<PAGE>

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

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

For the fiscal year ended NOVEMBER 30, 2003 OR

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

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

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

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

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

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

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

                     COMMON SHARES, PAR VALUE $.01 PER SHARE
                     ---------------------------------------
                                (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
 requirements for the past 90 days.        Yes  [X]        No [ ]

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

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

The aggregate market value of the common shares held by non-affiliates of the
Registrant as of May 30, 2003 (the last business day of the Registrant's most
recently completed second fiscal quarter), computed by reference to the closing
sale price as reported by Nasdaq on such date, was approximately $25,991,000.

The number of the Registrant's common shares outstanding as of January 30, 2004
                                 was 9,312,680

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2004 Annual Meeting of Shareholders,
scheduled to be held March 31, 2004, are incorporated by reference in Part III,
if the Proxy Statement is filed no later than March 29, 2004.

================================================================================

<PAGE>

                             SOMANETICS CORPORATION

                           ANNUAL REPORT ON FORM 10-K

                   FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2003

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                               ----
<S>                                                                                                            <C>
                                                      PART I
Item 1.     Business  ...................................................................................        2
Item 2.     Properties...................................................................................       23
Item 3.     Legal Proceedings............................................................................       23
Item 4.     Submission of Matters to a Vote of Security Holders..........................................       23
Supplemental Item.  Executive Officers of the Registrant.................................................       24
                                                     PART II
Item 5.     Market for Registrant's Common Equity and Related Shareholder Matters........................       26
Item 6.     Selected Financial Data......................................................................       27
Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations........       28
Item 7A     Quantitative and Qualitative Disclosures About Market Risk...................................       38
Item 8.     Financial Statements and Supplementary Data..................................................       39
Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........       57
Item 9A.    Controls and Procedures......................................................................       57
                                                     PART III
Item 10.    Directors and Executive Officers of Registrant...............................................       58
Item 11.    Executive Compensation.......................................................................       58
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related                          58
            Stockholder Matters..........................................................................
Item 13.    Certain Relationships and Related Transactions...............................................       58
Item 14.    Principal Accountant Fees and Services.......................................................       58
                                                     PART IV
Item 15.    Exhibits, Financial Statement Schedules and Reports on Form 8-K..............................       59
</TABLE>

<PAGE>

                                     PART I

ITEM 1.  BUSINESS

THE COMPANY

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

         We developed the Cerebral Oximeter to meet the need for information
about oxygen in the brain, the organ least tolerant of oxygen deprivation.
Without sufficient oxygen, brain damage may occur within a few minutes, which
can result in paralysis, severe and complex disabilities or death. Brain oxygen
information, therefore, is important, especially in surgical procedures
requiring general anesthesia and in other critical care situations with a high
risk of the brain getting less oxygen than it needs. We target surgical
procedures with a high risk of brain oxygen imbalances, primarily cardiac
surgeries, as well as other blood vessel surgeries, such as carotid artery
surgeries, and surgeries involving elderly patients. Surgeons,
anesthesiologists, perfusionists and other medical professionals use the
Cerebral Oximeter to identify brain oxygen imbalances and take corrective
action, potentially improving patient outcome and reducing the cost of care.

         The Cerebral Oximeter is a relatively inexpensive, portable and
easy-to-use monitoring system placed at a patient's bedside in hospital critical
care areas, especially operating rooms, recovery rooms, intensive care units and
emergency rooms. It is comprised of

         -        a portable unit including a computer and a display monitor,

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

         -        proprietary software, and

         -        a preamplifier cable.

SomaSensors can be placed on both sides of a patient's forehead to offer
bi-lateral monitoring and are connected to the computer through the preamplifier
cable. The computer uses our proprietary software to analyze information
received from the SomaSensors and provides a continuous digital and trend
display on the monitor of an index of the oxygen saturation in the area of the
brain under the SomaSensors. Users of the Cerebral Oximeter are required to
purchase disposable SomaSensors on a regular basis because of their single-use
nature. We began shipping the model 4100 Cerebral Oximeter in the first quarter
of fiscal 1998. We began international shipments of the model 5100 Cerebral
Oximeter in August 1999. The model 5100 Cerebral Oximeter has the added
capability of being able to monitor pediatric patients. In September 2000, we
received clearance from the FDA to market the model 5100 Cerebral Oximeter in
the United States and began shipping the model 5100 Cerebral Oximeter in the
United States.

         Our objective is to establish the Cerebral Oximeter as a standard of
care in surgical procedures requiring general anesthesia and in other critical
care situations.

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

                                       2

<PAGE>

directly. We entered into a License Agreement as of June 2, 2000 giving us
exclusive, worldwide, royalty-bearing licenses to specified rights relating to
the CorRestore System, subject to the terms and conditions of the license
agreement. In November 2001 we received clearance from the FDA to market the
CorRestore patch in the United States. The first surgical procedure using the
CorRestore System was performed in January 2002. We began shipping the
CorRestore System in the United States in the first quarter of fiscal 2002. In
April 2003, we met the requirements under the European Medical Device Directive
to use the CE Mark, thereby allowing us to market the CorRestore System in the
European Economic Community. In October 2003, we began shipping the CorRestore
System in Europe. Our objective is to have the CorRestore System used in SVR
surgeries in the United States and Europe. Our initial target market is SVR
surgeries on patients with dilated ischemic cardiomyopathy due to a previous
myocardial infarction involving the anterior wall of the ventricle. Ischemic
cardiomyopathy is a damaged heart muscle caused by the obstruction of the inflow
of blood from the arteries, resulting in an enlarged ventricle. Myocardial
infarction is the death of an area of the middle muscle layer in the heart wall.

MARKET OVERVIEW

Industry Background

         The brain is the human organ least tolerant of oxygen deprivation.
Without sufficient oxygen, brain damage may occur within a few minutes, which
can result in paralysis, severe and complex disabilities, or death. Undetected
brain hypoxia, which is the insufficiency of oxygen delivery, and ischemia,
which is tissue oxygen starvation due to the obstruction of the inflow of
arterial blood, are common causes of brain damage and death during and after
many surgical procedures and in other critical care situations. A December 1996
article in The New England Journal of Medicine and a March 1998 article in The
Lancet reported separately on the results of multi-center studies involving
surgeries. The New England Journal of Medicine article concluded that adverse
cerebral outcomes after coronary artery bypass graft surgery are relatively
common and serious and are associated with substantial increases in death,
length of hospitalization and use of intermediate- or long-term care facilities.
Adverse cerebral outcomes occurred in 6.1% of the patients included in the
study. The Lancet article reported that approximately 26% of patients over age
60 who had major abdominal or orthopedic surgery under general anesthesia
experienced a neurological injury. Additional studies have estimated that a
higher percentage of patients experience some neurological decline after heart
surgery and that insufficient oxygen delivery to the brain is a frequent cause
of this problem. The Lancet article reported that injured patients require more
assistance with everyday actions, and The New England Journal of Medicine
article concluded that new diagnostic and therapeutic strategies must be
developed to lessen these injuries.

         Oxygen is carried to the brain by hemoglobin in the blood. Hemoglobin
passes through the lungs, bonds with oxygen and is pumped by the heart through
arteries and capillaries to the brain. Brain cells extract the oxygen and the
blood carries away carbon dioxide through the capillaries and veins back to the
lungs. Brain oxygen imbalances can be caused by several factors, including
changes in oxygen saturation, which is the percentage of hemoglobin contained in
a given amount of blood which carries oxygen, in the arteries, blood flow to the
brain, hemoglobin concentration and oxygen consumption by the brain.

         Brain oxygen information is important in surgical procedures requiring
general anesthesia, in other critical care situations with a high risk of brain
oxygen imbalances, as well as in the treatment of patients with head injuries or
strokes. These procedures include

         -        heart surgeries,

         -        heart blood vessel surgeries,

         -        other blood vessel surgeries,

                                       3

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         -        surgeries involving elderly patients,

         -        any neurosurgery,

         -        major surgeries involving the neck,

         -        transplant surgeries,

         -        treatment of patients with diseases resulting from high blood
                  pressure,

         -        lung problems,

         -        head, organ or heart injuries, and

         -        treatment of patients suffering from strokes.

These patients are most commonly found in operating rooms as well as in the
other critical care areas of hospitals, especially recovery rooms, intensive
care units and emergency rooms. We believe that medical professionals need
immediate and continuous information about changes in the oxygen levels in the
blood in the brain to identify brain oxygen imbalances. After they are alerted
to these imbalances, medical professionals have the information to take
corrective action through the introduction of medications, anesthetic agents or
mechanical intervention, potentially improving patient outcome and reducing the
costs of care. Immediate and continuous information about changes in brain
oxygen levels also provides immediate feedback regarding the adequacy of the
selected therapy. Equally important, without information about brain oxygen
levels, therapy that may not be necessary might be initiated to assure adequate
brain oxygen levels. Unnecessary therapy can have an adverse impact on patient
safety and increase hospital costs.

         A 1999 independent industry report estimates that there are
approximately 60,000 operating rooms worldwide performing approximately 50
million surgeries involving general anesthesia every year. Industry sources
estimate that, in the United States in 2003, there were approximately 4.6
million surgeries involving patients that, due to the type of surgery, age of
the patient, or other factors, represent a higher risk for post-operative
neurological complications. Such surgeries include open heart surgeries, carotid
endarterectomies, which is the removal of blockage in the artery, major
abdominal surgeries, orthopedic surgeries, and other major general surgeries
involving elderly patients.

         Currently, several different methods are used to detect one or more of
the factors affecting brain oxygen levels or the effects of brain oxygen
imbalances. These methods include

         -        invasive jugular bulb catheter monitoring,

         -        transcranial Doppler,

         -        electroencephalograms, or EEGs,

         -        intracranial pressure monitoring, and

         -        neurological examination.

These methods have not been widely adopted to monitor brain oxygen levels in
critical care situations for a variety of reasons. The use of any of these
methods is limited because it is either

         -        expensive,

         -        difficult or impractical to use as a brain monitor,

         -        invasive,

         -        not available under some circumstances, such as when the
                  patient is unconscious or has suppressed neural activity,

         -        not able to measure all of the factors that may affect brain
                  oxygen imbalances,

         -        not organ specific,

         -        not able to provide continuous information, or

         -        able to measure only the effects of brain oxygen imbalances.

                                       4

<PAGE>

         Arterial oxygen saturation is only one of the factors that can affect
oxygen imbalances in the brain. Pulse oximetry measures oxygen saturation in the
arteries. It is non-invasive, uses optical spectroscopy and has become a
standard of care for measuring arterial oxygen saturation in critical care
situations. However, pulse oximeters require a strong pulse, making them
unavailable during bypass surgeries, surgeries involving induced hypothermia or
any other time the patient does not have a strong peripheral pulse. Pulse
oximeters provide information about the oxygen saturation of the arteries in a
finger or earlobe, not oxygen imbalances in the brain. Changes in the oxygen
balance in the brain may not have any affect on the oxygen levels in a finger or
earlobe. For example, a blocked artery to the brain would affect oxygen in the
brain, but would not affect the amount of oxygen in the arteries in the finger.

         The Cerebral Oximeter is the only non-invasive monitoring system
commercially available in the United States that provides continuous information
about changes in the blood oxygen level in the brain. It is easy to use and
relatively inexpensive, and provides medical professionals with information to
help them identify brain oxygen imbalances. This information may help medical
professionals intervene in a timely manner to correct brain oxygen imbalances,
provide feedback regarding the adequacy of the selected therapy and provide
medical professionals with additional assurance when they make decisions
regarding the need for therapy, thereby potentially improving patient outcome
and reducing the cost of care.

Market Trends

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

         Less Invasive Medical Procedures. We believe there is a trend toward
less invasive medical procedures. Notable examples include laparoscopic
procedures in general surgery and arthroscopic procedures in orthopedic surgery.
Such procedures are designed to reduce trauma, thereby decreasing complications,
reducing pain and suffering, speeding recovery and decreasing costs associated
with patient care. We also believe that there is a trend to minimize invasive
procedures relating to the brain to increase the safety of patients and medical
professionals, reduce recovery time and minimize costs.

         Demand to Reduce Health Care Costs. Hospitals in the United States are
increasingly faced with direct economic incentives to control health care costs
through improved labor productivity, shortened hospital stays and more selective
performance of medical procedures and use of facilities and equipment. Hospitals
often receive a fixed fee from Medicare, managed care organizations and private
insurers based on the disease diagnosed, rather than based on the services
actually performed. Therefore, hospitals are increasingly focused on avoiding
unexpected costs, such as those associated with increased hospital stays
resulting from patients with brain damage or other adverse outcomes following
surgery. This focus on avoiding unexpected costs is especially pronounced in the
operating room and other hospital critical care areas due to their high
operating costs. The economic and human costs of brain damage can be tremendous.
Even short extensions of hospital stays resulting from brain damage can be
expensive. In addition, over-treating a patient as a result of lack of knowledge
about brain oxygen levels can result in unnecessary costs.

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

                                       5

<PAGE>

         Aging Population. According to the Administration on Aging, United
States Department of Health and Human Services, approximately 33.5 million
persons in the United States were age 65 or older in 1995, representing 13% of
the population. The number of Americans age 65 or older increased by
approximately 2.3 million, or 7%, between 1990 and 1995, compared to an increase
of 5% for the under-65 population. The Administration on Aging predicts that the
number of Americans age 65 or older will increase to approximately 39.4 million
by the year 2010 and to approximately 69.4 million by the year 2030. We believe
that older patients require a higher level of medical care using more procedures
in which the patient or the procedure involves a risk of brain oxygen
imbalances.

BUSINESS STRATEGY

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

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

         Demonstrate Clinical Benefits and Promote Acceptance of the Cerebral
Oximeter. We sponsor clinical studies using the Cerebral Oximeter to provide
additional evidence of its benefits. We use the resulting publication of any
favorable peer-reviewed papers to help convince the medical community of the
clinical benefits of the Cerebral Oximeter. We also promote acceptance of the
Cerebral Oximeter in the medical community by encouraging surgeons,
anesthesiologists, perfusionists and nurses in leading hospitals, whose opinions
and practices we believe are valued by other hospitals and physicians, to use
the Cerebral Oximeter on a trial basis. We believe that successful evaluations
of the Cerebral Oximeter by these medical professionals will accelerate the
acceptance of the Cerebral Oximeter by other medical professionals. We are
sponsoring discussions among physicians who have used the Cerebral Oximeter
about its clinical benefits.

         Invest in Marketing and Sales Activities. We have established a
distribution network consisting of our direct sales employees, independent sales
representative firms and distributors. We invest in our marketing and sales
efforts to increase the medical community's exposure to our INVOS technology and
the Cerebral Oximeter, including continued participation in trade shows and
medical conferences, and ongoing product evaluations. We are marketing our
products through our existing sales force and independent sales representative
firms and we leverage our sales resources through the use of our distributors,
including Tyco Healthcare in Europe and Canada, and Edwards Lifesciences Ltd. in
Japan.

         License Our Technology to Medical Device Manufacturers. We plan to
license our Cerebral Oximeter technology to other medical device manufacturers
to expand the installed base of Cerebral Oximeters and increase the demand for
SomaSensors. Such a license might be made to a company interested in
incorporating the Cerebral Oximeter into a multi-function monitor. We believe
that such an arrangement could provide another distribution channel for our
Cerebral Oximeter. We, however, have no current commitments for any such
licenses.

         Develop Additional Applications of the Cerebral Oximeter. In September
2000, we received clearance from the FDA to market the model 5100 Cerebral
Oximeter in the United States. The

                                       6

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model 5100 Cerebral Oximeter has the added capability of being able to monitor
pediatric patients. Over the longer term, we expect to focus efforts on
developing product-line extensions of the Cerebral Oximeter for use on newborns
and in other non-brain tissue applications. We believe that these natural
extensions of our existing products will increase the market for the Cerebral
Oximeter without the more significant development efforts required for entirely
new products. Research conducted on children has resulted in a SomaSensor that
can fit smaller heads. We believe that non-invasive monitoring is especially
important in this patient population, as they generally have lower oxygen
reserves than adults, have less blood volume from which to make invasive blood
gas measurements and are less tolerant of painful skin punctures and infections.

PRODUCTS AND TECHNOLOGY

The Cerebral Oximeter

         Our Cerebral Oximeter is the only non-invasive patient monitoring
system commercially available in the United States that provides continuous
information about changes in the blood oxygen level in the brain. It is a
portable and easy-to-use monitoring system that is placed at a patient's bedside
in hospital critical care areas, especially operating rooms, recovery rooms,
ICUs and emergency rooms. Surgeons, anesthesiologists, perfusionists and other
medical professionals use the information provided by the Cerebral Oximeter to
identify brain oxygen imbalances and take corrective action, potentially
improving patient outcome and reducing the cost of care. Once the cause of a
cerebral oxygen imbalance is identified and therapy is initiated, the Cerebral
Oximeter provides immediate feedback regarding the adequacy of the selected
therapy. It can also provide medical professionals with an additional level of
assurance when they make decisions regarding the need for therapy.

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

         The Cerebral Oximeter monitoring system is comprised of

         -        a portable unit including a computer and a display monitor,

         -        dual single-use, disposable sensors, called SomaSensors,

         -        proprietary software, and

         -        a preamplifier cable.

         SomaSensors can be placed on both sides of a patient's forehead to
offer bi-lateral monitoring and are connected to the computer through the
preamplifier cable. The SomaSensors continuously transmit and receive
predetermined wavelengths of light sent through the scalp, muscle and skull into
the brain tissue. The computer receives the information about the intensity of
the light scattered by the blood and tissue in the area being monitored. The
computer uses our proprietary software to analyze this information and provide a
continuous digital and trend display on the monitor of an index of the oxygen
saturation in the area of the brain under the SomaSensors.

         The portable unit includes menus that make it easy for users to set
high and low audible alarms, customize the display and retrieve data.
Single-function keys provide a convenient means to turn on the Cerebral
Oximeter, silence alarms, mark important events and print results that can be
stored for up to 24

                                       7

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hours and retrieved by a variety of standard, commercially-available printers.
The Cerebral Oximeter measures approximately 9 inches wide, 8 inches high, and 8
inches deep and weighs approximately 14 pounds.

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

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

<TABLE>
<CAPTION>
         Features                                             Benefits
         --------                                             --------
<S>                                      <C>
FDA-cleared                              - Access to United States and certain foreign markets

Non-invasive                             - Consistent with market trend toward less invasive medical
                                           procedures

                                         - No risk to patients and medical professionals

                                         - No added patient recovery costs

Continuous Information                   - Immediate information regarding brain oxygen imbalances

                                         - Real-time guide to therapeutic interventions

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

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

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

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

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

                                         - Automatic SomaSensor calibration

                                         - Simple user interface and controls

                                         - Audible alarm limits

Effective in Difficult Circumstances     - Provides information when the patient is unconscious, lacks
                                           a strong peripheral pulse or has suppressed neural activity,
                                           specifically during cardiac arrest, hypothermia,
                                           hypertension, hypotension and hypovolemia

                                         - Indicates oxygen imbalances in the brain, not just blood
                                           flow, oxygenation of the arteries or the effects of
                                           imbalances

Portable                                 - Placed at patient's bedside
</TABLE>

Optical Spectroscopy Technology

         Our proprietary In Vivo Optical Spectroscopy, or INVOS, technology is
based primarily on the physics of optical spectroscopy. Optical spectroscopy is
the interpretation of the interaction between matter and light. Spectrometers
and spectrophotometers function primarily by shining light through matter and
measuring the extent to which the light is transmitted through, or scattered or
absorbed by, the matter. Physicians and scientists can use spectrophotometers to
examine human blood and tissue. Although most human tissue is opaque to ordinary
light, some wavelengths penetrate tissue more easily than others. Therefore, by
shining appropriate wavelengths of light into the body and measuring its
transmission, scattering and absorption, or a combination, physicians can obtain
information about the

                                       8

<PAGE>

matter under analysis. Optical spectroscopy generates no ionizing radiation and
produces no known hazardous effects.

         Optical spectroscopy was first used clinically in the 1940s at the
Sloan-Kettering Institute for cancer research. The pulse oximeter uses optical
spectroscopy to determine the oxygen saturation of the blood in the arteries in
peripheral tissue, such as in a finger or an earlobe. By identifying the
hemoglobin and the oxygenated hemoglobin and measuring the relative amounts of
each, oxygen saturation of hemoglobin can be measured. However, optical
spectroscopy was generally not useful when the substances to be measured were
surrounded by, were behind, or were near bone, muscle or other tissue, because
they produce extraneous data that interferes with analysis of the data from the
area being examined.

INVOS Technology

         The Cerebral Oximeter is based on our INVOS technology. In 1982, we
began developing a spectroscopic instrument to measure breast tissue
abnormalities. Our first product, the Somanetics INVOS 2100 System, used the
same INVOS technology as the Cerebral Oximeter. Later, we began analyzing the
use of INVOS technology to measure changes in cellular metabolism in the brain.
Early studies conducted with the Henry Ford Neurosurgical Institute demonstrated
the ability of our INVOS technology to make measurements that were highly
correlated to controlled changes in animal brain cell metabolism. In 1988, we
began clinical studies of the Cerebral Oximeter on human patients in operating
rooms, emergency rooms and intensive care units at Henry Ford Hospital and later
at Bowman Gray School of Medicine and Mount Sinai Medical Center.

         Like other applications of optical spectroscopy, INVOS analyzes various
characteristics of human blood and tissue by measuring and analyzing
low-intensity visible and near-infrared light transmitted into portions of the
body. It measures the composition of substances by detecting the effect they
have on light. The INVOS technology measurement is made by transmitting
low-intensity visible and near-infrared light through a portion of the body and
detecting the manner in which the molecules of the exposed substance interact
with light at specific wavelengths. INVOS technology detects this interaction by
measuring the intensity of the various wavelengths of light received by light
sensors. By measuring the effect on specific wavelengths of light caused by
oxygenated hemoglobin contained in blood in the region of the brain being
monitored, the Cerebral Oximeter can monitor changes in the approximate oxygen
saturation of the hemoglobin in that region of the brain.

         We have developed a method of reducing extraneous spectroscopic data
caused by surrounding bone, muscle and other tissue. This method allows us to
gather information about portions of the body that previously could not be
analyzed using traditional optical spectroscopy. The dual detector design of the
SomaSensor enables us to measure scattered light intensities from the
intermediate tissues of skin, muscle and skull in a separate process. Each
SomaSensor contains two light detectors and a light source. While both detectors
receive similar information about the tissue outside the brain, the detector
further from the light source detects light that has penetrated deeper into the
brain, and, therefore, receives more information specific to the brain than does
the detector closer to the light source. By subtracting the two measurements,
INVOS technology is able to suppress the influence of the tissues outside the
brain to provide a measurement of changes in brain oxygen saturation.

                                       9

<PAGE>

RESEARCH AND DEVELOPMENT

         We are currently focusing our research and development efforts on the
advancement of the design and production processes of the Cerebral Oximeter and
SomaSensor. Over the longer term, we expect to focus efforts on developing
product-line extensions of the Cerebral Oximeter for use on newborns, other
non-brain tissue applications, and advancement of the design and production
processes of the Cerebral Oximeter and SomaSensor.

         We spent $412,953 during fiscal 2003 on research, development and
engineering, $571,126 during fiscal 2002, and $777,974 during fiscal 2001.

MARKETING, SALES AND DISTRIBUTION

MARKETING

         The Cerebral Oximeter is for use on patients at risk of brain oxygen
imbalances. These patients are most commonly found in operating rooms undergoing
general anesthesia for various surgical procedures as well as in the other
critical care areas of hospitals, especially recovery rooms, intensive care
units and emergency rooms. After the Cerebral Oximeter is accepted in hospitals,
future markets might include free-standing operating rooms, clinics, ambulances
and nursing homes.

         We market the Cerebral Oximeter primarily to cardiac, cardiovascular
and vascular surgeons, neurosurgeons, anesthesiologists and perfusionists. We
believe that these specialists are the medical professionals most aware of the
risks of brain damage resulting from brain oxygen imbalances. We and our
distributors have concentrated our sales efforts on the larger hospitals in the
United States and selected foreign markets in which we have commenced commercial
sales, because theses hospitals have a larger volume of surgical procedures and
we consider them to be opinion leaders in the medical community. In addition, we
sponsor discussions among physicians who have used the Cerebral Oximeter about
its clinical benefits.

         We believe that favorable peer review is a key element to a product's
success in the medical equipment industry. Accordingly, we support clinical
research programs with third-party clinicians and researchers intended to
demonstrate the need for the Cerebral Oximeter and its clinical benefits with
the specific objective of publishing the results in peer-reviewed journals. The
research primarily consists of studies comparing patients managed based on
information provided by cerebral oximetry with other patients, based on measures
of patient outcome and hospital costs, including patient length of stay, length
of time on the ventilator, cognitive dysfunction and incidence of stroke. During
fiscal 2003, the results of the first prospective, randomized, blinded,
intervention trial were presented, reporting a statistically significant
reduction in average length of hospital stay for cardiac surgery patients who
were monitored and managed with the INVOS Cerebral Oximeter. This trial is
ongoing, and other fully randomized studies are being pursued that investigate
the ability of clinicians to improve patient outcomes and reduce hospital costs
by managing patients based on information provided by the Cerebral Oximeter. We
attend trade shows and medical conferences to introduce and promote the Cerebral
Oximeter and to meet medical professionals with an interest in performing
research and reporting their results in peer-reviewed medical journals and at
major international meetings.

Sales and Distribution

         We sell the Cerebral Oximeter through our direct sales force,
independent sales representative firms and, in international markets,
independent distributors. In the United States, we sell the Cerebral

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Oximeter through our seven direct salespersons, two clinical specialists and 12
independent sales representative firms. Our sales compensation and incentive
plans are designed to motivate our direct sales force by making half of their
targeted compensation dependent on meeting targeted sales levels. We believe
that the minimum selling cycle for new medical devices is approximately six to
nine months.

         Internationally, we have distribution agreements with three independent
distributors covering 56 countries for the Cerebral Oximeter. Our distributors
for the Cerebral Oximeter include Tyco Healthcare, part of Tyco International
Ltd., in Europe and Canada, and Edwards Lifesciences Ltd., formerly Baxter
Limited, in Japan.

         During fiscal 1998, we began a no-cap sales program in the United
States whereby we ship the Cerebral Oximeter to the customer at no charge, and
the customer agrees to purchase at a premium a minimum monthly quantity of
SomaSensors. It has been our experience that the larger hospitals in the United
States prefer to use this method to acquire Cerebral Oximeters.

         We did not have any backlog of firm orders as of January 10, 2004 or as
of January 10, 2003. We generally do not have a backlog of firm orders.

         For a description of sales to major customers, see Note 10 of Notes to
Financial Statements included in Item 8 of this Report. Tyco Healthcare was our
largest customer in fiscal 2003, 2002 and 2001. We are dependent on our sales to
Tyco Healthcare, and the loss of them as a customer would have an adverse effect
on our business, financial condition and results of operations.

         Our export sales were approximately $1,945,000 for the fiscal year
ended November 30, 2003, $1,348,000 for the fiscal year ended November 30, 2002,
and $1,595,000 for the fiscal year ended November 30, 2001. See Note 10 of Notes
to Financial Statements. For a description of the breakdown of sales between
Cerebral Oximeters, SomaSensors, and CorRestore Systems, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations."

MANUFACTURING

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

         On June 11, 1998, we received ISO 9001 certification and met the
requirements under the European Medical Device Directive to use the CE Mark,
thereby allowing us to continue to market our Cerebral Oximeter and SomaSensor
in the European Economic Community. Our most recent ISO 9001 compliance
surveillance audit occurred in April 2003.

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COMPETITION

         We do not believe there is currently any direct commercial competition
for the Cerebral Oximeter. We believe, however, that the market for cerebral
oximetry products is in the early stages of its development and, if it develops,
might become highly competitive. Our initial United States patent, covering in
vivo tissue examination technology, was allowed and issued in 1986 and expired
in October 2003. We do not expect the expiration of this patent to have a
material effect on our business. We are aware of patents issued to unaffiliated
third parties and relating to cerebral oximetry that have expired. These expired
patents make that technology generally available and potentially help the
development of competing products. In addition, we are aware of foreign
companies that have sold products relating to cerebral metabolism monitoring for
research or evaluation.

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

         We also compete indirectly with the numerous companies that sell
various types of medical equipment to hospitals for the limited amount of
funding allocated to capital equipment in hospital budgets. The market for
medical products is subject to rapid change due to an increasingly competitive,
cost-conscious environment and to government programs intended to reduce the
cost of medical care. Many of these manufacturers of medical equipment are
large, well-established companies whose resources, reputations and ability to
leverage existing customer relationships might give them a competitive advantage
over us. Our products and technology also compete indirectly with many other
methods currently used to measure blood oxygen levels or the effects of low
blood oxygen levels.

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

PROPRIETARY RIGHTS INFORMATION

         We have fifteen United States patents and four patents in various
foreign countries. In September 2003, we were issued a new patent by the U.S.
Patent and Trademark Office, titled "Multi-Channel, Noninvasive, Tissue
Oximeter," covering the application of non-invasive, near-infrared spectroscopy
to measure continuously and substantially concurrently a blood metabolite
(oxygen saturation) in at least two separate internal regions of the brain. This
patent will expire in October 2019. The corresponding Australian patent for
"Multi-Channel, Noninvasive, Tissue Oximeter" issued in December 2003, and also
expires in October 2019. Our other patents basically cover methods and apparatus
for introducing light into a body part and receiving, measuring and analyzing
the resulting light and its interaction with tissue. These methods also involve
receiving, measuring and analyzing the light transmissivity of various body

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parts of a single subject, as well as of body parts of different subjects, which
provides a standard against which a single subject can be compared. Although we
believe that one or more of our issued patents cover some of the underlying
technology used in the Cerebral Oximeter, only eleven of the issued patents
expressly refer to examination of the brain or developments involving the
Cerebral Oximeter.

         Our initial United States patent, covering the in vivo tissue
examination technology developed in conjunction with the INVOS 2100 and its
predecessor, the SOMA 100, was allowed and issued in 1986 and expired in October
2003. We do not expect the expiration of this patent to have a material effect
on our business. The corresponding Canadian patent was issued in 1987 and
expires in October 2004. The corresponding European Community patent was issued
in 1990, with related patents issued in the ten Western European countries that
were then member states, and the corresponding Japanese patent was issued in
1991. These European patents and this Japanese patent have now expired. We do
not expect the expiration of these patents to have a material effect on our
business. Our fifteen additional United States patents, and the corresponding
four foreign patents, expire on various dates from February 2005 to October
2019. We currently do not have any patent applications pending in the United
States, although we do have patent applications in various foreign countries
with respect to aspects of our technology relating to the interaction of light
with tissue.

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

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

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

GOVERNMENT REGULATION

         The testing, manufacture and sale of our products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign agencies. Pursuant to the Federal Food, Drug,
and Cosmetic Act, and the related regulations, the FDA regulates the preclinical
and clinical testing, manufacture, labeling, distribution and promotion of
medical devices. If we do not comply with applicable requirements, we can be
subject to, among other things,

         -        fines,

         -        injunctions,

         -        civil penalties,

         -        recall or seizure of products,

         -        total or partial suspension of production,

         -        failure of the government to grant premarket clearance or
                  premarket approval for devices,

         -        withdrawal of marketing clearances or approvals and

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         -        criminal prosecution.

         A medical device may be marketed in the United States only if the FDA
gives prior authorization, unless it is subject to a specific exemption. Devices
classified by the FDA as posing less risk than class III devices are categorized
as class I or II. These devices, and certain pre-amendment class III devices,
are eligible to seek "510(k) clearance." 510(k) clearance generally is granted
when submitted information establishes that a proposed device is "substantially
equivalent" in intended use and other factors, such as technological
characteristics, to a class I or II device already legally on the market or to a
"preamendment" class III device, which is one that has been in commercial
distribution since before May 28, 1976, for which the FDA has not called for PMA
applications, which are defined below. In recent years, the FDA has been
requiring a more rigorous demonstration of substantial equivalence than in the
past, including requiring clinical trial data in many cases. For any devices
that are cleared through the 510(k) process, modifications or enhancements that
could significantly affect safety or effectiveness, or constitute a major change
in the intended use of the device, will require new 510(k) submissions. We
believe that it now usually takes from three to six months from the date of
submission to obtain 510(k) clearance, but it can take substantially longer. We
cannot assure you that any of our devices or device modifications will receive
510(k) clearance in a timely fashion, or at all. The Cerebral Oximeter has been
categorized as a class II device. The CorRestore patch has been categorized as a
class II device.

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

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

         In June 1992, we received 510(k) clearance from the FDA to market the
Cerebral Oximeter in the United States for use on adults. We began commercial
shipments of Cerebral Oximeters and SomaSensors in May 1993. In November 1993,
we received notification that the FDA had rescinded our 510(k) clearance to
market the Cerebral Oximeter. As a result, all commercial sales of our product
were suspended. In February 1994, we resumed marketing our product in several
foreign countries. In June 1996, we received 510(k) clearance from the FDA to
market the Cerebral Oximeter, including the SomaSensor, in the United States. In
October 1997, we obtained FDA clearance for new advances in our INVOS technology
that are incorporated in our model 4100 Cerebral Oximeter. We made additional
minor changes to the model 3100A Cerebral Oximeter which resulted in the model
4100. We also made additional minor changes to the SomaSensor. In September
2000, we received 510(k) clearance from the FDA to market the model 5100
Cerebral Oximeter in the United States. The model 5100 Cerebral Oximeter has the
added capability of being able to monitor pediatric patients. We have made
additional minor changes to the model 5100. We do not believe that these changes
could significantly affect the safety or efficacy of

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the Cerebral Oximeter or the SomaSensor and, therefore, we believe that these
changes do not require the submission of a new 510(k) notice. The FDA, however,
could disagree with our determination not to submit a new 510(k) notice for the
Cerebral Oximeter or SomaSensor and could require us to submit a new 510(k)
notice for any changes made to the device. If the FDA requires us to submit a
new 510(k) notice for our Cerebral Oximeter or SomaSensor or for any device
modification, we might be prohibited from marketing the modified device until
the 510(k) notice is cleared by the FDA.

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

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

         We are subject to routine inspection by the FDA and some state agencies
for compliance with QSR requirements and other applicable regulations. Our most
recent FDA QSR inspection occurred in October 2001. We are also subject to
numerous federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances.

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

         -        the company believes the device can be found to be
                  substantially equivalent through a 510(k) submission,

         -        the device is labeled and intended for export only,

         -        the device meets the specifications of the foreign purchaser,
                  and

         -        other conditions of the export provisions of the Federal Food,
                  Drug, and Cosmetic Act and the Export Reform Act have been
                  met.

Rules for export of PMA devices are more stringent.

         Congress has enacted the Medical Device User Fee Modernization Act of
2002. Among other things, this law has provisions which permit the assessment of
user fees for product approvals and clearances. Given the recent enactment of
this law, the effect of the law as it relates to us and our products is still
unknown, other than that we will have to pay the FDA to review our 510(k)
submissions.

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For fiscal 2003, our fees for 510(k) reviews were approximately $2,000, and for
fiscal 2004 our fees for a 510(k) review will be approximately $3,000.

SEASONALITY

         Our business is seasonal. Our third quarter sales have typically been
lower, compared to other fiscal quarters, principally because the fiscal quarter
coincides with the summer vacation season, especially in Europe, the United
States and Japan.

THE CORRESTORE SYSTEM

Market Overview

         Congestive heart failure is when the heart is unable to pump enough
blood to meet the circulation needs of the body. It is the number one cause of
death for persons over age 65. Approximately 5,000,000 persons in the United
States have been diagnosed with congestive heart failure, and each year an
estimated 550,000 additional persons in the United States are diagnosed with
this condition. An estimated 30% of those with congestive heart failure are in
Class III or IV, based on the New York Heart Association classifications. These
classifications divide patients into four classes based on how debilitating
their condition is. Of these patients in Classes III and IV, only approximately
61% survive one year after they are diagnosed with congestive heart failure,
and, for all classes, there is a 40% annualized rate of admission to the
hospital for congestive heart failure.

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

         Surgical ventricular restoration is a surgical technique that can be
used to treat some patients suffering from congestive heart failure. It involves
reducing the size of the ventricle to restore more normal function. During SVR,
the surgeon restores an enlarged, poorly functioning left ventricle to more
normal size and function by inserting an implant, in most instances, or closing
the defect directly. One study of SVR surgeries using existing dacron patches
indicates a higher 12-month, 18-month and 36-month survival rate and a lower
hospital re-admission rate for patients undergoing SVR. These existing patches
take time for the surgeon to form, can be difficult to insert, and can leak
around the edges. Two heart surgeons and their company, CorRestore LLC, have
designed and patented a patch for use in SVR that they believe is easier to
implant and provides a better seal against leaks at the perimeter than existing
patches, which are formed by the surgeon during the surgery out of dacron or
bovine pericardium tissue. Therefore, we believe it will be possible to
demonstrate the clinical benefits of the CorRestore System and to gain market
acceptance for this product in connection with these surgeries.

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

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Business Strategy

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

         Target and Promote Surgical Procedures Where Benefits Have Been
Demonstrated. Our initial target market is SVR surgeries on Class III and IV
congestive heart failure patients with dilated ischemic cardiomyopathy due to a
previous myocardial infarction in the anterior wall of the left ventricle.
Dilated ischemic cardiomyopathy is a damaged heart muscle caused by the
obstruction of the inflow of blood from the arteries and resulting in an
enlarged ventricle. Myocardial infarction is death of an area of the middle
muscle layer in the heart wall. One study of SVR surgeries on these patients,
using patches that were formed by the surgeon during the surgery out of dacron,
indicates a higher 12-month, 18-month and 36-month survival rate and a lower
hospital re-admission rate for patients undergoing SVR. We promote SVR by
sponsoring education programs teaching SVR with the CorRestore System. Existing
patches used in SVR take time for the surgeon to form, can be difficult to
insert, and can leak around the edges. Therefore, we believe it will be possible
to demonstrate the clinical benefits of the CorRestore System and to gain market
acceptance for this product in connection with these surgeries.

         Demonstrate the Clinical Benefits and Promote Acceptance of the
CorRestore System. We expect to promote the acceptance of the CorRestore System
in the medical community by encouraging cardiac surgeons in leading hospitals,
whose opinions and practices we believe are valued by other hospitals and
physicians, to use the CorRestore System. We believe that the successful
evaluations of the CorRestore System by these medical professionals will
accelerate the acceptance of the CorRestore System by other medical
professionals.

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

Product

         We are developing and marketing the CorRestore System for use in
cardiac repair and reconstruction, including heart surgeries called surgical
ventricular restoration, or SVR. During SVR, the surgeon restores an enlarged,
poorly functioning left ventricle to more normal size and function by inserting
an implant, in most instances, or closing the defect directly. SVR is currently
generally performed using a patch that is formed by the surgeon during the
surgery out of dacron or bovine pericardium tissue. These existing patches take
time for the surgeon to form, can be difficult to insert, and can leak around
the edges.

         As a result of these problems, the inventors developed a non-circular
bovine pericardium, or cow heart-sac, tissue patch with an integrated
pericardial suture ring. It was developed to make SVR easier for the surgeon and
to provide a better seal on the edges of the patch to minimize leaking. The
inventors and their company, CorRestore LLC, filed for a patent with respect to
their patch, which was issued in the United States in February 2000 and expires
in May 2018. The claims allowed relate primarily to the product design of a soft
suture ring integrated with a patch. Subsequently, two other United States
patents

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have been issued to the inventors, also with the claims allowed relating
primarily to the product design of a soft suture ring integrated with a patch,
and they also expire in May 2018. In addition, other United States and foreign
patent applications are pending. We have also obtained United States Trademark
registration for the trademark "CorRestore."

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

Marketing

         We believe that favorable peer review is a key element to a product's
success in the medical equipment industry. In November 2002, the results of a
13-center, 1,113-patient study evaluating the safety and effectiveness of SVR
reported improvement in patient function based on New York Heart Association
classification criteria, improvement in readmission and survival rates, and
improvement in ejection fraction for SVR patients. Most of the patients in the
study were severe New York Hospital Association Class III and Class IV
congestive heart failure patients. For those patients whose New York Hospital
Association Class was reported at last follow-up, 89 percent were functionally
Class I or Class II. In addition, 89 percent of the patients were not readmitted
to the hospital for congestive heart failure during the three years after their
SVR surgery. By comparison, the annual hospital admission rate for Class III and
IV heart failure patients is more than 40 percent and 24 percent are admitted
two or more times each year.

         The overall survival rate for the study group was 83 percent at three
years. In addition, post-operatively, the ejection fraction of these patients
increased from 28% to 40% and the left ventricular end systolic volume index
decreased from 96 ml/m2 to 62 ml/m2. These results were presented at the
November 2002 meeting of the American Heart Association. These results updated
the three-year results of a study of 662 SVR patients that were presented at the
May 2001 meeting of the American Association for Thoracic Surgery, and were
published in the October 2001 issue of Seminars in Thoracic and Cardiovascular
Surgery. The initial three-year results had updated the 18-month results of a
study of 439 SVR patients that was published in a peer-reviewed article in the
April 2001 issue of the Journal of the American College of Cardiology.

Sales and Distribution

         We sell the CorRestore System through our seven direct salespersons,
two clinical specialists and eight independent sales representative firms in the
United States. Internationally, we met the requirements under the European
Medical Device Directive to use the CE Mark in April 2003. We sell the
CorRestore System through independent distributors in international markets. We
have distribution agreements with two independent distributors covering two
countries for the CorRestore System.

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License Agreement

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

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

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

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

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

         -        providing ongoing technical and general consulting and advice;

         -        assisting with product designs; and

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

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

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

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

         -        Five-year warrants to purchase up to 400,000 common shares at
                  $3.00 a share. The warrants became exercisable to purchase
                  300,000 shares immediately, became exercisable to purchase an
                  additional 50,000 shares when we received clearance from the
                  FDA to market the CorRestore patch in the United States, and
                  became exercisable to purchase another 50,000 shares when we
                  received CE certification for the CorRestore System. The
                  warrants expire when the licenses terminate, except that the
                  vested portion of the warrants remain exercisable for an
                  additional 90 days or, if the licenses terminate because of
                  specified breaches by us, for the remaining term of the
                  warrants.

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

                                       19

<PAGE>

<TABLE>
<CAPTION>
                              Additional Portion
  Net Sales                       of Shares
  ---------                       ---------
<S>                           <C>
$ 5,000,000                        233,330
$10,000,000                        233,330
$20,000,000                        233,340
$35,000,000                        350,000
$55,000,000                        466,000
$80,000,000                        584,000
</TABLE>

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

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

         We have also agreed to increase the size of our Board of Directors and
add CorRestore LLC's designee as a director. Joe B. Wolfe is CorRestore LLC's
designee and he has been added as a Class I director. We have also agreed to
cooperate with CorRestore LLC to establish a mutually acceptable medical
advisory board to provide us with information and advice regarding the
CorRestore System. The inventors and CorRestore LLC also agreed to specified
confidentiality, non-competition and non-solicitation provisions in the license
agreement and we agreed to specified confidentiality provisions in the license
agreement.

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

         -        In their sole discretion, within 120 days after we consummate
                  specified types of business combination transactions with
                  another entity and the holders of our common shares
                  immediately before the transaction hold less than 50% of the
                  surviving entity's or its ultimate parent's outstanding voting
                  securities immediately after the transaction, but only if (1)
                  the transaction is consummated before June 2, 2004, and (2)
                  the consideration received by our shareholders in the
                  transaction has a fair market value of less than $10.00 a
                  share.

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

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

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

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

                                       20

<PAGE>

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

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

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

         We may terminate the licenses as follows:

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

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

Competition

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

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

                                       21

<PAGE>

INSURANCE

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

EMPLOYEES

         As of January 28, 2004, we employed 27 full-time individuals, including
11 in sales and marketing, four in research and development, five in general and
administration and seven in manufacturing, quality and service. We also employed
one part-time individual, in general and administration. In addition, we use two
contract manufacturing employees, and we use two consultants. We believe that
our future success is dependent, in large part, on our ability to attract and
retain highly qualified managerial, marketing and technical personnel. We expect
to add additional sales and marketing employees in fiscal 2004. Our employees
are not represented by a union or subject to a collective bargaining agreement.
We believe that our relations with our current employees are good.

FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

         We are located in Troy, Michigan and have no other locations. Our
export sales were approximately $1,945,000 for the fiscal year ended November
30, 2003, $1,348,000 for the fiscal year ended November 30, 2002 and $1,595,000
for the fiscal year ended November 30, 2001, including approximately $1,166,000
in fiscal 2003, $820,000 in fiscal 2002 and $939,000 in fiscal 2001 to Tyco
Healthcare, our distributor in Europe and Canada, and approximately $616,000 in
fiscal 2003, $352,000 in fiscal 2002, and $369,000 in fiscal 2001 to Edwards
Lifesciences Ltd., our distributor in Japan. See Note 10 of Notes to Financial
Statements included in Item 8 of this Report.

WHERE YOU CAN GET INFORMATION WE FILE WITH THE SEC

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

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

                                       22

<PAGE>

ITEM 2. PROPERTIES

         We lease 23,392 square feet of office, manufacturing and warehouse
space in Troy, Michigan. Approximately 12,000 square feet is office space for
sales and marketing, engineering, accounting and other administrative
activities. The lease agreement was extended in January 2003, with the extension
commencing January 1, 2004 and expiring December 31, 2004. The minimum monthly
lease payment was approximately $16,200 for fiscal 2001, $16,500 for fiscal
2002, $16,800 for fiscal 2003, and is approximately $16,800 for fiscal 2004
excluding other occupancy costs. We believe that, depending on sales of the
Cerebral Oximeter and the CorRestore System, our current facility is more than
suitable and adequate for our current needs, including our assembly of the
Cerebral Oximeter, storing inventories of CorRestore System products and
conducting our operations in compliance with prescribed FDA QSR guidelines, and
will allow for substantial expansion of our business and number of employees.

ITEM 3. LEGAL PROCEEDINGS

         We are not a party to any pending legal proceedings.

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

         No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended November 30, 2003.

                                       23

<PAGE>

SUPPLEMENTAL ITEM.  EXECUTIVE OFFICERS OF THE REGISTRANT

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

<TABLE>
<CAPTION>
                                   Executive
                                    Officer
       Name                          Since        Age                    Position
       ----                          ------       --                     --------
<S>                                <C>            <C>    <C>
Bruce J. Barrett                      6/94         44    President and Chief Executive Officer
William M. Iacona                    12/00         33    Vice President, Finance, Controller, and Treasurer
Richard S. Scheuing                   1/98         48    Vice President, Research and Development
Dominic J. Spadafore                  8/02         44    Vice President, Sales and Marketing
Mary Ann Victor                       1/98         46    Vice President, Communications and Administration, and Secretary
Ronald A. Widman                      1/98         53    Vice President, Medical Affairs
Pamela A. Winters                     1/98         45    Vice President, Operations
</TABLE>

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

BIOGRAPHICAL INFORMATION

          Mr. Bruce J. Barrett has served as our President and Chief Executive
Officer and as one of our directors since June 1994. Mr. Barrett previously
served, from June 1993 until May 1994, as the Director, Hospital Products
Division for Abbott Laboratories, Ltd., a health care equipment manufacturer and
distributor, and from September 1989 until May 1993, as the Director, Sales and
Marketing for Abbott Critical Care Systems, a division of Abbott Laboratories,
Inc., a health care equipment manufacturer and distributor. While at Abbott
Critical Care Systems, Mr. Barrett managed Abbott's invasive oximetry products
for approximately four years. From September 1981 until June 1987, he served as
the group product manager of hemodynamic monitoring products of Baxter Edwards
Critical Care, an affiliate of Baxter International, Inc., another health care
equipment manufacturer and distributor. Mr. Barrett received a B.S. degree in
marketing from Indiana State University and an M.B.A. degree from Arizona State
University. Mr. Barrett is a party to an employment agreement with us that
requires us to elect him to the offices he currently holds.

          Mr. William M. Iacona has served as our Vice President, Finance since
December 2000, as our Treasurer since February 2000 and as our Controller since
April 1997. Before joining us, he was in the Finance Department of Ameritech
Advertising Services, a telephone directory company and a division of Ameritech
Corporation (now SBC Communications), from November 1994 until April 1997, and
was on the audit staff of Deloitte & Touche LLP, independent auditors, from
September 1992 until October 1994. He is a certified public accountant and
received a B.S. degree in accounting from the University of Detroit.

          Mr. Richard S. Scheuing has served as our Vice President, Research and
Development since January 1998. From March 1993 to January 1998, he served as
our Director of Research and Development. He joined us in 1991 as our Director
of Mechanical Engineering. He is an inventor on five of our issued patents.
Before joining us, he was Director of Mechanical Engineering for Irwin Magnetic
Systems, Inc. from 1987 until 1991 and was a Development Engineer with the Sarns
division of Minnesota Mining and Manufacturing Company, or 3M, from 1982 to
1987. He received a B.S. degree in mechanical engineering from the University of
Michigan.

                                       24

<PAGE>

         Mr. Dominic J. Spadafore has served as our Vice President, Sales and
Marketing since August 2002. Mr. Spadafore previously served, from July 2000
until July 2002, as National Sales and Clinical Director of the Cardiac Assist
Division of Datascope Corporation, a medical device company that manufactures
and markets healthcare products including medical devices used in high-risk
cardiac patients. In this position, Mr. Spadafore supervised approximately 50
sales and clinical personnel, and approximately $80 million in domestic
revenues. From July 1997 until July 2000 he served as Western Area Manager of
the Patient Monitoring Division of Datascope Corporation, and from January 1990
until July 1997 held field sales representative and regional manager positions
with progressive responsibilities with Datascope Corporation. From May 1983 to
January 1984 Mr. Spadafore was a sales representative with the Upjohn Company, a
pharmaceutical manufacturer, and from January 1984 until January 1990 was a
sales representative with White and White Incorporated, a medical supply
distributor. He received a BA degree in pre-medicine from Oakland University.
Mr. Spadafore is a party to an employment agreement with us that requires us to
elect him to the office he currently holds.

          Ms. Mary Ann Victor has served as our Vice President, Communications
and Administration and Secretary since January 1998. From July 1997 until
January 1998, she served as our Director, Communications and Administration and
was our consultant from September 1996 until July 1997. She also served as our
Director of Corporate Communications from July 1991 until February 1994. Prior
experience includes serving as Director of Investor Relations with the Taubman
Company from February to May 1994, legal assistant from June 1994 to November
1994 and then attorney from November 1994 to September 1995 with Varnum
Riddering Schmidt & Howlett, and Human Resources Consultant in the Actuarial
Benefits and Compensation Consulting Group of Deloitte & Touche LLP from
September 1995 to September 1996. Ms. Victor received a B.S. in political
science from the University of Michigan and a J.D. from the University of
Detroit.

          Mr. Ronald A. Widman has served as our Vice President, Medical Affairs
since January 1998. From August 1994 to January 1998, he served as our Director
of Medical Affairs. Before joining us as Marketing Manager in 1991, he was
employed by Mennen Medical, Inc., a manufacturer and marketer of medical
monitoring and diagnostic devices, for 12 years, where he held various positions
in domestic and international medical product marketing, including Senior
Product Manager from 1982 until 1991. He is the author of several papers and
articles related to medical care and monitoring devices.

          Ms. Pamela A. Winters has served as our Vice President, Operations
since January 1998. From February 1996 to January 1998, she served as our
Director of Operations. From May 1992 to February 1996, she served as our
Manager of Quality Assurance. From October 1991 to May 1992, Ms. Winters served
as our Quality Assurance Supervisor. Ms. Winters received a B.S. degree in
management from the University of Phoenix.

                                       25

<PAGE>

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

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

<TABLE>
<CAPTION>
                                                        HIGH         LOW
                                                        ----         ---
<S>                                                  <C>         <C>
Fiscal Year Ended November 30, 2002
  First Quarter..................................    $   4.95    $   3.65
  Second Quarter.................................        4.10        2.38
  Third Quarter..................................        2.84        1.40
  Fourth Quarter.................................        2.10        1.43

Fiscal Year Ended November 30, 2003
  First Quarter..................................    $   2.15    $   1.55
  Second Quarter ................................        3.48        1.54
  Third Quarter .................................        5.75        3.08
  Fourth Quarter ................................        9.17        5.70
</TABLE>

    As of January 28, 2004, we had 590 shareholders of record.

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

                                       26

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

    The following selected financial data as of November 30, 2003, 2002, 2001,
2000 and 1999, and for each of the years in the five-year period ended November
30, 2003 have been derived from our audited financial statements, some of which
appear in Item 8 of this Report. In fiscal 2002 we began selling the CorRestore
System in the United States, and in fiscal 2003 we began selling the CorRestore
System in Europe. See Item 1. "Business - The CorRestore System."

    This selected financial data might not be a good indicator of our expected
results for fiscal 2004. You should read the selected financial data together
with the Financial Statements and Notes to Financial Statements included in Item
8 of this Report and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Item 7 of this Report.

<TABLE>
<CAPTION>
                                                                                FISCAL YEAR ENDED NOVEMBER 30,
                                                           ----------------------------------------------------------------------
                                                            2003           2002            2001            2000            1999
                                                           -------         ----            ----            ----            ----
                                                                           (in thousands, except per share data)
<S>                                                        <C>            <C>             <C>             <C>             <C>
STATEMENT OF OPERATIONS DATA:
Net revenues (1) ......................................    $ 9,361        $ 6,706         $ 5,656         $ 5,103         $ 4,001
Cost of sales .........................................      2,140          2,049           2,094           2,370           1,906
Gross margin ..........................................      7,221          4,657           3,561           2,733           2,095
Research, development and engineering expenses ........        413            571             778             514             598
Selling, general, and administrative expenses .........      6,759          5,344           5,133           5,722           6,436
Net income (loss) .....................................         73         (1,207)         (2,331)         (3,622)         (4,665)
Net income (loss) per common share - basic
      and diluted (2) .................................        .01           (.13)           (.31)           (.57)           (.77)
Weighted average number of common shares
     outstanding - basic (2) ..........................      9,114          8,951           7,606           6,310           6,036
Weighted average number of common shares
     outstanding - diluted (2) ........................      9,467          8,951           7,606           6,310           6,036
</TABLE>

<TABLE>
<CAPTION>
                                                                          AT NOVEMBER 30,
                                                  ----------------------------------------------------------------
                                                    2003          2002          2001          2000         1999
                                                    ----          ----          ----          ----         ----
                                                                           (in thousands)
<S>                                               <C>           <C>           <C>           <C>           <C>
BALANCE SHEET DATA:
Cash and marketable securities ..............     $  2,239      $  2,382      $    168      $    122      $  2,257
Working capital .............................        4,480         4,047         1,724         1,393         2,960
Total assets ................................        7,156         6,164         3,587         3,659         4,444
Total liabilities ...........................          991           664           575           776           762
Accumulated deficit .........................      (53,589)      (53,661)      (52,455)      (50,124)      (46,502)
Shareholders' equity (3) ....................        6,165         5,501         3,013         2,883         3,682
</TABLE>

(1)  Net revenues recorded in fiscal years 2001, 2000, and 1999 relate primarily
     to the sale of Cerebral Oximeters and SomaSensors for commercial use.
     Fiscal years 2003 and 2002 net revenues include sales of CorRestore
     Systems.

(2)  See Note 4 of Notes to Financial Statements included in Item 8 of this
     Report for information with respect to the calculation of per share data.

(3)  See Statements of Shareholders' Equity of the Financial Statements included
     in Item 8 of this Report for an analysis of common share transactions for
     the period from December 1, 2000 through November 30, 2003.

                                       27

<PAGE>

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

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

         Our actual results might differ materially from those projected in the
forward-looking statements depending on various important factors. These
important factors include our history of losses, our current dependence on the
Cerebral Oximeter and SomaSensor, the challenges associated with developing new
products, the uncertainty of acceptance of our products by the medical
community, the lengthy sales cycle for our products, competition in our markets,
our dependence on our distributors, and the other factors discussed under the
caption "Risk Factors" and elsewhere in our Registration Statement on Form S-1
(file no. 333-74788) effective January 11, 2002 and elsewhere in this report,
all of which constitute cautionary statements identifying important factors with
respect to the forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements.

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

RESULTS OF OPERATIONS

Overview

         We develop, manufacture and market the INVOS Cerebral Oximeter, the
only non-invasive patient monitoring system commercially available in the United
States that continuously measures changes in the blood oxygen level in the
brain. We also develop and market the CorRestore System for use in cardiac
repair and reconstruction, including heart surgeries called surgical ventricular
restoration, or SVR. In June 2000, we entered into a license agreement for the
CorRestore System. In November 2001 we received clearance from the FDA to market
the CorRestore patch in the United States, and in April 2003 we met the
requirements under the European Medical Device Directive to use the CE Mark,
thereby allowing us to market the product in the European Economic Community.

         During fiscal 2001, our primary activities consisted of sales and
marketing of the Cerebral Oximeter and related disposable SomaSensor. During
fiscal 2002 and 2003, our primary activities consisted of sales and marketing of
the Cerebral Oximeter, the related disposable SomaSensor, and the CorRestore
System.

         We derive our revenues from sales of Cerebral Oximeters, SomaSensors
and CorRestore Systems to our distributors and to hospitals in the United States
through our direct sales employees and independent sales representative firms.
We offer to our customers in the United States a no-cap sales program whereby we
ship the Cerebral Oximeter to the customer at no charge, in exchange for the
customer agreeing to purchase at a premium a minimum monthly quantity of
SomaSensors. We recognize revenue when there is persuasive evidence of an
arrangement with the customer, the product

                                       28

<PAGE>

has been delivered, the sales price is fixed or determinable, and collectibility
is reasonably assured. The product is considered delivered to the customer once
we have shipped it, as this is when title and risk of loss have transferred.
Payment terms are generally net 30 days for United States sales and net 60 days
or longer for international sales. Our primary expenses, excluding the cost of
our products, are selling, general and administrative and research, development
and engineering.

         As described in more detail below, we achieved our first year of
profitability in fiscal 2003, with net income of $.01 per common share. Our net
income was primarily a result of a 40% increase in net revenues, an 8% increase
in gross margin percentage, and the control of our operating expenses. We have
projected an increase in net revenues for fiscal 2004 of approximately 30% to
40%, and have projected net income per basic common share of approximately $.12
to $.15. We also expect our gross margin percentage to increase in fiscal 2004.

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

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

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

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

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

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

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

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

         Effective September 1, 2003, we increased the suggested list price for
the adult SomaSensor and the pediatric SomaSensor in the United States to
$110.00 and $140.00, respectively. In addition, we

                                       29
<PAGE>

launched our new small adult SomaSensor, designed for use on patients with
smaller foreheads or lower hairlines, with a suggested list price of $125.00.

         Although these prices may not apply to existing customers or to any
existing sales quotations issued before September 1, 2003, we expect that the
average selling price of SomaSensors in the United States will increase by
approximately 15% in fiscal 2004, primarily as a result of

                  -        the addition of new customers at our suggested retail
                           prices,

                  -        the preference of larger U.S. hospitals to acquire
                           the Cerebral Oximeter using our no-cap sales program
                           and, thereby, pay a premium price for the disposable
                           SomaSensor,

                  -        increased sales of our pediatric SomaSensor, which
                           has a higher retail price than our adult SomaSensor,
                           and

                  -        increased sales of our new small adult SomaSensor.

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

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

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

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

                  -        increased sales of the CorRestore system in fiscal
                           2003.

We expect gross margins to increase in fiscal 2004 primarily as a result of
increased average selling prices of the SomaSensor in the United States and
expected reduced costs of manufacturing the SomaSensor.

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

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

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

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

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

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

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

                                       30

<PAGE>

We expect our selling, general and administrative expenses to increase in fiscal
2004 as a result of marketing and selling the Cerebral Oximeter and the
CorRestore System.

Fiscal Year Ended November 30, 2002 Compared to Fiscal Year Ended November 30,
2001

         Our net revenues increased approximately $1,050,000, or 19%, from
$5,655,532 in the fiscal year ended November 30, 2001 to $6,705,647 in the
fiscal year ended November 30, 2002. The increase in net revenues is primarily
attributable to

         -        an increase in United States sales of approximately
                  $1,296,000, or 32%, from approximately $4,061,000 in fiscal
                  2001 to approximately $5,357,000 in fiscal 2002, primarily due
                  to a 45% increase in sales of the disposable SomaSensor, and
                  approximately $268,000 in CorRestore System revenues in fiscal
                  2002, partially offset by a 33% decrease in sales of the
                  Cerebral Oximeter primarily as a result of approximately
                  $210,000 in stocking orders to independent representatives in
                  fiscal 2001, and also partly as a result of a preference by
                  larger U.S. hospitals to acquire Cerebral Oximeters using our
                  no-cap sales program, and

         -        a 10% increase in the average selling price of SomaSensors
                  primarily as a result of the 25% increase from the prior year
                  in the suggested retail price of the SomaSensor effective
                  September 1, 2001, and a change in the sales mix between sales
                  in the United States, which have higher average selling
                  prices, and sales to international distributors.

The increase in net revenues was achieved despite a decrease in international
sales of approximately $246,000, or 15%, from approximately $1,595,000 in fiscal
2001 to approximately $1,348,000 in fiscal 2002. This decrease is primarily
attributable to decreased purchases by Tyco Healthcare in fiscal 2002.

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

<TABLE>
<CAPTION>
                                                       PERCENT OF NET REVENUE
                                                   FISCAL YEAR ENDED NOVEMBER 30,
PRODUCT                                           2002                       2001
-------                                           ----                       ----
<S>                                               <C>                        <C>
SomaSensors........................                72%                        60%
Cerebral Oximeters.................                24%                        40%
CorRestore Systems.................                 4%                         0%
                                                  ---                        ---
    Total..........................               100%                       100%
                                                  ===                        ===
</TABLE>

Approximately 20% of our net revenues in fiscal 2002 were export sales, compared
to approximately 28% of our net revenues in fiscal 2001. One international
distributor accounted for approximately 12% of net revenues for the fiscal year
ended November 30, 2002, and approximately 17% of net revenues for the fiscal
year ended November 30, 2001.

         Effective December 1, 2002, we increased the suggested list price for
the adult SomaSensor and the pediatric SomaSensor in the United States to $95.00
and $125.00, respectively.

         Gross margin as a percentage of net revenues was approximately 69% for
the fiscal year ended November 30, 2002 and approximately 63% for the fiscal
year ended November 30, 2001. The increase in gross margin as a percentage of
net revenues is primarily attributable to

                  -        a 10% increase in the average selling price of
                           SomaSensors, described above,

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

                                       31

<PAGE>

                  -        sales of the CorRestore system in fiscal 2002, and

                  -        a change in sales mix with increased sales in the
                           United States and decreased sales to international
                           distributors which have lower average selling prices.

         Our research, development and engineering expenses decreased
approximately $207,000, or 27%, from $777,974 in fiscal 2001 to $571,126 in
fiscal 2002. The decrease is primarily attributable to approximately $222,000 in
decreased costs associated with the development of the CorRestore System and a
$35,000 decrease in engineering salaries as a result of one less engineer,
partially offset by approximately $64,000 in increased costs associated with the
development of our next generation Cerebral Oximeter.

         Selling, general and administrative expenses increased approximately
$210,000, or 4%, from $5,133,473 for the fiscal year ended November 30, 2001 to
$5,343,513 for the fiscal year ended November 30, 2002. The increase in selling,
general and administrative expense is primarily attributable to

         -        a $248,000 increase in commissions paid to our independent
                  sales representative firms,

         -        $234,000 in customer education expenses for the CorRestore
                  System in fiscal 2002,

         -        a $141,000 increase in trade show expenditures for the
                  Cerebral Oximeter and CorRestore System as a result of our
                  increased sales and marketing activities,

         -        a $74,000 increase in insurance expense, primarily due to
                  increased products liability insurance coverage since we began
                  marketing the CorRestore System, and

         -        a $73,000 increase in professional service fees, primarily due
                  to the timing of auditing and tax service expenses.

These increases were partially offset by

         -        a $219,000 decrease in intangible amortization expense as a
                  result of discontinued amortization of license acquisition
                  costs in connection with our adoption of Statement of
                  Financial Accounting Standards No. 142, "Goodwill and Other
                  Intangible Assets,"

         -        a $200,000 termination fee paid in fiscal 2001 related to the
                  Kingsbridge Capital Limited Private Equity Line,

         -        a $129,000 decrease in salaries, wages, commissions and
                  related expenses, primarily as a result of a reduction in the
                  number of employees, principally sales and marketing (from an
                  average of 31 employees for the fiscal year ended November 30,
                  2001 to an average of 28 employees for the fiscal year ended
                  November 30, 2002) and reduced employee sales commissions, and

         -        $45,000 paid in fiscal 2001 in connection with the Loan and
                  Security Agreement with Crestmark Bank.

Effects of Inflation

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

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operations during fiscal 2003 was approximately $260,000. Cash
was used primarily to

         -        increase accounts receivable by approximately $791,000,
                  primarily as a result of higher fourth quarter 2003 sales than
                  fourth quarter 2002 sales, and

                                       32

<PAGE>

         -        increase inventory by approximately $86,000, primarily due to
                  the acquisition of components associated with our SomaSensor
                  and Cerebral Oximeter due to anticipated sales, partially
                  offset by a reduction in CorRestore inventory.

These uses of cash were partially offset by

         -        our net income, approximately $308,000 before depreciation and
                  amortization expense,

         -        a $170,000 increase in accounts payable, primarily due to
                  increased inventories and the increased sales commissions
                  payable to our independent sales representative firms
                  described above, and

         -        a $157,000 increase in accrued liabilities, primarily as a
                  result of the increased accrued incentive compensation
                  described above and increased sales commissions to our direct
                  sales employees as a result of higher sales, partially offset
                  by a reduction in accrued training and clinical research
                  expenses from 2002.

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

         We capitalized approximately $371,000 of costs for Cerebral Oximeters
being used as demonstration units and no-cap units during fiscal 2003, compared
to approximately $239,000 in fiscal 2002. As of November 30, 2003, we have
capitalized approximately $1,309,000 in costs for Cerebral Oximeters being used
as demonstration and no-cap units, and these assets have a net book value of
approximately $530,000. We depreciate these costs over five years.

Capital expenditures in fiscal 2003 were approximately $421,000. These
expenditures were primarily

         -        approximately $371,000 for Cerebral Oximeters being used as
                  demonstration units and no-cap units, and

         -        approximately $33,000 in tooling costs, primarily for the
                  SomaSensor.

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

         On March 6, 2000, we entered into the Private Equity Line Agreement
with Kingsbridge Capital Limited, a private institutional investor. We completed
the sales of 714,484 common shares under the Private Equity Line Agreement, for
gross proceeds of $2,000,000 through December 4, 2000. Our net proceeds, after
deducting the commissions and the estimated expenses of the offerings, were
approximately $1,793,000. On April 10, 2001, we mutually agreed with Kingsbridge
to terminate the Private Equity Line Agreement, the related Registration Rights
Agreement, and Kingsbridge's right to the discount on any unsold shares, in
exchange for our payment of $200,000 to Kingsbridge.

         In connection with the Private Equity Line Agreement, we issued to
Kingsbridge Capital warrants which entitled the holder to purchase 205,097
common shares, after adjustment for the April 2001 private placement and the
January 2002 public offering, at a purchase price of $4.25 per share. The
warrants are exercisable at any time until September 3, 2005. The warrants
contain standard provisions that protect the holder against dilution by
adjustment of the exercise price and the number of shares issuable pursuant to
the warrants if various events occur. The exercise price of the warrants is
payable either in cash or by a cashless exercise. In November 2003, Kingsbridge
purchased 100,000 common shares under the warrants by a cashless exercise. As a
result of this cashless exercise, we issued 53,603 common shares to

                                       33

<PAGE>

Kingsbridge, retaining 46,397 common shares in payment of the exercise price,
and Kingsbridge's warrants now entitle it to purchase 105,097 more common
shares.

         On February 13, 2001, we entered into a Loan and Security Agreement
with Crestmark Bank for a working capital line of credit for up to $750,000,
collateralized by all of our assets. We paid a $45,000 commitment fee for the
loan. As of April 24, 2003, we amended our Loan and Security Agreement with
Crestmark Bank. Pursuant to the amendment, we paid a $5,000 renewal commitment
fee to continue our lending relationship for the remainder of 2003. Through
November 30, 2003, we had borrowed an aggregate of $1,295,050 under the
agreement and repaid $1,295,050 in principal amount through Crestmark's
collection of our receivables and by using some of the proceeds from our April
9, 2001 and January 16, 2002 offerings. No amounts were borrowed under this
facility in fiscal 2003. Effective December 31, 2003, our Loan and Security
Agreement with Crestmark Bank expired. We do not intend to renew this lending
agreement.

         On April 9, 2001, we completed the private placement of 1,325,000
newly-issued common shares at a price of $1.75 per share, for gross proceeds of
$2,318,750. Our estimated net proceeds, after deducting the placement agent's
commission and the expenses of the offering, were approximately $2,152,000.
Brean Murray & Co., Inc. was our exclusive placement agent for the offering and
received for its services (1) $104,363 as a placement agent fee, and (2)
warrants to purchase 25,000 common shares at $2.10 per share exercisable during
the four-year period beginning April 9, 2002, with the exercise price of the
warrants payable either in cash or by a cashless exercise. In addition, the
Brean Murray & Co., Inc. Profit Sharing Plan purchased 32,285 common shares in
the offering, and Robert R. Henry, one of our directors, purchased 100,000
common shares in the offering. In October 2003, Brean Murray & Co., Inc.
transferred the 25,000 warrants to persons who are or were employees of Brean
Murray & Co., Inc., and in November 2003, those persons exercised the warrants
to purchase all 25,000 common shares under the warrants by a cashless exercise.
As a result of this cashless exercise, we issued 18,832 restricted common shares
to those individuals, retaining 6,168 common shares in payment of the exercise
price, and no more common shares remain subject to these warrants.

         On January 16, 2002, we completed the public offering of 1,000,000
newly-issued common shares at a price of $4.25 per share, for gross proceeds of
$4,250,000. Our estimated net proceeds, after deducting the placement agent's
commission and the estimated expenses of the offering, were approximately
$3,680,000. Brean Murray & Co., Inc. was our exclusive placement agent for the
offering and received for its services (1) $340,000 as a placement agent fee,
and (2) warrants to purchase 100,000 common shares at $5.10 per share
exercisable during the four-year period beginning January 11, 2003.

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

         As of November 30, 2003, we had working capital of $4,480,492, cash and
cash equivalents of $2,239,192, total current liabilities of $990,779 and
shareholders' equity of $6,165,068. We had an accumulated deficit of $53,588,723
through November 30, 2003.

         We expect that our primary needs for liquidity in fiscal 2004 will be

         -        to fund our operations, including funding for

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

                  -        research and development efforts related to the
                           advancement of the design and production processes of
                           the Cerebral Oximeter and SomaSensor, and

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

                                       34

<PAGE>

In addition, we have budgeted approximately $300,000 for capital expenditures
during fiscal 2004, primarily for new demonstration and no-cap equipment.

         We believe that the cash and cash equivalents on hand at November 30,
2003 will be adequate to satisfy our operating and capital requirements for more
than the next twelve months.

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

         Our ability to use our accumulated net operating loss carryforwards to
offset future income, if any, for income tax purposes, is limited due to the
initial public offering of our securities in March 1991. See Note 6 of Notes to
Financial Statements included in Item 8 of this Report.

NEW ACCOUNTING PRONOUNCEMENTS

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

         During the first quarter of fiscal 2003, we adopted Financial
Accounting Standards Board Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." The adoption of this interpretation had no impact on
our financial statements.

         During the fourth quarter of fiscal 2003, we adopted Emerging Issues
Task Force Issue 00-21, "Revenue Arrangements with Multiple Deliverables." The
adoption of EITF 00-21 had no impact on our financial statements.

CRITICAL ACCOUNTING POLICIES

         We believe our most significant accounting policies relate to the
recording of an intangible asset for license acquisition costs related to our
acquisition of exclusive, worldwide, royalty-bearing licenses to specified
rights relating to the CorRestore System and related products and accessories,
and our accounting treatment of stock options issued to employees.

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

                                       35

<PAGE>

with negotiating and assisting us in completing the transaction, and our
estimate of the fair value of the vested portion of five-year warrants to
purchase common shares issued in the transaction.

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

         In addition, effective December 1, 2001, we adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
The effect of adopting this Statement has been to discontinue amortizing our
license acquisition costs related to our acquisition of exclusive, worldwide,
royalty-bearing licenses to specified rights relating to the CorRestore System
and related products and accessories described above because we believe these
licenses have an indefinite life. Therefore, we recorded no amortization expense
related to these license acquisition costs in fiscal 2003 or 2002. For fiscal
2001, we incurred amortization expense of approximately $219,000 associated with
these license acquisition costs. Our net loss for fiscal 2001, excluding the
effect of amortizing our license acquisition costs, would have been reduced to
approximately $2,112,000, or $(.28) per common share. It is possible to
determine a different life for these licenses, and if they had a definite life
we would amortize the intangible asset over the remaining useful life. However,
we believe it is appropriate to use an indefinite life for these licenses.

         In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," was issued by the Financial
Accounting Standards Board. In addition, as described above, in December 2002,
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," was issued by the Financial
Accounting Standards Board, and amends Statement No. 123. We have chosen to
continue to account for stock-based compensation of employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation costs for stock options granted to employees are
measured as the excess, if any, of the market price of our stock at the date of
the grant over the amount an employee must pay to acquire the stock. No
compensation expense has been charged against income for stock option grants to
employees because our stock option grants are priced at the market value as of
the date of grant. During fiscal 2003, we granted 471,000 stock options to our
employees and directors, in fiscal 2002 we granted 509,500 stock options to our
employees and directors, and in fiscal 2001 we granted 529,800 stock options to
our employees and directors.

         Had we recognized compensation expense for our stock options granted to
employees in fiscal 2003, based on the fair value of the options on the grant
date pursuant to the methodology of SFAS No. 123, we would have recorded
approximately $962,000 in compensation expense and incurred a pro forma net loss
of approximately $889,000, or $.09 per fully diluted common share. Had we
recognized compensation expense for stock options granted to employees in fiscal
2002 and 2001, our net loss, on a pro forma basis, would have

         -        increased by approximately $760,000, or $.08 per common share,
                  in fiscal 2002, and

         -        increased by approximately $606,000, or $.08 per common share,
                  in fiscal 2001.

                                       36

<PAGE>

CONTRACTUAL OBLIGATIONS

         The following information is provided as of November 30, 2003 with
respect to our known contractual obligations specified in the following table,
aggregated by type of contractual obligation:

<TABLE>
<CAPTION>
                                                                                       Payments due by period
                                                            ----------------------------------------------------------------------
                                                                              Less                                        More
                                                                             than 1           1-3           3-5           than 5
           Contractual Obligations                             Total          year           years         years          years
           -----------------------                             -----          ----           -----         -----          -----
<S>                                                         <C>            <C>            <C>            <C>            <C>
Long-term debt obligations ............................     $        0     $        0     $        0     $        0     $        0
----------------------------------------------------------------------------------------------------------------------------------
Capital lease obligations .............................     $        0     $        0     $        0     $        0     $        0
----------------------------------------------------------------------------------------------------------------------------------
Operating lease obligations ...........................     $  218,500     $  201,700     $   16,800     $        0     $        0
----------------------------------------------------------------------------------------------------------------------------------
Purchase obligations ..................................     $1,854,300     $1,854,300     $        0     $        0     $        0
----------------------------------------------------------------------------------------------------------------------------------
Other long-term liabilities ...........................     $        0     $        0     $        0     $        0     $        0
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

                                       37

<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable.

                                       38

<PAGE>

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Independent Auditors' Report

Board of Directors and Shareholders of
Somanetics Corporation
Troy, Michigan

We have audited the accompanying balance sheets of Somanetics Corporation (the
"Company") as of November 30, 2003 and 2002, and the related statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended November 30, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at November 30, 2003 and 2002,
and the results of its operations and its cash flows for each of the three years
in the period ended November 30, 2003 in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note 3 to the financial statements, the Company changed its
method of accounting for intangible assets in fiscal 2002.

/s/ DELOITTE & TOUCHE LLP
-------------------------

Detroit, Michigan
January 12, 2004

                                       39

<PAGE>

                             SOMANETICS CORPORATION

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                             November 30,
                                                                                  ------------------------------
                                                                                       2003            2002
                                                                                       ----            ----
<S>                                                                               <C>               <C>
ASSETS
CURRENT ASSETS:
    Cash and cash equivalents (Note 3) ......................................     $  2,239,192      $  2,381,808
    Accounts receivable .....................................................        2,018,615         1,227,785
    Inventory (Note 3) ......................................................        1,090,261         1,004,305
    Prepaid expenses ........................................................          123,203            96,308
                                                                                  ------------      ------------
        Total current assets ................................................        5,471,271         4,710,206
                                                                                  ------------      ------------
PROPERTY AND EQUIPMENT: (Note 3)
    Machinery and equipment .................................................        2,071,758         1,861,679
    Furniture and fixtures ..................................................          248,657           241,295
    Leasehold improvements ..................................................          171,882           171,882
                                                                                  ------------      ------------
        Total ...............................................................        2,492,297         2,274,856
    Less accumulated depreciation and amortization ..........................       (1,782,559)       (1,757,781)
                                                                                  ------------      ------------
        Net property and equipment ..........................................          709,738           517,075
                                                                                  ------------      ------------
OTHER ASSETS:
    Intangible assets, net (Note 3) .........................................          959,838           921,957
    Other ...................................................................           15,000            15,000
                                                                                  ------------      ------------
        Total other assets ..................................................          974,838           936,957
                                                                                  ------------      ------------
TOTAL ASSETS ................................................................     $  7,155,847      $  6,164,238
                                                                                  ============      ============

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
    Accounts payable ........................................................     $    641,232      $    470,880
    Accrued liabilities (Notes 5 and 7) .....................................          349,547           192,766
                                                                                  ------------      ------------
        Total current liabilities ...........................................          990,779           663,646
                                                                                  ------------      ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY: (Note 4)
    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, 9,298,669 shares at November 30, 2003,
        and 9,077,863 shares at November 30, 2002 ...........................           92,987            90,779
    Additional paid-in capital ..............................................       59,660,804        59,071,122
    Accumulated deficit .....................................................      (53,588,723)      (53,661,309)
                                                                                  ------------      ------------
        Total shareholders' equity ..........................................        6,165,068         5,500,592
                                                                                  ------------      ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................................     $  7,155,847      $  6,164,238
                                                                                  ============      ============
</TABLE>

                        See notes to financial statements

                                       40

<PAGE>

                             SOMANETICS CORPORATION

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                   For the Years Ended November 30,
                                                            --------------------------------------------
                                                               2003            2002              2001
                                                               ----            ----              ----
<S>                                                         <C>             <C>              <C>
NET REVENUES (Notes 3 and 10) .........................     $ 9,360,893     $ 6,705,647      $ 5,655,532
COST OF SALES .........................................       2,139,827       2,048,758        2,094,472
                                                            -----------     -----------      -----------
    Gross margin ......................................       7,221,066       4,656,889        3,561,060
                                                            -----------     -----------      -----------

OPERATING EXPENSES:
    Research, development and engineering
        (Note 3) ......................................         412,953         571,126          777,974
    Selling, general and administrative
        (Note 9) ......................................       6,758,637       5,343,513        5,133,473
                                                            -----------     -----------      -----------
        Total operating expenses ......................       7,171,590       5,914,639        5,911,447
                                                            -----------     -----------      -----------

OPERATING INCOME (LOSS) ...............................          49,476      (1,257,750)      (2,350,387)
                                                            -----------     -----------      -----------

OTHER INCOME (EXPENSE):
    Interest income ...................................          23,110          51,892           22,177
    Interest expense and other ........................              --            (794)          (2,701)
                                                            -----------     -----------      -----------
        Total other income (expense) ..................          23,110          51,098           19,476
                                                            -----------     -----------      -----------
NET INCOME (LOSS) .....................................     $    72,586     $(1,206,652)     $(2,330,911)
                                                            ===========     ===========      ===========

NET INCOME (LOSS) PER COMMON
    SHARE -BASIC AND DILUTED (Note 3) .................     $       .01     $      (.13)     $      (.31)
                                                            ===========     ===========      ===========
WEIGHTED AVERAGE NUMBER OF
    COMMON SHARES OUTSTANDING --
    BASIC (Note 3) ....................................       9,113,854       8,951,266        7,605,865
                                                            ===========     ===========      ===========
WEIGHTED AVERAGE NUMBER OF
    COMMON SHARES OUTSTANDING --
    DILUTED (Note 3) ..................................       9,466,838       8,951,266        7,605,865
                                                            ===========     ===========      ===========
</TABLE>

                        See notes to financial statements

                                       41

<PAGE>

                             SOMANETICS CORPORATION

                       STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                  ADDITIONAL                          TOTAL
                                                      SHARE        PAID-IN      ACCUMULATED        SHAREHOLDERS'    COMPREHENSIVE
                                                      VALUE        CAPITAL        DEFICIT             EQUITY         INCOME (LOSS)
                                                  ------------   ------------   ------------      --------------    --------------
<S>                                               <C>            <C>            <C>               <C>               <C>
Balance at December 1, 2000 ...................   $     66,371   $ 52,940,540   $(50,123,746)     $    2,883,165

For cash, less issuance costs of $13,000 ......          1,130        185,870                            187,000
For cash, less issuance costs of $166,488 .....         13,250      2,138,587                          2,151,837
Warrants issued to acquire license ............                       116,472                            116,472
Stock options issued to consultant ............                         4,984                              4,984
Net loss and comprehensive loss ...............                                   (2,330,911)         (2,330,911)    $ (2,330,911)
                                                  ------------   ------------   ------------      --------------     ============
Balance at November 30, 2001 ..................   $     80,751   $ 55,386,453   $(52,454,657)     $    3,012,547

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

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

                        See notes to financial statements

                                       42

<PAGE>

                             SOMANETICS CORPORATION

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                        For the Years Ended November 30,
                                                                                ----------------------------------------------
                                                                                   2003             2002              2001
                                                                                   ----             ----              ----
<S>                                                                             <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss) ......................................................     $    72,586      $(1,206,652)     $(2,330,911)
   Adjustments to reconcile net income (loss) to net
          cash used in operations:
       Depreciation and amortization ......................................         235,537          225,898          497,640
       Compensation expense for non-employee stock options ................           8,471            5,597            4,984
       Changes in assets and liabilities:
          Accounts receivable (increase) decrease .........................        (790,830)          35,254           86,687
          Inventory (increase) ............................................         (85,956)        (210,548)        (179,827)
          Prepaid expenses (increase) decrease ............................         (26,895)         (22,053)           8,845
          Other assets (increase) decrease ................................              --           12,078          (12,078)
          Accounts payable increase (decrease) ............................         170,352          (11,257)         (26,510)
          Accrued liabilities increase (decrease) .........................         156,781          100,337         (174,755)
                                                                                -----------      -----------      -----------
       Net cash (used in) operating activities ............................        (259,954)      (1,071,346)      (2,125,925)
                                                                                -----------      -----------      -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition of property and equipment (net) ............................        (421,288)        (403,820)        (167,338)
                                                                                -----------      -----------      -----------
       Net cash (used in) investing activities ............................        (421,288)        (403,820)        (167,338)
                                                                                -----------      -----------      -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of Common Shares ................................         538,626        3,689,101        2,338,837
                                                                                -----------      -----------      -----------
       Net cash provided by financing activities ..........................         538,626        3,689,101        2,338,837
                                                                                -----------      -----------      -----------

NET INCREASE (DECREASE) IN CASH AND
   CASH EQUIVALENTS .......................................................        (142,616)       2,213,935           45,574

CASH AND CASH EQUIVALENTS,
   BEGINNING OF PERIOD ....................................................       2,381,808          167,873          122,299
                                                                                -----------      -----------      -----------

CASH AND CASH EQUIVALENTS,
   END OF PERIOD ..........................................................     $ 2,239,192      $ 2,381,808      $   167,873
                                                                                ===========      ===========      ===========

Supplemental Disclosure of Non cash investing activities:
   Issuance of warrants and stock options in connection
       with license acquisition (Note 3) ..................................     $    44,793               --      $   116,472
</TABLE>

                        See notes to financial statements

                                       43

<PAGE>

                             SOMANETICS CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

1.       ORGANIZATION AND OPERATIONS

         We are a Michigan corporation that was formed in 1982. We develop,
manufacture and market the INVOS(R) Cerebral Oximeter, the only non-invasive
patient monitoring system commercially available in the United States that
continuously measures changes in the blood oxygen level in the brain. The
principal markets for our products are the United States, Europe, and Japan. The
Cerebral Oximeter is based on our proprietary In Vivo Optical Spectroscopy, or
INVOS, technology. INVOS analyzes various characteristics of human blood and
tissue by measuring and analyzing low-intensity visible and near-infrared light
transmitted into portions of the body.

         We also develop and market the CorRestore(TM) System for use in cardiac
repair and reconstruction, including heart surgeries called surgical ventricular
restoration, or SVR. We entered into a License Agreement as of June 2, 2000 with
the inventors and their company, CorRestore LLC. The license grants us
exclusive, worldwide, royalty-bearing licenses to specified rights relating to
the CorRestore System and related products and accessories for SVR, subject to
the terms and conditions of the license agreement (Note 3). In November 2001 we
received clearance from the FDA to market the CorRestore patch in the United
States. In April 2003, we met the requirements to use the CE Mark for the
CorRestore patch, which allows us to market the CorRestore System in the
European Economic Community.

2.       FINANCIAL STATEMENT PRESENTATION

         We have incurred an accumulated deficit of $53,588,723 through November
30, 2003. We had working capital of $4,480,492, cash and cash equivalents of
$2,239,192, total current liabilities of $990,779 and shareholders' equity of
$6,165,068, as of November 30, 2003.

         On June 6, 1996, we received clearance from the FDA to market our model
3100A Cerebral Oximeter in the United States, and on October 13, 1997, we
received clearance from the FDA to market enhancements to our Cerebral Oximeter
in the United States. On September 15, 2000, we received FDA clearance to market
our model 5100 Cerebral Oximeter in the United States. The model 5100 has the
added capability of being able to monitor pediatric patients. In November 2001,
we received clearance from the FDA to market the CorRestore patch in the United
States, and in April 2003, we met the requirements to use the CE Mark for the
CorRestore patch, which allows us to market the CorRestore System in the
European Economic Community. Our current financial condition and results of
operations and the status of our product marketing efforts and sales have been
affected by the process of obtaining such clearances.

         We have three international distributors for the Cerebral Oximeter, two
international distributors for the CorRestore System, seven direct sales
personnel, two clinical specialists, one international sales consultant, and 12
independent sales representative firms. During fiscal 2003, we devoted most of
our marketing to continuing to introduce cerebral oximetry patient monitoring
and the CorRestore System into the operating rooms of hospitals. There can be no
assurance that we will be successful in marketing the Cerebral Oximeter, the
related SomaSensor, and the CorRestore System.

         We believe that markets exist for the products we have developed and
are developing; however, whether our products will be successful is uncertain.
The following factors could impact the likelihood of our success: our limited
resources and current financial condition, the problems and expenses frequently
encountered by companies forming a new business, our ability to develop, apply
and market new technology, and our industry and competitive environment.

                                       44

<PAGE>

                             SOMANETICS CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

         We believe that the cash and cash equivalents on hand at November 30,
2003 will be adequate to satisfy our operating and capital requirements for more
than the next twelve months.

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

3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

<TABLE>
<CAPTION>
                                                                   NOVEMBER 30,
                                                            -------------------------
                                                               2003            2002
                                                               ----            ----
<S>                                                         <C>            <C>
Finished goods ........................................     $  354,024     $  410,133
Work in process .......................................        173,193        154,816
Purchased components ..................................        563,044        439,356
                                                            ----------     ----------
       Total ..........................................     $1,090,261     $1,004,305
                                                            ==========     ==========
</TABLE>

         Property and Equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets, which range from two to five years. We offer to our
United States customers a no-cap sales program whereby we ship the Cerebral
Oximeter to the customer at no charge, in exchange for the customer agreeing to
purchase at a premium a minimum monthly quantity of SomaSensors. The Cerebral
Oximeters that are shipped to our customers are classified as property and
equipment and are depreciated over five years. As of November 30, 2003, we have
capitalized approximately $1,309,000 in costs for Cerebral Oximeters being used
as demonstration and no-cap units, and these assets had a net book value of
approximately $530,000. As of November 30, 2002, we have capitalized
approximately $948,000 in costs for Cerebral Oximeters being used as
demonstration and no-cap units, and these assets had a net book value of
approximately $296,000. Property and equipment are reviewed for impairment
whenever events or changes in circumstances indicate that the net book value of
the asset may not be recovered.

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

<TABLE>
<CAPTION>
                                                                  NOVEMBER 30,
                                                            ------------------------
                                                              2003            2002
                                                              ----            ----
<S>                                                         <C>            <C>
Patents and trademarks ................................     $ 111,733      $ 111,733
Less: accumulated amortization ........................       (80,988)       (74,076)
                                                            ---------      ---------
       Total ..........................................     $  30,745      $  37,657
                                                            =========      =========
</TABLE>

                                       45

<PAGE>

                             SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (Continued)

         Amortization expense was $6,912 for the fiscal years ended November 30,
2003, November 30, 2002, and November 30, 2001. Amortization expense for each of
the next four fiscal years is expected to be approximately $6,900 per year, and
approximately $3,100 in fiscal 2008.

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

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

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

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

                                       46

<PAGE>

                             SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (Continued)

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

<TABLE>
<CAPTION>
                                                                     NOVEMBER 30,
                                                            ----------------------------
                                                               2003              2002
                                                               ----              ----
<S>                                                         <C>              <C>
License acquisition costs .............................     $ 1,258,163      $ 1,213,370
Less: accumulated amortization ........................        (329,070)        (329,070)
                                                            -----------      -----------
       Total ..........................................     $   929,093      $   884,300
                                                            ===========      ===========
</TABLE>

         Amortization expense was $219,378 for the fiscal year ended November
30, 2001. Net loss for fiscal 2001, excluding the effect of amortizing our
license acquisition costs, would have been approximately $2,112,000, or $(.28)
per common share.

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

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

         Research, Development and Engineering costs are expensed as incurred.

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

                                       47

<PAGE>

                             SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (Continued)

<TABLE>
<S>                                                         <C>
Weighted average shares - basic                             9,113,854
Add: effect of dilutive common
shares and warrants                                           352,984
                                                            ---------
Weighted average shares - diluted                           9,466,838
</TABLE>

Common shares issuable under stock options and warrants have not been included
in the computation of net loss per common share - diluted for the fiscal years
ended November 30, 2002 or November 30, 2001, because such inclusion would be
antidilutive. At November 30, 2003, there were approximately 99,000 stock
options outstanding that were excluded from the computation of net income per
common share - diluted, as the exercise price of these options exceeded the
average price per share of our common stock, and there were approximately
1,633,000 warrants outstanding that were excluded from the computation, as the
warrants are contingent on achieving specified future sales targets. As of
November 30, 2003, we had outstanding 5,308,819 warrants and options to purchase
common shares, as of November 30, 2002, we had outstanding 5,162,850 warrants
and options to purchase common shares, and as of November 30, 2001, we had
outstanding 4,774,228 warrants and options to purchase common shares.

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

         During the first quarter of fiscal 2003, we adopted Financial
Accounting Standards Board Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." The adoption of this interpretation had no impact on
our financial statements.

         During the fourth quarter of fiscal 2003, we adopted Emerging Issues
Task Force Issue 00-21, "Revenue Arrangements with Multiple Deliverables." The
adoption of EITF 00-21 had no impact on our financial statements.

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

4.       STOCK OFFERINGS AND COMMON SHARES

         Kingsbridge Capital Limited has warrants to purchase 105,097 common
shares exercisable at $4.25 per share until September 3, 2005 pursuant to the
Private Equity Line Agreement described below. In addition, CorRestore, LLC and
its agent, Joe B. Wolfe, received warrants to purchase 400,000 common shares
exercisable at $3.00 per share until June 2, 2005 pursuant to the CorRestore
license agreement, and received warrants to purchase an additional 2,100,000
common shares exercisable at $3.00 per share until November 21, 2006 pursuant to
the CorRestore license agreement. Also, as described below, the

                                       48
<PAGE>

                             SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

placement agent in the January 16, 2002 public offering received warrants to
purchase 100,000 common shares exercisable at $5.10 per share until January 11,
2007.

         On March 6, 2000, we entered into the Private Equity Line Agreement
with Kingsbridge Capital Limited, a private institutional investor. In
consideration for Kingsbridge's commitment under the Private Equity Line
Agreement, we issued warrants to Kingsbridge on March 6, 2000. The warrants
entitled the holder to purchase 205,097 common shares, after adjustment for the
April 2001 private placement and the January 2002 public offering, at a purchase
price of $4.25 per share. The warrants are exercisable at any time until
September 3, 2005. The warrants contain standard provisions that protect the
holder against dilution by adjustment of the exercise price and the number of
shares issuable pursuant to the warrants if various events occur. The exercise
price of the warrants is payable either in cash or by a cashless exercise. In
November 2003, Kingsbridge purchased 100,000 common shares under the warrants by
a cashless exercise. As a result of this cashless exercise, we issued 53,603
common shares to Kingsbridge, retaining 46,397 common shares in payment of the
exercise price, and Kingsbridge's warrants now entitle it to purchase 105,097
more common shares.

         Pursuant to the Private Equity Line Agreement, we completed the sales
of 714,484 common shares, for gross proceeds of $2,000,000, through December 4,
2000. Our net proceeds, after deducting the commissions and the estimated
expenses of the offerings, were approximately $1,793,000. On April 10, 2001, we
mutually agreed with Kingsbridge to terminate the Private Equity Line Agreement,
the related Registration Rights Agreement, and Kingsbridge's right to the
discount on any unsold shares, in exchange for our payment of $200,000 to
Kingsbridge.

         On April 9, 2001, we completed the private placement of 1,325,000
newly-issued common shares at a price of $1.75 per share, for gross proceeds of
$2,318,750. Our net proceeds, after deducting the placement agent's commission
and the expenses of the offering, were approximately $2,152,000. Brean Murray &
Co., Inc. was our exclusive placement agent for the offering and received for
its services (1) $104,363 as a placement agent fee, and (2) warrants to purchase
25,000 common shares at $2.10 per share exercisable during the four-year period
beginning April 9, 2002. In addition, the Brean Murray & Co., Inc. Profit
Sharing Plan purchased 32,285 common shares in the offering, and Robert R.
Henry, one of our directors, purchased 100,000 common shares in the offering. In
October 2003, Brean Murray & Co., Inc. transferred the 25,000 warrants to
persons who are or were employees of Brean Murray & Co., Inc., and in November
2003, those persons exercised the warrants to purchase all 25,000 common shares
under the warrants by a cashless exercise. As a result of this cashless
exercise, we issued 18,832 restricted common shares to those individuals,
retaining 6,168 common shares in payment of the exercise price, and no more
common shares remain subject to these warrants.

         On January 16, 2002, we completed a public offering of 1,000,000
newly-issued common shares at a price of $4.25 per share, for gross proceeds of
$4,250,000. Our estimated net proceeds, after deducting the placement agent's
commission and the estimated expenses of the offering, were approximately
$3,680,000. Brean Murray & Co., Inc. was our exclusive placement agent for the
offering and received for its services (1) $340,000 as a placement agent fee,
and (2) warrants to purchase 100,000 common shares at $5.10 per share
exercisable during the four-year period beginning January 11, 2003.

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

                                       49
<PAGE>

                          SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

         Common shares reserved for future issuance upon exercise of stock
options and warrants as discussed above at November 30, 2003, are as follows:

<TABLE>
<S>                                                                   <C>
1991 Incentive Stock Option Plan..............................           55,656
1993 Director Stock Option Plan...............................              500
1997 Stock Option Plan........................................        2,428,796
Options Granted Independent of Option Plans...................          236,311
Kingsbridge Capital Limited Warrants..........................          105,097
Placement Agent Warrants......................................          100,000
License Acquisition Warrants..................................        2,500,000
                                                                      ---------
         Total reserved for future issuance...................        5,426,360
                                                                      =========
</TABLE>

5.       ACCRUED LIABILITIES

         Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                                    NOVEMBER 30,
                                                       -------------------------------------
                                                            2003                   2002
                                                       --------------         --------------
<S>                                                    <C>                    <C>
Incentive..........................................    $   166,360            $     8,000
Sales Commissions..................................        123,356                 55,381
Insurance..........................................         29,836                 34,464
Royalty............................................         13,645                 12,071
Professional Fees..................................         10,500                 15,000
Warranty...........................................          5,850                  6,400
Training...........................................             --                 40,000
Clinical Research..................................             --                 21,450
                                                       -----------            -----------
     Total.........................................    $   349,547            $   192,766
                                                       ===========            ===========
</TABLE>

6.       INCOME TAX

         Deferred income taxes reflect the estimated future tax effect of (1)
temporary differences between the amount of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations and
(2) net operating loss and tax credit carryforwards. Our deferred tax assets
primarily represent the tax benefit of net operating loss carryforwards and
research and general business tax credit carryforwards. We had deferred tax
assets of approximately $17,061,000 and $17,210,000 for the years ended November
30, 2003 and 2002, respectively, which were entirely offset by valuation
allowances, due to the uncertainty of utilizing such assets against future
earnings, prior to their expiration. The components of deferred income tax
assets as of November 30, 2003 and 2002 were as follows:

<TABLE>
<CAPTION>
                                                                      NOVEMBER 30,
                                                          ----------------------------------
                                                                2003               2002
                                                          ---------------     --------------
                                                                      (IN THOUSANDS)
<S>                                                        <C>                <C>
Net operating loss carryforwards........................     $  16,549         $    16,638
Other...................................................            88                 115
Basis difference of fixed assets and intangibles                   (19)                 14
Research and general business tax credit carryforwards..           443                 443
                                                             ---------         -----------
      Subtotal..........................................        17,061              17,210
Valuation allowance.....................................       (17,061)            (17,210)
                                                             ---------         -----------
      Deferred tax asset................................     $      --         $        --
                                                             =========         ===========
</TABLE>

                                       50
<PAGE>

                          SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

         As of November 30, 2003, net operating loss carryforwards of
approximately $48.5 million were available for Federal income tax purposes. Our
ability to use the net operating loss carryforwards incurred on or before March
27, 1991 (the date we completed our initial public offering) is limited to
approximately $296,000 per year. Research and business general tax credits of
approximately $443,000 are also available to offset future taxes. These losses
and credits expire, if unused, at various dates from 2003 through 2023.

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

7.       COMMITMENTS AND CONTINGENCIES

         We have a lease agreement for a 23,392 square foot, stand-alone office,
assembly and warehouse facility. The current lease, as amended, expires December
31, 2004.

         Operating lease expense for the years ended November 30, 2003, 2002 and
2001 was approximately $216,000, $205,000, and $196,000, respectively.
Approximate future minimum lease commitments are as follows:

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------
<S>                                         <C>
 2004....................................   $    201,700
 2005....................................         16,800
                                            ------------
 Total...................................   $    218,500
                                            ============
</TABLE>

         In December 1991, we amended and restated our profit sharing plan to
include a 401(k) plan covering substantially all employees. Under provisions of
the plan, participants may contribute, annually, between 1% and 15% of their
compensation. At the discretion of our Board of Directors, we may contribute
matching contributions or make other annual discretionary contributions to the
plan, all of which, together with the participants' contributions, cannot exceed
15% of the total compensation we pay to eligible employees. We did not make any
matching or discretionary contributions to the plan for the years ended November
30, 2003, 2002 or 2001.

         As of November 30, 2003, we had an employment agreement with Bruce J.
Barrett, our President and Chief Executive Officer. Mr. Barrett's employment
agreement, as amended, expires April 30, 2006 unless earlier terminated as
provided in the agreement. Mr. Barrett is entitled to receive an annual base
salary, plus potential discretionary bonuses. Mr. Barrett has agreed not to
compete with us during specified periods.

         As of November 30, 2003, we had an employment agreement with Dominic J.
Spadafore, our Vice President of Sales and Marketing. Mr. Spadafore's employment
agreement terminates as provided in the agreement. Mr. Spadafore is entitled to
receive an annual base salary, plus potential bonuses. Mr. Spadafore has agreed
not to compete with us during specified periods.

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

                                       51
<PAGE>

                          SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

8.       STOCK OPTION PLANS

         In February 1991 and January 1997, we adopted stock option plans for
our key employees, directors, consultants and advisors. The plans provide for
our issuance of options to purchase a maximum of 115,000 common shares under the
1991 plan and 2,560,000 common shares under the 1997 plan. In addition, we
granted options to employees independent of the plans. Options granted generally
have a 10-year life, and vest over a three-year period. Awards and expirations
under the 1991 plan, 1997 plan, and independent of the plans during the years
ended November 30, 2003, 2002 and 2001 are listed below.

         At November 30, 2003, no additional options may be granted under the
1991 plan, and 117,541 common shares were available for options to be granted
under the 1997 plan.

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

         In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation," was issued. We have chosen to continue to account for stock-based
compensation of employees using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation costs for
stock options granted to employees are measured as the excess, if any, of the
market price of our stock at the date of the grant over the amount an employee
must pay to acquire the stock. No compensation expense has been charged against
income for stock option grants to employees. Stock-based compensation of
consultants and advisors is determined based on the fair value of the options or
warrants on the grant date pursuant to the methodology of SFAS No. 123,
estimated using the Black-Scholes model with the assumptions described in the
next paragraph. The resulting amount is recognized as compensation expense and
an increase in additional paid-in capital over the vesting period of the options
or warrants. As a result, we recorded $8,471 of compensation expense, and an
equal increase in additional paid in capital, for stock options issued to
non-employees in fiscal 2003, $5,597 of compensation expense in fiscal 2002, and
$4,984 of compensation expense in fiscal 2001.

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

                                       52
<PAGE>

                          SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

<TABLE>
<CAPTION>
                                                        FOR THE FISCAL YEAR ENDED NOVEMBER 30,
                                                        2003             2002             2001
                                                    -----------      -----------      ------------
<S>                                                 <C>              <C>              <C>
Net income (loss) ............................      $    72,586      $(1,206,652)     $(2,330,911)
Pro-forma net loss, had fair value method
been applied .................................      $  (889,000)     $(1,967,000)     $(2,937,000)
Net income (loss) per common share -
diluted ......................................              .01             (.13)            (.31)
Pro-forma net loss per common share -
diluted, had fair value method been
applied ......................................             (.09)            (.22)            (.39)
Stock-based employee compensation
included in actual net loss ..................      $     8,471      $     5,597      $     4,984
Pro-forma stock-based employee compensation,
had fair value method been applied ...........      $   962,000      $   760,000      $   606,000
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for 2003, 2002 and 2001: expected volatility (the measure by
which the stock price has fluctuated or is expected to fluctuate during the
period) 64.32% for 2003 (89.45% for 2002 and 100.68% for 2001), risk-free
interest rate of 4.0% for 2003 (4.0% for 2002 and 2001), expected lives of 7
years for fiscal 2003 (4 years for 2002 and 2001) and dividend yield of 0%.

         A summary of our stock option activity and related information for the
years ended November 30, 2003, 2002 and 2001 is as follows:

<TABLE>
<CAPTION>
                                       2003                         2002                           2001
                             --------------------------   ---------------------------   ---------------------------
                                             WEIGHTED                      WEIGHTED                      WEIGHTED
                                             AVERAGE                       AVERAGE                       AVERAGE
                                COMMON       EXERCISE       COMMON         EXERCISE       COMMON         EXERCISE
                                SHARES        PRICE         SHARES          PRICE         SHARES          PRICE
                              ---------     ----------    -----------     ----------    -----------     ---------
<S>                           <C>           <C>           <C>             <C>           <C>             <C>
Options outstanding
  December 1,............     2,332,753     $    4.04       1,846,120     $    4.52       1,394,537     $   5.74
  Options granted........       471,000          3.75         509,500          2.82         529,800         2.00
  Options exercised......      (148,371)         3.63          (2,833)         3.36              --           --
  Options canceled.......       (51,660)        10.08         (20,034)        17.17         (78,217)        9.25
                              ---------     ---------       ---------     ---------       ---------     --------
Options outstanding
  November 30,...........     2,603,722          3.89       2,332,753          4.04       1,846,120         4.52
                              =========     =========       =========     =========       =========     ========
Options exercisable
  November 30,...........     1,784,482     $    4.27       1,606,767     $    4.80       1,267,849     $   5.63
                              =========     =========       =========     =========       =========     ========
</TABLE>

         A summary of the price ranges of our stock options outstanding and
exercisable as of November 30, 2003 is as follows:

                                       53
<PAGE>

                          SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

<TABLE>
<CAPTION>
                                        Options outstanding                        Options exercisable
                              ---------------------------------------         ----------------------------
                                               WEIGHTED       WEIGHTED                            WEIGHTED
                                               AVERAGE        AVERAGE                             AVERAGE
RANGE OF EXERCISE              OPTIONS         EXERCISE      REMAINING          OPTIONS           EXERCISE
PRICES                       OUTSTANDING        PRICE       LIFE (YEARS)      EXERCISABLE          PRICE
-----------------            -----------        -----       ---- -------      -----------          -----
<S>                          <C>               <C>          <C>               <C>                 <C>
$1.44 - $5.00............     2,077,091         $ 3.19          7.32           1,257,851          $ 3.12
$5.01 - $10.00...........       462,072           6.13          3.92             462,072            6.13
$10.01 - $26.30..........        64,559          13.31          1.08              64,559           13.31
                              ---------         ------          ----           ---------          ------

Total....................     2,603,722         $ 3.89          6.56           1,784,482          $ 4.27
                              =========         ======          ====           =========          ======
</TABLE>

9.       RELATED PARTY TRANSACTIONS

         Pursuant to an engagement letter between us and Brean Murray & Co.,
Inc., dated March 1, 2000, we agreed to pay Brean Murray & Co., Inc. a
commission of 3.5% on proceeds of specified securities sales, including sales
pursuant to the Kingsbridge Capital Limited Private Equity Line Agreement.
During fiscal 2001, we paid Brean Murray & Co., Inc. $7,000 in commissions
pursuant to this engagement letter.

         In connection with our April 2001 private placement of common shares,
Brean Murray & Co., Inc. was our exclusive placement agent and received for its
services (1) $104,363 as a placement agent fee, and (2) warrants to purchase
25,000 common shares at $2.10 per share exercisable during the four-year period
beginning April 9, 2002. At the time, A. Brean Murray, one of our then current
directors, and his wife controlled Brean Murray & Co., Inc. In addition, the
Brean Murray & Co., Inc. Profit Sharing Plan purchased 32,285 common shares in
the offering, and Robert R. Henry, one of our directors, purchased 100,000
common shares in the offering. In October 2003, Brean Murray & Co., Inc.
transferred the 25,000 warrants to persons who are or were employees of Brean
Murray & Co., Inc., and in November 2003, those persons exercised the warrants
to purchase all 25,000 common shares under the warrants by a cashless exercise.
As a result of this cashless exercise, we issued 18,832 restricted common shares
to those individuals, retaining 6,168 common shares in payment of the exercise
price, and no common shares remain subject to these warrants.

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

         In connection with our January 2002 public offering of common shares,
Brean Murray & Co., Inc. was our exclusive placement agent and received for its
services (1) $340,000 as a placement agent fee, and (2) warrants to purchase
100,000 common shares at $5.10 per share exercisable during the four-year period
beginning January 11, 2003.

10.      MAJOR CUSTOMERS AND FOREIGN SALES

         One international distributor (Europe) accounted for approximately 12%
of net revenues for the fiscal year ended November 30, 2003, approximately 12%
of net revenues for the fiscal year ended November 30, 2002, and approximately
17% for the fiscal year ended November 30, 2001.

                                       54
<PAGE>

                          SOMANETICS CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

         Additionally, foreign net revenues for the fiscal year ended November
30, 2003 were approximately $1,945,000, for the fiscal year ended November 30,
2002 were approximately $1,348,000, and for the fiscal year ended November 30,
2001 were approximately $1,595,000.

11.      NOTES PAYABLE - BANK LINE OF CREDIT

         On February 13, 2001, we entered into a Loan and Security Agreement
with Crestmark Bank for a working capital line of credit for up to $750,000,
collateralized by all of our assets. Under the Agreement, Crestmark Bank may,
but is not obligated to, lend us amounts we request from time to time, up to
$750,000, if no default exists. The loans are limited by a borrowing base based
on qualifying accounts receivable and lender reserves. The loan is payable on
demand, and collections of our receivables are directed to Crestmark Bank in
payment of any outstanding balance of the loan.

         The principal amount outstanding bears interest, payable monthly, at
the prime rate (4.00% at November 30, 2003) plus 2% plus a 2.4% service fee, and
we paid a $45,000 commitment fee for the loan. As of November 30, 2003, $750,000
was available for borrowing, at Crestmark's discretion, under the facility. We
have agreed to use the proceeds of the loans solely as working capital. The line
of credit requires us to maintain minimum tangible net worth of $500,000 and a
ratio of total liabilities to tangible net worth not to exceed 3:1. The line of
credit terminates upon Crestmark's demand.

         As of April 24, 2003, we amended our Loan and Security Agreement with
Crestmark Bank. Pursuant to the amendment, we paid a $5,000 renewal commitment
fee to continue our lending relationship for the remainder of 2003. We must
negotiate a new lending relationship if we would like to continue the lending
relationship into 2004. Pursuant to the amendment, we also agreed to give the
bank at least 30 days advance notice of any intended draw on our line of credit.

         Effective December 31, 2003, our Loan and Security Agreement with
Crestmark Bank expired. We do not intend to renew this lending agreement.

12.      SEGMENT INFORMATION

         We operate our business in one reportable segment, the development,
manufacture and marketing of medical devices. Each of our two product lines have
similar characteristics, customers, distribution and marketing strategies, and
are subject to similar regulatory requirements. In addition, in making operating
and strategic decisions, our management evaluates net revenues based on the
worldwide net revenues of each major product line, and profitability on an
enterprise-wide basis due to shared costs. Approximately 92% of our net revenues
in fiscal 2003 were derived from our INVOS Cerebral Oximeter product line,
compared to 96% of our net revenues in fiscal 2002 and 100% of our net revenues
in fiscal 2001.

                                       55
<PAGE>

                        QUARTERLY INFORMATION (UNAUDITED)

         The following is a summary of our quarterly operating results for the
fiscal years ended November 30, 2003 and 2002:

<TABLE>
<CAPTION>
                                                                      QUARTER
                                   ----------------------------------------------------------------------------
                                      FIRST                SECOND                 THIRD                FOURTH
                                   ----------            ----------            ----------            ----------
                                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                <C>                   <C>                   <C>                   <C>
YEAR ENDED NOVEMBER 30, 2003

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

YEAR ENDED NOVEMBER 30, 2002

Net revenues...............        $1,591,820            $1,659,606            $1,432,826            $2,021,395
Gross margin...............         1,098,430             1,116,990             1,023,750             1,417,719
Net (loss).................          (354,508)             (389,253)             (377,042)              (85,849)
Net (loss) per
    common share - basic
    and diluted............        $    (0.04)           $    (0.04)           $    (0.04)           $    (0.01)
</TABLE>

                                       56
<PAGE>

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

NONE

ITEM  9A.         CONTROLS AND PROCEDURES

         Our management has evaluated, with the participation of our principal
executive and principal financial officers, the effectiveness of our disclosure
controls and procedures as of November 30, 2003, and, based on their evaluation,
our principal executive and principal financial officers have concluded that
these controls and procedures are effective as of November 30, 2003. There was
no change in our internal control over financial reporting identified in
connection with such evaluation that occurred during our fourth fiscal quarter
ended November 30, 2003 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

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

                                       57
<PAGE>

                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information required by this Item 10 regarding our executive
officers is included in the Supplemental Item in Part I of this Report, and is
incorporated in this Item 10 by reference. The information required by this Item
10 regarding our directors will be set forth under the caption "Election of
Director" in our Proxy Statement in connection with the 2004 Annual Meeting of
Shareholders scheduled to be held March 31, 2004, and is incorporated in this
Item 10 by reference. The information required by this Item 10 concerning
compliance with Section 16(a) of the Securities Exchange Act of 1934 will be set
forth under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in our Proxy Statement in connection with the 2004 Annual Meeting of
Shareholders scheduled to be held March 31, 2004, and is incorporated in this
Item 10 by reference.

         The information required by this Item 10 concerning our Code of
Business Conduct and Ethics will be set forth under the caption "Code of
Business Conduct and Ethics" in our Proxy Statement in connection with the 2004
Annual Meeting of Shareholders scheduled to be held March 31, 2004, and is
incorporated in this Item 10 by reference.

ITEM 11.          EXECUTIVE COMPENSATION

         The information required by this Item 11 concerning executive
compensation will be set forth under the caption "Executive Compensation" in our
Proxy Statement in connection with the 2004 Annual Meeting of Shareholders
scheduled to be held March 31, 2004, and is incorporated in this Item 11 by
reference.

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

         The information required by this Item 12 concerning security ownership
of certain beneficial owners and management will be set forth under the captions
"Voting Securities and Principal Holders" and "Election of Director" in our
Proxy Statement in connection with the 2004 Annual Meeting of Shareholders
scheduled to be held March 31, 2004, and is incorporated in this Item 12 by
reference. The equity compensation plan information required by this Item 12
will be set forth under the caption "Equity Compensation Plan Information" in
our Proxy Statement in connection with the 2004 Annual Meeting of Shareholders
scheduled to be held March 31, 2004, and is incorporated in this Item 12 by
reference.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this Item 13 concerning certain
relationships and related transactions, if any, will be set forth under the
caption "Certain Transactions" or "Compensation Committee Interlocks and Insider
Participation" in our Proxy Statement in connection with the 2004 Annual Meeting
of Shareholders scheduled to be held March 31, 2004, and is incorporated in this
Item 13 by reference.

ITEM 14.          PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The information required by this Item 14 concerning principal
accountant fees and services will be set forth under the caption "Independent
Accountants" in our Proxy Statement in connection with the 2004 Annual Meeting
of Shareholders scheduled to be held March 31, 2004, and is incorporated in this
Item 14 by reference.

                                       58
<PAGE>

                                     PART IV

ITEM 15.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
                  FORM 8-K

(a)      (1)      Financial Statements

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

                  Independent Auditors' Report
                  Balance Sheets - November 30, 2003 and 2002
                  Statements of Operations - For Each of the Three Years in the
                  Period Ended November 30, 2003
                  Statements of Shareholders' Equity - For Each of the Three
                      Years in the Period Ended November 30, 2003
                  Statements of Cash Flows - For Each of the Three Years in the
                      Period Ended November 30, 2003
                  Notes to Financial Statements

         (2)      Financial Statement Schedules

                  None.

         (3)      Exhibits

         The Exhibits to this Report are as set forth in the "Index to Exhibits"
         on pages 61 to 64 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.

(b)      Reports on Form 8-K

         No reports on Form 8-K were filed by us during the fourth quarter of
         the fiscal year ended November 30, 2003. We furnished a Current Report
         on Form 8-K on September 16, 2003, reporting under Item 12 that on
         September 15, 2003, we announced our financial results for our third
         quarter of fiscal 2003 and certain other information. No financial
         statements were filed, although we furnished the financial information
         included in the press release furnished with the Form 8-K.

                                       59
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                            Somanetics Corporation
Date: January 30, 2004                      By: /s/ Bruce J. Barrett
                                                --------------------------------
                                            Bruce J. Barrett
                                            President & Chief Executive Officer

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

<TABLE>
<CAPTION>
      Signature                                               Title                            Date
    -------------                                         ------------                       --------
<S>                                             <C>                                      <C>
  /s/ Bruce J. Barrett                          President and Chief Executive Officer    January 30, 2004
----------------------                          and a Director (Principal Executive
Bruce J. Barrett                                Officer)

  /s/ William M. Iacona                         Vice President, Finance, Controller,     January 30, 2004
-----------------------                         and Treasurer (Principal Financial
 William M. Iacona                              Officer and Principal Accounting
                                                Officer)

  /s/ Daniel S. Follis                          Director                                 January 30, 2004
----------------------
 Daniel S. Follis

  /s/ James I. Ausman                           Director                                 January 30, 2004
---------------------
James I. Ausman, M.D., Ph.D.

  /s/ Robert R. Henry                           Director                                 January 30, 2004
---------------------
 Robert R. Henry

  /s/ Joe B. Wolfe                              Director                                 January 30, 2004
------------------
 Joe B. Wolfe
</TABLE>

                                       60
<PAGE>

                                  EXHIBIT INDEX

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

 3(ii)                 Amended and Restated Bylaws of Somanetics Corporation.

 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                  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.

*10.9                  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.

*10.10                 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.

*10.11                 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.

*10.12                 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.

*10.13                 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.

*10.14                 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.

*10.15                 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.

*10.16                 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.
</TABLE>

                                       61
<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT                                   DESCRIPTION
------                                   -------------
<S>                    <C>
*10.17                 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.

*10.18                 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.

*10.19                 Somanetics Corporation 2003 Incentive Compensation Plan,
                       dated as of October 24, 2002, incorporated by reference
                       to Exhibit 10.20 to the Company's Annual Report on Form
                       10-K for the fiscal year ended November 30, 2002.

*10.20                 Somanetics Corporation 2004 Incentive Compensation Plan,
                       dated as of December 12, 2003

*10.21                 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.

*10.22                 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.

*10.23                 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.

*10.24                 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.

*10.25                 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.

*10.26                 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.

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

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

*10.29                 Stock Option Agreement, dated May 16, 1994, between
                       Somanetics Corporation and Bruce J. Barrett, incorporated
                       by reference to Exhibit 10.7 to the Company's Quarterly
                       Report on Form 10-Q for the quarter ended August 31,
                       1994.

*10.30                 Stock Option Agreement, dated July 21, 1994, between
                       Somanetics Corporation and Bruce J. Barrett, incorporated
                       by reference to Exhibit 10.4 to the Company's Quarterly
                       Report on Form 10-Q for the quarter ended August 31,
                       1994.

*10.31                 Stock Option Agreement, dated July 21, 1994, between
                       Somanetics Corporation and Gary D. Lewis, incorporated by
                       reference to Exhibit 10.5 to the Company's Quarterly
                       Report on Form 10-Q for the quarter ended August 31,
                       1994.

*10.32                 Stock Option Agreement, dated July 21, 1994, between
                       Somanetics Corporation and Raymond W. Gunn, incorporated
                       by reference to Exhibit 10.6 to the Company's Quarterly
                       Report on Form 10-Q for the quarter ended August 31,
                       1994.
</TABLE>

                                       62
<PAGE>

                                  EXHIBIT INDEX

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

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

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

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

*10.37                 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.

*10.38                 Amendment to Stock Option Agreement, dated as of February
                       1, 1995, between Somanetics Corporation and Gary D.
                       Lewis, amending July 21, 1994 Stock Option Agreement,
                       incorporated by reference to Exhibit 10.31 to
                       Post-Effective Amendment No. 5 to the Company's
                       Registration Statement on Form S-1 (file no. 33-38438)
                       filed with the Securities and Exchange Commission on
                       March 30, 1995.

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

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

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

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

 10.43                 Assignments, dated October 6, 1983, January 23, 1986,
                       February 11, 1986 and February 11, 1986, from Gary D.
                       Lewis to Somanetics Corporation in connection with the
                       Company's INVOS technology, incorporated by reference to
                       Exhibit 10.17 to the Company's Registration Statement on
                       Form S-1 (file no. 33-38438), filed January 7, 1991.

 10.44                 Assignments, dated October 5, 1983, August 28, 1985,
                       February 11, 1986, February 12, 1986, and September 24,
                       1986, from Hugh F. Stoddart to Somanetics Corporation in
                       connection with the Company's INVOS technology,
                       incorporated by reference to Exhibit 10.18 to the
                       Company's Registration Statement on Form S-1 (file no.
                       33-38438), filed January 7, 1991.

 10.45                 Warrant, dated as of March 6, 2000, from Somanetics
                       Corporation to Kingsbridge Capital Limited, incorporated
                       by reference to Exhibit 10.43 to the Company's
                       Registration Statement on Form S-1 (file no. 333-33262)
                       filed on March 24, 2000 and effective March 31, 2000.
</TABLE>

                                       63
<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT                                   DESCRIPTION
------                                   -------------
<S>                    <C>
10.46                  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.

10.47                  Form of Warrant Agreement and Warrant, dated January 16,
                       2002, between Brean Murray & Co., Inc. and Somanetics
                       Corporation, incorporated by reference to Exhibit 1.3 to
                       the Somanetics Corporation Registration Statement on Form
                       S-1 (file no. 333-74788) filed December 7, 2001 and
                       effective January 11, 2002.

10.48                  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.

10.49                  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.

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.
</TABLE>

                                       64