<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

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

For the quarterly period ended AUGUST 31, 2006

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 number 0-19095

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

<TABLE>
<S>                                                          <C>
            MICHIGAN                                              38-2394784
(State or other jurisdiction of                                (I.R.S. Employer
 incorporation or organization)                              Identification No.)
</TABLE>

                              1653 EAST MAPLE ROAD
                                 TROY, MICHIGAN
                                   48083-4208
                    (Address of principal executive offices)
                                   (Zip Code)

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

                                       N/A
              (Former name, former address and former fiscal year,
                          if changed since last report)

     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 whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):

Large accelerated filer [ ]   Accelerated filer [X]   Non-accelerated filer [ ]

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

Yes [ ] No [X]

     Number of common shares outstanding at October 6, 2006: 13,156,027

<PAGE>

                          PART I FINANCIAL INFORMATION

                             SOMANETICS CORPORATION

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                        AUGUST 31,    NOVEMBER 30,
                                                                           2006           2005
                                                                       ------------   ------------
                                                                        (Unaudited)     (Audited)
<S>                                                                    <C>            <C>
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents .......................................   $ 21,386,085   $ 13,148,237
   Marketable securities ...........................................     22,059,577             --
   Accounts receivable .............................................      5,147,384      3,531,740
   Inventory .......................................................      2,029,797      1,058,101
   Prepaid expenses ................................................        147,691        623,303
   Deferred tax asset - current ....................................      1,979,582      1,561,322
                                                                       ------------   ------------
      Total current assets .........................................     52,750,116     19,922,703
                                                                       ------------   ------------
PROPERTY AND EQUIPMENT (at cost):
   Demonstration and no capital cost sales equipment at customers ..      2,395,886      1,916,655
   Machinery and equipment .........................................      1,244,282        768,992
   Furniture and fixtures ..........................................        297,257        289,397
   Leasehold improvements ..........................................        195,565        187,135
                                                                       ------------   ------------
      Total ........................................................      4,132,990      3,162,179
   Less accumulated depreciation and amortization ..................     (2,161,964)    (1,836,438)
                                                                       ------------   ------------
      Net property and equipment ...................................      1,971,026      1,325,741
                                                                       ------------   ------------
OTHER ASSETS:
   Long-term investments ...........................................     26,139,122             --
   Deferred tax asset - non-current ................................      5,415,755      8,438,678
   Other ...........................................................         15,000         15,000
   Intangible assets, net ..........................................         11,737         16,921
                                                                       ------------   ------------
      Total other assets ...........................................     31,581,614      8,470,599
                                                                       ------------   ------------
TOTAL ASSETS .......................................................   $ 86,302,756   $ 29,719,043
                                                                       ============   ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Accounts payable ................................................   $  1,045,657   $    712,796
   Accrued liabilities .............................................        913,789      1,165,594
                                                                       ------------   ------------
      Total current liabilities ....................................      1,959,446      1,878,390
                                                                       ------------   ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
   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, 13,095,918 shares at August 31, 2006,
      and 10,715,885 shares at November 30, 2005 ...................        130,959        107,159
   Additional paid-in capital ......................................    116,287,299     64,864,554
   Accumulated deficit .............................................    (32,074,948)   (37,131,060)
                                                                       ------------   ------------
      Total shareholders' equity ...................................     84,343,310     27,840,653
                                                                       ------------   ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .........................   $ 86,302,756   $ 29,719,043
                                                                       ============   ============
</TABLE>

                        See notes to financial statements


                                        2

<PAGE>

                             SOMANETICS CORPORATION

                            STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                     THREE MONTHS                NINE MONTHS
                                                   ENDED AUGUST 31,            ENDED AUGUST 31,
                                              -------------------------   -------------------------
                                                  2006          2005          2006          2005
                                              -----------   -----------   -----------   -----------
<S>                                           <C>           <C>           <C>           <C>
NET REVENUES ..............................   $ 7,867,739   $ 5,242,848   $21,016,310   $14,358,211
COST OF SALES .............................     1,081,890       661,196     2,716,886     1,856,185
                                              -----------   -----------   -----------   -----------
   Gross Margin ...........................     6,785,849     4,581,652    18,299,424    12,502,026
                                              -----------   -----------   -----------   -----------
OPERATING EXPENSES:
   Research, development and engineering ..       135,063        95,924       454,140       296,441
   Selling, general and administrative ....     4,533,565     3,064,857    11,894,113     8,685,648
                                              -----------   -----------   -----------   -----------
      Total operating expenses ............     4,668,628     3,160,781    12,348,253     8,982,089
                                              -----------   -----------   -----------   -----------
OPERATING INCOME ..........................     2,117,221     1,420,871     5,951,171     3,519,937
                                              -----------   -----------   -----------   -----------
OTHER INCOME:
   Interest income ........................       751,523        85,413     1,709,603       189,542
                                              -----------   -----------   -----------   -----------
      Total other income ..................       751,523        85,413     1,709,603       189,542
                                              -----------   -----------   -----------   -----------
NET INCOME BEFORE INCOME TAXES ............     2,868,744     1,506,284     7,660,774     3,709,479
                                              -----------   -----------   -----------   -----------
INCOME TAX PROVISION ......................       975,373       512,136     2,604,663     1,261,223
                                              -----------   -----------   -----------   -----------
NET INCOME ................................   $ 1,893,371   $   994,147   $ 5,056,111   $ 2,448,256
                                              -----------   -----------   -----------   -----------
NET INCOME PER COMMON
   SHARE - BASIC ..........................   $      0.14   $      0.10   $      0.41   $      0.24
                                              -----------   -----------   -----------   -----------
NET INCOME PER COMMON
   SHARE - DILUTED ........................   $      0.13   $      0.08   $      0.37   $      0.21
                                              -----------   -----------   -----------   -----------
WEIGHTED AVERAGE SHARES
   OUTSTANDING - BASIC ....................    13,071,340    10,360,990    12,238,600    10,227,923
                                              ===========   ===========   ===========   ===========
WEIGHTED AVERAGE SHARES
   OUTSTANDING - DILUTED ..................    14,460,299    12,102,611    13,713,731    11,850,418
                                              ===========   ===========   ===========   ===========
</TABLE>

                       See notes to financial statements


                                        3
<PAGE>

                             SOMANETICS CORPORATION

                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                  FOR THE NINE-MONTH
                                                                                     PERIODS ENDED
                                                                              --------------------------
                                                                               AUGUST 31,     AUGUST 31,
                                                                                  2006           2005
                                                                              ------------   -----------
<S>                                                                           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income .............................................................   $  5,056,111   $ 2,448,256
   Adjustments to reconcile net income to net cash provided by operations:
      Income tax provision ................................................      2,604,663     1,261,223
      Depreciation and amortization .......................................        421,416       276,967
      Stock compensation expense ..........................................        125,992         7,013
      Changes in assets and liabilities:
         Accounts receivable (increase) ...................................     (1,615,644)     (441,813)
         Inventory (increase) .............................................     (1,523,460)     (627,277)
         Prepaid expenses decrease ........................................        475,612       103,911
         Accounts payable increase ........................................        332,861       117,453
         Accrued liabilities increase (decrease) ..........................       (251,805)      178,422
                                                                              ------------   -----------
      Net cash provided by operating activities ...........................      5,625,746     3,324,155
                                                                              ------------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of marketable securities and long-term investments ...........    (48,198,699)           --
   Acquisition of property and equipment (net) ............................       (509,753)     (119,543)
                                                                              ------------   -----------
      Net cash (used in) investing activities .............................    (48,708,452)     (119,543)
                                                                              ------------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of common shares ................................     51,232,774            --
   Proceeds from issuance of common shares due to exercise of stock options         87,780     1,424,970
                                                                              ------------   -----------
      Net cash provided by financing activities ...........................     51,320,554     1,424,970
                                                                              ------------   -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................................      8,237,848     4,629,582
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................     13,148,237     7,069,542
                                                                              ------------   -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................   $ 21,386,085   $11,699,124
                                                                              ============   ===========
Supplemental Disclosure of Non cash investing activities:
   Demonstration and no capital cost sales equipment capitalized
      from inventory (Note 2) .............................................   $    551,764   $   390,150
</TABLE>

                        See notes to financial statements


                                        4

<PAGE>

                             SOMANETICS CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

                                 AUGUST 31, 2006

1.   FINANCIAL STATEMENT PRESENTATION

     We prepared our unaudited interim financial statements pursuant to the
Securities and Exchange Commission's rules. These interim financial statements
do not include all of the information and notes normally included in our annual
financial statements prepared in accordance with generally accepted accounting
principles. We believe, however, that the disclosures are adequate to make the
information presented not misleading.

     The unaudited interim financial statements in this report reflect all
adjustments which are, in our opinion, necessary for a fair statement of the
results for the interim periods presented. All of these adjustments that are
material are of a normal recurring nature. Our operating results for the
nine-month period ended August 31, 2006 do not necessarily indicate the results
that you should expect for the year ending November 30, 2006. You should read
the unaudited interim financial statements together with the financial
statements and related notes for the year ended November 30, 2005 included in
our Annual Report on Form 10-K for the fiscal year ended November 30, 2005.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Marketable Securities and Long-Term Investments consist of Aaa-rated United
States government agency bonds, classified as held to maturity, maturing
approximately four months to three years from the date of acquisition, are
stated at an amortized cost of $48,198,699, and have a current market value of
$48,210,423.

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

<TABLE>
<CAPTION>
                          AUGUST 31,   NOVEMBER 30,
                             2006          2005
                          ----------   ------------
<S>                       <C>          <C>
Purchased components ..   $1,502,309    $  652,876
Finished goods ........      427,165       352,560
Work in process .......      100,323        52,665
                          ----------    ----------
   Total ..............   $2,029,797    $1,058,101
                          ==========    ==========
</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. Depreciation expense was
$416,232 and $271,783 for the nine-month periods ended August 31, 2006 and
August 31, 2005, respectively. We offer to our United States customers a no
capital cost sales program whereby we ship the INVOS System monitor to the
customer at no charge. The INVOS System monitors that are shipped to our
customers are classified as no capital cost sales equipment and are depreciated
over five years to cost of goods sold. All other depreciation expense is
recorded as a selling, general and administrative expense. As of August 31,
2006, we have capitalized $2,395,886 in costs for INVOS System monitors being
used as demonstration and no capital cost sales equipment, and these assets had
a net book value of $1,367,510. 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. Patents and trademarks
are recorded at cost and are being amortized using the straight-line method over
17 years. The carrying amount and accumulated amortization of these patents and
trademarks are as follows:


                                        5

<PAGE>

                             SOMANETICS CORPORATION

                    NOTES TO FINANCIAL STATEMENTS- CONTINUED
                                   (UNAUDITED)

                                 AUGUST 31, 2006

<TABLE>
<CAPTION>
                                    AUGUST 31,   NOVEMBER 30,
                                       2006          2005
                                    ----------   ------------
<S>                                 <C>          <C>
Patents and trademarks ..........    $111,733      $111,733
Less: accumulated amortization ..     (99,996)      (94,812)
                                     --------      --------
   Total ........................    $ 11,737      $ 16,921
                                     ========      ========
</TABLE>

     Amortization expense for the nine months ended August 31, 2006 and August
31, 2005 was $5,184. Amortization expense for each of the next two fiscal years
is expected to be approximately $6,900 per year, and approximately $3,100 in
fiscal 2008.

     Stock Compensation In October 1995, Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," was issued. In
December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (revised), Share Based Payment. This
Statement revises Statement No. 123, "Accounting for Stock-Based Compensation,"
and requires that compensation costs related to share-based payment
transactions, including stock options, restricted stock and restricted stock
units be recognized in the financial statements. This Statement became effective
for our fiscal quarter that began December 1, 2005.

     We previously accounted 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 were
measured as the excess, if any, of the market price of our stock at the date of
grant over the amount an employee must pay to acquire the stock. During the
first three quarters of fiscal 2005, we recorded no compensation expense against
income for stock option grants to employees. Stock-based compensation of
consultants and advisors was determined based on the fair value of the options
or warrants on the grant date pursuant to the methodology of SFAS No. 123,
estimated using the Black-Scholes model. The resulting amount was recognized as
compensation expense and an increase in additional paid-in capital over the
vesting period of the options or warrants. In the first nine months of fiscal
2005, we recorded such compensation expense of $7,013.

     In November 2005, we approved the acceleration of vesting of all unvested
stock options as of November 30, 2005. The primary purpose of this accelerated
vesting was to eliminate compensation expense we would recognize in our results
of operations upon the adoption of SFAS 123(R), which became effective for our
fiscal quarter that began December 1, 2005. After the effects of the accelerated
vesting, the initial adoption of SFAS 123(R) was immaterial and resulted in no
compensation expense in the first three quarters of fiscal 2006 with respect to
options granted before December 1, 2005. However, the issuance of additional
stock compensation under the 2005 Stock Incentive Plan in the third quarter of
fiscal 2006 had an impact on our financial statements.

     During the first three quarters of fiscal 2006 we granted 232,000 stock
options to our officers, employees, directors and one of our consultants, we
issued 68,000 restricted common shares to our officers, and we issued 12,033
newly-issued common shares as a result of stock option exercises. These stock
options and restricted shares that were granted vest over five years. As a
result of the stock options and restricted common shares that we granted during
the nine months ended August 31, 2006, we have recorded $125,992 in stock
compensation expense in accordance with SFAS No. 123(R). The fair value of the
stock option grants was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions: expected
volatility (the measure by which the stock price has fluctuated or is expected
to fluctuate during the period) 54.00%, risk-free rate of 5%, expected lives of
6 years, and a dividend yield of 0%. The fair value of the restricted common
shares was estimated based on the market value of the common shares on the date
of issuance.


                                        6

<PAGE>

                             SOMANETICS CORPORATION

                    NOTES TO FINANCIAL STATEMENTS- CONTINUED
                                   (UNAUDITED)

                                 AUGUST 31, 2006

     Had compensation expense for stock options that vested in the third quarter
and the first three quarters of fiscal 2005 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:

<TABLE>
<CAPTION>
                                                                            FOR THE THREE      FOR THE NINE
                                                                             MONTHS ENDED      MONTHS ENDED
                                                                           AUGUST 31, 2005   AUGUST 31, 2005
                                                                           ---------------   ---------------
<S>                                                                        <C>               <C>
Net income .............................................................      $ 994,147        $ 2,448,256
Add: Stock-based employee compensation included in actual net income ...          4,208              7,013
Deduct: Total stock-based employee compensation, had fair value
   method been applied .................................................       (721,957)        (1,315,687)
                                                                              ---------        -----------
Pro-forma net income ...................................................      $ 276,398        $ 1,139,582
                                                                              =========        ===========
Net income per common share - diluted ..................................      $     .08        $       .21
                                                                              =========        ===========
Pro-forma net income per common share - diluted, had fair
   value method been applied ...........................................      $     .02        $       .10
                                                                              =========        ===========
</TABLE>

     Net Income 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 includes the potential dilution
that could occur for common stock issuable under stock options or warrants. The
difference between weighted average shares - diluted and weighted average shares
- basic is calculated as follows:

<TABLE>
<CAPTION>
                                              2006
                                    ------------------------
                                       Three
                                      Months     Nine Months
                                    ----------   -----------
<S>                                 <C>          <C>
Weighted average shares - basic     13,071,340    12,238,600
Add: effect of dilutive common
shares and warrants                  1,388,959     1,475,131
                                    ----------    ----------
Weighted average shares - diluted   14,460,299    13,713,731
</TABLE>

<TABLE>
<CAPTION>
                                              2005
                                    ------------------------
                                       Three
                                      Months     Nine Months
                                    ----------   -----------
<S>                                 <C>          <C>
Weighted average shares - basic     10,360,990    10,227,923
Add: effect of dilutive common
shares and warrants                  1,741,621     1,622,495
                                    ----------    ----------
Weighted average shares - diluted   12,102,611    11,850,418
</TABLE>

     For the three and nine months ended August 31, 2006 and 2005, the number of
stock options that were excluded from the computation of net income per common
share - diluted, because the exercise price of the options exceeded the average
price per share of our common shares, was approximately 166,000, and the number
of warrants excluded from the calculation was 2,100,000, as they are contingent
on achieving specified future sales targets that we do not expect to achieve. As
of August 31, 2006 we had outstanding 4,232,699 warrants and options to purchase
common shares, and as of August 31, 2005 we had outstanding 4,303,151 warrants
and options to purchase common shares.


                                        7
<PAGE>

                             SOMANETICS CORPORATION

                    NOTES TO FINANCIAL STATEMENTS- CONTINUED
                                   (UNAUDITED)

                                 AUGUST 31, 2006

3.   ACCRUED LIABILITIES

     Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                            AUGUST 31,   NOVEMBER 30,
                               2006          2005
                            ----------   ------------
<S>                         <C>          <C>
Incentive Compensation ..    $519,450    $  701,658
Sales Commissions .......     222,968       352,459
Professional Fees .......      96,698         5,625
Clinical Research .......      47,081        21,675
Warranty ................      19,150        16,850
Royalty .................       8,442        13,788
401(k) Match ............          --        42,164
Taxes ...................          --        11,375
                             --------    ----------
   Total ................    $913,789    $1,165,594
                             ========    ==========
</TABLE>

4.   COMMITMENTS AND CONTINGENCIES

     On April 19, 2006, we amended and restated the employment agreement with
our President and Chief Executive Officer that was scheduled to expire on April
30, 2006. The amended and restated agreement provides for severance benefits
consisting of fringe benefits for one year, a lump sum payment equal to one
year's salary plus the target bonus for the year of termination (which must be
at least 65% of his salary), plus a pro rata bonus through the date of
termination, plus an amount equal to the cost of his automobile, cellular phone
and Internet access for one year upon termination of his employment without
cause or for good reason, or if his employment terminates because his agreement
expires. His amended and restated employment agreement expires April 30, 2009,
unless earlier terminated as provided in the agreement. He has agreed not to
compete with us and not to solicit our employees during specified periods
following the termination of employment, and he has agreed to various
confidentiality and assignment of invention obligations. Upon his termination
without cause or if the agreement expires, the estimated financial exposure of
this amended and restated employment agreement is approximately $500,000.

     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.

5.   COMMON STOCK

     On March 6, 2006, we completed a public offering of 2,300,000 of our
newly-issued common shares at a public offering price of $24.00 per share. The
net proceeds, after deducting the underwriting discount and the expense of the
offering, were $51,232,774. These amounts include the exercise in full by the
underwriters of an option to purchase up to 300,000 shares to cover
over-allotments. At completion of the offering, we had 13,015,885 shares
outstanding. We are using, or intend to use, the net proceeds from the offering
for the expansion of our direct sales team and other sales and marketing
activities, to sponsor additional clinical trials, to expand research and
development efforts, and for working capital and general corporate purposes,
including potential acquisitions of complementary products, technologies or
businesses.


                                       8

<PAGE>

                             SOMANETICS CORPORATION

                    NOTES TO FINANCIAL STATEMENTS- CONTINUED
                                   (UNAUDITED)

                                 AUGUST 31, 2006

     In June 2006, we granted 10-year options under the 2005 Stock Incentive
Plan to purchase 166,000 common shares to our officers and three of our
directors at an exercise price of $18.06 per share (the average of the high and
low sale prices of the common shares as of the date of grant), and issued 68,000
restricted common shares to our officers. In addition, in June 2006 we granted
10-year options under the 2005 Stock Incentive Plan to purchase 66,000 common
shares to 18 of our employees, one of our directors and one of our consultants
at an exercise price of $15.33 per share (the average of the high and low sale
prices of the common shares as of the date of grant).

     During the first three quarters of fiscal 2006, we issued 12,033 common
shares as a result of stock option exercises by our employees and one of our
former directors, for proceeds of $87,780.

6.   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 99 percent of our net
revenues in the first three quarters of fiscal 2006 were derived from our INVOS
System product line, compared to 97 percent of our net revenues in the first
three quarters of fiscal 2005.

7.   SUBSEQUENT EVENTS

     We entered into a Contract Development and Exclusive Licensing Agreement
with NeuroPhysics Corporation as of September 18, 2006. The agreement provides
us with feasibility research, contract development and consulting services and
certain ownership and licensing rights, subject to the rights of the United
States Federal government, to intellectual property and technical knowledge
associated with several novel near-infrared spectroscopy, or "NIRS", and imaging
technologies and products under development at NeuroPhysics. We paid an initial
license fee of $1,000,000 and have agreed to pay monthly license fees of up to
$30,000 a month (depending on which projects are continuing under development at
NeuroPhysics at the time) for products continuing under development at
NeuroPhysics beginning April 1, 2008 and a royalty on future sales of the new
products.

     NeuroPhysics is in the early stage of feasibility research and development
of several NIRS-based technologies and products, including a novel approach to
depth resolved NIRS measurements. In addition to this NIRS-based, depth-resolved
technology, products under development at NeuroPhysics include (1) a fetal
cerebral oximetry system, (2) a monitor for measuring oxygen saturation in deep
tissues for assessing hemorrhagic shock, (3) devices to assess tumors or
swelling containing blood, including in the brain of head trauma victims and
neonates with intra-ventricular hemorrhage, (4) a continuous and non-invasive
blood gas monitor, and (5) a new imaging concept intended to improve resolution
and expand the applicability of endoscopes. We may terminate any or all of the
projects under this agreement at any time. We might not be able to develop these
technologies or products into commercially viable products, and competitors
might develop and market similar products before we do.


                                       9

<PAGE>

                             SOMANETICS CORPORATION

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

                                 AUGUST 31, 2006

FORWARD-LOOKING STATEMENTS

     You should read the following discussion and analysis of our financial
condition and results of operations together with our financial statements and
the related notes and other financial data included elsewhere in this report.
Some of the information contained in this discussion and analysis or set forth
elsewhere in this report, including information with respect to our plans and
strategy for our business, includes forward-looking statements that involve
risks and uncertainties. You should review the "Risk Factors" section of our
Annual Report on Form 10-K for a discussion of important factors that could
cause actual results to differ materially from the results described in or
implied by the forward-looking statements contained in the following discussion
and analysis See also "Forward-Looking Statements" in Item 1A of our Annual
Report on Form 10-K.

OVERVIEW

     We develop, manufacture and market the INVOS System, a non-invasive patient
monitoring system that continuously measures changes in blood oxygen levels in
the brain. In the first quarter of fiscal 2005, we initiated selling and
marketing efforts for the INVOS System in the pediatric intensive care unit, or
ICU. We plan to launch the product into the neonatal ICU in early 2007, after
completing development of a smaller SomaSensor. We are currently sponsoring a
clinical trial evaluating the use of the INVOS System on diabetic patients over
age 50. If the results of this trial are positive, we intend to target more
actively the sale of the INVOS System for use in diabetic patients undergoing
major surgeries, consistent with FDA requirements. We expect to begin this
marketing in 2008.

     In November 2005, we received 510(k) clearance from the FDA to market our
INVOS System to monitor changes in somatic tissue blood oxygen saturation in
regions of the body other than the brain in patients with or at risk for
restricted blood flow. Our next generation INVOS System monitor, which we
launched in the second quarter of 2006, can display information from four
SomaSensors, which will allow for the simultaneous monitoring of changes in
blood oxygen saturation in the brain and, in patients with or at risk for
restricted blood flow, in somatic tissue.

     We also develop and market the CorRestore System for use in cardiac repair
and reconstruction. In September 2004, the European Economic Community changed
its regulations, limiting approval authority for animal tissue implant products
sold in Europe to some independent registration agencies that do not include our
registrar. Sales of CorRestore Systems represented one percent of our net
revenues for the first nine months of fiscal 2006. We expect that as sales of
our INVOS System increase, the CorRestore System will become an even less
significant component of our business.

     NET REVENUES AND COST OF SALES

     We derive our revenues from sales of INVOS Systems and CorRestore Systems
to hospitals in the United States through our direct sales team and independent
sales representative firms. Outside the United States, we have distribution
agreements with independent distributors for the INVOS System, including Tyco
Healthcare in Europe, Canada, the Middle East and Africa, and Edwards
Lifesciences Ltd. in Japan. Our cost of sales represent the cost of producing
monitors and disposable SomaSensors. Revenues from outside the United States
contributed 21 percent to our net revenues for the first nine months of fiscal
2006. As a percentage of revenues, the gross margins from our international
sales are typically lower than gross margins from our U.S. sales, reflecting the
difference between the prices we receive from distributors and from direct
customers.


                                       10

<PAGE>

                             SOMANETICS CORPORATION

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

                                 AUGUST 31, 2006

     We offer to our customers in the United States a no capital cost sales
program whereby we ship the INVOS System monitor to the customer at no charge.
Under this program, we do not recognize any revenue upon the shipment of the
monitor. We recognize SomaSensor revenue when we receive purchase orders and
ship the product to the customer. At the time of shipment of the monitor, we
capitalize the monitor as an asset and depreciate this asset over five years,
and this depreciation is included in cost of goods sold.

     OPERATING EXPENSES

     Selling, general and administrative expenses generally consist of:

     -    salaries, wages and related expenses of our employees and consultants;

     -    sales and marketing expenses, such as employee sales commissions,
          commissions to independent sales representatives, travel,
          entertainment, advertising, education and training expenses,
          depreciation of demonstration monitors and attendance at selected
          medical conferences;

     -    clinical research expenses, such as costs of supporting clinical
          trials; and

     -    general and administrative expenses, such as the cost of corporate
          operations, professional services, insurance, warranty and royalty
          expenses, investor relations, depreciation and amortization,
          facilities expenses and other general operating expenses.

     We have increased the size of our direct sales team and expect to continue
to increase significantly the number of sales personnel in fiscal 2006. In
addition, we are evaluating placing direct salespersons and clinical specialists
in Europe to support Tyco Healthcare. We also expect our clinical research
expenses to increase in fiscal 2006 as a result of sponsoring a clinical trial
evaluating the use of the INVOS System on diabetic patients over age 50. As a
result, we expect selling, general and administrative expenses to increase in
fiscal 2006.

     Research, development and engineering expenses consist of:

     -    salaries, wages and related expenses of our research and development
          personnel and consultants;

     -    costs of various development projects; and

     -    costs of preparing and processing applications for FDA clearance of
          new products.

We expect our research, development and engineering expenses to increase as a
result of our Contract Development and Exclusive Licensing Agreement with
NeuroPhysics Corporation, dated September 18, 2006.

RESULTS OF OPERATIONS

     THREE MONTHS ENDED AUGUST 31, 2006 COMPARED TO THREE MONTHS ENDED AUGUST
31, 2005

     NET REVENUES. Our net revenues increased $2,624,891, or 50 percent, from
$5,242,848 in the three-month period ended August 31, 2005 to $7,867,739 in the
three-month period ended August 31, 2006. The increase in net revenues is
primarily attributable to:


                                       11

<PAGE>

                             SOMANETICS CORPORATION

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

                                 AUGUST 31, 2006

     -    an increase in U.S. sales of $1,423,853, or 32 percent, from
          $4,414,127 in the third quarter of fiscal 2005 to $5,837,980 in the
          third quarter of fiscal 2006. The increase in U.S. sales was primarily
          due to an increase in sales of the disposable SomaSensor of
          $1,059,270, or 28 percent, primarily as a result of a 21 percent
          increase in SomaSensor unit sales. In addition, sales of the INVOS
          System monitor in the United States increased $384,608, or 79 percent,
          primarily as a result of increased purchases by pediatric hospitals
          after the launch of our products into the pediatric ICU in the first
          quarter of fiscal 2005; and

     -    an increase in international sales of $1,201,039, or 145 percent, from
          $828,721 in the third quarter of fiscal 2005 to $2,029,760 in the
          third quarter of fiscal 2006. The increase in international sales was
          primarily due to purchases of our next generation INVOS System monitor
          and disposable SomaSensors by Tyco Healthcare in Europe, in connection
          with the launch of this new monitor in the second quarter. In the
          third quarter of fiscal 2006, international sales represented 26
          percent of our net revenues, compared to 16 percent of our net
          revenues in the third quarter of fiscal 2005. Purchases by Tyco
          Healthcare accounted for 23 percent of net revenues in the third
          quarter of fiscal 2006 and 12 percent of net revenues in the third
          quarter of fiscal 2005.

     In the United States, we sold 50,366 SomaSensors in the third quarter of
fiscal 2006, and internationally, we sold 36,920 SomaSensors in the third
quarter of fiscal 2006. We placed 98 INVOS System monitors in the United States
and 133 internationally in the third quarter of fiscal 2006, and our installed
base of INVOS System monitors in the United States was 1,374, in 568 hospitals,
as of August 31, 2006.

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

<TABLE>
<CAPTION>
                             THREE MONTHS
                           ENDED AUGUST 31,
                           ----------------
PRODUCT                       2006   2005
-------                       ----   ----
<S>                        <C>       <C>
SomaSensors ............       74%    79%
INVOS System Monitors ..       25%    19%
                              ---    ---
   Total INVOS System ..       99%    98%
CorRestore Systems .....        1%     2%
                              ---    ---
   Total ...............      100%   100%
                              ===    ===
</TABLE>

     Effective December 1, 2005, we increased the suggested list price of the
adult SomaSensor and the pediatric SomaSensor in the United States to $140.00
and $155.00, respectively. Although these prices may not apply to existing
customers or to any existing sales quotations issued before the price increase
was effective, we expect that the average selling price of SomaSensors in the
United States will increase in fiscal 2006, primarily as a result of the
addition of new customers at our suggested retail prices and increased sales of
our pediatric SomaSensor.

     GROSS MARGIN. Gross margin as a percentage of net revenues was 86 percent
for the three months ended August 31, 2006 and 87 percent for the three months
ended August 31, 2005. The decrease in gross margin percentage is primarily
attributable to increased purchases of our next generation INVOS System monitor
and disposable sensor by Tyco Healthcare, due to the lower margin we receive on
sales to our distributors. This decrease was partially offset by a six percent
increase in the average selling price of SomaSensors in the United States and
increased sales of the INVOS System monitors to pediatric hospitals in the
United States. The increase in our average selling prices is attributable to
increased sales of our pediatric SomaSensor, which sells for a higher price than
the adult SomaSensor, and to the addition of new customers at our higher
suggested retail prices.


                                       12

<PAGE>

                             SOMANETICS CORPORATION

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

                                 AUGUST 31, 2006

     RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES. Our research, development
and engineering expenses increased $39,139, or 41 percent, from $95,924 in the
third quarter of fiscal 2005 to $135,063 in the third quarter of fiscal 2006.
The increase is primarily attributable to a $19,207 increase in development
costs associated with our next generation INVOS System monitor, which was
launched in the second quarter of fiscal 2006, and an $18,973 increase in
salaries due to the addition of one engineer. We expect our research,
development and engineering expenses to increase in fiscal 2006, primarily as a
result of development costs associated with our new smaller pediatric
SomaSensor.

     We expect our research, development and engineering expenses to increase as
a result of our Contract Development and Exclusive Licensing Agreement with
NeuroPhysics Corporation, dated September 18, 2006.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1,468,708, or 48 percent, from $3,064,857 for
the three months ended August 31, 2005 to $4,533,565 for the three months ended
August 31, 2006, primarily due to:

     -    a $529,230 increase in salaries, wages and related expenses, primarily
          as a result of an increase in the number of employees, principally in
          sales and marketing (from an average of 43 employees for the three
          months ended August 31, 2005 to an average of 55 employees for the
          three months ended August 31, 2006) and an increase in salaries of
          existing employees;

     -    a $217,482 increase in commissions paid to our sales employees as a
          result of increased sales and hiring additional sales employees;

     -    a $164,294 increase in accrued incentive compensation expense due to
          our year-to-date 2006 financial performance, primarily increased sales
          and net income in accordance with the 2006 Incentive Compensation
          Plan;

     -    a $160,172 increase in professional service fees, primarily due to
          increased legal and consulting fees;

     -    a $153,136 increase in travel, marketing and selling-related expenses
          as a result of our increased sales personnel and increased sales and
          marketing activities, primarily trade shows and sales training; and

     -    a $121,784 increase in stock compensation expense due to stock
          compensation issued to directors, officers, employees and a consultant
          in the third quarter.

     We expect our selling, general and administrative expenses to increase in
fiscal 2006, primarily as a result of our hiring additional direct sales
personnel in fiscal 2005 and 2006, increased sales commissions payable as a
result of increased sales, increased clinical research expense, increased stock
compensation expenses due to third quarter stock compensation, and increased
sales and marketing expenses.

     OTHER INCOME. During the third quarter of fiscal 2006, interest income
increased to $751,523, from $85,413 in the third quarter of 2005, primarily due
to our increased cash, cash equivalents, marketable securities and long-term
investment balances as a result of the proceeds from our public offering of
common shares that closed in the second quarter, and increased interest rates.

     INCOME TAX PROVISION. During the third quarter of fiscal 2006 and 2005, we
recognized income tax expense at an estimated effective tax rate of 34 percent
on our statement of operations, and we expect this to continue for future
periods.


                                       13

<PAGE>

                             SOMANETICS CORPORATION

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

                                 AUGUST 31, 2006

     NINE MONTHS ENDED AUGUST 31, 2006 COMPARED TO NINE MONTHS ENDED AUGUST 31,
2005

     NET REVENUES. Our net revenues increased $6,658,099, or 46 percent, from
$14,358,211 in the nine-month period ended August 31, 2005 to $21,016,310 in the
nine-month period ended August 31, 2006. The increase in net revenues is
primarily attributable to:

     -    an increase in U.S. sales of $4,543,038, or 38 percent, from
          $11,976,210 in the first nine months of fiscal 2005 to $16,519,248 in
          the first nine months of fiscal 2006. The increase in U.S. sales was
          primarily due to an increase in sales of the disposable SomaSensor of
          $3,683,230, or 36 percent, primarily as a result of a 29 percent
          increase in SomaSensor unit sales. In addition, sales of the INVOS
          System monitor in the United States increased $937,483, or 61 percent,
          primarily as a result of increased purchases by pediatric hospitals
          after the launch of our products into the pediatric ICU in the first
          quarter of fiscal 2005; and

     -    an increase in international sales of $2,115,061, or 89 percent, from
          $2,382,001 in the first nine months of fiscal 2005 to $4,497,062 in
          the first nine months of fiscal 2006. The increase in international
          sales was primarily due to increased purchases of the INVOS System
          monitor and disposable SomaSensors by Tyco Healthcare in Europe. This
          increase included the purchases of our next generation INVOS System
          monitor by Tyco Healthcare in Europe, in connection with the launch of
          this new monitor in the second quarter, partially for evaluation and
          demonstration purposes. In the first nine months of fiscal 2006,
          international sales represented 21 percent of our net revenues,
          compared to 17 percent of our net revenues in the first nine months of
          fiscal 2005. Purchases by Tyco Healthcare accounted for 17 percent of
          net revenues in the first nine months of fiscal 2006 and 12 percent of
          net revenues in the first nine months of fiscal 2005.

     In the United States, we sold 145,037 SomaSensors in the first nine months
of fiscal 2006, and internationally, we sold 70,410 SomaSensors. We placed 274
INVOS System monitors in the United States and 360 internationally in the first
nine months of fiscal 2006.

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

<TABLE>
<CAPTION>
                              NINE MONTHS
                           ENDED AUGUST 31,
                           ----------------
PRODUCT                       2006   2005
-------                       ----   ----
<S>                        <C>       <C>
SomaSensors ............       74%    77%
INVOS System Monitors ..       25%    20%
                              ---    ---
   Total INVOS System ..       99%    97%
CorRestore Systems .....        1%     3%
                              ---    ---
   Total ...............      100%   100%
                              ===    ===
</TABLE>

     GROSS MARGIN. Gross margin as a percentage of net revenues was 87 percent
for the nine months ended August 31, 2006 and 87 percent for the nine months
ended August 31, 2005. While gross margins as a percentage of net revenues
remained fairly constant for the first nine months of fiscal 2006 compared to
the first nine months of fiscal 2005, we realized a six percent increase in the
average selling price of SomaSensors in the United States and increased sales of
the INVOS System monitors to pediatric hospitals in the United States, offset by
the purchases of our next generation INVOS System monitor and disposable sensor
by Tyco Healthcare, due to the lower margin we receive on sales to our
distributors. The increase in our average selling prices in the United States is
attributable to increased sales of our pediatric SomaSensor, which sells for a
higher price than the adult SomaSensor, and the addition of new customers at our
higher suggested retail prices.


                                       14

<PAGE>

                             SOMANETICS CORPORATION

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

                                 AUGUST 31, 2006

     RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES. Our research, development
and engineering expenses increased $157,699, or 53 percent, from $296,441 in the
first three quarters of fiscal 2005 to $454,140 in the first three quarters of
fiscal 2006. The increase is primarily attributable to $95,172 in development
costs associated with our next generation INVOS System monitor, which was
launched in the second quarter of fiscal 2006, and a $59,607 increase in
salaries due to the addition of one engineer.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3,208,465, or 37 percent, from $8,685,648 for
the nine months ended August 31, 2005 to $11,894,113 for the nine months ended
August 31, 2006, primarily due to:

     -    a $1,199,689 increase in salaries, wages and related expenses,
          primarily as a result of an increase in the number of employees,
          principally in sales and marketing (from an average of 40 employees
          for the nine months ended August 31, 2005 to an average of 59
          employees for the nine months ended August 31, 2006) and an increase
          in salaries of existing employees;

     -    a $574,406 increase in travel, marketing and selling-related expenses
          as a result of our increased sales personnel and increased sales and
          marketing activities, primarily trade shows and sales training;

     -    a $392,497 increase in employee sales commissions as a result of
          increased sales and hiring additional sales employees in the first
          nine months of fiscal 2006;

     -    a $344,462 increase in professional service fees primarily due to
          increased legal and consulting fees;

     -    a $165,037 increase in accrued incentive compensation expense due to
          our year-to-date 2006 financial performance, primarily increased sales
          and net income in accordance with the 2006 Incentive Compensation
          Plan;

     -    a $139,534 increase in commissions paid to our independent sales
          representative firms as a result of increased sales;

     -    a $118,979 increase in stock compensation expense due to stock
          compensation issued to directors, officers, employees and a consultant
          in the third quarter; and

     -    a $118,095 increase in office and facilities expenses primarily as a
          result of increased employees and increased insurance costs.

     OTHER INCOME. During the first nine months of fiscal 2006, interest income
increased to $1,709,603 from $189,542 in the first nine months of 2005,
primarily due to our increased cash, cash equivalents, marketable securities and
long-term investment balances as a result of the proceeds from our public
offering of common shares that closed in the second quarter, and increased
interest rates.

     INCOME TAX PROVISION. During the first nine months of fiscal 2006 and 2005,
we recognized income tax expense at an estimated effective tax rate of 34
percent on our statement of operations, and we expect this to continue for
future periods.

LIQUIDITY AND CAPITAL RESOURCES

     GENERAL

     Our principal sources of operating funds have been the proceeds of equity
investments from sales of our common shares and cash provided by operating
activities.


                                       15
<PAGE>

                             SOMANETICS CORPORATION

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

                                 AUGUST 31, 2006

     As of August 31, 2006, we did not have any outstanding or available debt
financing arrangements, we had working capital of $50.8 million and our primary
sources of liquidity were $21.4 million of cash and cash equivalents, $22.1
million of marketable securities and $26.1 million of long-term investments.
Marketable securities and long-term investments consist of Aaa-rated United
States Government agency bonds, and cash and cash equivalents are currently
invested in bank savings accounts and money market accounts, pending their
ultimate use.

     On March 6, 2006, we completed a public offering of 2,300,000 of our
newly-issued common shares at a public offering price of $24.00 per share. The
net proceeds, after deducting the underwriting discount and the expense of the
offering, were $51,232,774. These amounts include the exercise in full by the
underwriters of an option to purchase up to 300,000 shares to cover
over-allotments. At completion of the offering, we had 13,015,885 shares
outstanding. We are using, or intend to use, the net proceeds from the offering
for the expansion of our direct sales team and other sales and marketing
activities, to sponsor additional clinical trials, to expand research and
development efforts, and for working capital and general corporate purposes,
including potential acquisitions of complementary products, technologies or
businesses.

     We believe that cash, cash equivalents, marketable securities and long-term
investments on hand at August 31, 2006 will be adequate to satisfy our operating
and capital requirements for more than the next twelve months.

     We entered into a Contract Development and Exclusive Licensing Agreement
with NeuroPhysics Corporation as of September 18, 2006. The agreement provides
us with feasibility research, contract development and consulting services and
certain ownership and licensing rights, subject to the rights of the United
States Federal government, to intellectual property and technical knowledge
associated with several novel near-infrared spectroscopy, or "NIRS", and imaging
technologies and products under development at NeuroPhysics. We paid an initial
license fee of $1,000,000 and have agreed to pay monthly license fees of up to
$30,000 a month (depending on which projects are continuing under development at
NeuroPhysics at the time) for products continuing under development at
NeuroPhysics beginning April 1, 2008 and a royalty on future sales of the new
products.

     CASH FLOWS FROM OPERATING ACTIVITIES

     Net cash provided by operations during the first nine months of fiscal 2006
and 2005 was $5,625,746 and $3,324,155, respectively. In the first nine months
of fiscal 2006, cash was provided primarily by:

     -    $8,208,182 of net income before income taxes and non-cash
          depreciation, amortization, and stock compensation expense;

     -    a $475,612 decrease in prepaid expenses, primarily because we
          capitalized to machinery and equipment tooling that was completed in
          the first six months of fiscal 2006 for our next generation INVOS
          System monitor, and the amortization of prepaid insurance payments
          made in fiscal 2005; and

     -    a $332,861 increase in accounts payable, primarily as a result of
          increased inventory and operating expenses, partially offset by more
          timely payments made to vendors.


                                       16

<PAGE>

                             SOMANETICS CORPORATION

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

                                 AUGUST 31, 2006

Cash provided by operations in the first nine months of fiscal 2006 was
partially offset by:

     -    a $1,615,644 increase in accounts receivable, primarily as a result of
          higher third quarter sales in fiscal 2006 than in the fourth quarter
          of fiscal 2005 and increased international sales which are generally
          collected more slowly;

     -    a $1,523,460 increase in inventories, primarily due to the acquisition
          of components associated with the launch of our next generation INVOS
          System monitor and SomaSensors and components associated with our
          INVOS System monitor due to anticipated sales; inventories on our
          balance sheet increased less because we capitalized INVOS System
          monitors to property and equipment that are being used as
          demonstration units and no capital cost sales equipment, as described
          below; and

     -    a $251,805 decrease in accrued liabilities, primarily as a result of
          the payment of year-end 2005 accrued incentive compensation, accrued
          401(k) Plan matching contributions and accrued sales commissions,
          partially offset by increased accrued professional fees, primarily
          legal and consulting fees.

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

     The increase in inventories described above is greater than shown on our
balance sheet because it includes INVOS System monitors that we capitalized
because they are being used as demonstration units and no capital cost sales
equipment. We capitalized $551,764 of costs from inventory for INVOS System
monitors being used as demonstration units and no capital cost sales equipment
at customers during the first nine months of fiscal 2006, compared to $390,150
in the first nine months of fiscal 2005. As of August 31, 2006, we had
capitalized $2,395,886 in costs for INVOS System monitors being used as
demonstration and no capital cost sales equipment, and these assets had a net
book value of $1,367,510. We depreciate these assets over five years.

     CASH FLOWS FROM INVESTING ACTIVITIES

     Net cash used in investing activities in the first three quarters of fiscal
2006 and 2005 was $48,708,452 and $119,543, respectively. In the first three
quarters of fiscal 2006, these expenditures were primarily for investments in
marketable securities and long-term investments with the proceeds from our
public offering, described above, and also $509,753 in capital expenditures,
primarily tooling for the next generation INVOS System monitor.

     CASH FLOWS FROM FINANCING ACTIVITIES

     Net cash provided by financing activities in the first three quarters of
fiscal 2006 and 2005 was $51,320,554 and $1,424,970, respectively. On March 6,
2006, we completed a public offering of 2,300,000 of our newly-issued common
shares at a public offering price of $24.00 per share. The net proceeds, after
deducting the underwriting discount and the expense of the offering, were
$51,232,774. In addition, in the first three quarters of fiscal 2006, we issued
12,033 common shares as a result of stock option exercises, for proceeds of
$87,780.

CONTRACTUAL OBLIGATIONS

     As of August 31, 2006, there have been no material changes outside the
ordinary course of business in the contractual obligations disclosed in our
Annual Report on Form 10-K for the fiscal year ended November 30, 2005 under the
caption "Contractual Obligations."

OFF-BALANCE SHEET ARRANGEMENTS

     We do not have any off-balance sheet arrangements or financing activities.


                                       17

<PAGE>

                             SOMANETICS CORPORATION

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

                                 AUGUST 31, 2006

CRITICAL ACCOUNTING POLICIES

     We believe our most significant accounting policies relate to our
accounting treatment of stock compensation of employees, our accounting
treatment for income taxes, and our revenue recognition associated with our no
capital cost sales program.

     STOCK COMPENSATION

     In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (revised), Share Based Payment. This
Statement requires that compensation costs related to share-based payment
transactions, including stock options, stock appreciation rights and restricted
stock be recognized in the financial statements. This Statement became effective
for our fiscal quarter that began December 1, 2005.

     We previously accounted 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 in the first three quarters
of fiscal 2005 for stock option grants to employees because our stock option
grants are priced at the market value as of the date of grant. Stock-based
compensation of consultants and advisors was determined based on the fair value
of the options or warrants on the grant date pursuant to the methodology of SFAS
No. 123, estimated using the Black-Scholes model. The resulting amount was
recognized as compensation expense and an increase in additional paid-in capital
over the vesting period of the options or warrants. In the first nine months of
fiscal 2005, we recorded such compensation expense of $7,013.

     In November 2005, we approved the acceleration of vesting of all unvested
stock options as of November 30, 2005. The primary purpose of this accelerated
vesting was to eliminate compensation expense we would recognize in our results
of operations upon the adoption of SFAS 123(R), which became effective for our
fiscal quarter that began December 1, 2005. After the effects of the accelerated
vesting, the initial adoption of SFAS 123(R) has been immaterial with respect to
options granted before December 1, 2005. The issuance of additional stock
compensation under the 2005 Stock Incentive Plan in the third quarter of fiscal
2006 had an impact on our financial statements.

     During the first three quarters of fiscal 2006 we granted 232,000 stock
options to our officers, employees, directors and one of our consultants, and we
issued 68,000 restricted common shares to our officers. These stock options and
restricted shares vest over five years. As a result of the stock options and
restricted common shares that we granted during the nine months ended August 31,
2006, we have recorded $125,992 in stock compensation expense in accordance with
SFAS No. 123(R). The fair value of the stock option grants was estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: expected volatility (the measure by which the
stock price has fluctuated or is expected to fluctuate during the period)
54.00%, risk-free rate of 5%, expected lives of 6 years, and a dividend yield of
0%. The fair value of the restricted common shares was estimated based on the
market value of the common shares on the date of issuance.

     Had we recognized compensation expense for our stock options that vested in
the first three quarters of fiscal 2005 using the fair value method of
accounting based on the fair value of the options on the grant date using the
Black-Scholes valuation model, we would have recorded $1,315,687 in compensation
expense (including the $7,013 actually recorded) and realized pro forma net
income of $1,139,582, or $.10 per diluted common share.


                                       18

<PAGE>

                             SOMANETICS CORPORATION

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

                                 AUGUST 31, 2006

     INCOME TAXES

     We have performed the required assessment of positive and negative evidence
regarding realization of our deferred tax assets in accordance with SFAS No.
109, including our past operating results, the existence of cumulative losses
over our history up to the most recent three fiscal years, and our forecast for
future net income. Our assessment of our deferred tax assets, and the reversal
of part of our valuation allowance, included assuming that our net revenues and
pre-tax income will grow in future years consistent with the growth guidance
given for fiscal 2006 and making allowance for the uncertainties surrounding,
among other things, our future rate of growth in net revenues, the rate of
adoption of our products in the marketplace, and the potential for competition
to enter the marketplace. In reversing a portion of our valuation allowance, in
fiscal 2005 and fiscal 2004, we have concluded that it is more likely than not
that approximately $10,000,000 of such assets will be realized.

     During fiscal 2004, we adjusted our deferred tax asset valuation allowance
resulting in the recognition of a deferred tax asset of $6,700,000 related to
the expected future benefits of our net operating loss carryforwards, in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." During fiscal 2005, we further adjusted our deferred tax
asset valuation allowance resulting in the recognition of an additional net
deferred tax asset of $3,300,000.

     The effect of recognizing this asset on our balance sheet, and associated
tax benefit on our statement of operations, is to increase our net income for
fiscal 2005 to $7,751,087, or $0.66 per diluted common share, and to increase
our net income for fiscal 2004 to $8,706,576, or $0.77 per diluted common share.
Given the assumptions inherent in our financial plans, it is possible to
calculate a different value for our deferred tax asset by changing one or more
of the variables in our assessment. However, we believe that our evaluation of
our financial plans was reasonable, and that the judgments and assumptions that
we made at the time of developing the plan were appropriate.

     NO CAPITAL COST SALES REVENUE RECOGNITION

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


                                       19

<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The table below provides information about our financial instruments that
are sensitive to changes in interest rates, consisting of investments in United
States government agency bonds. For these financial instruments, the table
presents principal cash flows and related weighted average interest rates by
expected maturity dates. Weighted average fixed rates are based on the contract
rates. The actual cash flows of all instruments are denominated in U.S. dollars.
We invest our cash on hand not needed in current operations in United States
government agency bonds with varying maturity dates with the intention of
holding them until maturity.

<TABLE>
<CAPTION>
                                                     AUGUST 31, 2006
                                           EXPECTED MATURITY DATES BY FISCAL YEAR
                               -------------------------------------------------------------
                                  2006        2007         2008         2009         2010      THEREAFTER      TOTAL     FAIR VALUE
                               ---------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
<S>                            <C>         <C>          <C>          <C>          <C>          <C>          <C>          <C>
INVESTMENTS:
Marketable Securities and
   Long-term Investments:
   Fixed Rate ($)............. 5,057,026   21,037,872   12,011,647   10,092,154       --           --       48,198,699   48,210,423
      Average interest rate...      5.11%        5.16%        5.25%        5.33%      N/A          N/A            5.22%
</TABLE>


                                       20

<PAGE>

ITEM 4. 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 August 31, 2006 and any change in our internal
control over financial reporting that occurred during our third fiscal quarter
ended August 31, 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. Based on their
evaluation, our principal executive and principal financial officers have
concluded that these controls and procedures are effective as of August 31,
2006. There was no change in our internal control over financial reporting
identified in connection with such evaluation that occurred during our third
fiscal quarter ended August 31, 2006 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.

     Internal control over financial reporting is a process designed by, or
under the supervision of, our principal executive and principal financial
officers, and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that: (1) pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect our transactions
and dispositions of assets, (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations of our
management and directors, and (3) and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial statements.


                                       21

<PAGE>

                            PART II OTHER INFORMATION

ITEM 6. EXHIBITS

<TABLE>
<S>    <C>
10.1   Contract Development and Exclusive Licensing Agreement, dated as of
       September 18, 2006, among Somanetics Corporation, NeuroPhysics
       Corporation, Hugh F. Stoddart, and Hugh A. Stoddart, incorporated by
       reference to Exhibit 99.1 to the Company's Current Report on Form 8-K,
       dated September 18, 2006 and filed September 20, 2006.

10.2   Summary of Outside Director Compensation, incorporated by reference to
       Item 1.01 to the Company's Current Report on Form 8-K dated June 29, 2006
       and filed July 5, 2006.

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>


                                       22

<PAGE>

                                   SIGNATURES

     Pursuant to the requirements 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
                                        (Registrant)


Date: October 6, 2006                   By: /s/ William M. Iacona
                                            ------------------------------------
                                            William M. Iacona
                                            Vice President and Chief Financial
                                            Officer, Controller and Treasurer
                                            (Duly Authorized and Principal
                                            Financial Officer)


                                       23

<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit                                 Description
-------                                 -----------
<S>       <C>
10.1      Contract Development and Exclusive Licensing Agreement, dated as of
          September 18, 2006, among Somanetics Corporation, NeuroPhysics
          Corporation, Hugh F. Stoddart, and Hugh A. Stoddart, incorporated by
          reference to Exhibit 99.1 to the Company's Current Report on Form
          8-K,, dated September 18, 2006 and filed September 20, 2006.

10.2      Summary of Outside Director Compensation, incorporated by reference to
          Item 1.01 to the Company's Current Report on Form 8-K dated June 29,
          2006 and filed July 5, 2006.

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>


                                       24