group will consist of patients whose surgeries are managed based on
information provided by the INVOS System, and the control group will consist of similarly
situated patients whose surgeries are not managed based on information provided by the
INVOS System. The two groups will be compared across measures of patient outcomes and
hospital costs, including length of hospital stay. Diabetics are at particular risk of
oxygen imbalances because of a higher incidence of vascular disease. If results of this
trial are positive, we intend to target more actively the sale of the INVOS System for use
in diabetic patients undergoing major general surgeries, consistent with FDA requirements.
We expect to begin this marketing in 2008. We are also evaluating sponsorship of other
clinical trials which may allow us to more actively target the sale of the INVOS System for
use in other patient populations. We use the results of clinical studies to help convince
the medical community of the clinical importance of the information provided by the INVOS
System. We also sponsor peer-to-peer educational opportunities and promote use of the
INVOS System in regional centers of influence that we believe will influence its adoption
by others.
    
    Invest in Sales and Marketing Activities.We continue to increase our investment in our
distribution network consisting of our direct sales employees, independent sales
representative firms and distributors. We sell the INVOS System through a direct sales
team in the United States, the size of which has increased from 17 persons at the end of
fiscal 2004 to 26 persons at the end of fiscal 2005, and 10 independent sales
representative firms. We expect to increase significantly the size of our U.S. direct
sales team in fiscal 2006 and are evaluating placing direct salespersons and clinical
specialists in Europe to support Tyco Healthcare. We also have a co-promotion relationship
with Fresenius Medical Care Cardiovascular Resources, Inc.s North American Extracorporeal
Alliance. We participate in trade shows and medical conferences, ongoing peer-to-peer
educational programs and targeted public relations opportunities.
    
    Interface and Integrate Our Technology into Other Manufacturers Multi-Modality Systems.
There are many existing monitoring systems in the operating room and the ICU. We would
like to interface with these monitors. We have interfaced the INVOS System with the
Philips Medical Systems VueLink System to provide data, alarm events and status messages
from the INVOS System on any monitor that accepts the VueLink module, a multi-parameter
monitor. This enables oximetry data from our INVOS System to be displayed on the VueLink
screen and integrated with other vital patient information. We plan to support the
interface and integration of our INVOS System technology with other medical device
manufacturers to expand the installed base of INVOS System monitors and increase the demand
for SomaSensors. We expect that such arrangements will provide another distribution
channel for our INVOS System.
    
    Develop Additional Applications and Markets for the INVOS System.We are developing a
smaller SomaSensor for use with newborns, developing a product-line extension of the INVOS
System for monitoring non-brain tissues and making other advances to the design and
performance features of the INVOS System, including the SomaSensor. We are also evaluating
additional potential market segments for our INVOS System, such as use in other major
surgeries, in the adult ICU, in the emergency room, in ambulances, in the catheterization
laboratory, for blood transfusions, for muscle ischemia, for cosmetic surgery, for
non-surgical neurology or cardiology applications, for psychiatric applications, and for
sleep disorders. Pursuit of some of these potential market segments may require additional
FDA clearance. We believe that these natural extensions of our technology will increase
our market potential without the more significant risks and costs associated with
developing entirely new products.
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The INVOS System
 Components of the INVOS System
  
    
    Monitor and Software.Our oximeter is a portable monitor that uses our proprietary
software to analyze information received from the SomaSensors. It provides a continuous
digital and trend display of an index of the oxygen saturation in the region of the body
under the SomaSensors. The monitor includes menus for users to set high and low audible
alarms, customize the display and retrieve data. Single-function keys allow users to
silence alarms, mark important events, store data for up to 28 surgical procedures, and
retrieve data by disk or through a USB link to a computer. The monitor measures
approximately 9 inches wide, 8 inches high, and 8 inches deep and weighs approximately 14
pounds. Our next generation INVOS System monitor, which we expect to launch in the first
half of 2006, measures approximately 11 inches wide, 9 inches high, and 6 inches deep and
weighs approximately 11 pounds. We provide a one-year warranty on the monitor, and we
offer service for the monitor for a fee after the warranty expires. As of November 30,
2005, we had an installed base of approximately 1,100 INVOS System monitors in the United
States in approximately 500 hospitals.
 
    
    SomaSensors.Each single-use SomaSensor contains a light source and two light
detectors. For multi-channel cerebral monitoring, SomaSensors are placed on both sides of
a patients forehead and are connected to the monitor, which allows for monitoring both
sides of the brain. Our next generation INVOS System, which we expect to launch in the
first half of 2006, can display information from four SomaSensors, which will allow for
the simultaneous monitoring of changes in blood oxygen saturation in the brain and, in patients
with or at risk for restricted blood flow, in somatic tissue. The number of sensors used
will depend on the application. We expect that the INVOS System will be used to monitor
simultaneously the brain and somatic tissue initially for patients in the pediatric and
neonatal ICU, and will later also be used on adults and for monitoring somatic tissue
alone. The SomaSensors contain information that is processed by the INVOS System allowing
it to automatically calibrate each sensor. During our fiscal year ended November 30, 2005,
net revenues from SomaSensors comprised approximately 75 percent of our net revenues.
During fiscal 2005 we sold approximately 213,000 SomaSensors worldwide.
 Overview of INVOS Technology
    7




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Applications and Market Segments
  
    
    Cardiac and Carotid Artery Surgery.Until the first quarter of fiscal 2005, we focused
our marketing efforts primarily on cardiac and carotid artery surgeries. We believed it
would be easier to demonstrate clinical importance of the information provided by the INVOS
System and potentially gain market acceptance for our products in connection with these
surgeries. Moreover, much of the earliest clinical data regarding the use of the INVOS
System involved these surgeries. In September 2000, we received 510(k) clearance from the
FDA to market the model 5100 INVOS System in the United States.
Unlike earlier models, the model 5100 INVOS
System has the added capability of being able to monitor pediatric patients. After
receiving this clearance, we expanded our marketing efforts to include pediatric cardiac
surgeries.
    
    Pediatric and Neonatal ICU.We are not aware of any other FDA-cleared cerebral oximeter
commercially available in the United States that is cleared for monitoring non-adult
patients. In the first quarter of fiscal 2005, we initiated selling and marketing efforts
for the INVOS System in the pediatric ICU. We plan to launch the product into the neonatal
ICU in late 2006, after completing development of a smaller SomaSensor. Our next
generation INVOS System monitor, which we expect to launch in the first half of 2006, can
display information from four SomaSensors, which will allow for the simultaneous monitoring of
changes in blood oxygen saturation in the brain and, in patients with or at risk for
restricted blood flow, in somatic tissue. We expect that initially the INVOS System will
be used to monitor simultaneously the brain and somatic tissue initially for patients in
the pediatric and neonatal ICU.
    
    Diabetic Patient Major Surgeries.We are currently sponsoring a prospective,
randomized, blinded clinical trial involving diabetic patients over age 50 who are
undergoing major general surgery. The study group will consist of patients whose surgeries
are managed based on information provided by the INVOS System, and the control group will
consist of similarly situated patients whose surgeries are not managed based on information
provided by the INVOS System. The two groups will be compared across measures of patient
outcomes and hospital costs, including length of hospital stay. Diabetics are at
particular risk of oxygen imbalances because of a higher incidence of vascular disease. If
results of this trial are positive, we intend to target more actively the sale of the INVOS
System for use in diabetic patients undergoing major general surgeries, consistent with FDA
requirements. We expect to begin this marketing in 2008.
    
    Other Applications.We are also evaluating sponsorship of other clinical trials which
may allow us to more actively target the sale of the INVOS System for use in other patient
populations. If the results of these trials are positive, following completion of these
trials and publication of the results, we intend to target the sale of the INVOS System for
use on elderly patients undergoing major surgeries. We are also evaluating additional
potential market segments for our INVOS System, such as use in other major surgeries, in
the adult ICU, in the emergency room, in ambulances, in the catheterization laboratory, for
blood transfusions, for muscle ischemia, for cosmetic surgery, for non-surgical neurology
or cardiology applications, for
 8




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psychiatric applications and for sleep disorders. Pursuit of some of these potential market
segments may require additional FDA clearance.
 Clinical Development
  Murkin Study
      9




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Goldman Study
 Optimizing Intraoperative Cerebral Oxygen Delivery Using
Noninvasive Cerebral Oximetry Decreases the Incidence of Stroke for Cardiac Surgical Patients
    Diabetic Patients Studies
 th
  10




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Other Future Studies
  The CorRestore System
    Surgical Ventricular Restoration in the Treatment of
Congestive Heart Failure Due to Post-Infarction Ventricular Dilation
 11




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License Agreement
     Marketing, Sales and Distribution
 Marketing
    12




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Sales and Distribution
         13




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Research and Development
  Manufacturing
   Competition
   14




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Proprietary Rights Information
      15




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Government Regulation
  
    
    product development;
    
    product testing;
    
    product labeling;
    
    product storage;
    
    premarket clearance or approval;
    
    advertising and promotion; and
    
    product sales and distribution.
  510(k) Clearance Pathway .
  16




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PMA Approval Pathway .
 Clinical Trials .
  Postmarket .
  
    
    fines, injunctions, and civil penalties;
    
    recall or seizure of products;
    
    operating restrictions, partial suspension or total shutdown of production;
    
    refusing requests for 510(k) clearance or PMA approval of new products;
    
    withdrawing 510(k) clearance or PMA approvals already granted; and
    
    criminal prosecution.
 17




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Seasonality
  Employees
  Insurance
    18




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http://www.sec.gov
 http://www.somanetics.com.
  19




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ITEM 1A. RISK FACTORS
 An investment in our common shares involves a high degree of risk. You should carefully
consider the specific factors described below, together with the cautionary statement under the
caption Forward  Looking Statements in Item 7 of this Report and the other information included
in this report, before purchasing our common shares. The risks described below are not the only
ones that we face. Additional risks that are not yet known to us or that we currently think are
immaterial could also impair our business, financial condition or results of operations. If any of
the following risks actually occurs, our business, financial condition or results of operations
could be adversely affected. In such case, the trading price of our common shares could decline,
and you may lose all or part of your investment.
 Risks Relating to Our Business
 Our future growth depends on increased market acceptance of our INVOS System in existing market
segments and market acceptance in new market segments.
      20




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We are dependent on our distributors and our independent sales representative firms for a
substantial portion of our sales, and their failure to sell our products adequately would
adversely affect our business.
    We currently depend on single-source suppliers for key components of the INVOS System, and the
loss of any of these suppliers could harm our ability to manufacture and sell our products,
increase the cost of our components or delay our clinical trials.
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We may become subject to competition which may adversely affect us.
  We also compete with companies that have longer operating histories, more established products
and greater resources than we do for, among other things, forehead monitoring space, limited
hospital capital budgets and alternative products.
  If we fail to manage our growth effectively, our business and operating results could be harmed.
   22




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Patients might assert product liability claims against us.
  If we fail to obtain and maintain necessary U.S. Food and Drug Administration clearances for our
products and indications or if clearances for future products and indications are delayed or not
issued, our business would be harmed.
    The
FDA might require us to obtain a new clearance to label or promote
more actively the INVOS System for
specific patient subgroups, such as diabetics; if we fail to obtain such clearances, our sales
and revenues may be adversely affected.
  23




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After clearance or approval of our products, we are subject to continuing regulation by the FDA,
and if we fail to comply with FDA regulations, our business could
suffer.
   
    
    untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
    
    repair, replacement, refunds, recall or seizure of our products;
    
    operating restrictions or partial suspension or total shutdown of production;
    
    refusing or delaying our requests for 510(k) clearance or premarket approval of new
products or new intended uses;
    
    withdrawing 510(k) clearance or premarket approvals that have already been granted; and
    
    criminal prosecution.
  We have modified some of our products without FDA clearance. The FDA could retroactively
determine that the modifications were improper and require us to stop marketing and recall the
modified products.
  24




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If we fail to comply with the FDAs Quality System Regulation, our manufacturing operations
could be halted, and our business would suffer.
  Failure to obtain or maintain regulatory approval in foreign jurisdictions would prevent us from
marketing our products abroad.
  Federal regulatory reforms may adversely affect our ability to sell our products profitably.
  Changes in our actual or estimated future taxable income could change the value of our deferred
tax asset, potentially resulting in a decrease in net income, which could adversely affect the
price of our common shares.
  New stock option accounting rules will increase our reported expenses, which could adversely
affect the price of our common shares.
  25




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The lengthy sales cycle for the INVOS System could cause variability in our operating results.
  If we are unable to obtain or maintain intellectual property rights relating to our technology
and products, the commercial value of our technology and products will be adversely affected and
our competitive position could be harmed.
    26




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If we are found to infringe or are alleged to infringe any third party intellectual property
rights, then our business may be adversely affected.
   27




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
    
    pay damages, including up to treble damages and the other partys attorneys fees, which
may be substantial;
    
    cease the development, manufacture, importation, use and sale of products that infringe
the patent rights of others, including our INVOS System, through a court-imposed sanction
called an injunction;
    
    expend significant resources to redesign our technology so that it does not infringe
others patent rights, or to develop or acquire non-infringing intellectual property, which
may not be possible;
    
    discontinue manufacturing or other processes incorporating infringing technology; and/or
    
    obtain licenses to the infringed intellectual property, which may not be available to us
on acceptable terms, or at all.
    28




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Our success depends on our ability to attract and retain key personnel.
  Any acquisitions that we make could disrupt our business and harm our financial condition.
  We have had limited success in marketing the CorRestore System, which could result in claims
against us.
    Risks Relating to Our Common Shares
 If
we were to complete a public offering, we would have broad discretion
to determine how to allocate the net proceeds of that offering and may not use them effectively.
  29




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Provisions of our corporate charter documents and Michigan law may delay or prevent attempts by
our shareholders to change our management and hinder efforts to acquire a controlling interest
in us.
   The market price of our common shares has been volatile and may continue to remain so.
  
    
    changes in our quarterly financial condition or operating results;
    
    changes in general conditions in the economy;
    
    changes in the financial markets;
    
    changes in the medical equipment industry;
    
    changes in financial estimates by securities analysts or differences between those
estimates and our actual results;
    
    the liquidity of the market for the common shares;
    
    developments with respect to patents and proprietary rights;
    
    publication of clinical research results regarding our products;
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
    
    changes in health care policies in the United States or foreign countries;
    
    grants or exercises of stock options or warrants;
    
    news announcements;
    
    litigation involving us;
    
    actions by governmental agencies, including the FDA, or changes in regulations; and
    
    other developments affecting us or our competitors.
  We have never paid cash dividends on our capital stock, and we do not anticipate paying any cash
dividends in the foreseeable future.
  The market price of the common shares might be lower because of shares eligible for future sale
and shares reserved for future issuance upon the exercise of options and warrants we have
granted.
  Forward-Looking Statements
   31




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32




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ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  33




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SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
  ExecutiveName
    
    Officer Since
    
    Age
    
    PositionBruce J. Barrett
    
    6/94
    
    
    46
    
    
    President and Chief Executive OfficerWilliam M. Iacona
    
    12/00
    
    
    35
    
    
    Vice President and Chief Financial Officer, Controller, and TreasurerRichard S. Scheuing
    
    1/98
    
    
    50
    
    
    Vice President, Research and DevelopmentDominic J. Spadafore
    
    8/02
    
    
    46
    
    
    Vice President, Sales and MarketingMary Ann Victor
    
    1/98
    
    
    48
    
    
    Vice President and Chief Administrative Officer and SecretaryRonald A. Widman
    
    1/98
    
    
    55
    
    
    Vice President, Medical AffairsPamela A. Winters
    
    1/98
    
    
    47
    
    
    Vice President, Operations
  Biographical Information
     34




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35




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
  High
    
    
    LowFiscal Year Ended November 30, 2004First Quarter
    
    $
    10.00
    
    
    $
    6.00Second Quarter
    
    
    15.86
    
    
    
    8.77Third Quarter
    
    
    16.70
    
    
    
    9.23Fourth Quarter
    
    
    14.98
    
    
    
    10.65Fiscal Year Ended November 30, 2005First Quarter
    
    $
    16.00
    
    
    $
    13.00Second Quarter
    
    
    18.85
    
    
    
    12.50Third Quarter
    
    
    25.74
    
    
    
    17.66Fourth Quarter
    
    
    36.95
    
    
    
    21.51
   36




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ITEM 6. SELECTED FINANCIAL DATA
  Year Ended November 30,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands, except per share data)Statement of Operations Data:Net revenues
    
    $
    20,509
    
    
    $
    12,609
    
    
    $
    9,361
    
    
    $
    6,706
    
    
    $
    5,656Cost of sales
    
    
    2,601
    
    
    
    2,050
    
    
    
    2,140
    
    
    
    2,049
    
    
    
    2,094Gross margin
    
    
    17,908
    
    
    
    10,558
    
    
    
    7,221
    
    
    
    4,657
    
    
    
    3,561Operating expenses:Research, development and engineering
    
    
    526
    
    
    
    369
    
    
    
    413
    
    
    
    571
    
    
    
    778Selling, general and administrative (1)
    
    
    13,241
    
    
    
    8,237
    
    
    
    6,759
    
    
    
    5,344
    
    
    
    5,133Total operating expenses
    
    
    13,767
    
    
    
    8,606
    
    
    
    7,172
    
    
    
    5,915
    
    
    
    5,911Operating income (loss)
    
    
    4,141
    
    
    
    1,952
    
    
    
    49
    
    
    
    (1,258
    )
    
    
    (2,350
    )Other income:Interest income
    
    
    310
    
    
    
    55
    
    
    
    23
    
    
    
    52
    
    
    
    22Interest expense and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (3
    )Total other income
    
    
    310
    
    
    
    55
    
    
    
    23
    
    
    
    51
    
    
    
    19Income (loss) before income taxes
    
    $
    4,451
    
    
    $
    2,007
    
    
    $
    72
    
    
    
    (1,207
    )
    
    
    (2,331
    )Income tax benefit (2)
    
    
    3,300
    
    
    
    6,700
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    7,751
    
    
    $
    8,707
    
    
    $
    72
    
    
    $
    (1,207
    )
    
    $
    (2,331
    )Net income (loss) per common share 
basic
    
    $
    0.75
    
    
    $
    0.89
    
    
    $
    0.01
    
    
    $
    (0.13
    )
    
    $
    (0.31
    )Net income (loss) per common share 
diluted
    
    $
    0.66
    
    
    $
    0.77
    
    
    $
    0.01
    
    
    $
    (0.13
    )
    
    $
    (0.31
    )Weighted average number of common shares
outstanding  basic
    
    
    10,322
    
    
    
    9,780
    
    
    
    9,114
    
    
    
    8,951
    
    
    
    7,606Weighted average number of common shares
outstanding  diluted
    
    
    11,798
    
    
    
    11,323
    
    
    
    9,467
    
    
    
    8,951
    
    
    
    7,606
 As of November 30,2005
    
    2004
    
    2003
    
    2002
    
    2001(in thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    13,148
    
    
    $
    7,070
    
    
    $
    2,239
    
    
    $
    2,382
    
    
    $
    168Working capital
    
    
    18,044
    
    
    
    9,311
    
    
    
    4,480
    
    
    
    4,047
    
    
    
    1,724Total assets
    
    
    29,719
    
    
    
    18,785
    
    
    
    7,156
    
    
    
    6,164
    
    
    
    3,587Total liabilities
    
    
    1,878
    
    
    
    1,232
    
    
    
    991
    
    
    
    664
    
    
    
    575Accumulated deficit
    
    
    (37,131
    )
    
    
    (44,882
    )
    
    
    (53,589
    )
    
    
    (53,661
    )
    
    
    (52,445
    )Total shareholders equity
    
    
    27,841
    
    
    
    17,553
    
    
    
    6,165
    
    
    
    5,501
    
    
    
    3,013
 
 (1)
    
    Includes an impairment expense of $929,093 in fiscal 2005 in connection with the write-off of
our intangible asset associated with the acquisition of the license for the CorRestore System.(2)
    
    Represents income recognized in fiscal 2005 and fiscal 2004 as a result of a reversal of a
portion of our income tax valuation allowance. 37




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements
 You should read the following discussion and analysis of our financial condition and results
of operations together with our financial statements and the related notes and other financial data
included elsewhere in this report. Some of the information contained in this discussion and
analysis or set forth elsewhere in this report, including information with respect to our plans and
strategy for our business, includes forward-looking statements that involve risks and
uncertainties. You should review the Risk Factors section of this report for a discussion of
important factors that could cause actual results to differ materially from the results described
in or implied by the forward-looking statements contained in the following discussion and analysis.
See also Forward-Looking Statements in Item 1A of this report.
 Overview
     Net Revenues and Cost of Sales
  38




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##### Table of Contents



Operating Expenses
  
    
    salaries, wages and related expenses of our employees and consultants;
    
    sales and marketing expenses, such as employee sales commissions, commissions to
independent sales representatives, travel, entertainment, advertising, education and
training expenses, depreciation of demonstration monitors and attendance at selected
medical conferences;
    
    clinical research expenses, such as costs of supporting clinical trials; and
    
    general and administrative expenses, such as the cost of corporate operations,
professional services, insurance, warranty and royalty expenses, investor relations,
depreciation and amortization, facilities expenses and other general operating expenses.
   
    
    salaries, wages and related expenses of our research and development personnel and consultants;
    
    costs of various development projects; and
    
    costs of preparing and processing applications for FDA clearance of new products.
 Deferred Tax Assets and Impairment Charges
   39




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##### Table of Contents




    
    We recorded an impairment expense of $929,093 associated with the write-down of our
intangible asset associated with the acquisition of the license for the CorRestore System.
    
    We further adjusted our deferred tax asset valuation allowance resulting in the
recognition of additional deferred tax assets due to expected future tax benefits related
to our net operating loss carryforwards. Recognition of this additional deferred tax asset
resulted in a non-cash tax benefit on our statement of operations for fiscal 2005 of
$3,300,000.
 Results of Operations
 Fiscal Year Ended November 30, 2005 Compared to Fiscal Year Ended November 30, 2004
 Net Revenues.
 
    
    an increase in U.S. sales of $6,688,546, or 64 percent, from $10,517,014 in fiscal 2004
to $17,205,560 in fiscal 2005. The increase in U.S. sales was primarily due to an increase
in sales of the disposable SomaSensor of $4,900,660, or 54 percent, as a result of a 38
percent increase in SomaSensor unit sales and a 12 percent increase in SomaSensor average
selling prices. This increase in our average selling prices is attributable to the
addition of new customers at our higher suggested retail prices and increased sales of our
pediatric SomaSensor which sells for a higher price than the adult SomaSensor. In
addition, sales of the INVOS System monitor in the United States increased $1,817,406, or
180 percent, primarily as a result of increased purchases by pediatric hospitals after the
launch of our products into the pediatric ICU in the first quarter of fiscal 2005; and
    
    an increase in international sales of $1,212,090, or 58 percent, from $2,091,602 in
fiscal 2004 to $3,303,692 in fiscal 2005. The increase in international sales was
primarily due to increased purchases of the INVOS System monitor and disposable SomaSensor
by Tyco Healthcare in Europe, which was partially offset by decreased purchases by Edwards
Lifesciences in Japan. In fiscal 2005, international sales represented 16 percent of our
net revenues, compared to 17 percent of our net revenues in fiscal 2004. Purchases by Tyco
Healthcare accounted for 11 percent of net revenues in fiscal 2005.
   Fiscal Year Ended November 30,Product
    
    2005
    
    2004SomaSensors
    
    
    75
    %
    
    
    78
    %INVOS System Monitors
    
    
    23
    %
    
    
    18
    %Total INVOS System
    
    
    98
    %
    
    
    96
    %CorRestore Systems
    
    
    2
    %
    
    
    4
    %Total
    
    
    100
    %
    
    
    100
    %
  40




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##### Table of Contents



Gross Margin.
 Research, Development and Engineering Expenses.
 Selling, General and Administrative Expenses.
 
    
    a $1,031,964 increase in salaries, wages and related expenses, primarily as a result of
an increase in the number of employees, principally in sales and marketing (from an average
of 32 employees for the fiscal year ended November 30, 2004 to an average of 42 employees
for the fiscal year ended November 30, 2005);
    
    an impairment expense of $929,093 as a result of the write-down of our intangible asset
associated with the acquisition of the license for the CorRestore System;
    
    an $832,012 increase in employee sales commissions as a result of increased sales and
increased sales personnel during fiscal 2005;
    
    an $811,524 increase in commissions paid to our independent sales representative firms
as a result of increased sales;
    
    a $661,785 increase in travel and selling-related expenses as a result of our increased
sales personnel and increased sales and marketing activities;
    
    a $377,153 increase in audit-related expenses, primarily as a result of costs associated
with our first internal control assessment under Section 404 of the Sarbanes-Oxley Act and
related regulations;
    
    a $365,770 increase in accrued incentive compensation expense due to our fiscal 2005
financial performance, primarily increased sales and net income, in accordance with the
2005 Incentive Compensation Plan; and
    
    a $105,120 increase in employer 401(k) matching contributions as a result of increased
personnel and increased salaries and wages as described above.
   Income Tax Benefit.
 41




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


Net Revenues.



    
    an increase in U.S. sales of $3,100,634, or 42 percent, from $7,416,380 in fiscal 2003
to $10,517,014 in fiscal 2004. The increase in U.S. sales was primarily due to an increase
in sales of the disposable SomaSensor of $2,967,150, or 49 percent, as a result of a 22
percent increase in SomaSensor unit sales and a 22 percent increase in SomaSensor average
selling prices. 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
INVOS System monitor in exchange for the customer agreeing to pay a higher price for the
disposable SomaSensor. In addition, sales of the INVOS System monitor in the United States
increased $332,779, or 49 percent, as a result of increased purchases by pediatric
hospitals. These increases were partially offset by a decrease in CorRestore System
revenues of $199,295, or 29 percent; and
    
    an increase in international sales of $147,089, or 8 percent, from $1,944,513 in fiscal
2003 to $2,091,602 in fiscal 2004. The increase in international sales was primarily due
to increased purchases of the INVOS System monitor and disposable SomaSensor by Edwards
Lifesciences in Japan, which was partially offset by decreased purchases by Tyco Healthcare
in Europe. In fiscal 2004, international sales represented 17 percent of our net revenues,
compared to 21 percent of our net revenues in fiscal 2003. Purchases by Tyco Healthcare
accounted for 12 percent of net revenues in fiscal 2003.






Fiscal Year Ended November 30,Product
    
    2004
    
    2003SomaSensors
    
    
    78
    %
    
    
    71
    %INVOS System Monitors
    
    
    18
    %
    
    
    21
    %Total INVOS System
    
    
    96
    %
    
    
    92
    %CorRestore Systems
    
    
    4
    %
    
    
    8
    %Total
    
    
    100
    %
    
    
    100
    %


Gross Margin.



    
    a change in the sales mix with increased sales of the disposable SomaSensor, which has a
higher gross margin percentage than the INVOS System monitor or CorRestore System;
    
    the increase in the average selling price of SomaSensors;
    
    a significant reduction in the cost of our SomaSensor 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.


Research, Development and Engineering Expenses. 42




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Selling, General and Administrative Expenses.
 
    
    a $398,329 increase in salaries, wages and related expenses, primarily as a result of an
increase in the number of employees, principally in 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 $393,196 increase in employee sales commissions as a result of increased sales and
increased sales headcount during fiscal 2004;
    
    a $352,948 increase in commissions paid to our independent sales representative firms as
a result of increased sales;
    
    a $226,588 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 $117,416 increase in travel and selling-related expenses as a result of our increased
sales headcount and increased sales and marketing activities;
    
    $96,254 in costs associated with a 401(k) matching contribution program that we
implemented in fiscal 2004; and
    
    $95,998 in costs associated with the termination of some of our independent sales
representative firms in the second quarter of fiscal 2004.
  Income Tax Benefit.
 Effects of Inflation
  Liquidity and Capital Resources
 General
    43




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Cash Flows From Operating Activities
  
    
    $5,764,166 of net income before income taxes, non-cash intangible impairment expense,
and non cash depreciation and amortization expense;
    
    a $462,485 increase in accrued liabilities, primarily as a result of the increased
accrued incentive compensation and accrued sales commissions as a result of our fiscal 2005
financial performance, partially offset by reduced accrued 401(k) matching contributions as
of the end of the fiscal year and decreased accrued professional fees; and
    
    a $184,000 increase in accounts payable, primarily as a result of increased inventory
and operating expenses, partially offset by more timely payments made to vendors.
  
    
    a $1,509,196 increase in accounts receivable primarily as a result of higher fourth
quarter sales in fiscal 2005 than in the fourth quarter of fiscal 2004, and the timing of
more of the sales in fiscal 2005 towards the end of the fourth quarter;
    
    a $859,312 increase in inventories, primarily due to the acquisition of SomaSensors and
components associated with our INVOS System monitor due to anticipated sales; inventories
on our balance sheet increased less because we capitalized INVOS System monitors to
property and equipment that are being used as demonstration units and no capital cost sales
equipment, as described below; and
    
    a $365,410 increase in prepaid expenses, primarily due to the timing of the renewal of
our product liability and general liability insurance policies, and increased prepaid
expenses for trade shows and marketing programs.We expect our working capital requirements to increase as sales increase.
  Cash Flows From Investing Activities
  Cash Flows From Financing Activities
  44




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##### Table of Contents



Contractual Obligations
  Payments due by periodLess
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    1-3
    
    3-5
    
    than 5Contractual Obligations
    
    Total
    
    year
    
    years
    
    years
    
    yearsLong-term debt obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    $
    590,200
    
    
    $
    140,400
    
    
    $
    288,700
    
    
    $
    161,100
    
    
    
    Purchase obligations
    
    
    2,010,000
    
    
    
    2,010,000
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Off-Balance Sheet Arrangements
  New Accounting Pronouncements
  Critical Accounting Policies
  CorRestore Intangible Asset
  45




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##### Table of Contents



Employee Stock Options
    46
    Table of Contents      Income Taxes
    No Capital Cost Sales Revenue Recognition
  47




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  48




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
     49




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Internal ControlIntegrated Framework
  
 50




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##### Table of Contents



SOMANETICS CORPORATION
 BALANCE SHEETS
 November 30,2005
    
    
    2004ASSETSCURRENT ASSETS:Cash and cash equivalents (Note 2)
    
    $
    13,148,237
    
    
    $
    7,069,542Accounts receivable
    
    
    3,531,740
    
    
    
    2,022,544Inventory (Note 2)
    
    
    1,058,101
    
    
    
    682,910Prepaid expenses
    
    
    623,303
    
    
    
    257,893Deferred tax
asset  current (Note 5)
    
    
    1,561,322
    
    
    
    510,000Total current assets
    
    
    19,922,703
    
    
    
    10,542,889PROPERTY AND EQUIPMENT: (Note 2)Demonstration and no capital cost sales equipment at customers
    
    
    1,916,655
    
    
    
    1,628,431Machinery and equipment
    
    
    768,992
    
    
    
    704,581Furniture and fixtures
    
    
    289,397
    
    
    
    255,044Leasehold improvements
    
    
    187,135
    
    
    
    171,882Total
    
    
    3,162,179
    
    
    
    2,759,938Less accumulated depreciation and amortization
    
    
    (1,836,438
    )
    
    
    (1,675,881
    )Net property and equipment
    
    
    1,325,741
    
    
    
    1,084,057OTHER ASSETS:Deferred tax asset  non-current (Note 5)
    
    
    8,438,678
    
    
    
    6,190,000Intangible assets, net (Note 2)
    
    
    16,921
    
    
    
    952,926Other
    
    
    15,000
    
    
    
    15,000Total other assets
    
    
    8,470,599
    
    
    
    7,157,926TOTAL ASSETS
    
    $
    29,719,043
    
    
    $
    18,784,872LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    712,796
    
    
    $
    529,097Accrued liabilities (Notes 4 and 6)
    
    
    1,165,594
    
    
    
    703,109Total current liabilities
    
    
    1,878,390
    
    
    
    1,232,206COMMITMENTS 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, 10,715,885 shares at November 30, 2005,
and 10,137,782 shares at November 30, 2004
    
    
    107,159
    
    
    
    101,378Additional paid-in capital
    
    
    64,864,554
    
    
    
    62,333,435Accumulated deficit
    
    
    (37,131,060
    )
    
    
    (44,882,147
    )Total shareholders equity
    
    
    27,840,653
    
    
    
    17,552,666TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    29,719,043
    
    
    $
    18,784,872
  51




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SOMANETICS CORPORATION
 STATEMENTS OF OPERATIONS
 For the Years Ended November 30,2005
    
    
    2004
    
    
    2003NET REVENUES (Notes 2 and 9)
    
    $
    20,509,252
    
    
    $
    12,608,615
    
    
    $
    9,360,893COST OF SALES
    
    
    2,601,488
    
    
    
    2,050,253
    
    
    
    2,139,827Gross margin
    
    
    17,907,764
    
    
    
    10,558,362
    
    
    
    7,221,066OPERATING EXPENSES:Research, development and engineering
(Note 2)
    
    
    525,679
    
    
    
    369,106
    
    
    
    412,953Selling, general and administrative (Note 2)
    
    
    13,241,053
    
    
    
    8,237,401
    
    
    
    6,758,637Total operating expenses
    
    
    13,766,732
    
    
    
    8,606,507
    
    
    
    7,171,590OPERATING INCOME
    
    
    4,141,032
    
    
    
    1,951,855
    
    
    
    49,476OTHER INCOME:Interest income
    
    
    310,055
    
    
    
    54,721
    
    
    
    23,110Total other income
    
    
    310,055
    
    
    
    54,721
    
    
    
    23,110INCOME BEFORE INCOME TAXES
    
    $
    4,451,087
    
    
    $
    2,006,576
    
    
    $
    72,586INCOME TAX BENEFIT
    
    
    3,300,000
    
    
    
    6,700,000
    
    
    
    NET INCOME
    
    $
    7,751,087
    
    
    $
    8,706,576
    
    
    $
    72,586NET INCOME PER COMMON
SHARE  BASIC (Note 2)
    
    $
    .75
    
    
    $
    .89
    
    
    $
    .01NET INCOME PER COMMON
SHARE  DILUTED (Note 2)
    
    $
    .66
    
    
    $
    .77
    
    
    $
    .01WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 
BASIC (Note 2)
    
    
    10,322,226
    
    
    
    9,780,104
    
    
    
    9,113,854WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 
DILUTED (Note 2)
    
    
    11,797,799
    
    
    
    11,323,272
    
    
    
    9,466,838
  52




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SOMANETICS CORPORATION
 STATEMENTS OF SHAREHOLDERS EQUITY
 Additional
    
    
    
    
    
    
    TotalShare
    
    
    Paid-In
    
    
    Accumulated
    
    
    Shareholders
    
    
    ComprehensiveValue
    
    
    Capital
    
    
    Deficit
    
    
    Equity
    
    
    Income (Loss)Balance at December 1, 2002
    
    $
    90,779
    
    
    $
    59,071,122
    
    
    $
    (53,661,309
    )
    
    $
    5,500,592For cash, exercise of stock options
    
    
    1,484
    
    
    
    537,142
    
    
    
    
    
    
    
    538,626Warrants issued to acquire license
    
    
    
    
    
    
    44,793
    
    
    
    
    
    
    
    44,793Stock options issued to non-employees
    
    
    
    
    
    
    8,471
    
    
    
    
    
    
    
    8,471Cashless exercise of warrants
    
    
    724
    
    
    
    (724
    )
    
    
    
    
    
    
    Net income and comprehensive income
    
    
    
    
    
    
    
    
    
    
    72,586
    
    
    
    72,586
    
    
    $
    72,586Balance at November 30, 2003
    
    $
    92,987
    
    
    $
    59,660,804
    
    
    $
    (53,588,723
    )
    
    $
    6,165,068For cash, exercise of stock options
    
    
    3,213
    
    
    
    1,537,809
    
    
    
    
    
    
    
    1,541,022For cash, exercise of warrants
    
    
    3,800
    
    
    
    1,136,200
    
    
    
    
    
    
    
    1,140,000Cashless exercise of warrants
    
    
    1,378
    
    
    
    (1,378
    )
    
    
    
    
    
    
    Net income and comprehensive income
    
    
    
    
    
    
    
    
    
    
    8,706,576
    
    
    
    8,706,576
    
    
    $
    8,706,576Balance at November 30, 2004
    
    $
    101,378
    
    
    $
    62,333,435
    
    
    $
    (44,882,147
    )
    
    $
    17,552,666For cash, exercise of stock options
    
    
    5,618
    
    
    
    2,520,061
    
    
    
    
    
    
    
    2,525,679Cashless exercise of warrants
    
    
    163
    
    
    
    (163
    )
    
    
    
    
    
    
    Consultant stock option expense
    
    
    
    
    
    
    11,221
    
    
    
    
    
    
    
    11,221Net income and comprehensive income
    
    
    
    
    
    
    
    
    
    
    7,751,087
    
    
    
    7,751,087
    
    
    $
    7,751,087Balance at November 30, 2005
    
    $
    107,159
    
    
    $
    64,864,554
    
    
    $
    (37,131,060
    )
    
    $
    27,840,653
  53




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SOMANETICS CORPORATION
 STATEMENTS OF CASH FLOWS
 For the Years Ended November 30,2005
    
    
    2004
    
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    7,751,087
    
    
    $
    8,706,576
    
    
    $
    72,586Adjustments to reconcile net income to net
cash provided by (used in) operations:Income tax benefit
    
    
    (3,300,000
    )
    
    
    (6,700,000
    )
    
    
    Intangible asset impairment
    
    
    929,093
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    383,986
    
    
    
    282,558
    
    
    
    235,537Compensation expense for consultant stock options
    
    
    11,221
    
    
    
    
    
    
    
    8,471Changes in assets and liabilities:Accounts receivable (increase)
    
    
    (1,509,196
    )
    
    
    (3,929
    )
    
    
    (790,830
    )Inventory (increase)
    
    
    (859,312
    )
    
    
    (158,611
    )
    
    
    (456,579
    )Prepaid expenses (increase)
    
    
    (365,410
    )
    
    
    (134,690
    )
    
    
    (26,895
    )Accounts payable increase (decrease)
    
    
    183,699
    
    
    
    (112,135
    )
    
    
    170,352Accrued liabilities increase
    
    
    462,485
    
    
    
    353,562
    
    
    
    156,781Net cash provided by (used in) operating activities
    
    
    3,687,653
    
    
    
    2,233,331
    
    
    
    (630,577
    )CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of property and equipment (net)
    
    
    (134,637
    )
    
    
    (84,003
    )
    
    
    (50,665
    )Net cash (used in) investing activities
    
    
    (134,637
    )
    
    
    (84,003
    )
    
    
    (50,665
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of Common Shares
    
    
    2,525,679
    
    
    
    2,681,022
    
    
    
    538,626Net cash provided by financing activities
    
    
    2,525,679
    
    
    
    2,681,022
    
    
    
    538,626NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    6,078,695
    
    
    
    4,830,350
    
    
    
    (142,616
    )CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD
    
    
    7,069,542
    
    
    
    2,239,192
    
    
    
    2,381,808CASH AND CASH EQUIVALENTS,
END OF PERIOD
    
    $
    13,148,237
    
    
    $
    7,069,542
    
    
    $
    2,239,192Supplemental Disclosure of Non cash investing activities:Demonstration and no capital cost sales equipment capitalized
from inventory (Note 2)
    
    $
    484,121
    
    
    $
    565,962
    
    
    $
    370,623Issuance of warrants and stock options in connection
with license acquisition (Note 2)
    
    $
    
    
    
    $
    
    
    
    $
    44,793
  54




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SOMANETICS CORPORATION
 NOTES TO FINANCIAL STATEMENTS
 1. Organization and Operations
 ®
  ®
  2. Summary of Significant Accounting Policies
 Cash Equivalents
 Inventory
 November 30,2005
    
    
    2004Purchased components
    
    $
    652,876
    
    
    $
    323,053Finished goods
    
    
    352,560
    
    
    
    358,815Work in process
    
    
    52,665
    
    
    
    1,042Total
    
    $
    1,058,101
    
    
    $
    682,910
 Property and Equipment
 55




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##### Table of Contents



SOMANETICS CORPORATION
 NOTES TO FINANCIAL STATEMENTS  (Continued)
  Intangible Assets
 November 30,2005
    
    
    2004Patents and trademarks
    
    $
    111,733
    
    
    $
    111,733Less: accumulated amortization
    
    
    (94,812
    )
    
    
    (87,900
    )Total
    
    $
    16,921
    
    
    $
    23,833
     56




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##### Table of Contents



SOMANETICS CORPORATION
 NOTES TO FINANCIAL STATEMENTS  (Continued)
   November 30,2005
    
    
    2004License acquisition costs
    
    $
    
    
    
    $
    1,258,163Less: accumulated amortization
    
    
    
    
    
    
    (329,070
    )Total
    
    $
    
    
    
    $
    929,093
  Revenue Recognition
 Research, Development and Engineering
 Net
Income (Loss) Per Common Share  basic and diluted
 57




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##### Table of Contents



SOMANETICS CORPORATION
 NOTES TO FINANCIAL STATEMENTS  (Continued)
 2005
    
    
    2004
    
    
    2003Weighted
average shares  basic
    
    
    10,322,226
    
    
    
    9,780,104
    
    
    
    9,113,854Add: effect of dilutive common
shares and warrants
    
    
    1,475,573
    
    
    
    1,543,168
    
    
    
    352,984Weighted
average shares  diluted
    
    
    11,797,799
    
    
    
    11,323,272
    
    
    
    9,466,838
  Accounting Pronouncements
   Use Of Estimates
 Reclassifications
 3. Stock Offerings and Common Shares
  58




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SOMANETICS CORPORATION
 NOTES TO FINANCIAL STATEMENTS  (Continued)
        59




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##### Table of Contents



SOMANETICS CORPORATION
 NOTES TO FINANCIAL STATEMENTS  (Continued)
 1991 Incentive Stock Option Plan
    
    
    14,6631993 Director Stock Option Plan
    
    
    5001997 Stock Option Plan
    
    
    1,731,7542005 Stock Incentive Plan
    
    
    600,000Options Granted Independent of Option Plans
    
    
    73,100License Acquisition Warrants
    
    
    2,100,000Total shares reserved for future issuance
    
    
    4,520,017
 4. Accrued Liabilities
  November 30,2005
    
    
    2004Incentive Compensation
    
    $
    701,658
    
    
    $
    390,978Sales Commissions
    
    
    352,459
    
    
    
    153,180401(k) Match
    
    
    42,164
    
    
    
    97,071Clinical Research
    
    
    21,675
    
    
    
    Warranty
    
    
    16,850
    
    
    
    10,750Royalty
    
    
    13,788
    
    
    
    9,130Taxes
    
    
    11,375
    
    
    
    Professional Fees
    
    
    5,625
    
    
    
    42,000Total
    
    $
    1,165,594
    
    
    $
    703,109
 5. Income Tax
   November 30,2005
    
    
    2004(in thousands)Net operating loss carryforwards
    
    $
    17,620
    
    
    $
    16,216Other
    
    
    91
    
    
    
    90Basis difference of fixed assets and intangibles
    
    
    167
    
    
    
    (92
    )Research and general business tax credit carryforwards
    
    
    443
    
    
    
    443Subtotal
    
    
    18,321
    
    
    
    16,657Valuation allowance
    
    
    (8,321
    )
    
    
    (9,957
    )Deferred tax asset
    
    $
    10,000
    
    
    $
    6,700
  60




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SOMANETICS CORPORATION
 NOTES TO FINANCIAL STATEMENTS  (Continued)
 For the Fiscal Year Ended November 30,2005
    
    
    2004
    
    
    2003Taxes at
U.S. statutory rate  34 percent
    
    $
    1,513,370
    
    
    $
    682,236
    
    
    $
    24,679Nondeductible meals and entertainment
    
    $
    24,050
    
    
    $
    15,109
    
    
    $
    9,531Change in valuation allowance
    
    $
    (4,837,420
    )
    
    $
    (7,397,345
    )
    
    $
    (34,210
    )Income tax expense (benefit) from
continuing operations
    
    $
    (3,300,000
    )
    
    $
    (6,700,000
    )
    
    $
    Effective tax rate
    
    
    (74.1
    )%
    
    
    (333.9
    )%
    
    
    0
    %
     6. Commitments and Contingencies
   Year
ending November 30,2006
    
    $
    140,4002007
    
    $
    142,9002008
    
    $
    145,8002009
    
    $
    148,7002010
    
    $
    12,400Total
    
    $
    590,200
  61




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##### Table of Contents



SOMANETICS CORPORATION
 NOTES TO FINANCIAL STATEMENTS  (Continued)
    7. Stock Option Plans
     62




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##### Table of Contents



SOMANETICS CORPORATION
 NOTES TO FINANCIAL STATEMENTS  (Continued)
      For the Fiscal Year Ended November 30,2005
    
    
    2004
    
    
    2003Net income
    
    $
    7,751,087
    
    
    $
    8,706,576
    
    
    $
    72,586Add: Stock-based employee compensation
included in actual net income
    
    $
    11,221
    
    
    $
    0
    
    
    $
    8,471Deduct: Total stock-based employee
compensation, had fair value method been
applied
    
    $
    (1,804,000
    )
    
    $
    (796,000
    )
    
    $
    (962,000
    )Pro-forma net income (loss)
    
    $
    5,958,308
    
    
    $
    7,911,576
    
    
    $
    (880,943
    )Net income
per common share  diluted
    
    $
    .66
    
    
    $
    .77
    
    
    $
    .01Pro-forma net income (loss) per common
share  diluted, had fair value method been
applied
    
    $
    .51
    
    
    $
    .70
    
    
    $
    (.09
    )
  63




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##### Table of Contents



SOMANETICS CORPORATION
 NOTES TO FINANCIAL STATEMENTS  (Continued)
  2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageCommon
    
    
    Exercise
    
    
    Common
    
    
    Exercise
    
    
    Common
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOptions outstandingDecember 1,
    
    
    2,316,315
    
    
    $
    3.83
    
    
    
    2,603,722
    
    
    $
    3.89
    
    
    
    2,332,753
    
    
    $
    4.04Options granted
    
    
    168,257
    
    
    
    13.79
    
    
    
    53,500
    
    
    
    10.23
    
    
    
    471,000
    
    
    
    3.75Options exercised
    
    
    (561,839
    )
    
    
    4.50
    
    
    
    (321,276
    )
    
    
    4.79
    
    
    
    (148,371
    )
    
    
    3.63Options canceled
    
    
    (8,501
    )
    
    
    8.29
    
    
    
    (19,631
    )
    
    
    13.94
    
    
    
    (51,660
    )
    
    
    10.08Options outstandingNovember 30,
    
    
    1,914,232
    
    
    
    4.59
    
    
    
    2,316,315
    
    
    
    3.83
    
    
    
    2,603,722
    
    
    
    3.89Options exercisableNovember 30,
    
    
    1,914,232
    
    
    $
    4.59
    
    
    
    1,827,008
    
    
    $
    3.91
    
    
    
    1,784,482
    
    
    $
    4.27
  Options outstanding
    
    
    Options exercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    
    
    
    
    AverageRange of Exercise
    
    Options
    
    
    Exercise
    
    
    Remaining
    
    
    Options
    
    
    ExercisePrices
    
    Outstanding
    
    
    Price
    
    
    Life (years)
    
    
    Exercisable
    
    
    Price$1.70  $5.00
    
    
    1,391,001
    
    
    $
    3.03
    
    
    
    6.11
    
    
    
    1,391,001
    
    
    $
    3.03$5.01  $10.00
    
    
    332,478
    
    
    
    5.95
    
    
    
    2.56
    
    
    
    332,478
    
    
    
    5.95$10.01  $26.30
    
    
    190,753
    
    
    
    13.56
    
    
    
    9.43
    
    
    
    190,753
    
    
    
    13.56Total
    
    
    1,914,232
    
    
    $
    4.59
    
    
    
    5.83
    
    
    
    1,914,232
    
    
    $
    4.59
 8. Related Party Transactions
    64




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SOMANETICS CORPORATION
 NOTES TO FINANCIAL STATEMENTS  (Continued)
  9. Major Customers and Foreign Sales
   10. Segment Information
  65




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##### Table of Contents



QUARTERLY INFORMATION (unaudited)
  QuarterFirst
    
    Second
    
    Third
    
    Fourth(in thousands, except per share data)Year Ended November 30, 2005Net revenues
    
    $
    4,032,617
    
    
    $
    5,082,746
    
    
    $
    5,242,848
    
    
    $
    6,151,041Gross margin
    
    
    3,482,468
    
    
    
    4,437,906
    
    
    
    4,581,652
    
    
    
    5,405,738Net income
    
    
    563,926
    
    
    
    890,183
    
    
    
    994,147
    
    
    
    5,302,831
    *Net income per common
share  basic
    
    $
    0.06
    
    
    $
    0.09
    
    
    $
    0.10
    
    
    $
    0.50Net income per common
share  diluted
    
    $
    0.05
    
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.43
 
  Year Ended November 30, 2004Net revenues
    
    $
    2,670,265
    
    
    $
    3,032,976
    
    
    $
    3,076,373
    
    
    $
    3,829,001Gross margin
    
    
    2,149,872
    
    
    
    2,513,660
    
    
    
    2,632,536
    
    
    
    3,262,294Net income
    
    
    292,744
    
    
    
    409,730
    
    
    
    539,722
    
    
    
    7,464,380
    **Net income per common
share  basic
    
    $
    0.03
    
    
    $
    0.04
    
    
    $
    0.05
    
    
    $
    0.74Net income per common
share  diluted
    
    $
    0.03
    
    
    $
    0.04
    
    
    $
    0.05
    
    
    $
    0.64
 
 
 66




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
    67




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Managements Report on
Internal Control Over Financial Reporting Internal Control-Integrated Framework
    Internal Control-Integrated Framework Internal Control-Integrated Framework
   
 68




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##### Table of Contents



ITEM 9B. OTHER INFORMATION
  69




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
   Name
    
    Age
    
    PositionBruce J. Barrett
    
    
    46
    
    
    President, Chief Executive Officer and a DirectorDr. James I. Ausman (1) (2) (3)
    
    
    68
    
    
    DirectorDaniel S. Follis (1) (2) (3)
    
    
    68
    
    
    DirectorRobert R. Henry (1) (2) (3)
    
    
    65
    
    
    Director
 
 (1)
    
    Member of the Compensation Committee.(2)
    
    Member of the Audit Committee.(3)
    
    Member of the Nominating Committee. Bruce J. Barrett
 James I. Ausman, M.D., Ph.D.
 Daniel S. Follis.
 Robert R. Henry.
 70




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##### Table of Contents



Audit Committee
  Audit Committee Financial Expert
  Compensation Committee
  Nominating Committee
   
    
    with respect to the director candidate,
 
    
    the candidates name, age, business address and residence address,
    
    the candidates principal occupation or employment,
    
    the number of our common shares beneficially owned by the candidate,
 71




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##### Table of Contents




    
    information with respect to the candidates independence, as defined
under Nasdaqs listing standards for independent directors in general
and with respect to Audit Committee members,
    
    information with respect to other boards on which the candidate
serves,
    
    information with respect to direct or indirect transactions,
relationships, arrangements and understandings between the candidate
and us and between the candidate and the shareholder giving the notice,
and
    
    any other information relating to the candidate that we would be
required to disclose in our proxy statement if we were to solicit
proxies for the election of the candidate as one of our directors or
that is otherwise required under Securities and Exchange Commission
rules, including the candidates written consent to being named in the
proxy statement as a nominee and to serving as a director if elected,
and
 
    
    with respect to the shareholder giving the notice,
 
    
    the name and address of the shareholder as they appear on our stock
transfer records, and
    
    the number of our common shares beneficially owned by the
shareholder (and the period they have been held).
  Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Business Conduct and Ethics
  
    
    Honest and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional relationships;
    
    Full, fair, accurate, timely, and understandable disclosure in reports and documents
that we file with, or submit to, the Securities and Exchange Commissions and in other
public communications we make;
    
    Compliance with applicable governmental laws, rules and regulations;
    
    The prompt internal reporting of violations of the code to an appropriate person or
persons named in the code; and
    
    Accountability for adherence to the code.
  72




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##### Table of Contents



ITEM 11. EXECUTIVE COMPENSATION
 Summary Compensation Table
  Summary Compensation Table
 Long-TermCompensationAwardsSecurities
    
    All OtherAnnual Compensation
    
    Underlying
    
    CompensationName and Principal Position
    
    Year
    
    Salary($)
    
    Bonus($)
    
    Options(#)
    
    ($) (1)Bruce J. Barrett, President
    
    
    2005
    
    
    
    250,377
    
    
    
    302,999
    
    
    
    31,919
    
    
    
    11,574and Chief Executive Officer
    
    
    2004
    
    
    
    238,415
    
    
    
    184,653
    
    
    
    
    
    
    
    11,3742003
    
    
    
    225,500
    
    
    
    103,253
    
    
    
    132,000
    
    
    
    3,174Richard S. Scheuing, Vice
    
    
    2005
    
    
    
    119,853
    
    
    
    76,030
    
    
    
    12,220
    
    
    
    7,855President, Research and
    
    
    2004
    
    
    
    114,811
    
    
    
    49,162
    
    
    
    
    
    
    
    6,574Development
    
    
    2003
    
    
    
    111,100
    
    
    
    19,002
    
    
    
    56,000
    
    
    
    Dominic J. Spadafore, Vice
    
    
    2005
    
    
    
    136,097
    
    
    
    190,376
    
    
    
    11,680
    
    
    
    11,015President, Sales and
    
    
    2004
    
    
    
    133,486
    
    
    
    100,570
    
    
    
    
    
    
    
    9,778Marketing
    
    
    2003
    
    
    
    130,866
    
    
    
    64,553
    
    
    
    36,000
    
    
    
    1,578Mary Ann Victor, Vice President
    
    
    2005
    
    
    
    117,699
    
    
    
    93,360
    
    
    
    12,861
    
    
    
    9,297and Chief Administrative
    
    
    2004
    
    
    
    111,384
    
    
    
    57,861
    
    
    
    
    
    
    
    7,689Officer and Secretary
    
    
    2003
    
    
    
    106,400
    
    
    
    29,005
    
    
    
    56,000
    
    
    
    897Pamela A. Winters, Vice
    
    
    2005
    
    
    
    119,853
    
    
    
    76,030
    
    
    
    12,220
    
    
    
    8,890President, Operations
    
    
    2004
    
    
    
    114,811
    
    
    
    49,461
    
    
    
    
    
    
    
    7,6212003
    
    
    
    111,100
    
    
    
    26,562
    
    
    
    50,000
    
    
    
    948
 
 (1)
    
    Amounts for 2005 include (a) the following matching contributions paid by us into our 401(k)
plan on behalf of the following persons: $8,400 for Mr. Barrett, $7,855 for Mr. Scheuing, $8,400
for Mr. Spadafore, $8,400 for Ms. Victor and $7,855 for Ms. Winters, and (b) the following premiums
paid for additional disability insurance for the following persons: $3,174 for Mr. Barrett, $2,615
for Mr. Spadafore, $897 for Ms. Victor and $1,035 for Ms. Winters. Stock Option Grants
  73




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##### Table of Contents



Option Grants In Last Fiscal Year
 Individual Grants% of
    
    
    
    
    
    
    
    
    
    PotentialTotal
    
    
    
    
    
    
    
    
    
    Realizable Value atNumber of
    
    Options
    
    
    
    
    
    
    
    
    
    Assumed AnnualSecurities
    
    Granted to
    
    
    
    
    
    
    
    
    
    Rates of Stock PriceUnderlying
    
    Employees
    
    Exercise
    
    
    
    
    
    AppreciationOptions
    
    in Fiscal
    
    Price
    
    Expiration
    
    for Option TermName
    
    Granted (#) (1)
    
    Year
    
    ($/Sh)
    
    Date
    
    5% ($)
    
    10% ($)Bruce J. Barrett
    
    
    31,919
    
    
    
    24.2
    
    
    
    13.55
    
    
    
    4/21/15
    
    
    
    271,998
    
    
    
    689,298Richard S. Scheuing
    
    
    12,220
    
    
    
    9.2
    
    
    
    13.55
    
    
    
    4/21/15
    
    
    
    104,133
    
    
    
    263,893Dominic J. Spadafore
    
    
    11,680
    
    
    
    8.8
    
    
    
    13.55
    
    
    
    4/21/15
    
    
    
    99,531
    
    
    
    252,232Mary Ann Victor
    
    
    12,861
    
    
    
    9.7
    
    
    
    13.55
    
    
    
    4/21/15
    
    
    
    109,595
    
    
    
    277,736Pamela A. Winters
    
    
    12,220
    
    
    
    9.2
    
    
    
    13.55
    
    
    
    4/21/15
    
    
    
    104,133
    
    
    
    263,893
 
 (1)
    
    The options listed in the table were non-qualified stock options granted to Messrs. Barrett,
Scheuing and Spadafore, Ms. Victor and Ms. Winters in fiscal 2005 under our 2005 Stock Incentive
Plan or 1997 Stock Option Plan, exercisable at the then current fair market value of the underlying
common shares. Each of these options is exercisable in full beginning November 30, 2005. Each
option also becomes 100 percent exercisable 10 days before or immediately upon specified changes in
control. The portion of these options that is exercisable at the date of termination of employment
remains exercisable until the expiration date of the option, unless termination is for cause.  Aggregated Option Exercises and Fiscal Year-End Option Value Table
  74




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Aggregated Option Exercises In Last Fiscal Year And FY-End Option Values
 Number of Securities
    
    Value of UnexercisedShares
    
    
    
    
    
    Underlying Unexercised
    
    In-the-Money OptionsAcquired on
    
    Value
    
    Options at FY-End (#)
    
    at FY-End ($)Name
    
    Exercise (#)
    
    Realized ($)(1)
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableBruce J. Barrett
    
    
    178,200
    
    
    
    3,198,532
    
    
    
    761,919
    
    
    
    
    
    
    
    20,488,234
    
    
    
    Richard S. Scheuing
    
    
    50,000
    
    
    
    875,000
    
    
    
    138,220
    
    
    
    
    
    
    
    3,709,399
    
    
    
    Dominic J. Spadafore
    
    
    30,000
    
    
    
    723,100
    
    
    
    117,680
    
    
    
    
    
    
    
    3,178,185
    
    
    
    Mary Ann Victor
    
    
    51,000
    
    
    
    977,300
    
    
    
    153,261
    
    
    
    
    
    
    
    4,083,211
    
    
    
    Pamela A. Winters
    
    
    75,750
    
    
    
    1,620,713
    
    
    
    163,220
    
    
    
    
    
    
    
    4,257,089
    
    
    
    
 
 (1)
    
    Value Realized represents the fair value of the underlying securities on the exercise date,
based on the average of the high and low sales prices on the date of exercise, minus the aggregate
exercise price of the options. Compensation of Directors
  Employment Contracts and Termination of Employment and Change-in-Control Arrangements
 Bruce J. Barrett .
 Dominic J. Spadafore .
  75




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##### Table of Contents



Change in Control, Invention, Confidentiality, Non-Compete and Non-Solicitation Agreements.
 Stock Option Terms .
 Compensation Committee Interlocks and Insider Participation
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  Amount and
    
    PercentageNature of
    
    ofCommon Shares
    
    CommonBeneficially
    
    SharesName
    
    Owned
    
    Owned(1)Daniel S. Follis
    
    
    25,620
    
    
    
    (2
    )
    
    
    *Robert R. Henry
    
    
    283,200
    
    
    
    (3
    )
    
    
    2.6Bruce J. Barrett
    
    
    778,919
    
    
    
    (4
    )
    
    
    6.8Dr. James I. Ausman
    
    
    46,785
    
    
    
    (5
    )
    
    
    *Richard S. Scheuing
    
    
    138,220
    
    
    
    (6
    )
    
    
    1.3Dominic J. Spadafore
    
    
    121,180
    
    
    
    (7
    )
    
    
    1.1Mary Ann Victor
    
    
    158,361
    
    
    
    (8
    )
    
    
    1.5Pamela A. Winters
    
    
    163,220
    
    
    
    (9
    )
    
    
    1.5All directors and executive officers as a group (10 persons)
    
    
    1,962,137
    
    
    
    (10
    )
    
    
    15.9
 
 *
    
    Less than 1 percent(1)
    
    Based on 10,715,885 common shares outstanding as of January 26, 2006. 76




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##### Table of Contents



(2)
    
    Includes 13,500 common shares that Mr. Follis has the right to acquire within 60 days of
January 26, 2006. The 25,620 common shares shown above as beneficially owned by Mr. Follis
include 2,820 common shares owned by The Infinity Fund, a limited partnership in which Mr.
Follis is a six percent limited partner and a 50 percent general partner and which is
administered by Verschuren & Follis, Inc., a corporation in which Mr. Follis is a 50 percent
shareholder, a director and the President.(3)
    
    Includes 26,500 common shares that Mr. Henry has the right to acquire within 60 days of
January 26, 2006.(4)
    
    Includes 761,919 common shares that Mr. Barrett has the right to acquire within 60 days of
January 26, 2006 and 17,000 common shares owned jointly with his wife. The street address of
Mr. Barrett is 1653 East Maple Road, Troy, Michigan 48083-4208.(5)
    
    Includes 34,011 common shares that Dr. Ausman has the right to acquire within 60 days of
January 26, 2006, 9,744 common shares owned jointly with his wife, and 3,030 shares held in an
individual retirement account over which Dr. Ausman exercises sole voting and investment
control.(6)
    
    Includes 138,220 common shares that Mr. Scheuing has the right to acquire within 60 days of
January 26, 2006.(7)
    
    Includes 117,680 common shares that Mr. Spadafore has the right to acquire within 60 days of
January 26, 2006 and 3,500 common shares that Mr. Spadafore owns jointly with his spouse.(8)
    
    Includes 153,261 common shares that Ms. Victor has the right to acquire within 60 days of
January 26, 2006, 2,000 common shares held by Ms. Victors husband and 3,100 common shares
held by Ms. Victors husband jointly with his mother.(9)
    
    Includes 163,220 common shares that Ms. Winters has the right to acquire within 60 days of
January 26, 2006.(10)
    
    Includes 1,654,943 common shares that all executive officers and directors as a group have
the right to acquire within 60 days of January 26, 2006. Equity Compensation Plan Information
  (c)Number of securities(a)
    
    (b)
    
    remaining available forNumber of securities to
    
    Weighted-average
    
    future issuance underbe issued upon exercise
    
    exercise price of
    
    equity compensation plansof outstanding options,
    
    outstanding options
    
    (excluding securitiesPlan category
    
    warrants and rights
    
    warrants and rights
    
    reflected in column (a))Equity compensation
plans approved by
security holders (1)
    
    
    3,941,132
    
    
    $
    3.78
    
    
    
    505,785Equity compensation
plans not approved by
security holders (2)
    
    
    73,100
    
    
    $
    2.40
    
    
    
    0Total
    
    
    4,014,232
    
    
    
    
    
    
    
    505,785
 
 (1)
    
    These plans consist of: (a) the 1991 Incentive Stock Option Plan, which terminated in 2001
except for the options granted before that date, (b) the 1993 Director Stock Option Plan, which
terminated in 1998, except for the options granted before that date, (c) the Somanetics Corporation 1997
Stock Option Plan, (d) the
Somanetics Corporation 2005 Stock Incentive Plan, and (e) the outstanding Warrants granted to
CorRestore LLC and its agent 77




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##### Table of Contents



Wolfe & Company to purchase an aggregate of 2,100,000 common shares at
$3.00 per share in connection with the June 2, 2000 CorRestore License Agreement.(2)
    
    These plans consist of non-qualified options to purchase 73,100 common shares granted to three
of our officers, employees and advisors, including one current executive officers, one current
employee and one advisor, granted independent of our stock option plans (including one option
granted in fiscal 2002 as an inducement essential to an new executive officer entering into an
employment agreement with us, which currently represents the right to purchase 70,000 common shares).
The options are subject to anti-dilution adjustments.   
    
    in cash, or
    
    with the consent of the Compensation Committee or the board of directors, in its
discretion, and to the extent permitted by applicable law,
 
    
    in common shares,
    
    by a promissory note payable to the order of us that is acceptable
to the Compensation Committee or the board of directors,
    
    by a cash down payment and a promissory note for the unpaid balance,
    
    subject to any conditions established by the Compensation Committee
or the board of directors, by having us retain from the shares to be
delivered upon exercise of the stock option that number of shares
having a fair market value on the date of exercise equal to the option
price,
    
    by delivery to us of written notice of the exercise, in such form as
the Compensation Committee or the board of directors may prescribe,
accompanied by irrevocable instructions to a stock broker to promptly
deliver to us full payment for the shares with respect to which the
option is exercised from the proceeds of the stock brokers sale
of the shares or loan against them,
    
    in such other manner as the Compensation Committee or the board of
directors determines is appropriate, in its discretion.
   
    
    permit such options to be exercised in full for a limited period of time, after which
all unexercised options and all rights of holders of such options would terminate,
    
    permit such options to be exercised in full for their then remaining terms, or
    
    require all such options to be surrendered to us for cancellation and payment to each
holder in cash of the excess of the fair market value of the underlying common shares as of
the date the Transaction is effective over the exercise price, less any applicable
withholding taxes.
 78




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##### Table of Contents



ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Fiscal Year EndedNovember 30,2005
    
    2004Audit Fees (1)
    
    $
    306,850
    
    
    $
    78,050Audit-Related Fees
    
    $
    0
    
    
    $
    0Tax Fees (2)
    
    $
    60,550
    
    
    $
    46,200All Other Fees
    
    $
    0
    
    
    $
    0
 
 (1)
    
    Consists of fees for the audit of our annual financial statements and, in fiscal 2005, the
audit of our internal controls over financial reporting, review of financial statements included in
our Form 10-Qs, and services provided in connection with our Registration Statement on Form S-8 in
connection with our 2005 Stock Incentive Plan in fiscal 2005.(2)
    
    Consists of tax return preparation fees.  79




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##### Table of Contents

\

PART IV
 
 ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)
    
    (1)Financial Statements
  Report of Independent Registered Public Accounting FirmBalance Sheets  November 30, 2005 and 2004Statements of Operations  For Each of the Three Years in the Period Ended November
30, 2005Statements of Shareholders Equity   For Each of the Three Years in the Period
Ended November 30, 2005Statements of Cash Flows  For Each of the Three Years in the Period Ended November
30, 2005Notes to Financial Statements(2)
    
    Financial Statement SchedulesNone.(3)
    
    ExhibitsThe Exhibits to this report are as set forth in the Exhibit Index on pages 82
to 84 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.
 80




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##### Table of Contents



SIGNATURES
  Somanetics CorporationDate:
January 30, 2006
    
    By:
    
    /s/ Bruce J. BarrettBruce J. BarrettPresident & Chief Executive Officer
  Signature
    
    Title
    
    Date/s/ BRUCE J. BARRETT
Bruce J. Barrett
    
    President and Chief Executive Officer and a Director
(Principal Executive Officer)
    
    January 30, 2006/s/ WILLIAM M. IACONA
William M. Iacona
    
    Vice President and Chief Financial Officer,
Controller, and Treasurer
(Principal Financial Officer and Principal Accounting Officer)
    
    January 30, 2006/s/ JAMES I. AUSMAN
James I. Ausman, M.D., Ph.D.
    
    Director
    
    January 28, 2006/s/ DANIEL S. FOLLIS
Daniel S. Follis
    
    Director
    
    January 30, 2006/s/ ROBERT R. HENRY
Robert R. Henry
    
    Director
    
    January 30, 2006
 81




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    Description3(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.
 82




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##### Table of Contents



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 2005 Stock Incentive Plan, incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form
8-K, dated February 24, 2005*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
    
    Amended and Restated Employment Agreement between Somanetics
Corporation and Dominic J. Spadafore, incorporated by reference
to Exhibit 99.2 to the Companys Current Report on Form 8-K,
dated June 13, 2005 and filed June 14, 2005.*10.29
    
    Form of Change in Control, Invention, Confidentiality,
Non-Compete and Non-Solicitation Agreement, between Somanetics
Corporation and five executive officers, dated as of June 13,
2005, incorporated by reference to Exhibit 99.1 to the Companys
Current Report on Form 8-K, dated June 13, 2005 and filed June
14, 2005.*10.30
    
    Form of Director Stock Option Agreement, incorporated by
reference to Exhibit 10.30 to the Companys Annual Report on Form
10-K for the fiscal year ended November 30, 2004.*10.31
    
    Form of Officer Non-Qualified Stock Option Agreement,
incorporated by reference to Exhibit 10.31 to the Companys
Annual Report on Form 10-K for the fiscal year ended November 30,
2004.*10.32
    
    Form of Employee Non-Qualified Stock Option Agreement,
incorporated by reference to Exhibit 10.32 to the Companys
Annual Report on Form 10-K for the fiscal year ended November 30,
2004.*10.33
    
    Form of Incentive Stock Option Agreement, incorporated by
reference to Exhibit 10.33 to the Companys Annual Report on Form
10-K for the fiscal year ended November 30, 2004.*10.34
    
    Form of 2005 Stock Incentive Plan Incentive Stock Option
Agreement, incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarter ended May
31, 2005.
 83




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##### Table of Contents



Exhibit
    
    Description*10.35
    
    Form of 2005 Stock Incentive Plan Officer Non-Qualified Stock
Option Agreement, incorporated by reference to Exhibit 10.2 to
the Companys Quarterly Report on Form 10-Q for the quarter ended
May 31, 2005.*10.36
    
    Form of 2005 Stock Incentive Plan Incentive Non-Officer
Non-Qualified Stock Option Agreement, incorporated by reference
to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q
for the quarter ended May 31, 2005.*10.37
    
    Form of 2005 Stock Incentive Plan Director Stock Option
Agreement, incorporated by reference to Exhibit 10.4 to the
Companys Quarterly Report on Form 10-Q for the quarter ended May
31, 2005.*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
    
    Summary of Outside Director Compensation, incorporated by
reference to Item 1.01 to the Companys Current Report on Form
8-K dated June 13, 2005 and filed June 14, 2005.*10.41
    
    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, 1991.10.42
    
    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, 1992.10.43
    
    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, 1992.10.44
    
    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, 2001.10.45
    
    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, 2000.10.46
    
    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.
 84