<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 MAY 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 June 30, 2006: 13,023,218

<PAGE>

                          PART I FINANCIAL INFORMATION

                             SOMANETICS CORPORATION

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                          MAY 31,     NOVEMBER 30,
                                                                           2006           2005
                                                                       ------------   ------------
                                                                        (Unaudited)     (Audited)
<S>                                                                    <C>            <C>
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents .......................................   $ 19,275,013   $ 13,148,237
   Marketable securities ...........................................     17,982,466             --
   Accounts receivable .............................................      4,130,172      3,531,740
   Inventory .......................................................      1,970,727      1,058,101
   Prepaid expenses ................................................        163,417        623,303
   Deferred tax asset - current ....................................      1,888,778      1,561,322
                                                                       ------------   ------------
      Total current assets .........................................     45,410,573     19,922,703
                                                                       ------------   ------------
PROPERTY AND EQUIPMENT (at cost):
   Demonstration and no capital cost sales equipment at customers ..      2,138,791      1,916,655
   Machinery and equipment .........................................      1,201,521        768,992
   Furniture and fixtures ..........................................        295,148        289,397
   Leasehold improvements ..........................................        192,615        187,135
                                                                       ------------   ------------
      Total ........................................................      3,828,075      3,162,179
   Less accumulated depreciation and amortization ..................     (2,057,488)    (1,836,438)
                                                                       ------------   ------------
      Net property and equipment ...................................      1,770,587      1,325,741
                                                                       ------------   ------------
OTHER ASSETS:
   Long-term investments ...........................................     30,224,530             --
   Deferred tax asset - non-current ................................      6,481,932      8,438,678
   Other ...........................................................         15,000         15,000
   Intangible assets, net ..........................................         13,465         16,921
                                                                       ------------   ------------
      Total other assets ...........................................     36,734,927      8,470,599
                                                                       ------------   ------------
TOTAL ASSETS .......................................................   $ 83,916,087   $ 29,719,043
                                                                       ============   ============

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Accounts payable ................................................   $  1,048,061   $    712,796
   Accrued liabilities .............................................        585,986      1,165,594
                                                                       ------------   ------------
      Total current liabilities ....................................      1,634,047      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, 13,023,218 shares at May 31, 2006,
      and 10,715,885 shares at November 30, 2005 ...................        130,232        107,159
   Additional paid-in capital ......................................    116,120,128     64,864,554
   Accumulated deficit .............................................    (33,968,320)   (37,131,060)
                                                                       ------------   ------------
      Total shareholders' equity ...................................     82,282,040     27,840,653
                                                                       ------------   ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .........................   $ 83,916,087   $ 29,719,043
                                                                       ============   ============
</TABLE>

                        See notes to financial statements


                                        2

<PAGE>

                             SOMANETICS CORPORATION

                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                     THREE MONTHS                  SIX MONTHS
                                                     ENDED MAY 31,               ENDED MAY 31,
                                               -------------------------   -------------------------
                                                   2006         2005           2006         2005
                                               -----------   -----------   -----------   -----------
<S>                                            <C>           <C>           <C>           <C>
NET REVENUES ...............................   $ 7,394,857   $ 5,082,746   $13,148,571   $ 9,115,363
COST OF SALES ..............................       924,497       644,840     1,634,996     1,194,989
                                               -----------   -----------   -----------   -----------
   Gross Margin ............................     6,470,360     4,437,906    11,513,575     7,920,374
                                               -----------   -----------   -----------   -----------
OPERATING EXPENSES:
   Research, development and engineering ...       141,011       104,715       319,077       200,517
   Selling, general and administrative .....     3,852,667     3,044,655     7,360,548     5,620,791
                                               -----------   -----------   -----------   -----------
      Total operating expenses .............     3,993,678     3,149,370     7,679,625     5,821,308
                                               -----------   -----------   -----------   -----------
OPERATING INCOME ...........................     2,476,682     1,288,536     3,833,950     2,099,066
                                               -----------   -----------   -----------   -----------
OTHER INCOME:
   Interest income .........................       817,943        60,226       958,080       104,129
                                               -----------   -----------   -----------   -----------
      Total other income ...................       817,943        60,226       958,080       104,129
                                               -----------   -----------   -----------   -----------
NET INCOME BEFORE INCOME TAXES .............     3,294,625     1,348,762     4,792,030     2,203,195
                                               -----------   -----------   -----------   -----------
INCOME TAX PROVISION .......................     1,120,173       458,579     1,629,290       749,086
                                               -----------   -----------   -----------   -----------
NET INCOME .................................   $ 2,174,452   $   890,183   $ 3,162,740   $ 1,454,109
                                               -----------   -----------   -----------   -----------
NET INCOME PER COMMON
   SHARE - BASIC ...........................   $      0.17   $      0.09   $      0.27   $      0.14
                                               -----------   -----------   -----------   -----------
NET INCOME PER COMMON
   SHARE - DILUTED .........................   $      0.15   $      0.08   $      0.24   $      0.12
                                               -----------   -----------   -----------   -----------
WEIGHTED AVERAGE SHARES
   OUTSTANDING - BASIC .....................    12,895,472    10,180,853    11,817,654    10,160,659
                                               ===========   ===========   ===========   ===========
WEIGHTED AVERAGE SHARES
   OUTSTANDING - DILUTED ...................    14,353,075    11,866,928    13,360,564    11,832,184
                                               ===========   ===========   ===========   ===========
</TABLE>

                        See notes to financial statements


                                        3

<PAGE>

                             SOMANETICS CORPORATION

                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                       FOR THE SIX-MONTH
                                                                                         PERIODS ENDED
                                                                                  ---------------------------
                                                                                  MAY 31, 2006   MAY 31, 2005
                                                                                  ------------   ------------
<S>                                                                               <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income .................................................................   $  3,162,740    $ 1,454,109
   Adjustments to reconcile net income to net cash provided by operations:
      Income tax provision ....................................................      1,629,290        749,086
      Depreciation and amortization ...........................................        263,387        175,119
      Compensation expense for non-employee stock options .....................             --          2,805
      Changes in assets and liabilities:
         Accounts receivable (increase) .......................................       (598,432)      (492,243)
         Inventory (increase) .................................................     (1,156,104)      (317,890)
         Prepaid expenses decrease ............................................        459,886        106,370
         Accounts payable increase ............................................        335,265        207,751
         Accrued liabilities (decrease) .......................................       (579,608)      (100,808)
                                                                                  ------------    -----------
      Net cash provided by operating activities ...............................      3,516,424      1,784,299
                                                                                  ------------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of marketable securities and long-term investments ...............    (48,206,996)            --
   Acquisition of property and equipment (net) ................................       (461,299)       (44,942)
                                                                                  ------------    -----------
      Net cash (used in) investing activities .................................    (48,668,295)       (44,942)
                                                                                  ------------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of common shares ....................................     51,234,342             --
   Proceeds from issuance of common shares due to exercise of stock options ...         44,305        561,564
                                                                                  ------------    -----------
      Net cash provided by financing activities ...............................     51,278,647        561,564
                                                                                  ------------    -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .....................................      6,126,776      2,300,921
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................     13,148,237      7,069,542
                                                                                  ------------    -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................................   $ 19,275,013    $ 9,370,463
                                                                                  ============    ===========
Supplemental Disclosure of Non cash investing activities:
   Demonstration and no capital cost sales equipment capitalized
      from inventory (Note 2) .................................................   $    243,478    $   259,617
</TABLE>

                        See notes to financial statements


                                        4

<PAGE>

                             SOMANETICS CORPORATION

                         NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

                                  MAY 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
six-month period ended May 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, and are
stated at the amortized cost.

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

<TABLE>
<CAPTION>
                             MAY 31,    NOVEMBER 30,
                              2006         2005
                           ----------   ------------
<S>                        <C>          <C>
Purchased components ...   $1,483,096    $  652,876
Finished goods .........      382,194       352,560
Work in process ........      105,437        52,665
                           ----------    ----------
   Total ...............   $1,970,727    $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
$259,932 and $171,663 for the six-month periods ended May 31, 2006 and May 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. As of May 31, 2006, we have capitalized $2,138,791 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 $1,162,699. 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)

                                  MAY 31, 2006

<TABLE>
<CAPTION>
                                      MAY 31,   NOVEMBER 30,
                                       2006         2005
                                     --------   ------------
<S>                                  <C>        <C>
Patents and trademarks ...........   $111,733     $111,733
Less: accumulated amortization ...    (98,268)     (94,812)
                                     --------     --------
   Total .........................   $ 13,465     $ 16,921
                                     ========     ========
</TABLE>

     Amortization expense for the six months ended May 31, 2006 and May 31, 2005
was $3,456. 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 Options 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 two quarters of fiscal 2005, we recorded no compensation expense against
income for stock option grants to employees.

     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 two quarters of fiscal 2006. However, the
issuance of additional stock compensation under the 2005 Stock Incentive Plan in
the future will have an additional impact on our financial statements.

     Stock-based compensation of consultants and advisors is determined based on
the fair value of the options or warrants on the grant date pursuant to the
methodology of SFAS No. 123, estimated using the Black-Scholes model. The
resulting amount is recognized as compensation expense and an increase in
additional paid-in capital over the vesting period of the options or warrants.
We did not record any compensation expense, or any increase in additional paid
in capital, in the first two quarters of fiscal 2006. In the first two quarters
of fiscal 2005, we recorded such compensation expense of $2,805.

     Had compensation expense for stock options that vested in the second
quarter and first two 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:


                                        6

<PAGE>

                             SOMANETICS CORPORATION

                    NOTES TO FINANCIAL STATEMENTS- CONTINUED
                                   (UNAUDITED)

                                  MAY 31, 2006

<TABLE>
<CAPTION>
                                                                           FOR THE THREE    FOR THE SIX
                                                                            MONTHS ENDED   MONTHS ENDED
                                                                            MAY 31, 2005   MAY 31, 2005
                                                                           -------------   ------------
<S>                                                                        <C>             <C>
Net income .............................................................     $ 890,183      $1,454,109
Add: Stock-based employee compensation included in actual net income ...         2,805           2,805
Deduct: Total stock-based employee compensation, had fair value
   method been applied .................................................      (396,462)       (593,730)
                                                                             ---------      ----------
Pro-forma net income ...................................................     $ 496,526      $  863,184
                                                                             =========      ==========
Net income per common share - diluted ..................................     $     .08      $      .12
                                                                             =========      ==========
Pro-forma net income (loss) per common share - diluted, had fair
   value method been applied ...........................................     $     .04      $      .07
                                                                             =========      ==========
</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   Six Months
                                    ------------   ----------
<S>                                 <C>            <C>
Weighted average shares - basic      12,895,472    11,817,654
Add: effect of dilutive common
   shares and warrants                1,457,603     1,542,910
                                     ----------    ----------
Weighted average shares - diluted    14,353,075    13,360,564
</TABLE>

<TABLE>
<CAPTION>
                                               2005
                                    -------------------------
                                    Three Months   Six Months
                                    ------------   ----------
<S>                                 <C>            <C>
Weighted average shares - basic      10,180,853    10,160,659
Add: effect of dilutive common
   shares and warrants                1,686,075     1,671,525
                                     ----------    ----------
Weighted average shares - diluted    11,866,928    11,832,184
</TABLE>

     For the three and six months ended May 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 500, 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
May 31, 2006 we had outstanding 4,006,899 warrants and options to purchase
common shares, and as of May 31, 2005 we had outstanding 4,502,456 warrants and
options to purchase common shares.


                                        7

<PAGE>

                             SOMANETICS CORPORATION

                    NOTES TO FINANCIAL STATEMENTS- CONTINUED
                                   (UNAUDITED)

                                  MAY 31, 2006

3.   ACCRUED LIABILITIES

     Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                              MAY 31,   NOVEMBER 30,
                               2006         2005
                             --------   ------------
<S>                          <C>        <C>
Incentive Compensation ...   $245,716    $  701,658
Sales Commissions ........    229,978       352,459
Professional Fees ........     68,567         5,625
Warranty .................     18,450        16,850
Clinical Research ........     16,925        21,675
Royalty ..................      6,350        13,788
401(k) Match .............         --        42,164
Taxes ....................         --        11,375
                             --------    ----------
   Total .................   $585,986    $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 $51,234,342. 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 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)

                                  MAY 31, 2006

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


                                        9
<PAGE>

                             SOMANETICS CORPORATION

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

                                  MAY 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
Repot 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 late 2006, 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 six 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 19 percent to our net revenues for the first six 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.

     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


                                       10

<PAGE>

                             SOMANETICS CORPORATION

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

                                  MAY 31, 2006

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 from 19 persons at the
end of the second quarter of fiscal 2005 to 31persons at the end of the second
quarter of fiscal 2006. We expect to increase significantly the size of our U.S.
direct sales team in fiscal 2006 and are evaluating placing direct salespersons
and clinical specialists in Europe to support Tyco Healthcare. We also 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.

RESULTS OF OPERATIONS

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

     NET REVENUES. Our net revenues increased $2,312,111, or 45 percent, from
$5,082,746 in the three-month period ended May 31, 2005 to $7,394,857 in the
three-month period ended May 31, 2006. The increase in net revenues is primarily
attributable to:

     -    an increase in U.S. sales of $1,648,105, or 39 percent, from
          $4,197,533 in the second quarter of fiscal 2005 to $5,845,638 in the
          second quarter of fiscal 2006. The increase in U.S. sales was
          primarily due to an increase in sales of the disposable SomaSensor of
          $1,432,590, or 43 percent, primarily as a result of a 35 percent
          increase in SomaSensor unit sales. In addition, sales of the INVOS
          System monitor in the United States increased $268,990, or 37 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 $664,007, or 75 percent, from
          $885,212 in the second quarter of fiscal 2005 to $1,549,219 in the
          second quarter of fiscal 2006. The increase in international sales was
          primarily due to 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 second quarter of fiscal 2006,
          international sales represented 21 percent of our net revenues,
          compared to 17 percent of our net revenues in the second quarter of
          fiscal 2005.


                                       11

<PAGE>

                             SOMANETICS CORPORATION

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

                                  MAY 31, 2006

          Purchases by Tyco Healthcare accounted for 16 percent of net revenues
          in the second quarter of fiscal 2006 and 14 percent of net revenues in
          the second quarter of fiscal 2005.

     In the United States, we sold 50,521 SomaSensors in the second quarter of
fiscal 2006, and internationally, we sold 15,200 SomaSensors in the second
quarter of fiscal 2006. We placed 96 INVOS System monitors in the United States
and 171 internationally in the second quarter of fiscal 2006, and our installed
base of INVOS System monitors in the United States was approximately 1,276, in
548 hospitals, as of May 31, 2006.

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

<TABLE>
<CAPTION>
                            THREE MONTHS ENDED MAY 31,
                            --------------------------
PRODUCT                             2006   2005
-------                             ----   ----
<S>                         <C>            <C>
SomaSensors .............            70%    74%
INVOS System Monitors ...            29%    24%
                                    ---    ---
   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 87 percent
for the three months ended May 31, 2006 and 87 percent for the three months
ended May 31, 2005. While gross margins as a percentage of net revenues remained
fairly constant for the second quarter of 2006 compared to 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. The increase in our average selling prices is attributable
to the addition of new customers at our higher suggested retail prices and
increased sales of our pediatric SomaSensor, which sells for a higher price than
the adult SomaSensor. The impact of the increases described above was offset by
the purchases of our next generation INVOS System monitor by Tyco Healthcare,
due to the lower margin we receive on sales to our distributors.

     RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES. Our research, development
and engineering expenses increased $36,296, or 35 percent, from $104,715 in the
second quarter of fiscal 2005 to $141,011 in the second quarter of fiscal 2006.
The increase is primarily attributable to an $18,973 increase in salaries due to
the addition of one engineer, and $17,891 in development costs associated with
our next generation INVOS System monitor, which was launched in the second
quarter of fiscal 2006. 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 and our hiring additional
research and development personnel.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $808,012, or 27 percent, from $3,044,655 for
the three months ended May 31, 2005 to $3,852,667 for the three months ended May
31, 2006, primarily due to a 36 percent increase in our sales and marketing
expenses in the second quarter of fiscal 2006 because of our increased sales
personnel and our increased sales and marketing efforts. The increase in
selling, general and administrative expense is primarily attributable to:


                                       12

<PAGE>

                             SOMANETICS CORPORATION

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

                                  MAY 31, 2006

     -    a $368,350 increase in salaries, wages, commissions and related
          expenses, primarily as a result of an increase in the number of
          employees, principally in sales and marketing (from an average of 39
          employees for the three months ended May 31, 2005 to an average of 56
          employees for the three months ended May 31, 2006);

     -    a $301,029 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 $92,255 increase in commissions paid to our independent sales
          representative firms as a result of increased sales; and

     -    a $75,096 increase in professional service fees, primarily due to
          increased legal and consulting fees.

These increases were partially offset by an $89,258 decrease in accrued
incentive compensation expense in accordance with the 2006 Incentive
Compensation Plan, primarily due to an unusually high accrual in the second
quarter of fiscal 2005.

     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 to our
independent sales representative firms, increased clinical research expense, and
increased sales and marketing expenses.

     OTHER INCOME. During the second quarter of fiscal 2006, interest income
increased to $817,943, from $60,226 in the second 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 second 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.

     SIX MONTHS ENDED MAY 31, 2006 COMPARED TO SIX MONTHS ENDED MAY 31, 2005

     NET REVENUES. Our net revenues increased $4,033,208, or 44 percent, from
$9,115,363 in the six-month period ended May 31, 2005 to $13,148,571 in the
six-month period ended May 31, 2006. The increase in net revenues is primarily
attributable to:

     -    an increase in U.S. sales of $3,119,185, or 41 percent, from
          $7,562,084 in the first six months of fiscal 2005 to $10,681,269 in
          the first six months of fiscal 2006. The increase in U.S. sales was
          primarily due to an increase in sales of the disposable SomaSensor of
          $2,623,960, or 42 percent, primarily as a result of a 34 percent
          increase in SomaSensor unit sales. In addition, sales of the INVOS
          System monitor in the United States increased $552,875, or 53 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 $914,024, or 59 percent, from
          $1,553,279 in the first six months of fiscal 2005 to $2,467,303 in the
          first six 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 six months of fiscal 2006,
          international sales represented 19 percent of our net revenues,
          compared to 17 percent of our net revenues in the first six months of
          fiscal 2005. Purchases by Tyco Healthcare accounted for 14 percent of
          net revenues in the first six months of fiscal 2006 and 12 percent of
          net revenues in the first six months fiscal 2005.


                                       13

<PAGE>

                             SOMANETICS CORPORATION

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

                                  MAY 31, 2006

     In the United States, we sold 94,671 SomaSensors in the first six months of
fiscal 2006, and internationally, we sold 33,490 SomaSensors. We placed 176
INVOS System monitors in the United States and 227 internationally in the first
six months of fiscal 2006.

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

<TABLE>
<CAPTION>
                            SIX MONTHS ENDED MAY 31,
                            ------------------------
PRODUCT                            2006   2005
-------                            ----   ----
<S>                         <C>           <C>
SomaSensors .............           74%    76%
INVOS System Monitors ...           25%    21%
                                   ---    ---
   Total INVOS System ...           99%    97%
CorRestore Systems ......            1%     3%
                                   ---    ---
   Total ................          100%   100%
                                   ===    ===
</TABLE>

     GROSS MARGIN. Gross margin as a percentage of net revenues was 88 percent
for the six months ended May 31, 2006 and 87 percent for the six months ended
May 31, 2005. The increase in gross margin as a percentage of net revenues is
primarily attributable to 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, partially offset by the
purchases of our next generation INVOS System monitor by Tyco Healthcare,
because of the lower margin we receive on sales to our distributors. The
increase in our average selling prices is attributable to the addition of new
customers at our higher suggested retail prices and increased sales of our
pediatric SomaSensor, which sells for a higher price than the adult SomaSensor.

     RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES. Our research, development
and engineering expenses increased $118,560, or 59 percent, from $200,517 in the
first two quarters of fiscal 2005 to $319,077 in the first two quarters of
fiscal 2006. The increase is primarily attributable to $75,965 in development
costs associated with our next generation INVOS System monitor, which was
launched in the second quarter of fiscal 2006, and a $40,634 increase in
salaries due to the addition of one engineer.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1,739,757, or 31 percent, from $5,620,791 for
the six months ended May 31, 2005 to $7,360,548 for the six months ended May 31,
2006, primarily due to a 34 percent increase in our sales and marketing expenses
in the first six months of fiscal 2006 because of our increased sales personnel
and our increased sales and marketing efforts. The increase in selling, general
and administrative expense is primarily attributable to:

     -    a $670,458 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 38 employees for the six
          months ended May 31, 2005 to an average of 54 employees for the six
          months ended May 31, 2006);

     -    a $365,272 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 $184,290 increase in professional service fees primarily due to
          increased legal, accounting and consulting fees.

     -    a $175,015 increase in employee sales commissions as a result of
          increased sales and increased sales personnel in first six months of
          fiscal 2006;

     -    a $154,423 increase in commissions paid to our independent sales
          representative firms as a result of increased sales;

     -    a $72,198 increase in manufacturing expenses, primarily as a result of
          increased contract labor costs.


                                       14

<PAGE>

                             SOMANETICS CORPORATION

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

                                  MAY 31, 2006

     OTHER INCOME. During the first six months of fiscal 2006, interest income
increased to $958,080, from $104,129 in the first six 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 six 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.

     As of May 31, 2006, we did not have any outstanding or available debt
financing arrangements, we had working capital of $43.8 million and our primary
sources of liquidity were $19.3 million of cash and cash equivalents, $18.0
million of marketable securities and $30.2 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, 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 $51,234,342. 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 May 31, 2006 will be adequate to satisfy our operating
and capital requirements for more than the next twelve months.

     CASH FLOWS FROM OPERATING ACTIVITIES

     Net cash provided by operations during the first six months of fiscal 2006
and 2005 was $3,516,424 and $1,784,299, respectively. In the first six months of
fiscal 2006, cash was provided primarily by:

     -    $5,055,417 of net income before income taxes and non-cash depreciation
          and amortization expense;

     -    a $459,886 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 $335,265 increase in accounts payable, primarily as a result of
          increased inventory and operating expenses, partially offset by more
          timely payments made to vendors.

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


                                       15

<PAGE>

                             SOMANETICS CORPORATION

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

                                  MAY 31, 2006

     -    a $1,156,104 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;

     -    a $598,432 increase in accounts receivable, primarily as a result of
          higher second quarter sales in fiscal 2006 than in the fourth quarter
          of fiscal 2005, partially offset by more timely collections in the
          second quarter of fiscal 2006; and

     -    a $579,608 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.

     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 $243,478 of costs from inventory for INVOS System
monitors being used as demonstration units and no capital cost sales equipment
at customers during the first six months of fiscal 2006, compared to $259,617 in
the first six months of fiscal 2005. As of May 31, 2006, we had capitalized
$2,138,791 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
$1,162,699. We depreciate these assets over five years.

     CASH FLOWS FROM INVESTING ACTIVITIES

     Net cash used in investing activities in the first two quarters of fiscal
2006 and 2005 was $48,668,295 and $44,942, respectively. In the first two
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 $461,299 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 two quarters of
fiscal 2006 and 2005 was $51,278,647 and $561,564, 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
$51,234,342. In addition, in the first two quarters of fiscal 2006, we issued
7,333 common shares as a result of stock option exercises, for proceeds of
$44,305.

CONTRACTUAL OBLIGATIONS

     As of May 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.


                                       16

<PAGE>

                             SOMANETICS CORPORATION

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

                                  MAY 31, 2006

CRITICAL ACCOUNTING POLICIES

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

     EMPLOYEE STOCK OPTIONS

     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 two 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.

     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. The issuance
of additional stock compensation under the 2005 Stock Incentive Plan after
November 30, 2005 will have an additional impact on our financial statements.

     Stock-based compensation of consultants and advisors is determined based on
the fair value of the options or warrants on the grant date pursuant to the
methodology of SFAS No. 123, estimated using the Black-Scholes model. The
resulting amount is recognized as compensation expense and an increase in
additional paid-in capital over the vesting period of the options or warrants.
We did not record any compensation expense for consultants and advisors in the
first two quarters of fiscal 2006, and in the first two quarters of fiscal 2005
we recorded $2,805 of compensation expense for stock options issued to
non-employees.

     Had we recognized compensation expense for our stock options that vested in
the first two 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 $593,730 in compensation expense
(including the $2,805 actually recorded) and realized pro forma net income of
$863,184, or $.07 per diluted common share.

     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


                                       17

<PAGE>

                             SOMANETICS CORPORATION

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

                                  MAY 31, 2006

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."


                                       18

<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>
                                                   MAY 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 ($).............   5,003,107   21,005,313   12,086,312   10,112,264     --        --      48,206,996   48,206,996
      Average interest rate...        5.11%        5.16%        5.25%        5.33%   N/A       N/A            5.22%
</TABLE>


                                       19
<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 May 31, 2006 and any change in our internal
control over financial reporting that occurred during our first fiscal quarter
ended May 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 May 31, 2006.
There was no change in our internal control over financial reporting identified
in connection with such evaluation that occurred during our first fiscal quarter
ended May 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.


                                       20

<PAGE>

                            PART II OTHER INFORMATION

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

     Our Annual Meeting of Shareholders was held on April 6, 2006. At the Annual
Meeting, Daniel S. Follis and Robert R. Henry were elected as directors and the
terms of office of Bruce J. Barrett and Dr. James I. Ausman as directors
continued after the meeting. 9,242,386 votes were cast for Mr. Follis' election
and 241,055 votes were withheld from Mr. Follis' election. 9,186,410 votes were
cast for Mr. Henry's election and 297,031 votes were withheld from Mr. Henry's
election. There were no abstentions or broker non-votes in connection with the
election of the directors at the Annual Meeting.


                                       21

<PAGE>

ITEM 6. EXHIBITS

     10.1 Amended and Restated Employment Agreement between Somanetics
          Corporation and Bruce J. Barrett, incorporated by reference to Exhibit
          99.1 to the Company's Current Report on Form 8-K, dated April 19, 2006
          and filed April 24, 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.


                                       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: June 30, 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      Amended and Restated Employment Agreement between Somanetics
          Corporation and Bruce J. Barrett, incorporated by reference to Exhibit
          99.1 to the Company's Current Report on Form 8-K, dated April 19, 2006
          and filed April 24, 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