704328--1/31/2006--SOMANETICS

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{product, liability, claim}

{stock, price, share}

{customer, product, revenue}

{product, candidate, development}

{property, intellectual, protect}

{acquisition, growth, future}

{product, market, service}

{personnel, key, retain}

{interest, director, officer}

{provision, law, control}

{tax, income, asset}

{competitive, industry, competition}

We are dependent on our distributors and our independent sales representative firms for a substantial portion of our sales, and their failure to sell our products adequately would adversely affect our business. We currently depend on single-source suppliers for key components of the INVOS System, and the loss of any of these suppliers could harm our ability to manufacture and sell our products, increase the cost of our components or delay our clinical trials. We may become subject to competition which may adversely affect us. We also compete with companies that have longer operating histories, more established products and greater resources than we do for, among other things, forehead monitoring space, limited hospital capital budgets and alternative products. If we fail to manage our growth effectively, our business and operating results could be harmed. Patients might assert product liability claims against us. If we fail to obtain and maintain necessary U.S. Food and Drug Administration clearances for our products and indications or if clearances for future products and indications are delayed or not issued, our business would be harmed. The FDA might require us to obtain a new clearance to label or promote more actively the INVOS System for specific patient subgroups, such as diabetics; if we fail to obtain such clearances, our sales and revenues may be adversely affected. After clearance or approval of our products, we are subject to continuing regulation by the FDA, and if we fail to comply with FDA regulations, our business could suffer. We have modified some of our products without FDA clearance. The FDA could retroactively determine that the modifications were improper and require us to stop marketing and recall the modified products. If we fail to comply with the FDA s Quality System Regulation, our manufacturing operations could be halted, and our business would suffer. Failure to obtain or maintain regulatory approval in foreign jurisdictions would prevent us from marketing our products abroad. Federal regulatory reforms may adversely affect our ability to sell our products profitably. Changes in our actual or estimated future taxable income could change the value of our deferred tax asset, potentially resulting in a decrease in net income, which could adversely affect the price of our common shares. New stock option accounting rules will increase our reported expenses, which could adversely affect the price of our common shares. The lengthy sales cycle for the INVOS System could cause variability in our operating results. If we are unable to obtain or maintain intellectual property rights relating to our technology and products, the commercial value of our technology and products will be adversely affected and our competitive position could be harmed. If we are found to infringe or are alleged to infringe any third party intellectual property rights, then our business may be adversely affected. Our success depends on our ability to attract and retain key personnel. Any acquisitions that we make could disrupt our business and harm our financial condition. We have had limited success in marketing the CorRestore System, which could result in claims against us. Risks Relating to Our Common Shares If we were to complete a public offering, we would have broad discretion to determine how to allocate the net proceeds of that offering and may not use them effectively. Provisions of our corporate charter documents and Michigan law may delay or prevent attempts by our shareholders to change our management and hinder efforts to acquire a controlling interest in us. The market price of our common shares has been volatile and may continue to remain so. We have never paid cash dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future. The market price of the common shares might be lower because of shares eligible for future sale and shares reserved for future issuance upon the exercise of options and warrants we have granted.

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704328--1/31/2006--SOMANETICS_CORP