10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended April 28, 2006
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from           to

Commission file number: 0-19806

Cyberonics, Inc.

(Exact name of registrant as specified in its charter)

Delaware	76-0236465
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Cyberonics Building

100 Cyberonics Blvd.

Houston, Texas

77058-2072

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code:

(281) 228-7200

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

None

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

Common Stock, $.01 Par Value

(Title of Class)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes o          No þ

      Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes o          No þ

      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 o          No þ

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

      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 o          Accelerated filer þ          Non-accelerated filer o

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o          No þ

      The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of October 27, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, was based upon the last sales price reported for such date on the NASDAQ Global Market, approximately $225 million. For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding shares of common stock and shares held by officers and directors of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination is not necessarily conclusive.

      At December 18, 2006, 25,711,387 shares of common stock were outstanding.

TABLE OF CONTENTS

PART I
Item 1.	Business	6
Item 1A.	Risk Factors	20
Item 1B.	Unresolved Staff Comments	30
Item 2.	Properties	30
Item 3.	Legal Proceedings	30
Item 4.	Submission of Matters to a Vote of Security Holders	30
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	31
Item 6.	Selected Financial Data	32
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 8.	Financial Statements and Supplementary Data	50
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	50
Item 9A.	Controls and Procedures	50
Item 9B.	Other Information	55
PART III
Item 10.	Directors and Executive Officers of the Registrant	55
Item 11.	Executive Compensation	60
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	69
Item 13.	Certain Relationships and Related Transactions	72
Item 14.	Principal Accountant Fees and Services	73
PART IV
Item 15.	Exhibits and Financial Statement Schedules	74
License Agreement
License Agreement
Lease Agreement
Release Agreement
Amendment to Stock Option Agreement
Stand Alone Stock Option Agreement
Employment Agreement - Michael A. Cheney
Stock Option Agreement
Indemnification Agreement
Letter Agreement re Advancement of Attorney's Fee
Officer Stock Option Plan Agreement
Employment Agreement - William Steven Jennings
Stock Option Agreement
Amendment to Stock Option Agreement
Employment Agreement - Shawn P. Lunney
Release Agreement
Indemnification Agreement
Officer Stock Option Plan Agreement
First Amendment to Employment Agreement - George e. Parker
Stand Alone Stock Option Agreement
Employee Restricted Stock Agreement
Employment Agreement - Richard L. Rudolph, M.D.
Stock Option Agreement
First Amendment to Employment Agreement - Randal L. Simpson
Stock Option Agreement
Employment Agreement - Pamela B. Westbrook
Letter Agreement re Advancement of Attorney's Fee
Indemnification Agreement
First Amendment to Employment Agreement - David S. Wise
New Employee Equity Inducement Plan Agreement
Form of Indemnification
Form of Amendment to Director Stock Option Agreement
Form of Stock Option Agreement
Form of Stock Option Agreement
Form of Employee Restricted Stock Agreement
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO & CFO Pursuant to Section 906

      In this Annual Report on Form 10-K, “Cyberonics,” “we,” “us” and “our” refer to Cyberonics, Inc. and

its consolidated subsidiary (Cyberonics Europe NV).

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EXPLANATORY NOTE

      In this Annual Report on Form 10-K, we are restating prior fiscal periods to reflect additional stock-based compensation expense relating to stock option grants made during the period from fiscal years 1994 through 2006. The effects of these restatements are reflected in the consolidated financial statements and other financial data, including quarterly data, included in this Form 10-K. None of the restatements have any impact on net cash provided by (used in) operating activities. For additional information, see “Note 1. Restatements” in the Notes to the Consolidated Financial Statements. Additionally, we have included under “Item 6. Selected Financial Data,” restated financial information for the fiscal years 2002 through 2005, and under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Selected Quarterly Information,” restated quarterly financial information for each interim period during fiscal years ended April 28, 2006 and April 29, 2005. Selected restated quarterly financial information is also presented in “Note 19. Quarterly Financial Information — Unaudited” in the Notes to the Consolidated Financial Statements for fiscal years 2006 and 2005. Other disclosures contained in the Quarterly Reports on Form 10-Q for fiscal years 2006 and prior have not been amended and should no longer be relied upon.

      On June 8, 2006, a published analyst research report raised questions about certain stock options granted to some of our officers and employees. On June 9, 2006, we were informed by the Staff of the United States Securities and Exchange Commission (“SEC”) that the Staff had initiated an informal inquiry into our stock option grants. Thereafter, we received a subpoena dated June 26, 2006 from the Office of the U.S. Attorney for the Southern District of New York (“U.S. Attorney”) seeking documents related to our stock option grants. We have fully cooperated with both of those governmental investigations, which remain ongoing.

      We initiated our own internal investigation into these matters. On June 26, 2006, our Board of Directors designated the Audit Committee, which consists entirely of independent directors, to undertake a review of our stock option grants and related practices, procedures and accounting during the period 1993 through the conclusion of this investigation. The Audit Committee undertook its investigation with the assistance of independent counsel and accounting experts retained by counsel. The Audit Committee concluded that certain stock options granted principally during the period 1998 to 2003 were not accounted for correctly in accordance with Generally Accepted Accounting Principles applicable at the time the grants were issued. Based on the Audit Committee’s investigation, subsequent internal analysis and discussions with our independent registered public accountants, on November 18, 2006, our Board concluded that the errors were material and that we needed to restate our historical financial statements to record non-cash charges for compensation expense relating to past stock option grants.

      Based on the Audit Committee’s investigation, we have determined that the accounting for certain stock option grants to employees, officers and directors during certain periods was incorrect primarily due to the following circumstances: (1) the approval date of the grant occurred subsequent to the actual grant date, (2) existence of multiple documents with different dates evidencing approval for the same grants, (3) the cancellation and reissuance of certain stock option grants at a different price than the original grant and (4) the failure to properly record certain stock option grants issued to non-employees. As a result, we are required to record non-cash adjustments for additional stock-based compensation expense in accordance with APB No. 25, “Accounting for Stock Issued to Employees.” These non-cash charges had no impact on previously reported revenues, cash or cash equivalents or total assets. Refer to “Note 1. Restatements,” in the Notes to the Consolidated Financial Statements for additional information.

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      The following table discloses the impact of additional pre-tax non-cash charges for stock-based compensation expense on net earnings (loss) for the fiscal years 1994 through 2005.

	Restatement Impact
	In Statement of
Fiscal Year	Operations(1)
1994	$	(4,667	)
1995		(29,641	)
1996		(40,189	)
1997		(116,709	)
1998		(245,233	)
1999		(419,229	)
2000		(678,124	)
2001		(936,379	)
2002		(2,093,214	)
2003		(5,276,786	)
2004		(2,141,571	)
2005		(6,391,159	)
Total	$	(18,372,901	)

(1)  There is no tax effect in the restatement due to the deferred tax valuation allowance.

      The total restatement impact, through fiscal year ended April 29, 2005, is approximately $18.4 million of additional pre-tax non-cash stock-based compensation expense. This amount exceeds the $10 million estimate disclosed in our Form 8-K filed on November 20, 2006, and reflects the results of additional review of the findings in the investigation and discussions with our independent registered public accountants regarding accounting treatment for restated stock option grants.

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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

      This Form 10-K contains forward-looking statements. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology such as “expect,” “may,” “will,” “intend,” “anticipate,” “believe,” “estimate,” “could,” “possible,” “plan,” “project,” “forecast,” and similar expressions. Our forward-looking statements generally relate to our growth strategies, financial results, reimbursement programs, product acceptance programs, product development programs, clinical and new indication development programs, regulatory approval programs, manufacturing processes and sales and marketing programs. Forward-looking statements should be carefully considered as involving a variety of risks and uncertainties, which include, but are not limited to:

•  continued market acceptance of our VNS Therapy System^tm(“VNS Therapy System”) and sales of our product;

•  refusal by third-party payers to cover or adequately reimburse Vagus Nerve Stimulation (“VNS”) Therapy (“VNS Therapy”) for treatment-resistant depression (“TRD”);

•  intellectual property protection and potential infringement claims;

•  maintaining compliance with government regulations;

•  obtaining necessary government approvals for new applications and retaining governmental approvals for existing applications;

•  product liability claims and potential litigation;

•  reliance upon single suppliers and manufacturers for certain components;

•  the development, satisfactory completion and results of clinical trials and/or market tests of the VNS Therapy System for the treatment of epilepsy, TRD or other disorders;

•  the accuracy of management’s estimates of future sales, expenses, and capital requirements;

•  changes in financial estimates and recommendations by securities analysts;

•  changes in market valuations of medical device companies in general;

•  additions or departures of key management personnel;

•  changes in the general condition of the economy;

•  possible acceleration of our convertible note debt;

•  maintaining adequate insurance at economical rates;

•  our ability to retire or refinance our debt at or before its maturity, which could be affected by conditions in financial markets or our financial position, and our ability to obtain any replacement long-term financing on terms as favorable to us, if at all;

•  the results of the previously disclosed inquiries by the SEC staff and the U.S. Attorney;

•  the impact of the restatement of our financial statements and any other actions that might be taken or required as a result of such inquiries or the review by the Audit Committee of our stock option grants, procedures, and practices, including a default under our credit facility or debt instruments;

•  the potential identification of new material weaknesses in our internal controls over financial reporting;

•  risks and costs associated with the governmental inquiries or the Audit Committee review and any litigation relating thereto or to our stock option grants, procedures, and practices (including the previously disclosed private litigation);

•  uncertainties associated with our efforts to regain compliance with the requirements of the NASDAQ Panel to avoid possible delisting of the Company’s stock from NASDAQ for failure to file timely periodic reports with the SEC;

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•  uncertainties associated with any appeal concerning any possible delisting by NASDAQ; and

•  uncertainties associated with stockholder litigation.

      No forward-looking statements can be guaranteed to be accurate and actual outcomes may vary materially. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We will not update any of the forward-looking statements after the date of this Form 10-K to conform these statements to actual results, unless required by law.

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PART I

Item 1. Business

General

      Cyberonics, Inc. is a neuromodulation company founded to design, develop and bring to market medical devices that provide a unique therapy, VNS Therapy, for the treatment of epilepsy, TRD and other debilitating neurological or psychiatric diseases and other disorders. VNS Therapy consists of the electrical stimulation of the vagus nerve with an implantable device.

      Our mission is to improve the lives of people touched by epilepsy, depression and other chronic disorders that may prove to be treatable with our VNS Therapy System. To achieve this mission, our plan is to become the market leader in neuromodulation by:

•  satisfying the urgent unmet medical need in TRD and developing and expanding our intellectual property, regulatory and market franchise in the global TRD market;

•  repositioning VNS Therapy in a unique, defensible market position in epilepsy to rejuvenate growth and accelerate penetration of the global epilepsy market; and

•  focusing our financial resources to develop and expand future revenue growth.

      The United States Food and Drug Administration (“FDA”) approved the VNS Therapy System in July 1997 for use as an adjunctive therapy in patients over 12 years of age in reducing the frequency of partial onset seizures that are refractory or resistant to antiepileptic drugs. Regulatory bodies in Canada, Europe, South America, Africa, India, Australia and certain countries in Eastern Asia have approved VNS Therapy for the treatment of epilepsy without age restrictions or seizure-type limitations. In July 2005, FDA also approved the VNS Therapy System for the adjunctive long-term treatment of chronic or recurrent depression for patients 18 years of age or older who are experiencing a major depressive episode and have not had an adequate response to four or more adequate anti-depressant treatments. Regulatory bodies in the European Union countries and Canada approved the VNS Therapy System for the treatment of chronic or recurrent depression in patients who are in a treatment-resistant or in a treatment-intolerant depressive episode without age restrictions.

      Our ability to successfully expand the commercialization of the VNS Therapy System depends on obtaining and maintaining favorable coverage, coding and reimbursement for the implant procedure and follow-up care. Currently, we have broad coverage, coding and reimbursement for VNS Therapy for the treatment of epilepsy. We are actively pursuing favorable coverage decisions to expand reimbursement to include VNS Therapy for TRD. Absent favorable coverage policies from governmental and commercial payers, we have been obtaining certain TRD case-by-case approvals since FDA approval in July 2005. Our long-term growth is highly dependent upon progress in obtaining case-by-case approvals and favorable regional and national coverage policies from third party payers in the use of VNS Therapy to treat TRD.

      Our clinical development program has included pilot and pivotal studies in using VNS Therapy (1) as an adjunctive therapy for reducing the frequency of seizures in patients over 12 years of age with partial onset seizures that are refractory to antiepileptic drugs and (2) as an adjunctive treatment of patients 18 years of age and older with chronic or recurrent TRD in a major depressive episode. We have also conducted or provided support for small pilot studies for the treatment of Alzheimer’s Disease, anxiety disorders, chronic headache, bulimia and other disorders. These studies have been conducted to determine the safety and effectiveness of VNS Therapy and to determine new indications that might be considered for pivotal studies (an important component of our clinical research activities).

      Since inception, we have incurred substantial expenses, primarily for research and development activities that include product and process development and clinical trials and related regulatory activities, sales and marketing activities, manufacturing start-up costs and systems infrastructure. We have also made significant investments in recent periods in connection with sales and marketing activities in the U.S. and clinical research costs associated with new indications development, most notably depression. For more information,

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see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K. For the period from inception through April 28, 2006, we incurred a cumulative net deficit of approximately $207 million. We anticipate increasing investments in post-approval clinical studies in epilepsy and depression.

Epilepsy

      Epilepsy is a disorder of the brain characterized by recurrent seizures that are categorized as either partial or generalized at onset. Generalized seizures that involve the entire brain from the onset usually result in the loss of consciousness and are typically manifested by convulsions. Partial onset seizures initiate in a localized region of the brain, and may or may not result in an alteration in consciousness. Partial onset seizures can also progress to generalized seizures. Patients who continue to have unsatisfactory seizure control or intolerable side effects after treatment with appropriate antiepileptic therapies for a reasonable period of time are said to suffer from refractory epilepsy. For reasons that are not clear, partial onset seizures are generally more refractory to existing therapies than generalized seizures.

Epilepsy Market Overview

      Epilepsy is the second most prevalent neurological disorder. It is estimated that approximately 2.8 million individuals in the U.S. have epilepsy, with approximately 150,000 new cases diagnosed each year, and that there are in excess of 3.3 million individuals with epilepsy in Western Europe and Japan, with over 210,000 new cases diagnosed each year. In addition, it is estimated that approximately 50% of patients with epilepsy suffer from partial onset seizures and that over 30% of these patients continue to suffer from seizures in spite of treatment with antiepileptic drugs. The medical, psychological, sociological and financial implications of refractory epilepsy can be profound for individuals and their families. Seizures can be severely debilitating and may result in major irreversible morbidity which consists of lasting complications or side effects. Medical consequences may include brain damage from recurrent seizures, injuries and accidents associated with the loss or impairment of consciousness and death as a result of severe seizures. Personal implications of epilepsy may include suffering the side effects of antiepileptic drugs, strained personal and family relations, and the inability to obtain and hold meaningful employment or a driver’s license.

Traditional Epilepsy Therapies

      Traditionally, there have been two courses of treatment available to persons suffering from epilepsy: drug therapy and surgery. Antiepileptic drugs serve as a first-line treatment and are prescribed for virtually all individuals being treated for epilepsy. When drug therapy is not effective, the other traditional treatment alternative has been surgical removal of the portion of the brain where seizures originate. Surgical treatment of epilepsy has been proven safe and beneficial for a limited number of patients. Approximately 3,000 epilepsy surgeries are performed per year in the U.S.

      Researchers are currently exploring the use of other treatments to control epilepsy, including direct deep brain stimulation (“DBS”). This treatment involves implanting electrodes in discrete focal areas of the basal ganglia and delivering a current via a computer controlled impulse generator implanted beneath the skin. Another treatment under investigation is the Responsive Neurostimulator System (“RNS^tm”), which is designed to suppress seizures before symptoms appear. The neurostimulator is surgically implanted in the patient’s skull and is connected to electrode wires that are either implanted within the patient’s brain or placed on the brain surface in the area of presumed seizure origin. The device monitors brain waves and, upon identifying the “signature” of a seizure onset, delivers an electric current to the patient’s brain to suppress the seizure. These treatments are in the investigation stage and do not currently compete with VNS Therapy.

VNS Therapy for Epilepsy

      To date, over 42,000 patients have accumulated in excess of 150,000 patient years of treatment experience with the VNS Therapy System.

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      Improvements in Disease Symptoms. In our two randomized, parallel, double-blind active control studies, the treatment groups reported a mean seizure reduction of approximately 24% and 28% during the three-month acute phase of the studies. Additionally, many patients, including some who reported no change or an increase in seizure frequency, also reported a reduction in seizure severity. Long-term follow-up data, derived from an uncontrolled protocol, on the 440 patients in five studies suggest that efficacy is maintained and, for many patients, improves over time when the VNS Therapy System is used as an adjunctive therapy with drugs as part of a patient’s optimized long-term treatment regimen. Analysis of this pooled data showed that the median percent seizure reduction increased from 20% in the first three months to 44% after 24 months of treatment and was sustained at that level at 36 months.

      Side Effects. In the treatment of refractory epilepsy, the side effects associated with the VNS Therapy System are generally mild, localized and related to the period of time in which stimulation is activated. The side effects include hoarseness, coughing, a feeling of shortness of breath, difficulty swallowing and throat or neck discomfort. The VNS Therapy System has not typically been associated with the debilitating central nervous system side effects that frequently accompany antiepileptic drugs. Additionally, side effects typically decrease over time.

Depression

      In July 2005, FDA approved VNS Therapy as a long-term adjunctive treatment for patients 18 years of age or older with chronic or recurrent TRD in a major depressive episode and who have not responded to at least four adequate antidepressant treatments.

Depression Market Overview

      Major depressive disorder is one of the most prevalent and serious illnesses in the U.S. It affects nearly 19 million Americans 18 years of age or older every year. Depression is the second leading cause of disability for the general population and is the leading cause of disability for American women. Depression interferes with a person’s ability to function, feel pleasure or maintain interest in everyday living. It is associated with increased mortality due to suicide and co-morbid general medical conditions, including heart disease and lung disease. Total annual costs for depression in the U.S. exceed $80 billion, including $30 billion in annual direct treatment costs.

      Standard treatment modalities for depression include antidepressant drugs, psychotherapy and electroconvulsive therapy (“ECT”). First-line therapy often consists of an antidepressant drug. For patients who do not respond adequately to initial antidepressant treatment, physicians will often switch to a different drug or use two drugs in combination. Physicians usually reserve ECT for patients who have not had an adequate response to multiple trials of antidepressant drugs or when they determine a rapid response to treatment is desirable.

VNS Therapy for Depression

      Prior to the 2005 FDA approval of the VNS Therapy TRD indication, we conducted four clinical studies in patients with major depressive episodes that had not responded to standard treatments:

•  a 60-patient open-label pilot study (“D-01”) that included long-term follow-up;

•  a 235-patient randomized, double-blind, placebo-controlled study (“D-02”) with long-term open-label follow-up;

•  an open-label post-marketing study in Europe (“D-03”); and

•  a 127-patient observational study of treatment-resistant depressed patients receiving standard-of-care treatment but no VNS Therapy (“D-04”).

      Clinical Study Results. The short-term placebo-controlled D-02 study showed a non-significant trend favoring adjunctive VNS Therapy over placebo. The long-term, uncontrolled phase of the D-02 study showed that response and remission rates (remission being a complete or near complete absence of depressive

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symptoms) and clinical benefit increased over one year of adjunctive VNS Therapy and then remained stable over the second year of treatment. After one year of adjunctive VNS Therapy, about one in three patients had responded and one in six had achieved remission. More than 50% of patients at 12 months of adjunctive VNS Therapy reported at least a meaningful prospectively-defined clinical benefit as measured by the Hamilton Rating Scale for Depression (“HRSD”) and defined as a 25% or greater improvement in depressive symptoms.

      A significant finding of the pivotal study (“D-02”) was that most patients who responded while receiving adjunctive VNS Therapy maintained that response at the one- and two-year evaluations; 60% of the patients who responded after three months of adjunctive VNS Therapy still responded at one year; and 70% of the three-month responders responded at the two-year evaluation. For patients who were responders at the one-year evaluation, 69% responded at two years.

      Effectiveness was further demonstrated by comparing the D-02 study outcomes over 12 months of adjunctive VNS Therapy with outcomes from a large group of non-randomized control patients who were treated for 12 months with standard antidepressant treatments but no VNS Therapy. The patients in the control study group (“D-04”), and the patients receiving adjunctive VNS Therapy in the D-02 study could receive any FDA-approved antidepressant treatment, but only the D-02 study patients received VNS Therapy. The results comparing adjunctive VNS Therapy and standard antidepressant treatment (sometimes referred to as “treatment as usual”) showed that the patients receiving adjunctive VNS Therapy had significantly more improvement in depressive symptoms, significantly higher response rates, significantly higher rates of remission, and a significantly higher rate of maintained response than did the patients who received treatment as usual without VNS Therapy.

      VNS Therapy was generally well-tolerated in the depression clinical studies. The most commonly reported adverse events were well-known side effects of the therapy and included voice alteration, increased cough, neck pain, shortness of breath and difficulty swallowing. These common side effects tended to occur during stimulation, tended to be reported as mild or moderate, and tended to be reported less frequently over time.

Post FDA Approval Study Commitments

      We have committed to FDA as part of post-market surveillance to undertake and we have commenced enrollment in a 460-patient dosing study and a 2,000-patient five-year TRD registry, to include 1,000 patients treated with adjunctive VNS Therapy. The dosing study will randomize patients to one of three different VNS dosages to help determine the optimum VNS dosage settings for patients. The patient registry will follow VNS Therapy-treated patients for up to five years. One of the primary objectives of the registry will be to help determine if there are specific predictors for which patients benefit most (or least) from VNS Therapy.

Clinical Research Studies

      We are conducting post-marketing studies in refractory epilepsy and TRD. We have also funded a variety of mechanism-of-actions studies to improve the fundamental understanding of how VNS Therapy works. These studies may help identify additional potential applications for VNS Therapy. Based on its known central nervous system effects and observed clinical effects, VNS Therapy may be useful for treating a variety of disorders. Accordingly, our patent portfolio includes many potential additional uses for VNS Therapy. We have conducted or supported small animal studies or human pilot studies for the treatment of Alzheimer’s Disease, anxiety disorders, bulimia, chronic headache, alcoholism, atrial arrhythmias, chronic pain, obesity and traumatic head injury. We expect to continue to invest in similar research activities as appropriate.

VNS Therapy System

      VNS Therapy is the first treatment approved by FDA for both medically refractory epilepsy and TRD. The safety profiles for VNS Therapy and the VNS Therapy System, including the implant procedure, are well established in clinical studies of refractory epilepsy and TRD and in commercial use in over 42,000 patients with over 150,000 total patient years of experience.

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      The VNS Therapy System is a proprietary, integrated system consisting of an implantable generator that delivers an electrical signal to an implantable lead attached to the left vagus nerve. The vagus nerve is the longest of the cranial nerves, extending from the brain stem through the neck to organs in the chest and abdomen. The left vagus nerve has been shown to have influence over numerous areas of the brain. Preclinical studies and mechanism of action research suggest that intermittent stimulation of the left vagus nerve in the neck modulates a number of structures and alters blood flow bilaterally in several areas of the brain. These studies have also shown that stimulation of the left cervical vagus nerve is effective in blocking seizures and results in persistent or carryover antiepileptic effects, which increase with chronic intermittent stimulation. The mechanism of action research associated with our TRD studies has shown stimulation of the left vagus nerve results in modulation of areas of the brain thought to be important in the regulation of mood.

      The VNS Therapy System consists of a pulse generator, a bipolar lead, a programming wand and software and a tunneling tool. The pulse generator and bipolar lead are surgically implanted in a procedure that takes from 30 to 90 minutes, during which time the patient is under general, regional or local anesthesia. The pulse generator is surgically implanted in a subcutaneous pocket in the upper left chest. The bipolar lead is connected to the pulse generator and attached to the vagus nerve in the lower left side of the patient’s neck. The patient is generally admitted to the hospital on the day of surgery and discharged the same or following day.

      The VNS Therapy System delivers VNS on a chronic, intermittent basis. The initial standard stimulation parameters that we typically recommend are a 30-second period of stimulation, which we refer to as ON time, followed by a five-minute period without stimulation, which we refer to as OFF time. To optimize patient treatment, the current pulse width, amplitude and frequency and stimulation ON and OFF intervals of the pulse generator can be programmed non-invasively and adjusted by the treating physician with a personal or handheld computer using our programming wand and software. In addition, the patient can use a small, handheld magnet provided with the pulse generator to manually activate or deactivate stimulation. On-demand therapy can be useful for those epilepsy patients who sense an oncoming seizure and has been reported by a number of patients to abort or reduce the severity or duration of seizures. The magnet can also be used to provide patient control of stimulation side effects by allowing the patient to deactivate stimulation temporarily.

      Pulse Generator. The pulse generator is an implantable, programmable signal generator designed to be coupled with the bipolar lead to deliver electrical signals to the vagus nerve. The pulse generator is a battery powered device. Upon depletion of the battery, the pulse generator is removed and a new generator is implanted in a short, outpatient procedure using local anesthesia.

      Bipolar Lead. The bipolar lead conveys the electrical signal from the pulse generator to the vagus nerve. The lead incorporates electrodes, which are self-sizing and flexible, minimizing mechanical trauma to the nerve and allowing body fluid interchange within the nerve structure. The lead’s two electrodes and anchor tether wrap around the vagus nerve and the connector end is tunneled subcutaneously to the chest where it attaches to the pulse generator. The leads are available in two sizes of inner spiral diameter to ensure optimal electrode placement on different size nerves.

      Programming Wand and Software. Our programming wand and proprietary software are used to interrogate the device and to transmit programming information from a personal or handheld computer to the pulse generator via electromagnetic signals. Programming capabilities include modification of the pulse generator’s programmable parameters (pulse width, amplitude, frequency and ON and OFF intervals) and storage and retrieval of telemetry data.

      Tunneling Tool. The tunneling tool is a single use, sterile, disposable surgical tool designed to be used during surgical placement of the bipolar lead. The tool is used for subcutaneous tunneling of the lead assembly between the nerve site in the neck and the pulse generator site in the chest.

      Accessory Pack. The Accessory Pack includes two resistor assemblies used to test the function of the device prior to implantation, the bipolar lead tie-downs and one hex screwdriver.

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      The implant procedure, including the cost of the device (approximately $17,000 for a Model 102 VNS Therapy System), hospital charges and physician fees, generally costs between $20,000 and $35,000.

Manufacturing and Sources of Supply

      Our manufacturing operations are required to comply with FDA’s Quality System Regulation (“QSR”), which incorporate the agency’s former Good Manufacturing Practices regulations. The QSR is promulgated under section 520 of the Food, Drug and Cosmetic Act. It requires that manufacturers have a quality system for the design and production of medical devices. The regulation requires that various specifications and controls be established for devices; that devices be designed under a quality system to meet these specifications; that devices be manufactured under a quality system; that finished devices meet these specifications; that devices be correctly installed, checked and serviced; that quality data be analyzed to identify and correct quality problems; and that complaints be processed. Thus, the QSR helps assure that medical devices are safe and effective for their intended use. In addition, certain international markets have regulatory, quality assurance and manufacturing requirements that may be more or less rigorous than those in the U.S. Specifically, we have authorized KEMA Registered Quality, Inc. (“KEMA”) to ensure that we are in compliance with the requirements of International Standards Organization 13485:2003, “Medical devices — Quality management systems — Requirements for regulatory purposes” and the European Council Directive 90/385/ CEE relating to Active Implantable Medical Devices (“AIMD”). KEMA is a Notified Body within the scope and framework of the European Council Directive 90/385/ CEE relating to AIMD. We are audited by KEMA on an annual basis, respectively, for such compliance.

      The Model 102 VNS Therapy Pulse Generator is similar in design and manufacture to a cardiac pacemaker. The Model 102 is comprised of one printed circuit board and a battery hermetically sealed in a titanium case. Standard components are assembled on printed circuit boards using surface-mount technology. The assembled circuit boards are then tested and mounted with the battery in the titanium case, which is laser welded. A header to which the bipolar lead connects is added and each unit is subject to final release testing prior to being sterilized.

Marketing and Sales

United States

      We market and sell our products for refractory epilepsy and treatment-resistant depression through a direct sales force in the U.S. Our sales and marketing plan focuses on creating awareness and demand for the VNS Therapy System among epileptologists and neurologists who treat refractory epilepsy, psychiatrists who treat TRD, implanting surgeons, nurses, third-party payers, and patients and their families.

      To reach each of these groups, we are using a specialized sales force consisting of sales personnel with medical device, pharmaceutical, or nursing experience; reimbursement specialists experienced in obtaining third-party coverage and payments for new medical technologies; account executives and field clinical engineers experienced in obtaining, training and maintaining adequate surgical capacity for implanting the VNS Therapy System; marketing teams experienced in educational and promotional marketing programs; and case managers experienced in patient education and insurance verification and authorization issues. In addition to our direct selling activities, we facilitate and support peer-to-peer interactions such as symposia, conference presentations, journal articles and patient support groups to provide experienced clinicians and patients the opportunity to share their perspectives on the VNS Therapy System with others.

      On July 15, 2005, FDA approved VNS Therapy as a long-term adjunctive treatment for patients 18 years of age or older with chronic or recurrent treatment-resistant depression in a major depressive episode and who have not responded to at least four adequate antidepressant treatments. Throughout fiscal 2006, we focused the efforts of our organization on the U.S. launch in TRD, and we structured our sales and case management organization to support anticipated sales demand in both the epilepsy and depression markets. Although patient and physician demand was strong, our actual sales did not increase to the extent anticipated due to a particularly challenging reimbursement environment. In fiscal 2007, we have not experienced and do not

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anticipate any meaningful sales growth until such time as we obtain favorable coverage policies for VNS Therapy in TRD.

International

      We market and sell our products through a combination of a direct sales force in certain European countries and distributors elsewhere. The VNS Therapy System is currently sold by a direct sales force in Austria, Belgium, Denmark, France, Germany, Italy, Luxemburg, The Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom. We have distribution agreements with independent distributors covering a number of other countries, principally in Europe, Asia, South Africa, Australia, Mexico, South America and Canada. The distribution agreements generally grant the distributor exclusive rights for the particular territory for a period of three years. The distributor generally assumes responsibility for obtaining regulatory and reimbursement approvals for such territory and agrees to certain minimum marketing and sales expenditures and purchase commitments. Under the terms of the distributor agreements, no product return rights are granted to the distributor and no additional product performance issues exist for us after shipment to the distributor. Pricing is generally fixed under the terms of the distribution agreements, but may change at our election, with as little as 30 days prior notice under most agreements. Sales incentives, if provided, are recorded as a reduction of net sales in the same period revenue is recognized.

Third-Party Reimbursement

      Our ability to expand the commercialization of the VNS Therapy System successfully depends on obtaining and maintaining favorable coverage, coding and reimbursement for the implant procedure and follow-up care. Currently, more than 99% of requests for VNS Therapy coverage and reimbursement for epilepsy are approved. VNS Therapy for the treatment of epilepsy has been recommended and/or adopted by most payers across the U.S., including Aetna, BlueCross BlueShield Technology Evaluation Center, CHAMPUS, Kaiser Permanente, Centers for Medicare & Medicaid Services (“CMS”) and most state Medicaid programs. The favorable coverage, coding and reimbursement decisions for VNS Therapy in the treatment of refractory epilepsy have established a foundation for obtaining favorable reimbursement decisions for VNS Therapy for TRD. Universal coverage for VNS Therapy for refractory epilepsy, existing coding for the VNS Therapy System implant and related dose adjustment procedures, payment rates for hospitals, surgeons and prescribing physicians are already in place. Additionally, the hospitals that purchase the VNS Therapy System and the implanting surgeons are largely the same for both refractory epilepsy and TRD. We are actively pursuing similar favorable coverage decisions to expand reimbursement to include VNS Therapy for the treatment of TRD, but can provide no assurance as to the timing or likelihood of our obtaining such coverage.

      In deciding to cover a new therapy, payers base their initial coverage decisions on several factors including, but not limited to, the status of FDA’s review of the product, National Coverage Determinations by CMS as well as Local Coverage Determinations by Medicare contractors, BlueCross BlueShield Technology Evaluation Center recommendations, the product’s safety and efficacy, the number of studies performed and peer-reviewed articles published with respect to the product and how the product and therapy compare to alternative therapies. Our Reimbursement Department is available to assist hospitals and physicians with reimbursement questions. Regional Reimbursement Managers and Reimbursement Case Managers are available through our Reimbursement Hotline, to help with coverage, coding and reimbursement issues on a case-by-case basis and/or policy level.

      The success of reimbursement for any new medical device therapy also depends on specific codes that physicians, surgeons and hospitals use to bill for their services. Medical services provided in conjunction with VNS Therapy have specifically approved codes for physicians, surgeons and hospitals to submit claims for their services. In making decisions about reimbursement amounts, payers typically reimburse for the costs of newly covered devices and services using the standard methods they employ for other products and services already covered. Many private insurers and managed care plans use a variety of payment mechanisms including, but not limited to, discounted charges, per diem amounts, resource-based payment scales, medical surgical case rates, contracted amounts and reimbursement of costs. We have found that many of these same

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payment mechanisms have provided reimbursement levels for VNS Therapy and related services that physicians and hospitals view as adequate to support use of VNS Therapy.

Medicare

      Effective July 1, 1999, CMS (formerly the Healthcare Financing Administration) issued National Coverage Policy Transmittal 114 (CIM Section 60-22). Under the policy, VNS Therapy is covered for patients with medically refractory partial onset seizures for whom surgery is not recommended or for whom surgery has failed. Currently, Medicare accounts for a total of 20% to 25% of the epilepsy patients implanted with VNS Therapy. The Medicare program uses different payment mechanisms to reimburse for procedures performed in different settings. For outpatient implants, Medicare introduced on August 1, 2000 a new prospective payment system based on Ambulatory Payment Classifications (“APCs”). Effective January 1, 2004, Medicare approved a new APC Code 0039 for implantation of neurostimulators. For inpatient implants, Medicare uses a fixed-payment method, which is an all-inclusive prospective amount known as Diagnosis Related Groups (“DRG”). Under current DRG groupings, hospital inpatient procedures for implanting the VNS Therapy System are assigned to one of two different DRGs based on whether or not the patient has complications or coexisting severe medical problems, also referred to as co-morbidities. In our experience, more than 90% of the VNS Therapy implants are implanted in the outpatient setting. Reimbursement codes are already in place to pay for the cost of the device implantation and the surgeon implant fees, both of which are identical in the treatment of refractory epilepsy and TRD. Existing prescriber codes for device interrogation and dosage adjustment currently cover medical professionals in the epilepsy medical community.

      In September 2005, the CPT Coding Committee issued clarifying guidance that the same codes should be used both for epilepsy and TRD. We are actively working with the CMS and numerous state Medicaid programs and large private payers to revise their existing VNS Therapy coverage policies to include TRD patients who have been either (1) previously treated with or refused treatment with ECT or (2) previously hospitalized for depression. The first CMS public comment period was completed in September 2006. During that 30-day period, CMS received more than 1,300 comments supporting coverage of VNS Therapy for TRD and fewer than 10 negative comments.

Medicaid

      Medicaid programs generally cover hospital inpatient and outpatient services that are medically necessary and appropriate. Currently, Medicaid accounts for 20% of patients implanted with the VNS Therapy System. Most state Medicaid agencies have developed their own coverage policy for VNS Therapy or have adopted the National CMS coverage policy. In many cases, prior authorization is required. Medicaid reimbursement mechanisms vary state by state. Medicaid policy and payment methodologies change on a regular basis, so vigilant and ongoing work is necessary to ensure continued access and acceptable reimbursement for patients covered by Medicaid programs. Reimbursement codes are already in place to pay for the cost of the device implantation and the surgeon implant fees, both of which are identical in the treatment of refractory epilepsy and TRD. Existing prescriber codes for device interrogation and dosage adjustment currently cover medical professionals in the epilepsy medical community. In September 2005, the CPT Coding Committee issued clarifying guidance that the same codes should be used both for epilepsy and TRD.

Private Payers

      Private payers generally also cover hospital inpatient and outpatient services that are considered to be medically necessary. Currently, private payers (commercial, managed care and other third-party payers) account for 50% to 60% of patients implanted with the VNS Therapy System. As with other payers, many private payers have developed clinical guidelines for coverage or adopted the National CMS coverage policy for use of VNS Therapy in epilepsy. Reimbursement mechanisms vary by plan.

      While we believe the clinical evidence supporting VNS Therapy for TRD should be adequate to convince private payers to provide coverage, approval is subject to each payer’s assessment program. We are actively

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working with private payers to gain approval of coverage for VNS Therapy in TRD, but we cannot give any assurances that private payers will expand coverage for VNS Therapy in TRD.

      Although the VNS Therapy System has been approved for commercial distribution in European Union countries and Canada for the treatment of chronic or recurrent depression, we do not anticipate significant sales volumes until reimbursement approvals are achieved in these countries. We are continuing to pursue appropriate reimbursement approvals in these countries.

Product Development

      Our product development efforts are directed toward improving the VNS Therapy System and developing new products that provide additional features and functionality while improving cost effectiveness. In fiscal year 2003, we received approval for a new family of products represented in the Model 102 System, including the VNS Therapy System Pulse Model 102 Generator, VNS Therapy Lead Model 302, Model 250 VNS Therapy System Programming Software, Version 4.6 for use with the laptop programming system, the Model 250 VNS Therapy Programming Software Version 6.1 for use with a handheld programming system, VNS Therapy Tunneler Model 402 and VNS Therapy Accessory Pack Model 502. In fiscal year 2004, we introduced the Model 102R Generator with a dual pin connector to provide the current generator technology for end of service replacement patients.

      On May 19, 2005, we received approval from KEMA Medical, our European Regulatory Notified body, to market our DEMIPULSE^tm (formerly, Model 103) and DEMIPULSE DUO^tm (formerly, Model 104) VNS Therapy System generators in the member countries of the European Union for the approved epilepsy and depression indications for use. The DEMIPULSE^tm generator is the next generation single connector VNS Therapy System generator for use in new patients, and the DEMIPULSE DUO^tm generator is the next generation dual-connector VNS Therapy System generator for use in patients who have elected replacement of their previous dual-connector generator at the end of its battery life. Both the DEMIPULSE^tm and DEMIPULSE DUO^tm generators are capable of delivering greater functionality and are smaller and lighter than the previous models. We anticipate submitting the PMA-S for both the DEMIPULSE^tm and the DEMIPULSE DUO^tm generators to FDA and initiating a limited release in fiscal 2007. The introduction of this new model is not currently expected to contribute significantly to sales.

      The VNS Therapy^tm PERENNIA^tm Lead (formerly, Model 303 Lead) was approved by FDA on May 4, 2006 and by KEMA Medical on August 22, 2006. The lead is currently in a limited commercial release. Functionally, the new lead is the same as its reliable predecessor, the Model 302 Lead, but incorporates a new design and is constructed from more durable components. Mechanical tests conducted in a laboratory setting have shown the PERENNIA^tm Lead to be more robust than its predecessor.

      We received approval for Model 250, Version 7.1 software from KEMA in May 2006 and from FDA in July 2006. We are conducting ongoing product development programs to design improvements in the VNS Therapy System pulse generator, the bipolar lead and software enhancements. We will be required to file for the appropriate U.S. and international regulatory approvals, and some projects may require clinical trials, in connection with the introduction of new and improved products.

Competition

      We believe that in the fields of refractory epilepsy and TRD, existing and future drug therapies are and will continue to be the primary competition for the VNS Therapy System. We may also face competition from other medical device companies for the treatment of partial seizures and TRD. Medtronic, Inc., for example, continues to conduct clinical studies involving an implantable signal generator used with an invasive deep brain probe for the treatment of neurological disorders including depression, and has received FDA approval for the device for the treatment of essential tremor and Parkinson’s Disease. We could also face competition from other large medical device and pharmaceutical companies that have the technology, experience and capital resources to develop alternative devices for the treatment of epilepsy. Many of our competitors have substantially greater financial, manufacturing, marketing and technical resources than we have. In addition, the healthcare industry is characterized by extensive research efforts and rapid technological progress. Our

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competitors may develop technologies and obtain regulatory approval for products that are more effective in treating epilepsy or TRD than our current or future products. In addition, advancements in surgical techniques could make surgery a more attractive therapy for epilepsy. The development by others of new treatment methods with novel antiepileptic and depression drugs, medical devices or surgical techniques for epilepsy could render the VNS Therapy System non-competitive or obsolete.

      We believe that the primary competitive factors within the epilepsy and TRD treatment markets are the efficacy and safety of the treatment relative to alternative therapies, physician and patient acceptance of the product and procedure, availability of third-party reimbursement for the treatment of epilepsy, quality of life improvements and product reliability. We also believe that the VNS Therapy System compares favorably with competitive products as to these factors.

      While no other therapies have been specifically approved for TRD, a well-established array of antidepressant drugs, typically combined with other antidepressants of complementary action or with atypical antipsychotic drugs and/or mood stabilizers, are frequently used for refractory patients. For severe patients or those at acute risk for suicide, ECT is often used. These treatment modalities may pose a competitive threat in the near term, to the extent that they may delay a decision to offer VNS Therapy to TRD patients. As other forms of neurostimulation are investigated and developed for TRD, these may emerge in years to come as competition for VNS patient candidates. Less invasive procedures like rTMS (repetitive transcranial magnetic stimulation) and MST (magnetic seizure therapy) may compete for a similar place in the TRD treatment algorithm. More invasive technology like DBS is also being investigated for TRD. Finally, ECT is undergoing refinements in technique to increase specificity and reduce the cognitive deficit side effects; if successful, the tolerability and patient acceptance of ECT could improve in the future. These neurostimulation techniques could prove to be more effective, more predictable, or have a more rapid onset of antidepressant activity than VNS Therapy.

      We face similar competition with respect to the development and sale of VNS Therapy as a treatment for the other disorders we are evaluating, including, but not limited to Alzheimer’s Disease, anxiety disorders and bulimia.

Patents, Licenses and Proprietary Rights

      Proprietary protection for our products is important to our business. We maintain a policy of seeking method and device patents on our inventions, acquiring licenses under selected patents of third parties, and entering into invention and confidentiality agreements with our employees and consultants with respect to technology that we consider important to our business. We also rely on trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitive position.

      We have an exclusive license agreement with Jacob Zabara, Ph.D., a co-founder and consultant to us, pursuant to which we currently maintain exclusive licenses on five U.S. method patents (and such international counterparts as have been or may be issued) covering the VNS Therapy System for vagus nerve and other cranial nerve stimulation for the control of movement disorders, including epilepsy, neuropsychiatric disorders, including depression, and other disorders. We believe that these patents give us an advantage by limiting competition in vagus nerve stimulation to treat refractory epilepsy and TRD. The license agreement runs for the term of licensed patents, which will give us coverage until expiration of the licensed patents in August 2011 for movement disorders and May 2011 for neuropsychiatric disorders. Pursuant to the license agreement, we are obligated to pay Dr. Zabara a royalty equal to 3.0% of net sales through August 2011, after which royalties will be reduced to 1.0% for the duration of any remaining patents covering licensed products.

      We have an agreement with Mitchell S. Roslin, M.D. on two U.S. patents that we co-own with Dr. Roslin for bilateral VNS for the treatment of obesity. Pursuant to the agreement, we are obligated to pay Dr. Roslin a royalty rate of 1.0% of the first $10 million of net obesity sales covered by one of the patents and 0.5% of net obesity sales thereafter. Pursuant to the agreement, we paid Dr. Roslin advances on royalties in the amount of $25,000 per year for five years beginning January 1, 2000, and we will be obligated to pay, upon the completion of certain milestones, up to $325,000 in additional advances on royalties.

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      Including the patents referred to in the foregoing agreements, as of December 31, 2006, we owned or licensed 34 U.S. patents and 67 pending U.S. patent applications, covering various aspects of the VNS Therapy System, potential improvements to the VNS Therapy System and the VNS method of treatment for a variety of disorders. In addition to movement disorders, other method patents cover the fields of eating disorders including obesity and bulimia, endocrine disorders, migraine headaches, dementia, neuropsychiatric disorders, including depression and anxiety disorders, motility disorders, sleep disorders, coma, chronic pain, cardiac disorders and hypertension. We have filed counterparts of certain of our key U.S. patent applications in certain key international jurisdictions and currently own or license 32 patents issued by the European Patent Office or other international authorities and 39 patent applications pending in the European Patent Office or before other international authorities.

      We cannot assure you that patents will issue from any of the pending applications or if patents issue, that they will be of sufficient scope or strength to provide meaningful protection for our technology. Notwithstanding the scope of the patent protection available to us, a competitor could develop treatment methods or devices that are not covered by our patents.

      We believe that the patents we own and license provide us with protection in the U.S. in the field of cranial nerve stimulation, including VNS for the control of epilepsy and other movement disorders, including Parkinson’s Disease and essential tremor, neuropsychiatric disorders, including clinical depression, eating disorders, anxiety disorders, obesity, dementia including Alzheimer’s Disease and additional indications for which method patents have been issued. The protection provided by our international patents is not as strong as that provided by our U.S. patents due to differences in patent laws. In particular, European and other countries prohibit patents covering methods for treatment of the human body by surgery or therapy.

      There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. In the future, we may need to engage in litigation to enforce patents issued or licensed to us, to protect our trade secrets or know-how or to defend us against claims of infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. Litigation could be costly and could divert our attention from other functions and responsibilities. Adverse determinations in litigation could subject us to significant liabilities to third parties, could require us to seek licenses from third parties and could prevent us from manufacturing, selling or using the VNS Therapy System, any of which could severely harm our business. We are not currently a party to any patent litigation or other litigation regarding proprietary rights and are not aware of any challenge to our patents or proprietary rights.

Government Regulation

      The preclinical and clinical testing, manufacturing, labeling, sale, distribution and promotion of the VNS Therapy System are subject to extensive and rigorous regulation in the U.S. by federal agencies, primarily FDA, and by comparable state agencies. In the U.S., the VNS Therapy System is regulated as a medical device and is subject to FDA’s pre-market approval requirements. Under the Food, Drug, and Cosmetic Act, all medical devices are classified into one of these three classes: I, II or III. New class III devices, such as the VNS Therapy System, are subject to the most stringent FDA review, and require submission and approval of a pre-market application before commencement of marketing, sales and distribution in the U.S.

      In July 1997, we received FDA approval to market the VNS Therapy System in the U.S. for use as an adjunctive therapy in reducing the frequency of seizures in adults and adolescents over 12 years of age with partial onset seizures that are refractory to antiepileptic drugs. While we have satisfied FDA’s requirements to sell our product in the U.S., we continue to be subject to FDA’s ongoing requirements to maintain regulatory compliance. We are also required by FDA to continue to provide post-market surveillance information including which patients benefit most from the device as well as information on any deaths, serious injuries or malfunctions that occur in patients who have the device implanted. FDA may raise additional concerns in the future, and any such concerns could significantly impact our business prospects. Accordingly, compliance with FDA regulations and requirements is a priority for us and critical for the continued success of our business.

      On June 15, 2004, an FDA-appointed Panel voted five to two to recommend approval with conditions of our VNS Therapy System as an adjunctive long-term treatment of chronic or recurrent depression for patients

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18 years of age or older who are experiencing a major depressive episode and have not had an adequate response to four or more adequate antidepressant treatments. Conditions recommended by the Panel included several labeling changes: that the VNS depression prescribers and implanting surgeons have appropriate experience and adequate training in the implantation and programming of the VNS Therapy System, that patient labeling and identification cards be provided and that we implement a long-term depression patient registry following approval.

      On August 11, 2004, FDA’s Center for Neurological and Restorative Devices determined that, notwithstanding the Neurological Devices Panel’s recommendation for approval with conditions, the PMA-S, absent additional information, must be considered not approvable. FDA’s stated reasons included observations of worsening depression in some patients, potential biases stemming from a non-randomized control and an inability to distinguish one-year VNS effects from placebo and concomitant treatment effects.

      On September 23, 2004, we filed an Amendment to the PMA-S to address the safety and effectiveness concerns expressed in FDA’s not-approvable letter. The Amendment augmented the original PMA-S, which included comprehensive one-year data and analyses on 460 patients, with two-year safety and effectiveness data and analyses on approximately 200 of these patients with chronic or recurrent treatment-resistant depression (“TRD”) treated with adjunctive VNS Therapy compared with their baseline depression. The Amendment also included updated, informative and transparent labeling for physicians and patients and a formal response to FDA’s not-approvable letter.

      On December 22, 2004, FDA issued a Warning Letter regarding nonconformities with Current Good Manufacturing Practice (“CGMP”) requirements of the QSR for medical devices, as specified in Title 21, Code of Federal Regulation, Part 820. The letter followed an inspection of our Houston manufacturing operations, the issuance of a number of Form-483 inspectional observations, our submission of written responses, and a meeting with the Dallas District Office. The Warning Letter cited a number of observations in the areas of MDR Reporting, device design validation procedures, complaint handling, quality systems and quality corrective and preventive actions. On January 21, 2005, we submitted a response to the FDA Warning Letter regarding nonconformities with CGMP requirements of the QSR for medical devices.

      On February 2, 2005, FDA deemed the VNS Therapy System approvable as an adjunctive treatment for TRD. The approvable letter indicated that final approval was conditional on satisfying the following four conditions: final labeling, final protocols for a post-approval dosing optimization study and patient registry, satisfactory compliance with QSR and satisfactory resolution of any outstanding bioresearch monitoring issues.

      In February 2005, FDA notified us that the bioresearch monitoring condition of approval was satisfied. On April 6, 2005, FDA’s Dallas District Office notified us that our response to FDA’s Warning Letter dated December 22, 2004 was found to be complete and adequate.

      On June 2, 2005, we received an Office of Regulatory Affairs Field Management Directive (“FMD”) No. 145, “Procedure for Release of Establishment Inspection Report to the Inspected Establishment,” letter from FDA’s Dallas District Office notifying us that the inspection and Warning Letter dated December 22, 2004 were officially closed under 21 C.F.R. 20.64(d)(3). We also were informed that FDA’s Center for Devices and Radiological Health (“CDRH”) was nearing completion of its final review of the conditions of TRD approval and that CDRH had requested the Dallas District Office conduct a follow-up facility inspection at our headquarters to confirm the QSR corrective and preventive actions implemented in response to the Warning Letter observations. That follow-up inspection was concluded on June 10, 2005 with no observations.

      On July 15, 2005, FDA approved VNS Therapy as a long-term adjunctive treatment for patients 18 years of age or older with chronic or recurrent TRD in a major depressive episode and who have not responded to at least four adequate antidepressant treatments.

      As a condition of approval for the VNS TRD indication, FDA is requiring us to conduct a post-approval 460-patient dosing study and a 2,000-patient registry. The results of these studies may be included in product

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labeling. If we fail to complete these studies in a timely manner, we may be subject to regulatory action, including withdrawal of our TRD indication approval.

      We will be required to obtain FDA approval of a new pre-market application or pre-market application supplement before making any change to the VNS Therapy System affecting the safety or effectiveness of the device including, but not limited to, new indications for use of the device, changes in the device’s performance or design specifications and device modifications and future generation products. New pre-market applications and pre-market application supplements generally require submission of information needed to support the proposed change and may require additional clinical data. If clinical data are required for a new indication, FDA can additionally require review of the results of a clinical study by one of their advisory panels. If the clinical testing required to obtain the information necessary to support the change places research subjects at risk, we could be required to obtain FDA’s approval of an investigational device exemption (“IDE”) before beginning such testing. We may sponsor additional clinical trials of the VNS Therapy System in the U.S. for central nervous system disorders. We believe that we will be required to conduct these additional clinical trials under one or more FDA-approved IDEs and under the auspices of one or more independent institutional review boards (“IRBs”) established pursuant to FDA regulations. We may be unable to obtain any required FDA or IRB approvals for such clinical trials or to complete the studies in a timely manner. Further, the information obtained may not be sufficient to support the filing or approval of a new pre-market application or pre-market application supplement for the proposed changes. Any of these events would prevent us from obtaining approvals to market our product for the indications, which could harm our business.

      We are required to register, and have registered, as a medical device manufacturer with FDA and state agencies and to list our products with FDA. Our facilities are subject to inspection on a routine basis by FDA for compliance with FDA’s QSR and other applicable regulations. The QSR imposes procedural and documentation requirements upon us with respect to product designs, manufacturing, testing, control, process validation and similar activities.

      Regulations governing post-market surveillance also apply to the VNS Therapy System. FDA also actively enforces regulations prohibiting marketing of products for non-indicated uses. The advertising of most FDA-regulated products, including the VNS Therapy System, is also subject to Federal Trade Commission jurisdiction and we are also subject to the Occupational Safety and Health Administration and other governmental entities.

      Healthcare regulations implementing the privacy requirements of the Administrative Simplification subtitle of the Health Insurance Portability and Accountability Act of 1996 (the “HIPAA Privacy Rule”) became effective in April 2003. Under the HIPAA Privacy Rule, the privacy of all medical records, billing records and other health information must be protected. Our proprietary patient identification and pull-through sales and marketing model relies on direct contact with patients to verify their insurance and provide education on VNS Therapy. Although we conduct our business as a HIPAA “covered entity” affording maximum protection to patients’ protected health information, some institutions and physicians may choose to limit direct access to patient information and their patients, which could negatively impact awareness and acceptance of VNS Therapy among patients and physicians.

      Clinical testing, manufacturing and sale of our products outside of the U.S. are subject to regulatory approval by other jurisdictions which may be more or less rigorous than in the U.S., and which vary from country to country. In order to market and sell our product in the European community, we must comply with the medical device directives. We are audited on a voluntary basis for compliance with these directives. We have obtained several foreign governmental approvals, including the approval to use the European Union CE Mark for epilepsy and depression, and have applied for additional approvals. However, we may not be granted the necessary approvals, including approval of new pre-market applications or supplements to existing pre-market applications for the VNS Therapy System, on a timely basis or at all. Delays in receipt of or failure to receive these approvals, or the withdrawal of previously received approvals, could harm our international operations and our business.

      Changes in existing requirements or the adoption of new requirements could significantly harm our ability to comply with regulatory requirements. Failure to comply with applicable regulatory requirements can result

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in, among other things, fines, suspensions or withdrawal of approvals, confiscations or recalls of products, operating restrictions and criminal prosecutions.

Product Liability and Insurance

      The manufacture and sale of our products subjects us to the risk of product liability claims. We are currently named as a defendant in one product liability lawsuit alleging strict liability and breach of warranty. We likely will be named in the future as a defendant in product liability lawsuits alleging claims of negligence, strict liability, breach of warranty, negligent misrepresentation, failure to warn, wrongful death and other claims. We do not believe that the VNS Therapy System is defective or otherwise has caused or will cause injury to patients who are or may be involved in these lawsuits; however, the outcome of litigation is inherently unpredictable and could result in an adverse judgment and an award of substantial and material damages against us. We established a liability reserve on our balance sheet in an amount less than the unpaid deductible for all matters that we believe is probable of payment as a result of a judgment or settlement. Although we maintain product liability insurance in amounts that we believe to be reasonable, coverage limits may prove not to be adequate in some circumstances. Product liability insurance is expensive and in the future may be available only at significantly higher premiums or not be available on acceptable terms, if at all. A successful claim brought against us in excess of our insurance coverage could severely harm our business and consolidated results of operations and financial position.

      We endeavor to maintain executive and organization liability insurance in a form and with aggregate coverage limits that we believe are adequate for our business purposes. As a consequence of the pendency of the governmental inquiries and the Audit Committee review at the time of our fiscal year 2007 insurance policy renewals, and our inability at that time to provide information about the results of the Audit Committee review, we elected to extend the aggregate coverage from our 2005-2006 executive and organization liability policies until a date later in fiscal year 2007 when the results of the Audit Committee review and any actions that might be taken or required as a result of that review could be discussed with our potential insurers.

Employees

      As of November 30, 2006, we had approximately 645 full-time employees. We believe that the success of our business depends, in part, on our ability to attract and retain qualified personnel. We believe our relationship with our employees is good. However, we cannot assure you that we will be successful in hiring or retaining qualified personnel. The loss of key personnel, or the inability to hire or retain qualified personnel, could significantly harm our business.

Financial Information

      Our financial information is described in the Consolidated Financial Statements and the related Notes beginning on page F-1.

Internet Website and Availability of Public Filings with the SEC

      Our internet address is www.cyberonics.com. We make available free of charge on or through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon as reasonably practicable after electronically filing such material with, or furnishing it to the SEC. Also available on our website are our corporate governance guidelines, corporate code of business conduct and ethics, financial code of ethics, and charters for each standing committee of our Board of Directors.

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Item 1A.      Risk Factors

Our common stock price constantly changes.

      Our common stock is traded on the NASDAQ Global Market under the ticker symbol “CYBX.” The price of stock on that trading market fluctuates, and we expect that the market price of our common stock will continue to fluctuate. For example, during the fiscal year ended April 28, 2006, our stock traded from a high of $47.77 to a low of $22.61 per share. Our stock price may be affected by a number of factors, some of which are beyond our control, including:

•  changes in the general conditions of the economy;

•  regulatory activities and announcements;

•  federal and state enforcement initiatives related to medical device companies;

•  changes in market valuations of medical device companies in general;

•  national and regional coverage determinations by third-party payers, including private insurance companies, Medicare, state Medicaid programs and others;

•  results of studies regarding the safety and efficacy of drugs or devices that are potential competitors to our VNS Therapy treatment for various indications including epilepsy, depression, Alzheimer’s Disease, anxiety and other disorders;

•  results of studies regarding the safety and efficacy of our VNS Therapy treatment for various indications including epilepsy, depression, Alzheimer’s Disease, anxiety and other disorders;

•  quarterly variations in our sales and operating results;

•  announcements of significant contracts, acquisitions or capital commitments;

•  changes in financial estimates by securities analysts;

•  additions or departures of key personnel;

•  the results of the previously disclosed inquiries by the SEC Staff and the U.S. Attorney;

•  the impact of the restatement of our financial statements and any other actions that might be taken or required as a result of such inquiries or the review by the Audit Committee of our stock option grants, procedures, and practices, including a default under our credit facility or debt instruments;

•  the potential identification of new material weaknesses in our internal controls over financial reporting;

•  risks and costs associated with inquiries or Audit Committee review and any litigation relating thereto or to our stock option grants, procedures, and practices (including the previously disclosed private litigation);

•  uncertainties associated with compliance with the requirements of the NASDAQ Panel to avoid possible delisting of our stock from NASDAQ for failure to file timely periodic reports with the SEC;

•  uncertainties associated with any appeal concerning any possible delisting by NASDAQ; and

•  uncertainties associated with stockholder litigation.

      In addition, the stock market in recent years has experienced broad price and volume fluctuations that have often been unrelated to the operating performance of companies. These broad market fluctuations have also adversely affected, and may continue to adversely affect, the market price of our common stock.

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We are not profitable now, and we have been profitable for only seven fiscal quarters since our inception.

      Through April 28, 2006, we incurred a cumulative net deficit of $207 million. We continue to incur substantial expenses, including:

•  sales and marketing expenses related to our U.S. launch of VNS Therapy in TRD and to our re-launch of VNS Therapy in epilepsy;

•  clinical expenses related to our commitment for post-market studies in the TRD indication;

•  regulatory expenses related to our post-market surveillance and other regulatory obligations and manufacturing expenses; and

•  general administrative expenses, including substantial expenses related to internal and governmental investigations of our stock option granting practices and procedures.

      We can provide no assurance that our revenues will grow or that our expenses will decline sufficient to enable us to become profitable in the future. The report of our auditors with respect to their audit of our Consolidated Financial Statements for the fiscal year ended April 28, 2006 contains an explanatory paragraph relating to the preparation of our financial statements as a “going-concern.” While our management expects to resolve the conditions referenced in “Note 3. Going Concern” in the Notes to the Consolidated Financial Statements, we can offer no assurance that we will be able to resolve these conditions and continue as a going concern.

Our quarterly operating results may fluctuate in the future, which may cause our stock price to decline.

      Our quarterly revenues, expenses and operating results may vary significantly from quarter to quarter for several reasons, including:

•  the extent to which the VNS Therapy System gains market acceptance;

•  the timing of obtaining marketing approvals for the VNS Therapy System for other indications;

•  the existence and timing of any approvals for reimbursement by third-party payers;

•  the rate and size of expenditures incurred as we expand our clinical, manufacturing, sales and marketing efforts;

•  our ability to retain qualified sales personnel; and

•  the availability of key components, materials and contract services, which depends on our ability to forecast sales among other things.

As a result of any of these factors, our consolidated results of operations may fluctuate significantly and may be below security analyst expectations, which may in turn cause our stock price to decline.

We may experience difficulties and delays in the development, manufacturing, marketing and sale of our VNS Therapy System for the treatment of depression.

      We are subject to extensive and rigorous ongoing regulation of the research, development, testing, manufacture, labeling, promotion, advertising, distribution and marketing of our product. Our failure to comply with regulations or to identify and resolve manufacturing or safety problems during commercial marketing could lead to the need for product marketing restrictions, product withdrawal or recall or other voluntary or regulatory action, which could delay further marketing until our product is brought into compliance. Our failure to comply with these requirements may also subject us to stringent penalties and lawsuits.

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Our indebtedness and debt service obligations may adversely affect our cash flow, cash position and stock price.

      As of November 30, 2006, we had approximately $125 million in convertible debt with aggregate annual debt service obligations, excluding full repayment of principal, of approximately $3.8 million and $7.5 million in outstanding borrowings against our revolving credit facility. If we issue other debt securities in the future, our debt service obligations and interest expense will increase further. We intend to fulfill our debt service obligations from earnings and our existing cash and investments. In the future, if we are unable to generate cash or raise additional cash through financing sufficient to meet these obligations and need to use existing cash or liquidate investments in order to fund these obligations, we may have to delay or curtail our research, development and commercialization programs. Our indebtedness could have significant additional negative consequences, including, without limitation:

•  requiring the dedication of a portion of our cash to service our indebtedness and to pay off the principal at maturity, thereby reducing the amount of our expected cash available for other purposes, including funding our research, development and commercialization efforts and capital expenditures;

•  increasing our vulnerability to general adverse economic conditions;

•  limiting our ability to obtain additional financing; and

•  placing us at a possible competitive disadvantage to less leveraged competitors and competitors with better access to capital resources.

Upon the occurrence of a fundamental change, holders of our senior subordinated convertible Notes may force us to purchase their Notes at the full amount owed, including accrued but unpaid interest.

      If we undergo a fundamental change, including, but not limited to, the acquisition by any person of the beneficial ownership of 50% of our common stock, our consolidation or merger with or into any other person, our liquidation, or our common stock being removed from listing on The NASDAQ Global Market, holders of our $125 million of 3% Senior Subordinated Convertible Notes due in 2012 (“Notes”) may, at their option, require us to purchase their Notes for the full amount owed including accrued but unpaid interest. This amount may be greater than the value of the Notes at the time of repurchase. As a result, the possibility of a repurchase requirement may inhibit the consummation of certain transactions such as mergers that may be beneficial to our stockholders.

Upon the occurrence of certain events, the initial conversion rate of our Notes will be adjusted, which could result in an increased number of shares being issued upon conversion.

      The initial conversion rate of our Notes will be adjusted upon the occurrence of certain events, including, among others, the issuance to holders of our common stock of certain rights to purchase our common stock at less than the current market price of our common stock or the issuance of cash dividends to substantially all of our common stockholders. If the conversion rate is adjusted, holders of our Notes will receive a greater number of shares of our common stock per Note, resulting in increased percentage ownership of our common stock by the former noteholders.

We may be forced to repay the full amount of our outstanding $125 million convertible note indebtedness and senior credit facility indebtedness on an accelerated basis.

      On July 31, 2006, we received a notice of default and demand letter (“Notice of Default”) dated July 28, 2006 from Wells Fargo Bank, National Association (the “Trustee”), pursuant to which the Trustee asserted that we were in default of our obligations under the Indenture dated September 27, 2005 (“Indenture”), between us, as issuer, and the Trustee, as trustee, with respect to our Notes, as a result of our failure (1) to timely file with the SEC this Form 10-K by July 12, 2006 and (2) to deliver a copy of the 2006 Form 10-K to the Trustee by July 27, 2006. On October 2, 2006, we received a notice of acceleration and demand letter (“Notice of Acceleration”) dated September 27, 2006 from the Trustee informing us that, pursuant to the Indenture, the Trustee has declared the Notes due and payable at their principal amount together with

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accrued and unpaid interest, and fees and expenses, and it demands that all such principal, interest, fees and expenses under the Notes be paid to the Trustee immediately. As such, although the Notes mature in 2012, we have included them as a current liability on our Consolidated Balance Sheet as of April 28, 2006. To clarify our rights and responsibilities under the Indenture, we filed a declaratory judgment action on October 3, 2006 styled Cyberonics, Inc. v. Wells Fargo Bank, N.A., as Trustee Under Indenture, No. 06-63284, in the 165th District Court of Harris County, Texas. In the lawsuit, we seek a declaration that no event of default has occurred under the Indenture and request attorney fees under the Declaratory Judgment Act. We are also a defendant in an action styled, Wells Fargo Bank, N.A. v. Cyberonics, Inc., No. 06-CV-15272, pending in the United States District Court for the Southern District of New York, alleging that we have breached the Indenture. If our interpretation of the Indenture is determined to be incorrect, a default and, therefore, an “event of default” will have occurred under the Indenture.

      If an event of default has occurred under the Indenture, all unpaid principal and accrued interest on the outstanding Notes will be due and payable immediately unless we negotiate an amendment to the terms of the Indenture. If the principal and accrued interest on the outstanding Notes must be repaid immediately, we may not have or be able to obtain access to the funds needed to repay the indebtedness, and we may be forced to seek protection under the Bankruptcy Code.

      In addition, any event of default under the Indenture constitutes an event of default under our Credit Agreement dated January 13, 2006 (“Credit Agreement”) with Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc. (“Administrative Agent”) and the lenders who are party thereto (“Lenders”). We entered into a Consent and Amendment Agreement (“Consent”) with the Administrative Agent and Lenders providing that certain events will not constitute a default under the Credit Agreement prior to October 31, 2006, including our failure to timely file with the SEC our 2006 Form 10-K. On October 31, 2006, we entered into an additional Consent with the Administrative Agent and Lenders extending through December 31, 2006 the period during which certain events will not constitute a default under the Credit Agreement, including our failure to timely file with the SEC our 2006 Form 10-K, our First Quarter Form 10-Q, and our Second Quarter Form 10-Q.

      On December 29, 2006, we entered into a Consent and Amendment Agreement with the Administrative Agent and Lenders which provided that the failure to file timely with the SEC our 2006 Form 10-K will not constitute a default under the Credit Agreement prior to January 8, 2007. The Consent and Amendment Agreement with the Administrative Agent and Lenders further provided that certain events will not constitute a default under the Credit Agreement prior to February 28, 2007. Such events include, among other events, (1) we failed to file timely with the SEC our 2007 quarterly reports on Form 10-Q, including the First Quarter Form 10-Q and the Second Quarter Form 10-Q; (2) our failure to maintain compliance with the NASDAQ listing standards because of our failure to file such SEC reports; and (3) our receipt of a notice of default and demand from the Trustee in connection with the Indenture as a result of our failure to timely file and deliver our 2006 Form 10-K as purportedly required by the Indenture, so long as there is no determination by a court and we have not otherwise acknowledged that a default has occurred under the Indenture. The Consent and Amendment Agreement with the Administrative Agent and Lenders further provided that for the term of the Consent and Amendment Agreement our borrowing under the Line of Credit is limited to $7.5 million. On February 1, 2007 we will be required to pay interest on the minimum loan balance of $10 million.

      If principal and interest on our indebtedness must be repaid immediately, we do not have the cash resources available to repay the debt. If we were not able to secure additional financing, our ability to continue as a going concern would be uncertain.

We may need significant additional capital and, as such, we may not be able to access sufficient sources or to access capital on terms which are acceptable to us.

      Our capital requirements are substantial and depend on many factors, including market acceptance of our product and clinical and strategic development opportunities. A large portion of our expenses is currently fixed, including expenses related to our facilities, equipment and personnel, and we may need to spend

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significant amounts to conduct our post-marketing clinical studies or to spend significant amounts to market our product for the treatment of depression. We will need to generate significant additional revenues to achieve profitability in the future. Even if we do achieve profitability, we may not be able to increase profitability on a quarterly or annual basis. Furthermore, if additional capital is required, we may not be able to access sufficient sources or to access capital on terms which are acceptable to us.

We may not be successful in our efforts to develop VNS Therapy for the treatment of other indications and, as such, we may not experience revenue growth from these other indications.

      We have conducted or supported animal studies or small human pilot studies for the treatment of Alzheimer’s Disease, anxiety disorders, bulimia, chronic headache, alcoholism, atrial arrhythmias, chronic pain, obesity and traumatic head injury. We expect to continue to invest in similar research activities as appropriate. We cannot assure you that our study results will be positive. If our study results are positive, additional studies would likely be required to pursue regulatory approval. If our study results are not positive, or if we receive no additional regulatory approvals or if alternative indications do not prove to be commercially viable, our revenues may not experience the growth that we would anticipate with the successful development of any of these indications.

We may not be able to expand or maintain market acceptance of the use of the VNS Therapy System to treat epilepsy or depression, which could cause our sales to be lower than expectations.

      Our product portfolio is limited to VNS Therapy Systems for two indications: (1) as an adjunctive therapy in reducing the frequency of seizures in adults and adolescents over 12 years of age with partial onset seizures that are refractory to antiepileptic drugs and (2) as a long-term adjunctive treatment of chronic or recurrent depression for patients 18 years or older who are experiencing a major depressive episode and have not had an adequate response to four or more adequate antidepressant treatments. Market acceptance of the VNS Therapy System for these indications depends on our ability to convince the medical community and third-party payers of the clinical efficacy and safety of vagus nerve stimulation and the VNS Therapy System. While the VNS Therapy System has been implanted in more than 42,000 patients, many physicians are still unfamiliar with this form of therapy. We believe that existing pharmacological therapies and surgery are the only other approved and currently available therapies competitive with the VNS Therapy System. These therapies may be more attractive to patients or their physicians than the VNS Therapy System in terms of efficacy, cost or reimbursement availability. Furthermore, we have not funded significant post-market clinical research that will change physicians’ opinions or use of our product. We cannot assure you that we will receive broad reimbursement coverage or that our sales will increase. Additionally, we cannot assure you that the VNS Therapy System will achieve expanded market acceptance for the treatment of epilepsy, depression or for any other indication. Failure of the VNS Therapy System to gain additional market acceptance would severely harm our business, our consolidated financial position and results of operations.

We may not be successful in our marketing and sales efforts, which could severely harm our business.

      We launched VNS Therapy for TRD in August 2005 following expansion of our sales and case management organization to support anticipated sales demand in both epilepsy and TRD markets. Although patient demand has been strong, our sales have not increased to the extent we anticipated in August 2005. At the present time, we do not expect sales of the VNS Therapy System for TRD to result in any consistent revenue growth in fiscal 2007 or future years until the product receives broader regional or national coverage by insurers and other payers. In addition, the absence of broad regional or national insurance coverage may have a negative affect on psychiatrists’ prescribing habits, resulting in decreasing sales of VNS Therapy Systems for TRD. Our inability to achieve annual or quarterly revenue growth could substantially harm our consolidated results of operations and financial position.

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Patient confidentiality and federal and state privacy laws and regulations may adversely impact

our selling model.

      The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) establishes federal rules protecting the privacy and security of personal health information. The privacy and security rules address the use and disclosure of individual health care information and the rights of patients to understand and control how such information is used and disclosed. HIPAA provides both criminal and civil fines and penalties for covered entities that fail to comply with HIPAA. We intend to comply with applicable privacy and security standards. However, if we fail to comply with the applicable regulations, we could suffer civil penalties up to $25,000 per calendar year for each violation and criminal penalties with fines up to $250,000. In addition to HIPAA, virtually every state has enacted one or more laws to safeguard privacy, and these laws vary significantly from state to state and change frequently. Even if our business model is compliant with the HIPAA Privacy Rule and the Texas privacy laws, it may not be compliant with the privacy laws of all states. Because the operation of our business involves the collection and use of substantial amounts of “protected health information,” we endeavor to conduct our business as a “covered entity” under the HIPAA Privacy Rule and consistent with the Texas privacy laws, obtaining HIPAA-compliant patient authorizations where required to support the collection and use of patient information. We also sometimes act as a “business associate” for a covered entity. Despite extensive efforts to conduct our business as a covered entity under the HIPAA Privacy Rule, the Office of the Inspector General of the Department of Health and Human Services (“OIG”) or another government enforcement agency may determine that our business model or operations are not in compliance with the HIPPA Privacy Rule, which could subject us to penalties and could severely limit our ability to market and sell VNS Therapy under our existing business model and could harm our business growth and consolidated financial position.

We may be unable to obtain and maintain adequate third-party reimbursement on our product, which could have a significant negative impact on our future operating results.

      Our ability to commercialize the VNS Therapy System successfully depends in part on whether third-party payers, including private healthcare insurers, managed care plans, Medicare and Medicaid programs and others, agree to cover the VNS Therapy System and associated procedures and services and to reimburse at adequate levels for the costs of the VNS Therapy System and the related services in the U.S. or internationally. While we currently have reimbursement approval for epilepsy, we have not yet received reimbursement coverage approval for the treatment of depression. In addition, periodic changes to reimbursement methodology for medical devices under the Medicare and Medicaid programs occur and may reduce the rate of increase in federal expenditures for health care costs. Such changes, as well as any future regulatory changes and the failure of the VNS Therapy System to continue to qualify for reimbursement under these programs, may have an adverse impact on our business. Healthcare, as one of the largest industries in the U.S., continues to attract substantial legislative interest and public attention. Congress and state legislatures are constantly reassessing the propriety of coverage for various health services and the payment level for such services. Certain reform proposals and other policy shifts, if enacted, could limit coverage for VNS Therapy or the reimbursement available for VNS Therapy from governmental agencies or third-party payers. Changes in Medicare, Medicaid and other programs, cost-containment initiatives by public and private payers, a failure to obtain substantial regional and national coverage policies for VNS Therapy in TRD, and proposals to limit payments and health care spending could have a significant negative impact on our future operating results.

Our current and future expense estimates are based, in large part, on estimates of our future sales, which are difficult to predict.

      We may be unable to, or may elect not to, adjust spending quickly enough to offset any unexpected sales shortfall. If increased expenses are not accompanied by increased sales, our consolidated results of operations and financial position for any particular quarter could be harmed.

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If our suppliers and manufacturers are unable to meet our demand for materials, components and contract services, we may be forced to qualify new vendors or change our product design which would impair our ability to deliver products to our customers on a timely basis.

      We rely upon sole source suppliers for certain of the key components, materials and contract services used in manufacturing the VNS Therapy System. We periodically experience discontinuation or unavailability of components, materials and contract services which may require us to qualify alternative sources or, if no such alternative sources are identified, change our product design. We believe that pursuing and qualifying alternative sources and/or redesigning specific components of the VNS Therapy System, if or when necessary, could consume significant resources. In addition, such changes generally require regulatory submissions and approvals. Any extended delays in or an inability to secure alternative sources for these or other components, materials and contract services could result in product supply and manufacturing interruptions, which could significantly harm our business.

Our products may have defects that result in product recalls, which may result in substantial costs and reduced sales.

      The VNS Therapy System includes an electronic pulse generator and lead designed to be implanted in the human body. Component failures, manufacturing or shipping problems or design defects could result in the product not delivering the therapy for which it is indicated. The occurrence of such problems or other adverse clinical reactions could result in a recall of our products, possibly requiring explantation and potential reimplantation of the VNS Therapy System, which may increase risk to the patient. Any product recall could result in a substantial loss of physician and patient confidence in our products, with a consequential substantial decrease in sales, and could result in substantial product liability litigation, with liabilities well in excess of our product liability insurance coverage limits, any or all of which could severely harm our business and our consolidated financial position and results of operations.

We may not be able to protect our technology from unauthorized use, which could diminish the value of our products and impair our ability to compete.

      Our success depends upon our ability to obtain and maintain patent and other intellectual property protection for the VNS Therapy System and its improvements, and for VNS Therapy. To that end, we have acquired licenses under certain patents and have patented and intend to continue to seek patents on our own inventions used in our products and treatment methods. The process of seeking patent protection can be expensive and time consuming, and we cannot assure you that patents will be issued from our currently pending or future applications or that, if patents are issued, they will be of sufficient scope or strength to provide meaningful protection of our technology or any commercial advantage to us. Further, the protection offered by the licensed international patents is not as strong as that offered by the licensed U.S. patents due to differences in patent laws. In particular, the European Patent Convention prohibits patents covering methods for treatment of the human body by surgery or therapy. Without effective patent protection, whether in the U.S. or abroad, we may be subject to competition that negatively affects our business and our consolidated financial position and results of operation.

We may engage in litigation to protect our proprietary rights, or defend against infringement claims by third parties, causing us to suffer significant liabilities or expenses or preventing us from selling our products.

      There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. Litigation, which could result in substantial cost to and diversion of effort by us, may be necessary to enforce patents issued or licensed to us, to protect trade secrets or know-how owned by us or to defend ourselves against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. Adverse determinations in litigation could subject us to significant liabilities to third parties, could require us to seek licenses from third parties and could prevent us from manufacturing, selling or using the VNS Therapy System, any of which could severely harm our business.

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Intense competition and rapid technological changes could reduce our ability to market our products and achieve sales.

      We believe that existing and future pharmaceutical therapies will continue to be the primary competition for the VNS Therapy System. We may also face competition from other medical device companies that have the technology, experience and capital resources to develop alternative devices for the treatment of epilepsy and depression. Medtronic, Inc., for example, continues to conduct clinical studies involving an implantable signal generator used with an invasive deep brain probe, or thalamic stimulator, for the treatment of neurological disorders, including depression, and has received FDA approval for the device for the treatment of essential tremor, including that associated with Parkinson’s Disease. Many of our competitors have substantially greater financial, manufacturing, marketing and technical resources than we do and have obtained third-party reimbursement approvals for their therapies. We may not have invested in the past, or be investing in the future, sufficient resources in engineering research and development to prepare the VNS Therapy System for competition in the future with other neurostimulation technologies. In addition, the healthcare industry is characterized by extensive research efforts and rapid technological progress. Our competitors may develop technologies and obtain regulatory approval for products that are more effective in treating epilepsy and depression than our current or future products. In addition, advancements in surgical techniques may make surgery a more attractive therapy for epilepsy and depression. The development by others of new treatment methods with novel drugs, medical devices or surgical techniques for epilepsy and depression could render the VNS Therapy System non-competitive or obsolete. We may not be able to compete successfully against current and future competitors, including new products and technology, which could severely harm our business and our consolidated financial position and results of operations.

We are subject to claims of product liability and we may not have the resources or insurance to cover the cost for losses under these claims.

      The manufacture and sale of the VNS Therapy System, an implantable medical device, entails the risk of product liability claims, which we have received from time to time in the ordinary course of business. We may be responsible for large deductibles for each claim, and our product liability coverage limit may not be adequate to pay defense costs and judgments that may result from these claims. Product liability insurance is expensive and in the future may only be available at significantly higher premiums or may not be available on acceptable terms, if at all. A successful claim brought against us in excess of our insurance coverage could significantly harm our business and consolidated financial position.

If we do not continue to comply with changing government laws and regulations, we could lose our ability to market and sell our product or be subject to substantial fines or other penalties.

      The preclinical and clinical design, testing, manufacturing, labeling, sale, distribution, servicing and promotion of the VNS Therapy System are subject to extensive and rigorous federal and state laws and regulations, including regulations from the Department of Health and Human Services (related to Medicare, HIPAA and FDA) and from comparable state agencies. In the future, it will be necessary for us to obtain additional government approvals for other indications of the VNS Therapy System and for modified or future-generation products. It is also necessary for us to ensure that our marketing and sales practices comply with all laws and regulations. Commercial distribution in certain foreign countries is also subject to regulatory approvals from the appropriate authorities in such countries. The process of obtaining FDA and other required regulatory approvals is lengthy, expensive and uncertain. Moreover, regulatory approvals may include regulatory restrictions on the indicated uses for which a product may be marketed. Failure to comply with applicable regulatory requirements can result in, among other things, fines, suspension or withdrawal of approvals, confiscations or recalls of products, operating restrictions and criminal prosecution. Adverse results in post-approval studies may result in limitations on or withdrawal of previously granted approvals. Furthermore, changes in existing regulations or adoption of new regulations could prevent us from obtaining, or affect the timing of, future regulatory approvals. We may not be able to obtain additional future regulatory approvals on a timely basis or at all. Delays in receipt of or failure to receive such future approvals, suspension or withdrawal of previously received approvals or recalls of the VNS Therapy System could severely harm our

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ability to market and sell our current and future products and improvements. As a condition of approval for the TRD indication, the FDA is requiring us to conduct a post-approval 460-patient dosing study and a 2,000-patient registry. The results of these studies may be included in product labeling. If we fail to complete these studies in a timely manner, we may be subject to regulatory action, including withdrawal of our TRD indication approval.

We are subject to federal and state laws governing our sales and marketing practices, and failure to adhere to these laws could result in substantial fines and other penalties.

      We are subject to certain laws and regulations, including the federal Anti-Kickback Statute, the federal False Claims Act and the HIPAA Privacy Rule, that govern the sales and marketing practices of healthcare companies. The Anti-Kickback Statute contains both civil and criminal sanctions, which are enforced by the OIG and the U.S. Department of Justice (“DOJ”). Over the past several years, the U.S. government has accused an increasing number of pharmaceutical and medical device manufacturers of violating the Anti-Kickback Statute based on certain marketing and sales practices and compensation arrangements with referral sources. Pharmaceutical and medical device manufacturers also have been accused of alleged violations of the federal False Claims Act, which imposes civil liability (including substantial monetary penalties and damages) on any person or corporation that (1) knowingly presents a false or fraudulent claim for payment to the U.S. government, (2) knowingly uses a false record or statement to obtain payment or (3) engages in a conspiracy to defraud the federal government to obtain allowance for a false claim. Under the qui tam, or whistleblower, provisions of the False Claims Act, private parties may bring actions on behalf of the U.S. government. These private parties are entitled to share in any amounts recovered by the government through trial or settlement. Both direct enforcement activity by the government and whistleblower lawsuits have increased significantly in recent years and have increased the risk that we may be forced to defend a prosecution under the Anti-Kickback Statute, a false claims action, be liable for monetary fines or be excluded from the Medicare and Medicaid programs as a result of an investigation resulting from an enforcement action or a whistleblower case.

      In 2004, we adopted a healthcare law compliance program, including our Business Practice Standards, which is a set of policies that embody the AdvaMed Code of Ethics for Interactions with Health Care Professionals. In January 2006, we adopted significant revisions to our Business Practice Standards that we believe more thoroughly address our compliance risks. We endeavor to conduct our business in compliance with our Business Practice Standards and to ensure continued compliance through regular education of our employees, audits of employee activities, and appropriate responses to violations of the Business Practice Standards. Although we believe that these efforts have been successful and that we are in compliance with our policies and the healthcare laws, given the complexity of our business model, including extensive interactions with patients and healthcare professionals, and the large number of field personnel employed by us, violations of our policy and the law could occur. We could be subject to investigation by the OIG or the DOJ. If investigated, we could be forced to incur substantial expense responding to the investigation and defending our actions. If unsuccessful in our defense, we could be found to be in violation of the healthcare laws and be subject to substantial fines and penalties, including exclusion of our products from Medicare and Medicaid reimbursement.

Our international operations are subject to risks not generally associated with commercialization efforts in the U.S.

      We may not be successful in increasing our international market sales or in obtaining reimbursement or any regulatory approvals required in foreign countries. The anticipated international nature of our business is also expected to subject us and our representatives, agents and distributors to laws and regulations of the foreign jurisdictions in which we operate or where the VNS Therapy System is sold. The regulation of medical devices in a number of such jurisdictions, particularly in the European Union, continues to develop and new laws or regulations may impair our ability to market and sell our products in those jurisdictions.

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Our failure to attract and retain qualified personnel, including key officers, could adversely affect our operations.

      In connection with the commercialization of the VNS Therapy System in the U.S. for TRD, we have made significant changes to our organization, including an initial scale up in personnel from February 2005 through July 2005 of approximately 50% and a subsequent reduction in personnel of 11% in February 2006. Such activities have placed, and may continue to place a significant strain on our resources and operations. Our ability to manage such growth effectively will depend upon our ability to attract, hire and retain highly qualified employees and management personnel. We compete for such personnel with other companies, academic institutions, government entities and other organizations and we may not be successful in hiring or retaining qualified personnel. Our success will also depend on the ability of our officers and key employees to continue to implement and improve our operational, management information and financial control systems. Our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) resigned in November 2006 and interim officers have assumed their responsibilities. We are in the process of recruiting new officers for these positions. We can provide no assurance that our interim officers will be able to manage our business effectively or that we will be able to hire new officers for these positions within a reasonable period of time. As a result, our business could be affected detrimentally.

We have in the past and may in the future be involved in an investigation conducted by the Staff of the Senate Committee on Finance resulting in adverse publicity about the safety and effectiveness of VNS Therapy, expenditure of substantial resources and diversion of management attention, all with an adverse affect on our business.

      The Senate Finance Committee (“SFC”) published a Committee Staff Report on February 16, 2006 entitled, “Review of FDA’s Approval Process for the Vagus Nerve Stimulation System for Treatment-Resistant Depression,” condemning FDA’s approval process and questioning whether approval was appropriate. A discussion of the SFC Staff Report is contained in “Note 16. Litigation — Senate Finance Committee Investigation.” We are unable to provide assurance at this time as to any further action that may be taken by the SFC or its staff in regard to this matter. Any further action taken by the SFC or its staff could have a material adverse effect on our business, including but not limited to increased expense to comply with requests and diversion of management attention from the conduct of our business.

We have been named in a putative securities class action lawsuit.

      We and certain of our officers have been named as defendants in a putative class action lawsuit. A discussion of this lawsuit is contained in “Note 16. Litigation — Securities Class Action Lawsuit” in the Notes to the Consolidated Financial Statements. Although it is not possible at this early stage to predict the likely outcome of this lawsuit, an adverse result could have a material adverse effect on us, our consolidated financial position, results of operations and cash flows. Even if the result of such litigation is not adverse, the cost of defending such litigation has been and will continue to be expensive and could have a material adverse effect on our consolidated financial position.

We are the subject of governmental investigations related to our stock option granting practices and procedures and other matters, the outcome of which could adversely affect our business.

      On June 9, 2006, the SEC staff advised us that it had commenced an informal inquiry of our stock option grants and related practices, procedures and accounting. On June 26, 2006, we received a subpoena from the U.S. Attorney requesting documents related to the same matters. On October 23, 2006 the SEC staff made an additional request for certain documents and information related to our revised guidance on February 8, 2006 and our financial results announced on May 1, 2006, our sales for the quarter ended April 28, 2006, coverage or potential coverage of our VNS Therapy System by Alabama BlueCross BlueShield and Aetna and the aging of our accounts receivable since January 1, 2003. We are cooperating with these governmental investigations. A more detailed discussion of these matters is contained in “Note 16. Litigation — Governmental Investigations of Options Granting Practices” in the Notes to the Consolidated Financial Statements. Although it is not possible at this early stage to predict the likely outcome of these inquiries, an adverse result

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could have a material adverse affect on us, our consolidated financial position, results of operations and cash flows. Even if the result of such inquiries is not adverse, the cost of defending such inquiries has been and will continue to be expensive and could have a material adverse effect on our consolidated financial position.

We are named as a nominal defendant in six stockholder derivative lawsuits which, as a result of our indemnity obligations to the current and former officers and Board members named as defendants, could be costly to us.

      A discussion of the pending stockholder derivative claims is contained in “Note 16. Litigation — Stockholder Derivative Litigation” in the Notes to the Consolidated Financial Statements. Our bylaws require us to advance fees and expenses to officers and Board members in certain situations. The advancement of fees and expenses to officers and Board members, both current and former, to defend the stockholder derivative claims could be costly and could have a material adverse effect on our consolidated financial position.

If our common stock is delisted from The NASDAQ Global Market, the ability to trade our stock will be impaired, which could result in a decrease in the trading price of the stock.

      On July 31, 2006, September 8, 2006 and December 13, 2006, we received Staff Determination Letters from the NASDAQ Stock Market, Inc. indicating that we failed to comply with the filing requirement for continued listing set forth in Marketplace Rule 4310(c)(14), and that our securities are, therefore, subject to delisting from The NASDAQ Global Market. For a description of the facts underlying this risk, see “Note 16. Litigation — NASDAQ Delisting Notice” in the Notes to the Consolidated Financial Statements. If NASDAQ delists our stock, there may be no market or a limited market for trading our stock, which could result in a substantial decrease in the trading price of the stock. In addition, the delisting of our stock could be a default under the Credit Agreement.

Item 1B.      Unresolved Staff Comments

      We have previously disclosed that we are subject to an inquiry by the SEC relating to our accounting for stock option grants. To date, we have not received written comments by the SEC regarding any of our periodic or current reports filed under the Exchange Act, as amended, not less than 180 days before the fiscal year ended April 28, 2006 that remain unresolved.

Item 2.      Properties

      We have agreed to lease approximately 143,000 square feet of office and manufacturing space in Houston, Texas through December 2009. We have also agreed to lease approximately 16,000 square feet in sales offices in Europe through April 2010. All leased properties have been expanded to accommodate expected growth in our domestic and international businesses.

Item 3.      Legal Proceedings

      For a description of our material pending legal and regulatory proceedings and settlements, see “Note 16. Litigation” in the Notes to the Consolidated Financial Statements.

Item 4.      Submission of Matters to a Vote of Security Holders

      None.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

      Our common stock is quoted on The NASDAQ Global Market under the symbol “CYBX.” The high and low sale prices for our common stock during fiscal years 2005 and 2006 are set forth below. Price data reflect actual transactions, but do not reflect mark-ups, mark-downs or commissions.

		High		Low
Fiscal Year Ended April 29, 2005
	First Quarter	$	40.07	$	16.78
	Second Quarter		28.69		12.78
	Third Quarter		26.24		18.10
	Fourth Quarter		46.71		24.20
Fiscal Year Ended April 28, 2006
	First Quarter	$	47.77	$	32.70
	Second Quarter		40.69		26.63
	Third Quarter		35.30		26.88
	Fourth Quarter		30.96		22.61

      As of November 30, 2006, according to data provided by our transfer agent, there were 435 stockholders of record.

      During the fiscal years 2005 and 2006, we did not pay any cash dividend to our stockholders. We currently intend to retain future earnings to fund the development and growth of our business and, therefore, do not anticipate paying cash dividends within the foreseeable future. Any future payment of dividends will be determined by our Board and will depend on our consolidated financial position and results of operations and other factors deemed relevant by our Board.

      For a discussion of the securities authorized under our equity compensation plans, see “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

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Item 6. Selected Financial Data

      The following table summarizes certain restated selected financial data and is qualified by reference to, and should be read in conjunction with the restated Consolidated Financial Statements and with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected financial data and the related notes for the 52 weeks ended April 28, 2006 and the restated selected financial data for the 52 weeks ended April 29, 2005 and the 53 weeks ended April 30, 2004 is derived from restated consolidated financial statements that are included elsewhere herein. The restated selected financial data for the 52 weeks ended April 25, 2003 and April 26, 2002 is derived from unaudited restated financial statements that are not included in this Form 10-K.

			52 Weeks Ended						53 Weeks			52 Weeks Ended
									Ended
			April 28,			April 29,			April 30,			April 25,			April 26,
			2006			2005			2004			2003			2002
						As Restated			As Restated			As Restated			As Restated
Consolidated Statement of Operations Data:
Net sales			$	123,441,575		$	103,442,570		$	110,721,499		$	104,466,998		$	70,111,293
Cost of sales				15,822,045			15,674,040			16,386,487			16,202,831			13,693,137
Gross profit				107,619,530			87,768,530			94,335,012			88,264,167			56,418,156
Operating expenses:
	Selling, general and administrative			137,310,196			86,972,068			72,198,977			70,480,847			60,894,800
	Research and development			29,541,707			20,092,810			17,582,527			18,376,484			24,828,752
		Total operating expenses		166,851,903			107,064,878			89,781,504			88,857,331			85,723,552
Earnings (loss) from operations				(59,232,373	)		(19,296,348	)		4,553,508			(593,164	)		(29,305,396	)
Interest income				3,211,956			1,072,488			469,924			471,213			1,264,853
Interest expense				(3,018,969	)		(444,270	)		(565,702	)		(413,192	)		(266,270	)
Other income, net				69,460			84,736			390,997			572,851			93,694
Earnings (loss) before income taxes				(58,969,926	)		(18,583,394	)		4,848,727			37,708			(28,213,119	)
Income tax expense				99,266			26,113			230,789			129,563			—
Net earnings (loss)			$	(59,069,192	)	$	(18,609,507	)	$	4,617,938		$	(91,855	)	$	(28,213,119	)
Basic earnings (loss) per share			$	(2.37	)	$	(0.77	)	$	0.20		$	(0.00	)	$	(1.30	)
Diluted earnings (loss) per share			$	(2.37	)	$	(0.77	)	$	0.18		$	(0.00	)	$	(1.30	)
Shares used in computing basic earnings (loss) per share				24,916,938			24,036,736			22,921,031			22,034,651			21,655,009
Shares used in computing diluted earnings (loss) per share				24,916,938			24,036,736			25,954,640			22,034,651			21,655,009
Consolidated Balance Sheet Data (as of Year End):
Cash, cash equivalents and marketable securities			$	92,355,071		$	61,475,892		$	58,363,731		$	43,576,305		$	38,195,962
Total assets				152,300,284			98,855,397			94,296,524			75,115,312			64,451,679
Convertible notes				125,000,000			—			—			—			—
Line of credit				2,500,000			3,000,000			10,031,000			8,370,000			6,500,000
Long-term obligations				1,148,457			209,928			—			141,066			274,969
Accumulated deficit				(207,466,149	)		(148,396,957	)		(129,787,450	)		(134,405,388	)		(134,313,533	)
Common stockholders’ equity				4,629,866			75,595,841			68,980,479			48,512,003			36,613,813

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      The restated selected financial data for the 52 weeks ended April 25, 2003 and April 26, 2002 is derived from unaudited restated financial statements that are not included in this Form 10-K. The table below discloses the impact of the restatement to the selected financial data applicable to fiscal years ended April 25, 2003 and April 26, 2002.

			52 Weeks Ended
			April 25, 2003						April 26, 2002
			As Reported			As Restated			As Reported			As Restated
Consolidated Statement of Operations Data:
Net sales			$	104,466,998		$	104,466,998		$	70,111,293		$	70,111,293
Cost of sales				16,066,229			16,202,831			13,616,374			13,693,137
Gross profit				88,400,769			88,264,167			56,494,919			56,418,156
Operating expenses:
	Selling, general and administrative			65,842,238			70,480,847			59,190,554			60,894,800
	Research and development			17,874,909			18,376,484			24,516,547			24,828,752
		Total operating expenses		83,717,147			88,857,331			83,707,101			85,723,552
Earnings (loss) from operations				4,683,622			(593,164	)		(27,212,182	)		(29,305,396	)
Interest income				471,213			471,213			1,264,853			1,264,853
Interest expense				(413,192	)		(413,192	)		(266,270	)		(266,270	)
Other income, net				572,851			572,851			93,694			93,694
Earnings (loss) before income taxes				5,314,494			37,708			(26,119,905	)		(28,213,119	)
Income tax expense				129,563			129,563			—			—
Net earnings (loss)			$	5,184,931		$	(91,855	)	$	(26,119,905	)	$	(28,213,119	)
Basic earnings (loss) per share			$	0.24		$	(0.00	)	$	(1.21	)	$	(1.30	)
Diluted earnings (loss) per share			$	0.22		$	(0.00	)	$	(1.21	)	$	(1.30	)
Shares used in computing basic earnings (loss) per share				22,034,651			22,034,651			21,655,009			21,655,009
Shares used in computing diluted earnings (loss) per share				23,173,324			22,034,651			21,655,009			21,655,009
Consolidated Balance Sheet Data (as of Year End):
Cash, cash equivalents and marketable securities			$	43,576,305		$	43,576,305		$	38,195,962		$	38,195,962
Total assets				75,115,312			75,115,312			64,451,679			64,451,679
Line of credit				8,370,000			8,370,000			6,500,000			6,500,000
Long-term obligations				141,066			141,066			274,969			274,969
Accumulated deficit				(124,565,217	)		(134,405,388	)		(129,750,148	)		(134,313,533	)
Common stockholders’ equity				48,512,003			48,512,003			36,613,813			36,613,813

      Read the “Explanatory Note” to this Form 10-K and “Note 1. Restatements” in our Notes to the Consolidated Financial Statements for more detailed information regarding the restatement of our consolidated financial statements for the fiscal years ended April 26, 2002, April 25, 2003, April 30, 2004 and April 29, 2005. We recorded prior period adjustments to increase additional paid-in capital and accumulated deficit as of the beginning of the fiscal year ended April 26, 2002 in the amount of approximately $2.5 million for the cumulative effect of the additional non-cash stock-based compensation expense applicable to years 1994 through 2001.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

      You should read the following discussion and analysis together with “Item 6. Selected Financial Data” and our Consolidated Financial Statements and the related Notes. The information below has been adjusted to reflect the restatement of our consolidated financial results which is more fully described in the “Explanatory Note” to this Form 10-K and in “Note 1. Restatements” in the Notes to the Consolidated Financial Statements.

      This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections about our industry and us. For a discussion of the risks and uncertainties affecting these statements, see “Cautionary Statement about Forward-Looking Statements” as well as “Item 1. Business” and “Item 1A. Risk Factors” in this Form 10-K. We undertake no obligation to update publicly any forward-looking statements, even if new information becomes available or other events occur in the future.

      This item provides material historical and prospective disclosures enabling investors and other users to assess our consolidated financial position and results of operations. The Consolidated Financial Statements, excluding the related Notes, include the consolidated statements of operations, consolidated balance sheets, consolidated statements of stockholders’ equity and comprehensive income (loss) and consolidated statements of cash flows. The Notes are an integral part of the Consolidated Financial Statements and provide additional information required to fully understand the nature of amounts included in the Consolidated Financial Statements.

Going Concern

      The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. Since inception, we have incurred an accumulated net deficit of approximately $207 million. We have incurred substantial expenses, primarily for research and development activities that include product and process development, clinical trials and related regulatory activities, sales and marketing activities, manufacturing start-up costs and systems infrastructure. For the fiscal years ended April 28, 2006 and April 29, 2005 we have had a net loss of $59 million and $19 million, respectively. To fund our operations, in fiscal 2006, we incurred additional indebtedness through the issuance of $125 million of senior subordinated convertible notes and the establishment of a $40 million line of credit.

      On July 31, 2006, we received a notice of default and demand letter (“Notice of Default”) dated July 28, 2006 from Wells Fargo Bank, National Association (the “Trustee”), pursuant to which the Trustee asserts that we were in default of our obligations under the Indenture dated September 27, 2005 (“Indenture”), between us, as issuer, and the Trustee, as trustee, with respect to our $125 million of 3.0% Senior Subordinated Convertible Notes due 2012 (“Notes”), as a result of our failure (1) to timely file with the SEC this Form 10-K by July 12, 2006 and (2) to deliver a copy of the 2006 Form 10-K to the Trustee by July 27, 2006. On October 2, 2006, we received a notice of acceleration and demand letter (“Notice of Acceleration”) dated September 27, 2006 from the Trustee informing us that, pursuant to the Indenture, the Trustee has declared the Notes due and payable at their principal amount together with accrued and unpaid interest, and fees and expenses, and it demands that all such principal, interest, fees and expenses under the Notes be paid to the Trustee immediately. We believe that neither a default nor an “event of default” has occurred under the Indenture. However, if an event of default has occurred under the Indenture, all unpaid principal and accrued interest on the outstanding Notes will be due and payable. Accordingly, until this matter is resolved, we have included them as a current liability on our Consolidated Balance Sheet as of April 28, 2006. In addition, if an event of default has occurred under the Indenture, we would also be in default of the $40 million Line of Credit. If principal and interest on our indebtedness must be repaid immediately, we do not have the cash resources available to repay the debt. If we were not able to renegotiate the terms of the Indenture, or to secure additional financing, this could raise substantial doubts regarding our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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Business Overview

      Cyberonics, Inc. is a neuromodulation company founded to design, develop and bring to market medical devices that provide a unique therapy, Vagus Nerve Stimulation (“VNS”), for the treatment of epilepsy, treatment-resistant depression (“TRD”) and other debilitating neurological, psychiatric diseases and other disorders. The United States Food and Drug Administration (“FDA”) approved the VNS Therapy System in July 1997 for use as an adjunctive therapy in patients over 12 years of age in reducing the frequency of partial onset seizures that are refractory or resistant to antiepileptic drugs. Regulatory bodies in Canada, Europe, South America, Africa, India, Australia and certain countries in Eastern Asia have approved VNS Therapy for the treatment of epilepsy without age restrictions or seizure-type limitations. FDA also approved the VNS Therapy System for the adjunctive long-term treatment of chronic or recurrent depression for patients 18 years of age or older who are experiencing a major depressive episode and have not had an adequate response to four or more adequate anti-depressant treatments. Regulatory bodies in the European Union countries and Canada approved the VNS Therapy System for the treatment of chronic or recurrent depression in patients who are in a treatment-resistant or in a treatment-intolerant depressive episode without age restrictions.

      Our ability to successfully expand the commercialization of the VNS Therapy System depends on obtaining and maintaining favorable coverage, coding and reimbursement for the implant procedure and follow-up care. Currently, we have broad coverage, coding and reimbursement for VNS Therapy for the treatment of epilepsy. We are actively pursuing favorable coverage decisions to expand reimbursement to include VNS Therapy for TRD. Absent favorable national and regional coverage policies, we have been obtaining certain TRD case-by-case approvals since FDA approval in July 2005. Our long-term growth is highly dependent upon progress in obtaining case-by-case approvals and favorable national and regional coverage policies in TRD.

      Our clinical development program has included pilot and pivotal studies in using VNS Therapy (1) as an adjunctive therapy for reducing the frequency of seizures in patients over 12 years of age with partial onset seizures that are refractory to antiepileptic drugs and (2) as an adjunctive treatment of patients 18 years of age and older with chronic or recurrent TRD in a major depressive episode. We have also conducted or provided support for small pilot studies for the treatment of Alzheimer’s Disease, anxiety, chronic migraine headache, bulimia and other indications. These studies have been conducted to determine the safety and effectiveness of VNS Therapy and to determine which new indications might be considered for pivotal studies and, therefore, are an important component of our clinical research activities.

      Since inception, we have incurred substantial expenses, primarily for research and development activities that include product and process development and clinical trials and related regulatory activities, sales and marketing activities, manufacturing start-up costs and systems infrastructure. We have also made significant investments in recent periods in connection with sales and marketing activities in the U.S. and clinical research costs associated with new indications development, most notably depression. For the period from inception through April 28, 2006, we incurred a cumulative net deficit of approximately $207 million. We anticipate increasing investments in post-approval clinical studies in epilepsy and depression.

      The primary exchange rate movements that impact our consolidated net sales growth include the U.S. dollar as compared to the Euro. The weakening of the U.S. dollar in fiscal 2006 generally has a favorable impact on our sales for the year. The impact of foreign currency fluctuations on net sales is not indicative of the impact on our operations due to the offsetting foreign currency impact on operating costs and expenses.

Restatement of Consolidated Financial Statements

      On June 8, 2006, a published analyst research report raised questions about certain stock options granted to some of our officers and employees. On June 9, 2006, the staff of the SEC informed us that it had initiated an informal inquiry into our stock option grants, and we engaged an outside law firm to represent us in the matter. Thereafter, we received a subpoena dated June 26, 2006 from the U.S. Attorney seeking documents related to our stock option grants. We have been cooperating in both the SEC staff’s and U.S. Attorney’s investigations.

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      We initiated our own internal investigation into these matters. On June 26, 2006, the Board designated the Audit Committee, which consists entirely of independent members of the Board, to undertake a review of our stock option grants and related practices, procedures, and accounting during the period from 1993 through the conclusion of the investigation. The Audit Committee undertook its investigation with the assistance of independent counsel and accounting experts retained by its counsel. The results of the Audit Committee’s investigation were announced on November 20, 2006 after the Audit Committee reported its findings to the Board. The Audit Committee concluded that certain stock options granted primarily during the period 1998 to 2003 were not accounted for correctly in accordance with Generally Accepted Accounting Principles (“GAAP”) applicable at the time the grants were issued. As a result of the Audit Committee’s investigation, and after additional review and consultation with our independent registered public accountants, we are restating consolidated financial statements and applicable disclosures for the fiscal years ended April 26, 2002, April 25, 2003, April 30, 2004 and April 29, 2005. A cumulative adjustment of $2.5 million related to restatements for fiscal years 1994 through 2001 is reflected in the restated beginning accumulated deficit for the fiscal year ended April 26, 2002. These non-cash adjustments do not have any impact on our previously reported net sales, cash or cash equivalents.

      The types of errors that were identified during the review processes are as follows:

      (1) Incorrect measurement dates were used for certain stock option grants made principally during the period from 1998 to 2003. Under applicable accounting principles, and particularly Accounting Principles Board Standard No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), the date of final approval of a stock option is the basis for determining the “measurement date” to be used in comparing the exercise price of the option to the fair value of our stock on the measurement date. In accordance with APB 25 and related interpretations, we should have recorded compensation expense in an amount per share subject to each option to the extent the fair market value of our stock on the measurement date exceeded the exercise price of the option. We have determined that in some instances we previously used an incorrect measurement date and failed to record such compensation expense.

      The stock option grant process in place during this time period required the Compensation Committee of the Board to approve all stock option grants. This was frequently accomplished through the use of unanimous written consents that were prepared by management and sent by overnight delivery to Compensation Committee members to review, execute and return. For certain grants issued during this period, the date of effective approval by the Compensation Committee was subsequent to the grant date as recorded in our records and used as the measurement date in preparing our consolidated financial statements. Electronic data available for unanimous written consent documents executed by the Compensation Committee during the time period from 1998 to 2003 indicated that the documents were created and therefore approved on a date later than the grant dates. With respect to grants for which the electronic data indicated such dating issues, but for which other contemporaneous documentation exists that establishes the date of final approval by all Compensation Committee members (such as, for example, signed and dated approval faxes), we relied on that other documentation to determine the date of effective approval and the appropriate measurement date. With respect to grants for which the electronic data indicated such dating issues, but for which no such other contemporaneous documentation exists, we used a measurement date corresponding to the date on which the unanimous written consent document was last saved electronically, plus four calendar days to allow for the approval process conducted using overnight shipping of approval documents to and from Compensation Committee members. Under APB 25, to the extent that the fair market value of our stock on the revised measurement date exceeded the exercise price of the option, we were required to recognize compensation expense with respect to that option at the time of the grant. The cumulative effect of these measurement date revisions on our consolidated financial statements through April 29, 2005 is approximately $5.3 million in aggregate pre-tax non-cash stock-based compensation expense.

      In light of the significant judgment used in establishing revised measurement dates, alternate approaches to the one used could have resulted in different aggregate pre-tax non-cash stock-based compensation expense charges than those recorded in the restatement.

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      While we used a measurement date for certain grants corresponding to the date on which the unanimous written consent document was last saved electronically plus four calendar days to allow for the approval process, the cycle time for securing approval could have been as short as two calendar days, or may have extended to as long as 17 calendar days, as observed in one situation. To assess the sensitivity of the aggregate pre-tax non-cash stock-based compensation charges attributable to the estimated cycle time for the approval process for these grants, management has performed variability analyses corresponding to the range from (1) the earliest possible approval, which was defined as two calendar days following the date the unanimous written consent document was last saved electronically, to (2) the longest cycle time observed for approval of one of these grants, which was 17 calendar days following the date the unanimous written consent document was last saved electronically.

      Within this time period spanning from two to 17 calendar days following the date the unanimous written consent document was last saved electronically, we calculated the range of aggregate pre-tax non-cash stock-based compensation charges that would have resulted if the measurement date used for each grant corresponded to the date within this time period that would have yielded the highest and lowest option prices applicable to that grant. Under this scenario, the aggregate pre-tax non-cash stock-based compensation charges for these grants through April 29, 2005 would have been as high as $9.5 million and as low as $3.5 million, compared to our value of $5.3 million.

      In addition, we also identified certain grants where evidence other than electronic unanimous written consent data exists that supports a measurement date other than the grant date. These grants were issued in 2001 and 2002, resulting in additional pre-tax non-cash stock-based compensation expense through April 29, 2005, of approximately $1.1 million.

      (2) The existence of multiple documents with different dates evidencing approval for the same grants resulted in a scenario that is considered re-pricing under GAAP. Our internal investigation identified several grants to directors, officers and employees where it appeared that the approval criteria under GAAP were met on multiple dates. The documents evidencing approval included communications between management and members of the Compensation Committee and subsequently completed unanimous written consent forms signed by the Compensation Committee members. Ultimately, grants were issued to individuals at the price determined by using as the measurement date the date of that subsequently completed unanimous written consent, resulting in a price lower than the price that would have resulted from use of the earlier dated documents to evidence approval of the grant. It is not clear which documents were intended to constitute final approval.

      Based on the existence of multiple approval documents with the subsequent approval at a lower stock price, these grants were deemed to involve re-pricing within the meaning of the applicable accounting literature. Variable accounting treatment has been applied in accordance with the provisions of FASB Interpretation 44, “Accounting for Certain Transactions involving Stock Compensation” (“FIN 44”), which was effective July 1, 2000 and provided for a “look back” period to December 15, 1998 for re-priced stock options.

      The effect of accounting for these grants as having been re-priced is to increase our cumulative compensation expense through April 29, 2005 by approximately $8.6 million to account for the additional pre-tax non-cash stock-based compensation expense.

      (3) The cancellation of certain stock option grants that were subsequently reissued at a lower price than the original grant constituted re-pricing that rendered the grants subject to variable accounting treatment. On certain occasions from fiscal year 1999 through fiscal year 2001, we cancelled certain stock option grants and subsequently reissued new grants. Therefore, these grants were deemed to be re-priced and subject to variable accounting treatment in accordance with FIN 44.

      The cumulative impact of the restatement through April 29, 2005 associated with this type of error is approximately $1.9 million in additional pre-tax non-cash stock-based compensation expense.

      (4) Stock option grants issued to non-employees were either not recorded or were recorded incorrectly. From fiscal year 1997 through fiscal year 2001, we issued certain stock option grants to

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various consultants. Compensation expense for some of the grants was recorded at the time the grants were issued; however, the grants were not correctly recorded in accordance with GAAP in effect at the time of the grants. Compensation expense was not recorded at all for the remaining grants.

      The cumulative impact of this type of error on the consolidated financial statements through April 29, 2005 is approximately $1.0 million in additional pre-tax non-cash stock-based compensation expense.

      (5) Other miscellaneous errors related to stock options. The cumulative impact for all other types of errors on the consolidated financial statements through April 29, 2005 is approximately $0.5 million in additional pre-tax non-cash stock-based compensation expense.

      The cumulative effect of the restatement adjustment on our consolidated balance sheet at April 29, 2005 was an increase in additional paid-in capital of approximately $18.4 million and an increase in accumulated deficit of $18.4 million. There was no impact on net sales, cash or cash equivalents.

Related Proceedings

      Regulatory Proceedings. On June 9, 2006, the SEC staff advised us that it had commenced an informal inquiry of our stock option grants and related practices, procedures and accounting. On June 26, 2006, we received a subpoena from the U.S. Attorney requesting documents related to the same matters. For additional information, see “Note 16. Litigation” in the Notes to the Consolidated Financial Statements.

      Legal Proceedings. We are named as a nominal defendant in six stockholder derivative lawsuits pending in Texas state and federal courts wherein a stockholder purports to pursue claims on our behalf against several of our current and former officers and Board members. For additional information, see “Note 16. Litigation” in the Notes to the Consolidated Financial Statements. On June 17, 2005, a putative class action lawsuit was filed against us and certain of our officers and Robert P. Cummins, then Chairman and Chief Executive Officer, in the United States District Court for the Southern District of Texas. On August 18, 2006, the lead plaintiffs filed a First Amended Complaint for Violation of the Securities Laws. The amended complaint includes an allegation that the defendants falsely stated that an analyst’s statements about options granted in June 2004 were inaccurate and without merit. For additional information, see “Note 16. Litigation” in the Notes to the Consolidated Financial Statements.

      NASDAQ Delisting. We have received three Staff Determination Letters indicating that we fail to comply with the filing requirement for continued listing set forth in Marketplace Rule 4310(c)(14) as a result of the delay in filing our Forms 10-K and 10-Q for past fiscal periods. For additional information, see “Note 16. Litigation” in the Notes to the Consolidated Financial Statements.

Critical Accounting Policies

      We have adopted various accounting policies to prepare the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“U.S.”). Our most significant accounting policies are disclosed in “Note 2. Summary of Significant Accounting Policies and Related Data” in the Notes to the Consolidated Financial Statements.

      The preparation of the Consolidated Financial Statements, in conformity with accounting principles generally accepted in the U.S., requires us to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the related Notes. The accompanying Consolidated Financial Statements have been prepared on a going-concern basis. Our estimates and assumptions are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience or various assumptions that are believed to be reasonable under the circumstances, and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates.

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      We consider the following accounting policies as the most critical because, in management’s view, they are most important to the portrayal of our consolidated financial position and results of operations and most demanding in terms of requiring estimates and other exercises of judgment.

      Accounts Receivable. We provide an allowance for doubtful accounts based upon specific customer risks and a general provision based upon historical trends. An increase in losses beyond that expected by management or that historically have been experienced by us would reduce earnings when they become known.

      Inventories. We state our inventories at the lower of cost, first-in, first-out (“FIFO”) method, or market. Cost includes the acquisition cost of raw materials and components, direct labor and overhead. Management considers potential obsolescence at each balance sheet date. An acceleration of obsolescence could occur if consumer demand should differ from expectations.

      Property and Equipment. Property and equipment are carried at cost, less accumulated depreciation. Maintenance, repairs and minor replacements are charged to expense as incurred; significant renewals, improvements and expansions are capitalized. For financial reporting purposes, we compute depreciation using the straight-line method over useful lives ranging from two to nine years. An unanticipated change in the utilization or expected useful life of property and equipment could result in acceleration in the timing of the expenses.

      Revenue Recognition. We sell our products through a combination of a direct sales force in the U.S. and certain European countries and through distributors elsewhere. We recognize revenue when title to the goods and risk of loss transfer to customers, providing there are no remaining performance obligations required of us or any matters requiring customer acceptance. We record estimated sales returns and discounts as a reduction of net sales in the same period revenue is recognized. Our revenues are dependent upon sales to new and existing customers pursuant to our current policies. Changes in these policies or sales terms could impact the amount and timing of revenue recognized.

      Research and Development. All research and development costs are expensed as incurred. We have entered into contractual obligations for the conduct of clinical studies. Costs are incurred primarily at the time of enrollment and paid under the terms of the contracts. Research and development expenses could vary significantly with changes in the timing of clinical activity.

      Stock Options. We have adopted the disclosure-only provisions of Statement of Financial Accounting Standards Board (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” which disclosures are presented in “Note 2. Summary of Significant Accounting Policies and Related Data” in the Notes to the Consolidated Financial Statements. Because of this election, we continue to account for our employee stock-based compensation plans under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and the related interpretations. We have adopted SFAS No. 123 (revised 2004) “Share Based Payment” (“FAS 123(R)”) starting on April 29, 2006 using The Black-Scholes option pricing model and The Modified Prospective Method which requires the compensation cost to be recognized under SFAS 123(R) for grants issued after the adoption date and the unvested portion of grants issued prior to the adoption date. As a result of the adoption of SFAS 123(R), we anticipate recognizing non-cash share-based compensation expense of approximately $20 million during fiscal year 2007 excluding the potential impact associated with the resignation of certain former officers and employees. This estimate is affected by assumptions regarding a number of complex and subjective variables.

      Stock Options (Restated). As a result of the investigation described in “Note 1. Restatements” in the Notes to the Consolidated Financial Statements, and after additional review and consultation with our independent registered public accountants, we determined that the original measurement date used for some of the stock options granted during the period from fiscal 1994 through 2006 was not correct. In addition, the fair market value of our stock on the appropriate measurement date was higher than the exercise price of the stock options, resulting in the measurement of non-cash compensation cost that is being recognized as expense over the vesting period.

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      For certain grants, principally during the period from 1998 to 2003, the date of effective approval by the Compensation Committee was subsequent to the grant date as recorded in our records and used as the measurement date in preparing our financial statements. Electronic data available for unanimous written consent documents executed by the Compensation Committee indicated that the documents were created, and therefore approved, on a date later than the recorded grant dates. With respect to grants for which the electronic data indicated such dating issues, but for which other contemporaneous documentation exists that establishes the date of final approval by all Compensation Committee members (such as for example, signed and dated approval faxes), we relied on that other documentation to determine the date of effective approval and the appropriate measurement date. With respect to grants for which the electronic data indicated such dating issues, but for which no such other contemporaneous documentation exists, we used a measurement date corresponding to the date on which the unanimous written consent document was last saved electronically, plus four calendar days to allow for the approval process conducted using overnight shipping of approval documents to and from Compensation Committee members. The cumulative effect of these measurement date revisions on our consolidated financial statements through April 29, 2005, is approximately $5.3 million in aggregate pre-tax non-cash stock-based compensation expense.

      In light of the significant judgment used in establishing revised measurement dates, alternate approaches to the one used could have resulted in different aggregate pre-tax non-cash stock-based compensation expense charges than those recorded in the restatement.

      While we used a measurement date corresponding to the date on which the unanimous written consent document was last saved electronically plus four calendar days to allow for the approval process, the cycle time for securing approval could have been as short as two calendar days, or may have extended to as long as 17 calendar days, as observed in one situation. To assess the sensitivity of the aggregate pre-tax non-cash stock-based compensation charges attributable to the estimated cycle time for the approval process for these grants, management has performed variability analyses corresponding to the range from (1) the earliest possible approval, which was defined as two calendar days following the date the written consent document was last saved electronically, to (2) the longest cycle time observed for approval of one of these grants, which was 17 calendar days following the date the unanimous written consent document was last saved electronically.

      Within this time period spanning from two to 17 calendar days following the date the written consent document was last saved electronically, we calculated the range of aggregate pre-tax non-cash stock-based compensation charges that would have resulted if the measurement date used for each grant corresponded to the date within this time period that would have yielded the highest and lowest option prices applicable to that grant. Under this scenario, the aggregate pre-tax non-cash stock-based compensation charges for these grants through April 29, 2005 would have been as high as $9.5 million and as low as $3.5 million, compared to our value of $5.3 million.

      Income Taxes. We account for income taxes under the asset and liability method. Under this method, deferred income taxes reflect the impact of temporary differences between financial accounting and tax bases of assets and liabilities. Such differences relate primarily to the deductibility of certain accruals and reserves and the effect of tax loss and tax credit carryforwards not yet utilized. Deferred tax assets are evaluated for realization based on a more-likely-than-not criterion in determining if a valuation allowance should be provided.

Results of Operations (Annual)

Net Sales

      U.S. net sales increased by $17.6 million, or 20%, in fiscal year 2006 compared to fiscal year 2005, primarily due to an 18% increase in new patient sales, partially offset by a decrease in replacement sales. International net sales increased by $2.4 million, or 18%, in fiscal year 2006 due to increases in new patient sales.

      U.S. net sales decreased by $9.9 million, or 10%, in fiscal year 2005 compared to fiscal year 2004, primarily due to a 16% volume decrease caused by reductions in both replacement and new patient sales, partially offset by an increase of 7% in average selling price due to new product introductions and changes in product mix.

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International net sales increased by $2.7 million, or 25%, in fiscal year 2005 due to increases in unit sales of 16% and increases in average selling prices of 8%. The increases in international average selling prices are primarily due to the favorable impact of foreign currency exchange and changes in product and country mix.

Gross Profit

      Gross profit increased by $19.9 million, or 23%, in fiscal year 2006 compared to fiscal year 2005, primarily due to higher sales volumes. Gross profit margin increased by 235 basis points to 87.2% due to increased production volumes resulting in improved operational efficiencies impacting gross profit margin by approximately 125 basis points and improvement in average selling prices due to mix which had a favorable impact of 110 basis points.

      Gross profit decreased by $6.6 million, or 7%, in fiscal year 2005 compared to fiscal year 2004, primarily due to lower sales volumes. Gross profit margin decreased by 40 basis points to 84.8%, due to operational inefficiencies relating to ramp up activities conducted during the first quarter of the fiscal year that negatively impacted gross profit margin by approximately 210 basis points and were offset by improvements in average selling prices and favorable manufacturing variances throughout the remainder of the year which had a favorable impact of approximately 170 basis points.

      Cost of sales consists primarily of direct labor, allocated manufacturing overhead, third-party contractor costs, royalties and the acquisition cost of raw materials and components. Gross margins can be expected to fluctuate in future periods based upon the mix between U.S. and international sales, direct and distributor sales, the VNS Therapy System selling price, applicable royalty rates and the levels of production volume.

Operating Expenses

      Selling, General and Administrative (SG&A) Expenses. SG&A expenses are comprised of sales, marketing, development, general and administrative activities. SG&A expenses increased by $50.3 or 58%, in fiscal year 2006 and by $14.8 million, or 20%, in fiscal year 2005, as compared to prior years, due to additional expenses associated with the TRD product launch which occurred on August 1, 2005. SG&A expenses include pre-tax non-cash stock-based compensation expense of ($1.1 million), $6.1 million and $2.3 million for fiscal years ended April 28, 2006, April 29, 2005 and April 30, 2004, respectively. In fiscal 2006, SG&A expense included a credit of $1.1 million for pre-tax non-cash stock-based compensation expense due to variable accounting treatment for certain grants and a drop in our common stock price relative to the price at the end of fiscal 2005.

      Research and Development (R&D) Expenses. R&D expenses are comprised of expenses related to our product and process development, product design efforts, clinical trials programs and regulatory activities. R&D expenses increased by $9.4 million, or 47%, in fiscal year 2006 and by $2.5 million, or 14%, in fiscal 2005, as compared to prior years, due to additional product development programs and expanded regulatory activities primarily related to the depression approval and launch. R&D expenses include pre-tax non-cash stock-based compensation expense of $1.7 million, $0.9 million and $0.7 million for fiscal years ended April 28, 2006, April 29, 2005 and April 30, 2004, respectively.

Interest Income

      Interest income of $3.2 million during fiscal year 2006 increased by 199%, as compared to interest income of $1.1 million for fiscal year 2005, due to higher average investment balances attributable to the net proceeds of $98.3 million received from the Notes and higher interest rates. Interest income for fiscal year 2005 increased by 128% as compared to fiscal year 2004 due to higher average investment balances and higher interest rates.

Interest Expense

      Interest expense of $3.0 million for fiscal year 2006 increased primarily due to interest expense applicable to the Notes. Interest expense of $0.4 million for fiscal year 2005 decreased compared to 2004 primarily due to

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lower borrowings against the line of credit facility and lower interest rates negotiated during the renewal of the line of credit during the fiscal year.

Other Income, Net

      Other income, net, primarily includes transaction gains and losses associated with the impact of changes in foreign currency exchange rates.

Income Taxes

      At April 28, 2006, we had net operating loss carryforwards for federal income tax purposes of approximately $224.0 million. The following is a reconciliation of statutory federal income tax rates to our effective income tax rate expressed as a percentage of income from operations before income taxes:

	52 Weeks			52 Weeks			53 Weeks
	Ended			Ended			Ended
	April 28, 2006			April 29, 2005			April 30, 2004
				As Restated			As Restated
Income Tax Expense	$	99,266		$	26,113		$	230,789
U.S. statutory rate		(34.0	)%		(34.0	)%		34.0	%
Change in deferred tax valuation allowance		31.6			32.1			(39.3	)
Foreign taxes		0.1			0.1			0.4
State & local tax provision		0.1			0.0			3.2
Other, net		2.4			1.9			5.3
		0.2	%		0.1	%		3.6	%

Results of Operations (Quarterly) — See also “Note 19. Quarterly Financial Information — Unaudited.”

Thirteen weeks ended July 29, 2005 (as restated) compared to thirteen weeks ended July 30, 2004 (as restated)

Net Sales

      During the thirteen weeks ended July 29, 2005, U.S. net sales increased by $1.1 million, or 5% as compared to the thirteen weeks ended July 30, 2004. Unit sales volume increased by 4% and average system prices increased by 1% largely resulting from changes in product mix.

      International sales for the thirteen weeks ended July 29, 2005 increased by $0.7 million, or 28% over the same period last year due to an increase in sales volume of 17% and an increase in average system prices of 9%, largely due to favorable currency impact and changes in country and product mix.

Gross Profit

      Gross profit increased $2.9 million or 14%, in the thirteen weeks ended July 29, 2005 compared to the thirteen weeks ended July 30, 2004. Gross profit margin for the thirteen weeks ended July 29, 2005 was 86.0%, compared to gross profit margin of 80.9% for the same period last year. Improvements in manufacturing efficiencies relating to increased production levels generated an improvement in gross profit margins of approximately 340 basis points, the remaining improvement in gross profit margin was largely the result of an increase in average system prices.

      Cost of sales consists primarily of direct labor, allocated manufacturing overhead, third-party contractor costs, royalties and the acquisition cost of raw materials and components. Gross margins can be expected to fluctuate in future periods based upon the mix between U.S. and international sales, direct and distributor sales, the VNS Therapy System selling price, applicable royalty rates, and the levels of production volume.

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Operating Expenses

      Selling, General and Administrative (SG&A) Expenses. SG&A expenses are comprised of sales, marketing, development, general and administrative activities. SG&A expenses increased by $16.1 million or 79% for the thirteen weeks ended July 29, 2005, as compared to the thirteen weeks ended July 30, 2004. Increases reflect the expansion of our organization primarily in the area of sales personnel to support the August 1, 2005 launch in the TRD market and expanded corporate administrative functions associated with increasing compliance requirements. SG&A expenses include pre-tax non-cash stock-based compensation expense of $0.5 million for the thirteen weeks ended July 29, 2005, as compared to $1.8 million for the thirteen weeks ended July 30, 2004.

      Research and Development (R&D) Expenses. R&D expenses are comprised of expenses related to our product and process development, product design efforts, clinical trials programs and regulatory activities. As compared to prior year, R&D expenses increased by $1.5 million or 31% for the thirteen weeks ended July 29, 2005 due to expanded clinical and regulatory activities supporting the completion of the U.S. regulatory process for obtaining approval of VNS Therapy in TRD, ongoing product development activities and expanded clinical and regulatory activities in epilepsy, depression and new indications programs. R&D expenses include pre-tax non-cash stock-based compensation expense of $0.2 million for the thirteen weeks ended July 29, 2005, as compared to $0.3 million for the thirteen weeks ended July 30, 2004.

Interest Income and Expense

      Interest income of $413,000 for the thirteen weeks ended July 29, 2005 increased by $260,000 or 171% as compared to interest income of $153,000 for the thirteen weeks ended July 30, 2004 as a result of lower invested cash and marketable securities balances offset by higher interest rates. Interest expense of $93,000 for the thirteen weeks ended July 29, 2005 decreased by 25% as compared to interest expense of $125,000 for the thirteen weeks ended July 30, 2004 due to the reduced borrowings and lower interest rates against our $20 million credit facility and reductions in interest expense on capital leases for manufacturing equipment.

Other Income, Net

      Other income, net, primarily includes transaction gains and losses associated with the impact of changes in foreign currency exchange rates.

Income Taxes

      We estimate our effective tax rate for the thirteen weeks ended July 29, 2005 to be less than 1%, due primarily to the change in the balance of our valuation allowance combined with state tax and tax on foreign operations. The effective tax rate represents our estimate of the rate expected to be applicable for the full fiscal year. In August 2004, we experienced an ownership change as defined in Section 382 of the Internal Revenue Code (IRC). Our ability to utilize certain net operating losses to offset future taxable income in any particular year may be limited pursuant to IRC Section 382. Due to our operating loss history and possible limitations pursuant to IRC Section 382, we have established a valuation allowance that fully offsets our net deferred tax assets, including those related to tax loss carry-forwards, resulting in no regular U.S. federal income tax expense or benefit for financial reporting purposes.

Thirteen weeks ended October 28, 2005 (as restated) compared to thirteen weeks ended October 29, 2004 (as restated)

Net Sales

      During the thirteen weeks ended October 28, 2005, U.S. net sales increased by $2.5 million or 11% as compared to the thirteen weeks ended October 29, 2004. Unit sales volume increased by 8% and average system prices increased by 3% largely resulting from changes in product mix.

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      International sales for the thirteen weeks ended October 28, 2005 increased by $1.1 million or 36% over the same period last year due to an increase in sales volume of 30% and an increase in average system prices of 5%, largely due to favorable currency impact and changes in country and product mix.

Gross Profit

      Gross profit increased $3.6 million or 17%, in the thirteen weeks ended October 28, 2005 compared to the thirteen weeks ended October 29, 2004. Gross profit margin for the thirteen weeks ended October 28, 2005 was 86.9% representing an increase of 165 basis points over the same period last year. An increase in manufacturing efficiencies due to higher production volume provided an improvement of 175 basis points, offset by changes in the mix between domestic and international sales which reduced gross profit margin by 10 basis points.

Operating Expenses

      Selling, General and Administrative (SG&A) Expenses. SG&A expenses are comprised of sales, marketing, development, general and administrative activities. SG&A expenses increased by $22.3 million or 136% for the thirteen weeks ended October 28, 2005, as compared to the thirteen weeks ended October 29, 2004. The increases in expenses for the thirteen weeks are largely due to sales, marketing and administrative activities in support of the TRD depression launch and expanded corporate administrative functions associated with increased compliance requirements. SG&A expenses include pre-tax non-cash stock-based compensation expense of ($1.4 million) for the thirteen weeks ended October 28, 2005, as compared to ($2.6 million) for the thirteen weeks ended July 30, 2004. In both cases, SG&A expense included a credit for pre-tax non-cash stock-based compensation expense due to variable accounting treatment for certain grants and a drop in the price of our common stock.

      Research and Development (R&D) Expenses. R&D expenses are comprised of expenses related to our product and process development, product design efforts, clinical trials programs and regulatory activities. As compared to prior year, R&D expenses increased by $2.8 million or 58% for the thirteen weeks ended October 28, 2005, due to expanded clinical and regulatory activities supporting the completion of the U.S. regulatory process for obtaining approval of VNS Therapy in TRD, ongoing product development activities and expanded clinical and regulatory activities in epilepsy, depression and new indications programs. R&D expenses include pre-tax non-cash stock-based compensation expense of $0.4 million for the thirteen weeks ended October 28, 2005, as compared to $0.2 million for the thirteen weeks ended October 29, 2004.

Interest Income and Expense

      Interest income of $616,000 for the thirteen weeks ended October 28, 2005 increased by 178% as compared to interest income of $221,000 for the thirteen weeks ended October 29, 2004 as a result of higher invested cash balances from the proceeds of our convertible notes offering completed during the quarter earning higher interest rates. Interest expense of $488,000 for the thirteen weeks ended October 28, 2005 increased by 339% as compared to interest expense of $111,000 for the thirteen weeks ended October 29, 2004 due to the interest on the Notes partially offset by lower interest expense caused by no borrowings against our $20 million line of credit facility which expired in September 2005 and reductions in interest expense on capital leases for manufacturing equipment.

Other Income, Net

      Other income, net, primarily includes income related to the over-allotment provision applicable to the Notes offering and transaction gains and losses associated with the impact of changes in foreign currency exchange rates.

Income Taxes

      We estimate our effective tax rate for the thirteen weeks ended October 28, 2005 to be less than 1%, due primarily to the increase in the balance of our valuation allowance combined with state tax and tax on foreign

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operations. The effective tax rate represents our estimate of the rate expected to be applicable for the full fiscal year. In August 2004, we experienced an ownership change as defined in Section 382 of the Internal Revenue Code (IRC). Our ability to utilize certain net operating losses to offset future taxable income in any particular year may be limited pursuant to IRC Section 382. Due to our operating loss history and possible limitations pursuant to IRC Section 382, we have established a valuation allowance that fully offsets our net deferred tax assets, including those related to tax loss carry-forwards, resulting in no regular U.S. federal income tax expense or benefit for financial reporting purposes.

Thirteen weeks ended January 27, 2006 (as restated) compared to thirteen weeks ended January 28, 2005 (as restated)

Net Sales

      During the thirteen weeks ended January 27, 2006, U.S. net sales increased by $4.6 million or 20% as compared to the thirteen weeks ended January 28, 2005, primarily the result of increase in unit sales volumes.

      International sales for the thirteen weeks ended January 27, 2006 increased by $0.5 million or 15% over the same period last year due to an increase in unit sales volume of 18% and a decrease in average system prices of 3%, largely due to unfavorable currency impact and changes in country and product mix.

Gross Profit

      Gross profit increased $5.0 million or 22%, in the thirteen weeks ended January 27, 2006 compared to the thirteen weeks ended January 28, 2005. Gross profit margin for the thirteen weeks ended January 27, 2006 was 87.6% representing an increase of 200 basis points over the same period last year. Increases in manufacturing efficiencies due to higher production volume provided an improvement of 220 basis points which were offset by changes in product mix between domestic and international sales that reduced gross profit margin by 20 basis points.

Operating Expenses

      Selling, General and Administrative (SG&A) Expenses. SG&A expenses are comprised of sales, marketing, development, general and administrative activities. SG&A expenses increased by $13.4 million or 63% for the thirteen weeks ended January 27, 2006, as compared to the thirteen weeks ended January 28, 2005. The increases in expenses for the thirteen weeks are largely due to sales, marketing and administrative activities in support of the TRD depression launch and expanded corporate administrative functions associated with increased compliance requirements. SG&A expenses include pre-tax non-cash stock-based compensation expense of $0.4 million for the thirteen weeks ended January 27, 2006, as compared to $2.4 million for the thirteen weeks ended January 28, 2005.

      Research and Development (R&D) Expenses. R&D expenses are comprised of expenses related to our product and process development, product design efforts, clinical trials programs and regulatory activities. As compared to prior year, R&D expenses increased by $2.8 million or 60% for the thirteen weeks ended January 27, 2006, due to expanded clinical and regulatory activities supporting the completion of the U.S. regulatory process for obtaining approval of VNS Therapy in TRD, ongoing product development activities and expanded clinical and regulatory activities in epilepsy, depression and new indications programs. R&D expenses include pre-tax non-cash stock-based compensation expense of $0.4 million for the thirteen weeks ended January 27, 2006, as compared to $0.2 million for the thirteen weeks ended January 28, 2005.

Interest Income and Expense

      Interest income of $1.2 million for the thirteen weeks ended January 27, 2006 increased by 289% as compared to interest income of $293,000 for the thirteen weeks ended January 28, 2005 as a result of higher invested cash balances earning higher interest rates. Interest expense of $1.1 million for the thirteen weeks ended January 27, 2006 increased by 1,043% as compared to interest expense of $101,000 for the thirteen

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weeks ended January 28, 2005 due to the Notes partially offset by reductions in interest expense on capital leases for manufacturing equipment.

Other Income, Net

      Other income, net, primarily includes income related to the amortization of the over-allotment provision applicable to the 2005 bond offering and transaction gains and losses associated with the impact of changes in foreign currency exchange rates.

Income Taxes

      We estimate our effective tax rate for the thirty-nine weeks ended January 27, 2006 to be less than 1%, due primarily to the increase in the balance of our valuation allowance combined with state tax and tax on foreign operations. The effective tax rate represents our estimate of the rate expected to be applicable for the full fiscal year. In August 2004, we experienced an ownership change as defined in Section 382 of the Internal Revenue Code (IRC). Our ability to utilize certain net operating losses to offset future taxable income in any particular year may be limited pursuant to IRC Section 382. Due to our operating loss history and possible limitations pursuant to IRC Section 382, we have established a valuation allowance that fully offsets our net deferred tax assets, including those related to tax loss carry-forwards, resulting in no regular U.S. federal income tax expense or benefit for financial reporting purposes.

Liquidity and Capital Resources

Overview

      We generated a net loss of $59.1 million for the year ended April 28, 2006, as compared to a net loss of $18.6 million for the year ended April 29, 2005 and net income of $4.6 for the year ended April 30, 2004. The significant increase in net loss is due to additional expenses associated with the August 2005 product launch in TRD. As a result, cash used in operations increased to $70.9 million for the year ended April 28, 2006, as compared to $4.0 million used in operations for the year ended April 29, 2005 and $3.6 million provided by operations for the year ended April 30, 2004. To fund operations, in fiscal 2006 we incurred additional indebtedness through the issuance of our Notes and the establishment of a $40 million line of credit.

Cash Flows

      Net cash provided by (used in) operating, investing and financing activities were as follows:

	Fiscal Year Ended
	April 28, 2006			April 29, 2005			April 30, 2004
Operating activities	$	(70,876,209	)	$	(3,969,672	)	$	3,595,349
Investing activities		17,501,141			(11,613,173	)		(17,501,056	)
Financing activities		106,994,787			10,851,738			14,496,645

Operating Activities

      Net cash used in operating activities in fiscal 2006 was $70.9 million as compared to net cash used in operating activities of $4.0 million in fiscal 2005. Operational cash flow decreased by approximately $66.9 million due to a net loss in fiscal 2006 of approximately $59.1 million and an increase of $15.9 million in working capital to support the U.S. TRD launch in fiscal 2006. Net cash used in operating activities in fiscal 2005 was $4.0 million as compared to net cash provided by operating activities of $3.6 million in fiscal 2004. Operational cash flow decreased by approximately $7.6 million due to a net loss in fiscal 2005 of approximately $18.6 million offset by a reduction in operating assets and liabilities of $4.3 million. Net cash provided by operating activities in fiscal 2004 was $3.6 million due primarily to net profit of $4.6 million.

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Investing Activities

      Net cash provided by investing activities in fiscal 2006 was $17.5 million. Net proceeds of $22.8 million from the sale of short-term marketable securities were offset by purchases of property and equipment of $4.3 million. Net cash used in investing activities in fiscal 2005 was $11.6 million and included net purchases of short-term marketable securities of $7.9 million and purchases of property and equipment of $3.7 million. Net cash used in investing activities in fiscal 2004 was $17.5 million, which included net purchases of short-term marketable securities of $14.9 million and purchases of property and equipment of $2.6 million.

Financing Activities

      Net cash provided by financing activities in fiscal 2006 was $107 million. On January 13, 2006, we established a $40 million revolving line of credit that replaced the $20 million revolving line of credit that expired in September 2005. Borrowings against the line of credit were reduced by approximately $0.5 million to $2.5 million. On September 27, 2005, we issued Notes in the amount of $125 million. Interest on the Notes at the rate of 3% per year on the principal amount is payable semi-annually in arrears in cash on March 27 and September 27 of each year, beginning March 27, 2006. Holders may convert their Notes, which were issued in the form of $1,000 bonds, into 24.0964 shares of our common stock per bond, which equal to a conversion price of approximately $41.50 per share, subject to adjustments, at any time prior to maturity. This offering provided net proceeds of approximately $121 million. We used the proceeds for (1) a simultaneous share buyback of 301,000 shares at $33.20 for a total of $9,993,200 and (2) the net cost of $13 million of separate convertible bond hedge and common stock warrant transactions, which transactions were designed to limit our exposure to potential dilution from conversion of the Notes. These transactions resulted in net cash proceeds of $98.3 million. We received approximately $10.5 million in connection with the issuance of shares pursuant to our stock option and employee stock purchase plans in fiscal year 2006.

      Net cash provided by financing activities in fiscal 2005 was $10.9 million. We received approximately $18.0 million in connection with the issuance of shares pursuant to our stock option and employee stock purchase plans in fiscal year 2005. Borrowings against the line of credit were reduced by approximately $7.0 million to $3.0 million.

      Net cash provided by financing activities in fiscal 2004 was $14.5 million. We received approximately $13.0 million in connection with the issuance of shares pursuant to our stock option and employee stock purchase plans in fiscal year 2004. Borrowings against the line of credit were increased by $1.7 million to $10.0 million.

Debt Instruments and Related Covenants

Line of Credit

      On January 13, 2006, we established a $40 million revolving line of credit (“Credit Agreement”) with Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc. (“Administrative Agent”) and the lenders who are party thereto (“Lenders”). The credit facility has a three-year term ending January 13, 2009 and is collateralized by accounts receivable, inventory, subsidiary stock, general intangibles, equipment and other collateral. The collateral does not include our intellectual property and provides the lender only limited rights and remedies with respect to the funds raised in our Notes offering. Pursuant to the terms of the Credit Agreement, we agreed to maintain a minimum liquidity, which is defined as the sum of the revolving loan limit minus the revolving loan outstanding plus the unrestricted cash and cash equivalent balances of $25 million, and to provide periodic certifications of compliance in connection with the facility. The amount available under the facility is limited to 85% of the eligible accounts receivable and a portion of eligible inventory. As of April 28, 2006 our available borrowing capacity was approximately $27,099,000 with a loan balance of $2.5 million. As discussed more fully in “Note 6 — Line of Credit,” we have been unable to timely file our 2006 Form 10-K, our Quarterly Report on Form 10-Q for the quarter ended July 28, 2006 (“First Quarter Form 10-Q”) and the Quarterly Report on Form 10-Q for the quarter ended October 27, 2006 (“Second Quarter Form 10-Q”).

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      On December 29, 2006, we entered into a Consent and Amendment Agreement with the Administrative Agent and Lenders which provided that the failure to file timely with the SEC our 2006 Form 10-K will not constitute a default under the Credit Agreement prior to January 8, 2007. The Consent and Amendment Agreement with the Administrative Agent and Lenders further provided that the certain events will not constitute a default under the Credit Agreement prior to February 28, 2007. Such events include, among other events, (1) we failed to file timely with the SEC our 2007 quarterly reports on Form 10-Q, including the First Quarter Form 10-Q and the Second Quarter Form 10-Q; (2) our failure to maintain compliance with the NASDAQ listing standards because of our failure to file such SEC reports; and (3) our receipt of a notice of default and demand from the Trustee in connection with the Indenture as a result of our failure to timely file and deliver our 2006 Form 10-K as purportedly required by the Indenture, so long as there is no determination by a court and we have not otherwise acknowledged that a default has occurred under the Indenture. The Consent and Amendment Agreement with the Administrative Agent and Lenders further provided that for the term of the Consent and Amendment Agreement our borrowing under the Line of Credit is limited to $7.5 million. On February 1, 2007 we will be required to pay interest on the minimum loan balance of $10 million.

      If an event of default has occurred under the indenture as discussed below, we would also be in default of the $40 million line of credit.

Convertible Notes

      On September 27, 2005, we issued the Notes. Interest on the Notes at the rate of 3% per year on the principal amount is payable semi-annually in arrears in cash on March 27 and September 27 of each year, beginning March 27, 2006. The Notes are unsecured and subordinated to all of our existing and future senior debt and equal in right of payment with our existing and future senior subordinated debt. Holders may convert their Notes, which were issued in the form of $1,000 bonds, into 24.0964 shares of our common stock per bond, which equal to a conversion price of approximately $41.50 per share, subject to adjustments, at any time prior to maturity.

      On July 31, 2006, we received the notice of default and demand letter (“Notice of Default”) dated July 28, 2006 from Wells Fargo Bank, National Association (“the Trustee”), pursuant to which the Trustee asserted that we were in default of our obligations under the Indenture dated September 27, 2005 (“Indenture”), between us, as issuer, and the Trustee, as trustee, with respect to our Notes, as a result of our failure (1) to timely file with the SEC this Form 10-K by July 12, 2006 and (2) to deliver a copy of this 2006 Form 10-K to the Trustee by July 27, 2006. On October 2, 2006, we received the notice of acceleration and demand letter (“Notice of Acceleration”) dated September 27, 2006 from the Trustee informing us that, pursuant to the Indenture, the Trustee has declared the Notes due and payable at their principal amount together with accrued and unpaid interest, and fees and expenses, and it demands that all such principal, interest, fees and expenses under the Notes be paid to the Trustee immediately. As such, although the Notes mature in 2012, we have included them as a current liability on our Consolidated Balance Sheet as of April 28, 2006. To clarify our rights and responsibilities under the Indenture, we filed a declaratory judgment action on October 3, 2006 styled Cyberonics, Inc. v. Wells Fargo Bank, N.A., as Trustee Under Indenture, No. 06-63284, in the 165th District Court of Harris County, Texas. In the lawsuit, we seek a declaration that no event of default has occurred under the Indenture and request attorney fees under the Declaratory Judgment Act. We are also a defendant in an action styled Wells Fargo Bank N.A. v. Cyberonics, Inc., No. 06-CV-15272, pending in the United States District Court for the Southern District of New York, alleging that we have breached the indenture. If our interpretation of the Indenture is determined to be incorrect, a default and, therefore, an “event of default” will have occurred under the Indenture.

      If an event of default has occurred under the Indenture, all unpaid principal and accrued interest on the outstanding Notes will be due and payable immediately unless we negotiate an amendment to the terms of the Indenture. If the principal and accrued interest on the outstanding Notes must be repaid immediately, we may not have or be able to obtain access to the funds needed to repay the indebtedness, and we may be forced to seek protection under the Bankruptcy Code.

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      If principal and interest on our indebtedness must be repaid immediately, we do not have the cash resources available to repay the debt. If we were not able to secure additional financing, our ability to continue as a going concern would be uncertain.

Contractual Obligations

      We are party to a number of contracts pursuant to which we are paying for clinical studies for current operating obligations payable totaling $530,000 as of April 28, 2006. Although we have no firm commitments, we expect to make capital expenditures of approximately $7.0 million during fiscal year 2007, primarily to expand organizational capacity and to enhance business infrastructure and facilities.

      The chart below reflects our current obligations under our material contractual obligations.

											Total
							Operating				Contractual
			Line of Credit		Notes Issuance(1)		Leases(2)		Other(3)		Obligations
Contractual obligations:
	Less Than One Year		$	10,638,194	$	128,750,000	$	2,248,218	$	1,015,984	$	142,652,396
	1-3 Years			1,395,139		—		6,009,810		73,691		7,478,640
	3-5 Years			—		—		2,837,835		—		2,837,835
	Over 5 Years			—		—		—		—		—
		Total Contractual Obligations	$	12,033,333	$	128,750,000	$	11,095,863	$	1,089,675	$	152,968,871

(1)	Consists of principal and interest obligations related to the Notes issuance presented as if the Notes were to become due and payable within twelve months from the issuance of this annual report. Although the Notes mature in 2012, we have classified them as current due to our receipt of the notice of default and demand letter from the Trustee.
(2)	Consists of operating lease obligations related to facilities and office equipment.
(3)	Reflects amounts we expect to expend in connection with sales, marketing and training events and debt applicable to acquisition of computer hardware and software.

      We believe our current financial and capital resources will be adequate to fund anticipated business activities through fiscal 2008, although there can be no assurance of this as this estimate is based upon a number of assumptions, which may not hold true. Our current assumptions include our ability to either prevail in our assertions on the terms of the Indenture of the Notes or negotiate terms which include principal maturity of greater than 24 months. If, within the short-term, we are unable to prevail or satisfactorily resolve the dispute surrounding the terms of the Indenture, we may not be able to maintain our operations as a going concern. Our projections of the future TRD markets for VNS Therapy will be significantly impacted by the timing and outcome of pending reimbursement decisions for depression by major payors. Furthermore, our liquidity could be adversely affected by the factors affecting future operating results that are discussed in “Item 1A. Risk Factors.”

Factors Affecting Future Operating Results and Common Stock Price

      The factors affecting our future operating results and common stock prices are disclosed in “Item 1A. Risk Factors.”

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      We are exposed to limited market risk on interest rates and foreign currency exchange rates.

      Our exposure to market risk for changes in interest rates relates primarily to our short-term investments in commercial paper, auction rate securities and our line of credit. We do not hedge interest rate exposure or invest in derivative securities. Based upon the average outstanding balances in cash, cash equivalents and our

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line of credit, a 100-basis point change in interest rates would not have a material impact on our consolidated financial results.

      Due to the global reach of our business, we are also exposed to market risk from changes in foreign currency exchange rates, particularly with the U.S. dollar over the Euro. Our wholly owned foreign subsidiary is consolidated into our financial results and is subject to risks typical of an international business including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility. Accordingly, our future results could be materially impacted by changes in these or other factors. At this time, we have not deemed it to be cost effective to engage in a program of hedging the effect of foreign currency fluctuations on our operating results using derivative financial instruments. A sensitivity analysis indicates that, if the U.S. dollar uniformly weakened 10% against the Euro, the effect upon our operations would be favorable by approximately $1.1 million or 1.9%. Conversely, if the U.S. dollar uniformly strengthened 10% against the Euro, the impact on our operations would decrease by approximately $1.1 million or 1.8%.

      Our Notes are sensitive to fluctuations in the price of our common stock into which the debt is convertible. Changes in equity prices may result in changes in the fair value of the convertible subordinated debt due to the difference between the current market price of the debt and the market price at the date of issuance of the debt. At November 30, 2006 a 10% change in the price of our common stock could have resulted in a decrease of approximately $12 million on the net fair value of our Notes.

Item 8. Financial Statements and Supplementary Data

      The information required by this Item is incorporated by reference to the Consolidated Financial Statements beginning on page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

      On June 9, 2006, the SEC staff advised us that it had commenced an informal inquiry of our stock option grants and related procedures, practices and accounting. On June 26, 2006, we received a subpoena from the U.S. Attorney requesting documents related to the same matters. We are cooperating with the SEC staff and the U.S. Attorney’s Office. Our Board directed the Audit Committee to conduct an independent investigation of our stock option grants, practices and procedures, including compliance with GAAP, and the Audit Committee retained independent counsel to assist it in completing that review.

      The Audit Committee, with the assistance of its independent counsel and their forensic accountants, has completed its review of our stock option grants, practices and procedures. The Audit Committee concluded that incorrect measurement dates were used for certain stock option grants made during the period from 1994 through 2006. Based on the Audit Committee’s investigation, subsequent internal analysis and discussions with our independent registered public accountants, our Board concluded on November 18, 2006, that we needed to restate historical consolidated financial statements to record non-cash charges for compensation expense relating to past stock option grants. The effects of these restatements are reflected in the consolidated financial statements and other financial data, including quarterly data, included in this Form 10-K. None of the restatements have any impact on net cash provided by (used in) operating activities. Refer to “Note 1. Restatements” in the Notes to the Consolidated Financial Statements for additional information. Selected quarterly financial information is also presented in “Note 19. Quarterly Financial Information — Unaudited” in the Notes to the Consolidated Financial Statements for fiscal years 2006 and 2005. Other disclosures contained in the quarterly reports on Form 10-Q for fiscal years 2006 and prior have not been amended and should no longer be relied upon.

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(a) Evaluation of Disclosure Controls and Procedures

      We maintain a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Such information is also accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the most recent fiscal quarter reported on herein. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of April 28, 2006 because of the material weakness discussed below.

(b) Management’s Report on Internal Control Over Financial Reporting

      Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and (3) 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 consolidated financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, the design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all future events, no matter how remote, or that the degree of compliance with the policies or procedures may not deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving financial reporting objectives.

      In connection with the preparation of our annual consolidated financial statements, our management, under the supervision and with the participation of our CEO and CFO, assessed the effectiveness of our internal control over financial reporting based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operating effectiveness of our internal control over financial reporting. During this evaluation, management identified a material weakness in our internal control over financial reporting, as described below. Management has concluded that, as a result of this material weakness, our internal control over financial reporting was not effective as of April 28, 2006 based upon the criteria issued by COSO.

      A material weakness is a control deficiency, or a combination of control deficiencies, that result in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of April 28, 2006, we had inadequate controls over the accounting for and disclosure of stock-based compensation. Specifically, we identified a material weakness comprised of the following internal control deficiencies:

•  Failure to recognize stock option granting practices as a significant risk and to ensure that all individuals involved in the granting process understood their appropriate roles and responsibilities and the consequences of their actions;

•  Lack of communication between individuals involved in the compensation approval process and personnel responsible for the accounting treatment of equity-based awards;

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•  Lack of accounting expertise and knowledge related to accounting for certain equity-based awards;

•  Inadequate policies and procedures regarding maintenance of records supporting the granting activities, grant date, and authorization of equity-based transactions;

•  Inadequate policies and procedures regarding preparation and retention of documentation of stock option granting procedures and practices; and

•  Inadequate supervision and training for personnel involved in the stock option granting process.

      This material weakness resulted in the material misstatement of stock-based compensation expense in the company’s consolidated financial statements for the 2004 and 2005 fiscal years and each of the quarters of fiscal 2005 and 2006 and the Company is restating previously issued financial statements for the 2004 and 2005 fiscal years and each of the quarters of fiscal years 2005 and 2006.

      KPMG LLP, an independent registered public accounting firm, has issued an audit report on management’s assessment of internal control over financial reporting.

(c) Changes in Internal Control Over Financial Reporting

      There were no changes in our internal control over financial reporting during the fourth quarter of the fiscal year ended April 28, 2006 in connection with the aforementioned evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

      In response to the material weakness identified by our management, we have dedicated significant resources to improve our control environment and to remedy the material weakness identified. These efforts include the following:

•  Establishing that all equity grants, other than grants to our Board, must be approved by the Compensation Committee at a meeting of the Compensation Committee held on or before the effective date of the grant;

•  Establishing that equity grants to non-executive members of our Board must be approved by a vote of the full Board at a meeting of our Board held on or before the effective date of the grant;

•  Establishing that all internal approvals of grant awards must be obtained in writing prior to any Board Compensation Committee action granting an equity award;

•  Establishing predefined dates for the granting of all equity-based awards; and

•  Establishing responsibility in one office for maintenance of records documenting all grant approvals.

      In addition, the following measures will be implemented in the fiscal year ending April 27, 2007:

•  Establishing additional education and training for personnel in areas associated with the stock option granting processes and other compensation practices to increase competency levels of the personnel involved; and

•  Establishing documented communication channels between Compensation Committee and personnel responsible for accounting treatment of the stock option grants upon approval.

Audit Committee Oversight

      The adequacy of our internal control over financial reporting, the accounting principles employed in our financial reporting and the scope of independent audits are reviewed by the Audit Committee, consisting solely of outside directors. The independent auditors meet with, and have confidential access to, the Audit Committee to discuss the results of their audit work.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Cyberonics, Inc.:

      We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (Item 9A(b)) that Cyberonics, Inc. did not maintain effective internal control over financial reporting as of April 28, 2006, because of the effect of the material weakness identified in management’s assessment, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Cyberonics, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (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 receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment. As of April 28, 2006, Cyberonics, Inc. had inadequate controls over the accounting for and disclosure of its stock-based compensation. Specifically, management identified a material weakness comprised of the following internal control deficiencies:

•  Failure to recognize stock option granting practices as a significant risk and to ensure that all individuals involved in the granting process understood their appropriate roles and responsibilities and the consequences of their actions;

•  Lack of communication between individuals involved in the compensation approval process and personnel responsible for the accounting treatment of equity-based awards;

•  Lack of accounting expertise and knowledge related to accounting for certain equity-based awards;

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•  Inadequate policies and procedures regarding maintenance of records supporting the granting activities, grant date, and authorization of equity-based transactions;

•  Inadequate policies and procedures regarding preparation and retention of documentation of stock option granting procedures and practices; and

•  Inadequate supervision and training for personnel involved in the stock option granting process.

      This material weakness resulted in the material misstatement of stock-based compensation expense in the Company’s consolidated financial statements for the 2004 and 2005 fiscal years and each of the quarters of fiscal 2005 and 2006 and the Company is restating previously issued financial statements for the 2004 and 2005 fiscal years and each of the quarters of fiscal years 2005 and 2006.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cyberonics, Inc. and subsidiary as of April 28, 2006 and April 29, 2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the 52 weeks ended April 28, 2006 and April 29, 2005 and the 53 weeks ended April 30, 2004. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2006 consolidated financial statements, and this report does not affect our report dated January 5, 2007, which expressed an unqualified opinion on those consolidated financial statements.

      In our opinion, management’s assessment that Cyberonics, Inc. did not maintain effective internal control over financial reporting as of April 28, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Cyberonics, Inc. has not maintained effective internal control over financial reporting as of April 28, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/     KPMG LLP

Houston, Texas

January 5, 2007

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Item 9B. Other Information

      None.

PART III

Item 10. Directors and Executive Officers of the Registrant

Directors and Executive Officers

      Set forth below are the names, ages and positions of our current directors and executive officers:

Name	Age		Position
Stanley H. Appel, M.D.		73	Director
Michael A. Cheney		52	Vice President, Marketing
Tony Coelho		64	Director
Guy C. Jackson		64	Director
W. Steven Jennings		55	Vice President, Sales
Shawn P. Lunney		43	Vice President, Market Development
Kevin S. Moore		52	Director
Hugh M. Morrison		60	Director
Alan J. Olsen		59	Director
George E. Parker III		44	Interim Chief Operating Officer
John A. Riccardi		37	Interim Chief Financial Officer
Richard L. Rudolph, M.D.		57	Vice President, Clinical and Medical Affairs and Chief Medical Officer
Randal L. Simpson		47	Vice President, Operations
Michael J. Strauss, M.D., M.P.H.		53	Director
Reese S. Terry, Jr.		64	Director and Interim Chief Executive Officer
David S. Wise		51	Vice President, General Counsel and Secretary

      Dr. Appel has been a member of our Board since December 1996. Dr. Appel is the Peggy and Gary Edwards Distinguished Endowed Chair for the Treatment and Research of ALS, Department of Neurology, Neurological Institute, The Methodist Hospital, Professor of Neurology, Weill Medical College of Cornell University and Professor of Biochemistry and Molecular Physiology at Baylor College of Medicine. He was previously Chair of the Department of Neurology at Baylor College of Medicine as well as Chief of the Neurology division and the James B. Duke Professor of Medicine at Duke University Medical Center, North Carolina. Dr. Appel is a native of Massachusetts and received his Bachelor Degree at Harvard University and his Medical Degree from Columbia College of Physicians and Surgeons. He is Director of the MDA/ ALS Research and Clinical Center at the Methodist Neurological Institute, and past Director of a National Institute of Aging Alzheimer’s Disease Research Center. Dr. Appel is a member of numerous professional societies and committees, and is the author of 15 published books and over 350 articles on topics such as ALS, neuromuscular disease, Alzheimer’s disease, and Parkinson’s disease. He has received a number of awards for his accomplishments in Neurology and Biochemistry, including the Gold Medal Award in 1997 from Columbia College of Physicians and Surgeons for “Distinguished Achievements in Medicine,” the Sheila Essey Award in 2003 from the American Academy of Neurology for “outstanding research in Amyotrophic Lateral Sclerosis,” Elected Fellow of the American Association for the Advancement of Science in recognition of the “dedication and commitment to advancing science and serving society” in 2003, Baylor College of Medicine Alumni Association Distinguished Faculty Award in 2004, MDA’s Wings Over Wall Street Diamond Award in 2004, Texas Neurological Society Lifetime Achievement Award in 2005 and the Forbes Norris Award for “compassion and love for humanity in research and treatment in patients with ALS” from the International Alliance of ALS/ MND Associations in 2005.

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      Mr. Cheney joined us in July 2001 as Vice President of Marketing and Managing Director of the Depression Business Unit. Mr. Cheney has more than 18 years of pharmaceutical marketing and product launch experience. From September 1997 to July 2001, he was Senior Director, Obesity Business Unit at Knoll Pharmaceutical Company, the U.S. pharmaceutical unit of BASF Corporation, which was recently acquired by Abbott Laboratories, where he was responsible for the launch of Meridia^® (sibutramine hydrochloride), a leading anti-obesity drug. Prior to that, Mr. Cheney was Group Director, Central Nervous System Therapeutics Marketing at Wyeth-Ayerst Laboratories, a subsidiary of American Home Products, where he was responsible for the marketing of Effexor^® (venlafaxine hydrochloride) and the launch of Effexor^® XR, a leading brand of medication for the treatment of depression.

      Mr. Coelho has been a member of our Board since March 1997 and was appointed Chairman in November 2006. Since June 1988, Mr. Coelho has been an independent business consultant. From October 1996 to June 1998, Mr. Coelho was the Chairman and Chief Executive Officer of ETC w/tci, the Washington-based education, training and communications subsidiary of Tele-Communications, Inc. From January 1990 to September 1995, Mr. Coelho served as the President and Chief Executive Officer of Wertheim Schroder Investment Services, Inc., an asset management firm, and from October 1989 to September 1995, he served as Managing Director of Wertheim Schroder and Co., an investment banking firm. Mr. Coelho served in the United States House of Representatives from California from 1979 to 1989 and as House Majority Whip from 1986 to 1989. Mr. Coelho also serves on the board of directors of Service Corporation International, a funeral service corporation, Warren Resources, an oil and gas exploration company, Ceptor Corporation, a biopharmaceutical company, Stem Cell Innovations, Inc., a biotechnology company and Unifund Government Services, LLC, a debt collection company, for which he also serves as chairman. Mr. Coelho is also the Chairman of the Epilepsy Foundation, a national organization that works for people affected by seizures through research, education, advocacy and service. Mr. Coelho also served as Chairman of the President’s Committee on Employment of People with Disabilities from 1994 to 2001.

      Mr. Jackson has been a member of our Board since July 2003. In June 2003, Mr. Jackson retired from the accounting firm of Ernst & Young LLP after 35 years with the firm and one of its predecessors, Arthur Young & Company. During his career, Mr. Jackson has served as the audit partner for a number of public companies in Ernst & Young’s New York and Minneapolis offices. Mr. Jackson has a B.S. degree from The Pennsylvania State University and a MBA from the Harvard Business School. Mr. Jackson also serves on the board of directors and is chairman of the audit committees of Digi International, Inc., a technology company, EpiCept Corporation, a specialty pharmaceutical company, Life Time Fitness, Inc., an operator of fitness centers, and Urologix, Inc., a medical device company.

      Mr. Jennings joined us in May 2003 as Vice President, Sales. Mr. Jennings has more than 25 years of pharmaceutical sales and marketing experience, including over 15 years of sales management experience at Solvay Pharmaceuticals, CIBA GEIGY and Reed and Carnrick. Prior to joining us, Mr. Jennings was Global Vice President, Gastrointestinal and Women’s Health at Solvay where he was responsible for worldwide sales and marketing for the two largest of Solvay’s four pharmaceutical divisions. During his 10-year career at Solvay, he also held positions in product management, regional and U.S. national sales management and Business Director for Solvay’s Mental Health and Cardiovascular business.

      Mr. Lunney joined us in April 1991 and served in various sales, marketing and reimbursement planning positions with us until May 1996, when he became Vice President, Marketing. He is currently serving as Vice President of Market Development. Prior to joining us, Mr. Lunney held the position of Sales and Marketing Manager with Perceptive Systems, Inc., a hospital laboratory medical instrument manufacturer, from December 1985 to April 1991.

      Mr. Moore has been a member of our Board since January 2004. He has over 20 years of investment and management experience. He has been with The Clark Estates, Inc. since 1991 where he is currently President and a director. Mr. Moore is responsible for all activities of The Clark Estates and its various affiliated investments and interests. The Clark Estates manages the business and financial affairs of the Clark family, co-founders of I.M. Singer & Company in 1850. Mr. Moore serves on the Boards of Directors of 3D Systems Corporation, Time Out New York magazine, and the National Baseball Hall of Fame & Museum where he is

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also Treasurer. He is also Vice Chairman of The Mary Imogene Bassett Hospital. Mr. Moore was originally appointed to our Board, and is nominated as a director for the 2006 Annual Meeting of Stockholders, pursuant to an agreement with The Clark Estates which requires our Board to nominate him for election as a director so long as The Clark Estates holds at least 600,000 shares of common stock, which were purchased in our private placement offering in 1997.

      Mr. Morrison was appointed to our Board in November 2006. From 1983 to December 2005, Mr. Morrison served as a director, and from January 1998 to December 2005 as Chairman of the board of directors, of Advanced Neuromodulation Systems, Inc., a publicly held designer, developer, manufacturer and marketer of advanced implantable neuromodulation devices. In December 2005, Advanced Neuromodulation Systems, Inc. was sold to St. Jude Medical, Inc. Mr. Morrison served as a director of Owen Healthcare, Inc., a publicly held hospital pharmacy management firm, from 1994 until it was acquired in 1996 by Cardinal Healthcare. In addition, Mr. Morrison served as a director of Dow Hickam Pharmaceuticals, Inc., a pharmaceutical manufacturer and marketer, from 1984 to 1991, when the company was sold to Mylan Laboratories, Inc. From March 1996 to May 2006, Mr. Morrison served as President and Chief Executive Officer, and from January 1998 to May 2006 as Chairman of the board of directors, of Pilgrim Cleaners, Inc., a retail dry cleaning company operating over 100 stores (Pilgrim), and its parent, Clean Acquisition, Inc. (Clean). In January 2004, Pilgrim and Clean each filed a petition under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the Southern District of Texas, Houston Division. Subsequent to Mr. Morrison’s resignation, Pilgrim and Clean each filed a petition under Chapter 7 of the Bankruptcy Code with the United States Bankruptcy Court for the Southern District of Texas, Houston Division in July 2006. Mr. Morrison is licensed as a Certified Public Accountant.

      Mr. Olsen has been a member of our Board since June 1999. He has over 30 years of medical device sales and marketing experience beginning with Smith & Nephew Richards, Inc., Danek Medical, Inc. and Sofamor Danek Group, Inc. He was founder and President of Danek Medical, Inc., a pioneer in the spinal fixation device market, which later became part of Sofamor Danek Group, Inc. He served as a director of Sofamor Danek Group, Inc. from 1985 to 1993. Since 1992, Mr. Olsen has served on the board of directors of five medical device or technology start-up companies that have either been acquired or are still operating businesses. He is the founder of Robomedica, Inc., which develops robotic devices to train paralyzed people to walk again. Mr. Olsen also serves on the board of directors of several private and charitable organizations.

      Mr. Parker joined us in July 2003 as Vice President of Human Resources. In November 2006, Mr. Parker assumed the role of Chief Operating Officer on an interim basis. Prior to joining us, he was Vice President, Human Resources at PerkinElmer Instruments from 1999 to 2002. Mr. Parker has 22 years of human resource management and consulting experience and has worked in a number of industries including medical equipment and pharmaceuticals with experience in building and developing people and organizations to support rapidly growing products and markets in both the U.S. and Europe.

      Mr. Riccardi joined us in November 2005 as Director of Financial Planning & Analysis and served in that role until November 2006 when he became Chief Financial Officer on an interim basis. Prior to joining us, Mr. Riccardi worked in several positions of increasing responsibility at Johnson & Johnson, a major producer and seller of products in the health care industry, from May 1997 to November 2005.

      Dr. Rudolph joined us in August 2001 as Vice President, Clinical and Medical Affairs and Chief Medical Officer. He has 20 years of pharmaceutical and medical device research and management experience in the neuroscience area. He has authored and co-authored numerous publications. Prior to joining us, Dr. Rudolph was Senior Director, Clinical Research and Development at Wyeth-Ayerst Research. During his 16-year career at Wyeth-Ayerst, Dr. Rudolph was responsible for numerous clinical studies and research on Effexor^®(venlafaxine hydrochloride) and Effexor^® XR, a leading brand of medication for the treatment of patients with depression and generalized anxiety disorder.

      Mr. Simpson joined us in 1998 and has served in various manufacturing management positions such as Director, Manufacturing, Director, Materials and Sr. Director of Operations, until October 2003 when he became Vice President, Operations. Prior to joining us, Mr. Simpson was employed by Intermedics, Inc., a manufacturer of implantable medical devices for cardiac rhythm management, including pacemakers and

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defibrillators, as Manager of Manufacturing. Mr. Simpson has over 22 years of manufacturing experience with over 15 years of experience in the medical device industry.

      Dr. Strauss has been a member of our Board since March 1997. Dr. Strauss is a health policy and business consultant who works with medical technology and service companies. He is an expert on medical device reimbursement. From 2001 until January 2005, he served as Chief Executive Officer of Naviscan PET Systems, Inc., a developer of compact, high-resolution positron emission tomography (“PET”) devices. From 1988 through 1999, Dr. Strauss was a founder and officer of Covance Health Economics and Outcomes Services, Inc., a healthcare consulting and service firm that specializes in medical product reimbursement. He also serves on the board of directors of VisionCare Opthalmic Technologies, which is developing products to treat macular degeneration and other disorders.

      Mr. Terry co-founded Cyberonics in December 1987 and served as Chairman of our Board and Chief Executive Officer until February 1990, when he became Chairman of our Board and Executive Vice President. He also served as Chief Executive Officer for a portion of 1995. Mr. Terry resigned from his position as Executive Vice President in February 2000 and from his positions as Chairman of our Board and Secretary in June 2001. In November 2006, Mr. Terry was appointed by our Board as Chief Executive Officer on an interim basis while our Board conducts a search for Chief Executive Officer. From 1976 to 1986, Mr. Terry held executive positions with Intermedics, Inc., a medical device and electronics company, including serving as Vice President of Engineering, Vice President of Corporate Technical Resources and Vice President of Quality. Mr. Terry serves on the Board of the Epilepsy Foundation, a national organization that works for people affected by seizures through research, education, advocacy and service. Mr. Terry also serves on the Board of IDEV, a privately held biomedical device company in the cardiovascular device field.

      Mr. Wise joined us in September 2003 as Vice President and General Counsel. He was appointed our Secretary in November 2003. From July 1994 to September 2003, Mr. Wise was employed at Centerpulse USA Inc. (formerly Sulzer Medica USA Inc.), a medical technology company specializing in orthopedic products acquired by Zimmer Holdings, Inc. in 2003, serving as Group Vice President and General Counsel from September 1998 to September 2003. Prior to July 1994, he spent 12 years in private legal practice focused on intellectual property and commercial litigation. Mr. Wise has more than 24 years of experience in intellectual property, business development and legal affairs in private practice and in corporate practice in the medical device industry.

Audit Committee Information

      The Audit Committee is appointed by our Board to assist it and to perform an oversight function by:

•  monitoring actions we take to comply with our internal accounting and control policies as well as external accounting, legal and regulatory requirements;

•  reviewing the qualifications and independence of the registered public accounting firm engaged for the purpose of preparing or issuing an audit report for inclusion in our Annual Report on Form 10-K (the “independent auditors”);

•  reviewing our consolidated financial statements and internal controls with management and the independent auditors; and

•  selecting our independent auditors and evaluating their performance.

      The Nominating & Governance Committee, in its business judgment, has determined that the members of the Audit Committee during the fiscal year ended April 28, 2006, Messrs. Jackson and Olsen and Dr. Strauss, and that each of the current members of the Audit Committee, Messrs. Jackson, Moore and Morrison, satisfy the standards of independence established under the SEC’s rules and regulations, NASDAQ listing requirements and our Corporate Governance Guidelines. Our Board, in its business judgment, has determined that each of the current members of the Audit Committee, Messrs. Jackson, Moore and Morrison, qualifies as an “audit committee financial expert” within the meaning of the SEC’s rules and regulations.

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      Pursuant to its charter, the Audit Committee has the authority, at our expense, to retain professional advisors, including legal, accounting or other consultants, to advise the Audit Committee in connection with the exercise of its powers and responsibilities. The Audit Committee may require any of our officers or employees, our outside legal counsel or our independent auditor to attend a meeting of the Audit Committee or to meet with any members of, or consultants to, the Audit Committee. The Audit Committee is responsible for the resolution of any disagreements between the independent auditors and management regarding our financial reporting. The Audit Committee meets at least quarterly with management and the independent auditor in separate executive sessions to discuss any matter that the Audit Committee or each of these groups believe should be discussed privately. The Audit Committee makes regular reports to our Board.

      In December 2006, our Board amended and restated the Audit Committee Charter. A copy of the current charter is available on our website at www.cyberonics.com.

Nominating Procedures

      The Nominating & Governance Committee is responsible for establishing criteria for selecting new directors and actively seeking individuals to become directors for recommendation to our Board. In considering candidates for our Board, the Nominating & Governance Committee considers the entirety of each candidate’s credentials. There is currently no set of specific minimum qualifications that must be met by a nominee recommended by the Nominating & Governance Committee, as different factors may assume greater or lesser significance at particular times and the needs of our Board may vary in light of its composition and the Nominating & Governance Committee’s perceptions about future issues and needs. However, while the Nominating & Governance Committee does not maintain a formal list of qualifications in making its evaluation and recommendation of candidates, it may consider, among other factors, diversity, age, skill, experience in the context of our Board’s needs, independence qualifications and whether prospective nominees have relevant business and financial experience, industry and/or other specialized expertise and good moral character.

      The Nominating & Governance Committee may consider candidates for our Board from any reasonable source, including from a search firm engaged by the Nominating & Governance Committee or stockholder recommendations, provided that the procedures set forth below are followed. The Nominating & Governance Committee does not intend to alter the manner in which it evaluates candidates based on whether the candidate is recommended by a stockholder or not. However, in evaluating a candidate’s relevant business experience, the Nominating & Governance Committee may consider previous experience as a member of our Board. Any invitation to join our Board must be extended by our Board as a whole and by the Chairman of the Nominating & Governance Committee.

      Stockholders or a group of stockholders may recommend potential candidates for consideration by the Nominating & Governance Committee by sending a written request to our Secretary, David S. Wise, at 100 Cyberonics Boulevard, Houston, Texas 77058 not later than 120 calendar days prior to the date that the proxy statement for the previous year’s annual meeting is first mailed to our stockholders. The written request must include (1) the name and address of the person or persons to be nominated, (2) the number and class of all shares of each class of our stock owned of record and beneficially by each nominee, as reported to the nominating stockholder by the nominee, (3) the information regarding each such nominee required by paragraphs (a), (d), (e) and (f) of Item 401 of Regulation S-K adopted by the SEC, (4) a signed consent by each nominee to serve as our director, if elected, (5) the nominating stockholder’s name and address, (6) the number and class of all shares of each class of our stock owned of record and beneficially by the nominating stockholder, and (7) in the case of a person that holds our stock through a nominee or street name holder of record, evidence establishing such indirect ownership of stock and entitlement to vote such stock for the election of directors at the annual meeting. From time to time, the Nominating & Governance Committee may request additional information from the nominee or the stockholder.

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Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the SEC. Such officers, directors and 10% stockholders are also required by securities laws to furnish us with copies of all Section 16(a) forms they file.

      For the fiscal year ended April 28, 2006, to our knowledge, all of our officers, directors and 10% stockholders complied with applicable reporting requirements of Section 16(a).

Code of Ethics

      Our Board has adopted a Corporate Code of Business Conduct and Ethics for our employees, agents and representatives. In addition, our Board has adopted a Financial Code of Ethics for our Chief Executive Officer, Chief Financial Officer and Controllers. A copy of each Code of Ethics is available on our website at www.cyberonics.com. Any change to, or waiver from, either of these codes of ethics will be disclosed as required by applicable securities laws.

Item 11. Executive Compensation

Compensation of Non-Employee Directors

2006 Compensation

      Annual compensation for our non-employee directors for the fiscal year ended April 28, 2006 was comprised of the following components:

•  cash compensation, consisting of annual retainers for board and committee membership and meeting and committee fees; and

•  equity compensation, consisting of stock option grants or restricted stock grants under our 2005 Stock Option Plan.

      In addition, we made available portable email technology services to our non-employee directors with an estimated value of $1,100 per year. Each compensation component and the total fiscal year 2006 compensation of our non-employee directors are shown in the following table:

	Fees Earned or Paid in Cash
	Board and		Board		Committee
	Committee		Meeting		Meeting		Stock		Other
Director	Retainer Fees(1)		Fees(2)		Fees(3)		Awards(4)		Compensation(5)		Total
Stanley Appel, M.D.	$	33,000	$	9,500	$	11,500	$	182,950	$	1,100	$	238,050
Tony Coelho		38,000		9,500		12,500		182,950		1,100		244,050
Guy Jackson		35,000		9,500		8,000		182,950		1,100		236,550
Ronald A. Matricaria(6)		14,167		2,500		2,500		—		275		19,442
Kevin Moore		38,000		8,000		11,000		182,950		1,100		241,050
Alan Olsen		31,000		10,000		8,000		182,950		1,100		233,050
Michael Strauss, M.D., M.P.H.		31,000		8,500		8,000		182,950		1,100		231,550
Reese S. Terry, Jr.		29,000		9,500		9,100		182,950		1,100		231,650

(1)	Consists of the following annual retainers: board membership — $25,000; membership for each committee — $4,000 (members of the Audit Committee receive an additional $2,000); committee Chairman — $5,000 (the Chairman of the Audit Committee receives an additional $5,000).
(2)	Consists of the following: each meeting attended in person — $1,500 and each meeting attended telephonically — $500.

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(3)	Consists of the following: each meeting attended in person — $1,000 and each meeting attended telephonically — $500.
(4)	On June 1, 2005, our non-employee directors received an award of 5,000 shares of restricted stock which vests 20% per year on the anniversary of the grant date, subject to forfeiture in the event the director no longer serves on our Board. All outstanding restricted stock awards at April 28, 2006 are valued in the table at the market closing price of our stock on the grant date, June 1, 2005, at $36.59 per share. If the value of these restricted shares was based on the market closing price of our stock on the last trading day of the fiscal year ended April 28, 2006 ($23.19 per share), the market value of these shares would be $115,950 for each director.
(5)	Reflects portable email technology services valued at $1,100 per year.
(6)	Mr. Matricaria resigned from our Board in July 2005. The compensation provided to Mr. Matricaria reflects the pro-rated portion of his service on our Board.

Changes for 2007 Compensation

      For the fiscal year ending April 29, 2007, we have supplemented the compensation of our non-employee directors set forth above by adding as compensation to our non-executive Chairman an annual retainer of $75,000 and an annual grant of 10,000 restricted shares of common stock (which vest annually over a three-year period from the date of grant). In addition, we have added a one-time grant of 10,000 restricted shares of common stock (which vest annually over a five-year period from the date of grant) to non-employee directors upon their first election or appointment to our Board. The estimated value of the portable email technology services made available to our non-employee directors has been increased to $1,800 per year.

Compensation and Other Information Concerning Executive Officers

Summary Compensation Table

      Except as noted below, the following table sets forth the compensation paid by us for the fiscal years ended April 28, 2006, April 29, 2005 and April 30, 2004 to our Chief Executive Officer and each of our four

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other most highly compensated executive officers whose total compensation exceeded $100,000 as well as that of our General Counsel. These officers are referred to as the “named executive officers”:

												Long-Term Compensation
												Awards
				Annual Compensation
												Restricted		Securities
									Other Annual			Stock		Underlying		All Other
Name and Principal Position		Year		Salary		Bonus			Compensation			Awards(1)		Options (#)(2)		Compensations(3)
Robert P. Cummins(4)			2006	$	542,788	$	5,507		$	—		$	3,783,000		—	$	420
	Chairman of the Board,		2005		395,000		429,841			—			—		150,000		456
	President and Chief		2004		410,257		244,918			—			—		250,000		403
	Executive Officer
Pamela B. Westbrook(5)			2006		287,788		43,007			—			177,945		—		274
	Vice President, Finance		2005		275,000		150,067			—			—		27,650		308
	and Administration and		2004		233,365		78,807			—			49,175		20,000		360
	Chief Financial Officer
Michael A. Cheney			2006		308,385		45,507			—			177,945		—		420
	Vice President, Marketing		2005		300,000		163,694			—			—		—		456
			2004		311,538		52,244			—			65,567		25,000		363
W. Steven Jennings			2006		251,885		37,259			—			177,945		—		545
	Vice President, Sales		2005		250,000		136,440			—			—		5,000		456
			2004		235,577		87,331	(6)		90,580	(7)		—		150,000		438
Richard Rudolph, M.D.			2006		283,558		42,259			—			944,855		—		786
	Vice President, Clinical		2005		255,000		139,165			—			—		20,000		884
	and Medical Affairs		2004		254,231		80,057			—			55,029		35,000		234
	and Chief Medical Officer
David S. Wise			2006		244,250		39,134			—			177,945		—		420
	Vice President, General		2005		232,000		119,678			—			—		34,500		363
	Counsel and Secretary		2004		141,060		39,855			—			—		150,000		183

(1)  The value shown is the number of restricted shares times the market price of our stock on the grant date. The following table shows the number of restricted shares granted in 2006 and the total number of shares and dollar value of restricted stock held by the named executive officer as of April 28, 2006. There were no restricted stock awards granted during the fiscal year ended April 29, 2005.

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				Restricted Stock Holdings
				as of April 28, 2006
				Valued at
	Restricted Stock Awards Granted			$23.19 per Share
	Number of Restricted			Number of
Name	Shares Granted		Vesting Schedule of Grant	Shares		Value
Robert P. Cummins(a)		100,000	Vests 20% per year on each anniversary of the grant date		100,000	$	2,319,000
Pamela B. Westbrook(b)		5,000	Vests 20% per year on each anniversary of the grant date		5,000	$	115,950
Michael A. Cheney		5,000	Vests 20% per year on each anniversary of the grant date		5,000	$	115,950
W. Steven Jennings		5,000	Vests 20% per year on each anniversary of the grant date		5,000	$	115,950
Richard Rudolph, M.D.		12,500	Vests 20% per year on each anniversary of the grant date		12,500	$	289,875
		11,933	Vests 100% on first anniversary of the grant date		11,933	$	276,726
David S. Wise		10,000	Vests 20% per year on each anniversary of the grant date		10,000	$	231,900

(a)	Pursuant to the Resignation Agreement dated November 17, 2006 between Mr. Cummins and us, all shares of restricted stock previously granted to Mr. Cummins vested immediately on November 17, 2006 and became freely tradable.
(b)	Pursuant to the Resignation Agreement dated November 19, 2006 between Ms. Westbrook and us, all shares of restricted stock that had not vested but would have vested within 12 months following November 19, 2006 (1,000 shares) vested immediately on November 19, 2006 and became freely tradable.

(2)	During the fiscal year ended April 28, 2006, we did not adjust or amend the exercise price of the stock options previously awarded to any of the named executive officers. However, during the fiscal year ending April 27, 2007, we anticipate that the exercise price of certain options awarded to the named executive officers will be amended. See “Ten-Year Option Repricings” below.
(3)	Represents premiums paid for term-life insurance.
(4)	Mr. Cummins resigned as Chairman of our Board, Chief Executive Officer and President and as a director on November 17, 2006. For a description of the compensation paid to Mr. Cummins in connection with his resignation, see “Employment Agreements — Robert P. Cummins.”
(5)	Ms. Westbrook resigned as our Vice President, Finance and Administration and Chief Financial Officer on November 19, 2006. For a description of the compensation paid to Ms. Westbrook in connection with her resignation, see “Employment Agreements — Pamela B. Westbrook.”
(6)	Includes $50,000 for hiring bonus.
(7)	Represents $90,580 for expenses paid to Mr. Jennings in connection with his relocation to Houston.

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Aggregated Option Exercises in the Last Fiscal Year

      The following table sets forth, for the named executive officers, each officer’s exercise of stock options through the fiscal year ended April 28, 2006 and the period-end value of unexercised options:

					Number of Securities
					Underlying Unexercised		Value of Unexercised
					Options		In-The-Money Options
	Shares		Value		at Fiscal Year-End		at Fiscal Year-End
	Acquired on		Realized		Exercisable/ Unexercisable		Exercisable/ Unexercisable
Name	Exercise (#)		($)(1)		(#)(2)		($)(3)
Robert P. Cummins(4)		—		—		1,009,174/ 240,286	$	5,922,110/ $1,129,890
Pamela B. Westbrook(5)		—		—		148,632/ 29.018		2,220,865/ 170,681
Michael A. Cheney		—		—		159,385/ 45,915		1,185,572/ 297,235
W. Steven Jennings		—		—		61,917/ 68,083		261,595/ 286,855
Richard Rudolph, M.D.		—		—		138,417/ 41,583		1,014,876/ 217,574
David S. Wise		—		—		89,250/ 95,250		98,136/ 193,709

(1)	Represents market value of underlying securities at date of exercise less option exercise price.
(2)	Options generally vest over five-year periods and 1/60th of the optioned shares vest each month until fully vested.
(3)	Market value of underlying securities at fiscal year-end is based on the fair market value of the securities on April 28, 2006 ($23.19 per share) less the exercise price.
(4)	Mr. Cummins resigned as Chairman of our Board, Chief Executive Officer and President and as a director on November 17, 2006. Pursuant to the Resignation Agreement dated November 17, 2006 between Mr. Cummins and us, all stock options previously granted to Mr. Cummins vested immediately and became fully exercisable, subject to the conditions set forth in the Resignation Agreement.
(5)	Ms. Westbrook resigned as our Vice President, Finance and Administration and Chief Financial Officer on November 19, 2006. Pursuant to the Resignation Agreement dated November 19, 2006 between Ms. Westbrook and us, all stock options that had not vested but would have vested within 12 months following November 19, 2006 (10,531 shares) vested immediately and became fully exercisable, subject to the conditions set forth in the Resignation Agreement.

Ten-Year Option Repricings

      During the fiscal year ended April 28, 2006, we did not adjust or amend the exercise price of the stock options previously awarded to any of the named executive officers. However, during the fiscal year ending April 27, 2007, we anticipate that the exercise price of certain options awarded to the named executive officers will be amended for the reasons set forth below.

      In June 2006, the Audit Committee conducted a review of our stock option grants, practices and procedures. In November 2006, the Audit Committee reported its findings that certain stock options granted primarily during the period 1998 to 2003 were not accounted for correctly in accordance with accounting pronouncements applicable to the time periods when the grants were issued. Because the vesting of misdated options gives rise in certain circumstances to an excise tax payable by the grantee, we anticipate that we will agree with the grantee of some of the misdated options to increase the exercise price of the option to the fair market value of the stock on the date of the grant. We anticipate that the agreements to increase the exercise price will be effected during the fiscal year ending April 27, 2007.

Employment Agreements

      Robert P. Cummins. On August 5, 2005, we entered into a five-year employment agreement with Mr. Cummins. After its initial five-year term, the employment agreement provided for automatic extension for an additional one-year term on each anniversary of the agreement, unless terminated by written notice six months prior to the anniversary date by either Mr. Cummins or us. The employment agreement provided that

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Mr. Cummins would serve as our Chief Executive Officer and Chairman of our Board. Pursuant to this agreement, Mr. Cummins received an annual base salary of $600,000, which could be adjusted annually by the Compensation Committee, and was eligible to earn a bonus up to 80 to 110% of his annual base salary based on his achievement of specified performance goals established by the Compensation Committee. Mr. Cummins received a grant of 75,000 shares of restricted stock, vesting 15,000 shares at the end of each year over a five-year period, in connection with the execution of the agreement. The agreement also provided that Mr. Cummins was to receive on the first anniversary of the date of execution of this employment agreement, a grant of 75,000 shares of restricted stock vesting 18,750 shares at the end of each year over a four-year period; and on the second anniversary of the execution date, a grant of 75,000 shares of restricted stock vesting 25,000 shares at the end of each year over a three-year period. Mr. Cummins was eligible for an annual overachievement bonus based on the overachievement of specified performance goals. Mr. Cummins’ employment agreement was approved by the Compensation Committee and was, in part, based on a survey of comparable companies and recommendations made by Towers Perrin, an independent compensation consulting firm. The compensation package provided in the employment agreement is approximately equal to the seventy-fifth percentile of our peer group. In the event of a termination of his employment other than for good cause, Mr. Cummins was entitled to receive a payment equal to twice the sum of his annual base salary and his annual bonus at 100% of his base salary. In addition, in the event of such a termination, all shares of restricted stock granted to Mr. Cummins prior to the date of termination would vest and be delivered immediately on termination, and Mr. Cummins would receive a cash payment in lieu of shares of restricted stock that he was contractually entitled to receive but that had not been granted as of the date of termination. The amount of the cash payment was determined by multiplying the number of such shares by the closing price for a share of our common stock as of the date of termination. Additionally, the employment agreement provided that if any payments to Mr. Cummins were subject to any excise or additional tax imposed by Section 4999 or Section 409A of the Internal Revenue Code, a “gross-up” payment would be made to place Mr. Cummins in the same net after-tax position as would have been the case if no excise or additional tax had been imposed. The employment agreement also included noncompetition provisions that applied while Mr. Cummins was employed by us and for one to two years following a termination of Mr. Cummins’ employment, depending on the circumstances.

      On November 17, 2006, Mr. Cummins resigned from all positions with us and our Board. In connection with Mr. Cummins’ resignation, we entered into a Resignation Agreement, dated November 17, 2006, with Mr. Cummins (the “Cummins Resignation Agreement”). The Cummins Resignation Agreement provided for the payment of approximately $1.7 million in cash within five days, the issuance of 75,000 unregistered shares of our common stock to Mr. Cummins, the acceleration of vesting for outstanding options and restricted stock grants and the payment of certain benefits. The Cummins Resignation Agreement also provided for the payment to Mr. Cummins of an amount equal to the cash value of 75,000 shares of our common stock within one week of the filing of our Annual Report on Form 10-K for the fiscal year ended April 28, 2006 and for the payment of cash for certain tax payments that will be incurred by Mr. Cummins as provided in Paragraph 6(f) of his employment agreement.

      Pamela B. Westbrook. Ms. Westbrook entered into an employment agreement with us as described below under “Other Named Executive Officers.” On November 19, 2006, Ms. Westbrook resigned from all positions with us. In connection with Ms. Westbrook’s resignation, we entered into a Resignation Agreement, dated November 19, 2006, with Ms. Westbrook (the “Westbrook Resignation Agreement”). The Westbrook Resignation Agreement provided for the payment of $300,000 in cash to Ms. Westbrook within five days and the acceleration and vesting of any stock options and restricted stock that would have vested within the next 12 months if Ms. Westbrook had remained employed by us. Also on November 19, 2006, we entered into a consulting agreement with Ms. Westbrook (the “Westbrook Consulting Agreement”). The Westbrook Consulting Agreement provides that Ms. Westbrook will advise us with respect to financial matters, including the preparation and filing of our Annual Report on Form 10-K for the fiscal year ended April 28, 2006 and Quarterly Reports on Form 10-Q for the quarters ended July 28, 2006 and October 27, 2006. We agreed to pay Ms. Westbrook $1,200 per day for these services.

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      Other Named Executive Officers. We have entered into three-year employment agreements commencing in June 2006 with Messrs. Cheney, Jennings, Rudolph and Wise. Pursuant to the terms of the employment agreements, each officer has agreed to devote his full business time, attention and energies to our business in exchange for a specified compensation, including a base salary, eligibility to participate in the annual bonus plan for our officers (with a target bonus of 50% of the officer’s annual base salary), eligibility to participate in the annual overachievement bonus plan for our officers as determined by the Compensation Committee, eligibility for equity grants at the discretion of the Compensation Committee and general welfare benefits. In the event that we terminate the officer without cause prior to expiration of the employment agreement, he is entitled to receive, in addition to unpaid salary and any earned, but unpaid, bonus for a prior year, a lump sum payment equal to 150% of the sum of his annual salary and the most recent bonus earned, or at the election of the officer, 150% of his annual salary and vesting under grants of options or restricted shares of the number of shares that would have vested during the 12-month period following his termination date had he remained in our employ.

Executive Severance Agreements

      In connection with accepting positions as an officer, each of our officers entered into a severance agreement with us that provides certain benefits during the protected period following a change of control as such terms are defined in the severance agreement (collectively, the “Severance Agreements”). The initial term of the Severance Agreements is one year and is automatically extended for successive one-year terms following the initial term. However, if a change of control (as defined in the Severance Agreements) occurs during the term of the Severance Agreement, the Severance Agreement cannot terminate until one year after the change of control. The Severance Agreements generally provide for the payment of (1) three times the sum of the officer’s base salary and bonus amount; plus (2) that portion of the officer’s base salary earned, and vacation pay vested for the prior year and accrued for the current year to the date of termination but not paid or used, and all other amounts previously deferred by the officer or earned but not paid as of such date under all company bonus or pay plans or programs. Additionally, the Severance Agreements provide that if any payments to the officer would be subject to any excise tax imposed by Section 4999 of the Internal Revenue Code, a “gross-up” payment will be made to the officer in the same net after-tax position as would have been the case that no excise tax had been imposed.

Other Compensatory Arrangements

      In connection with the resignations of Mr. Cummins and Ms. Westbrook, our Board appointed Reese S. Terry, Jr. as Interim Chief Executive Officer, John A. Riccardi as Interim Chief Financial Officer and George E. Parker III as Interim Chief Operating Officer. In December 2006, the Compensation Committee determined that, effective as of November 19, 2006, Messrs. Terry, Riccardi and Parker would receive the following:

•  Mr. Terry will receive a salary at the annual rate of $300,000 per year while he continues to serve as our Interim Chief Executive Officer.

•  Mr. Parker will receive, in addition to his base salary of $196,650, a supplemental bi-weekly payment at the annual rate of $100,000 while he continues to serve as our Interim Chief Operating Officer. This supplemental payment will be included with Mr. Parker’s base salary for purposes of calculating his bonus under our annual bonus and overachievement bonus plans for our executive officers. Mr. Parker is eligible to receive an annual bonus of up to 50% of his total salary and an annual overachievement bonus in such amount as may be determined by the Compensation Committee.

•  Mr. Riccardi will receive, in addition to his base salary of $149,784, a supplemental bi-weekly payment at the annual rate of $100,000 while he continues to serve as our Interim Chief Financial Officer. This supplemental payment will be included with Mr. Riccardi’s base salary for purposes of calculating his bonus under our corporate bonus plan, pursuant to which Mr. Riccardi is eligible to receive a bonus of up to 30% of his total salary. In addition, the Compensation Committee agreed that we will reimburse

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Mr. Riccardi for legal fees he incurs in connection with his assumption of his new responsibilities on behalf of us.

Compensation Committee Interlocks and Insider Participation

      No interlocking relationship exists between our Board or the Compensation Committee and the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past.

Report of the Compensation Committee

      Compensation Policy. The executive compensation policies of Cyberonics, Inc. (“Cyberonics”) are designed to attract, retain and motivate the highly skilled executive officers upon whose performance Cyberonics is dependent by providing compensation packages competitive with those provided by similarly situated companies with whom Cyberonics competes for key employees. To assist the Compensation Committee in gathering market information with respect to compensation levels of comparable companies, the Compensation Committee has engaged the services of Towers Perrin, an independent compensation consulting firm. It is the Compensation Committee’s policy that compensation of executive officers should include base compensation coupled with stock-based incentive opportunities and cash bonuses based on their level of responsibility. Prior to July 1, 2004, Cyberonics did not contribute to any retirement programs on behalf of any of its employees. Commencing July 1, 2004, Cyberonics matches employee contributions to the Cyberonics 401(k) Retirement Plan at the rate of 50% of up to 6% of an employee’s wages or salary. Compensation levels for executive officers are generally established for each fiscal year near the beginning of the fiscal year. Compensation levels for employees are established annually on a common review date of June 30th.

      Base Salaries. Base salaries for all employees are generally set at levels that are viewed as competitive. The Compensation Committee determined that the primary elements of officer compensation were to be base salaries together with bonus plan earnings and equity participation through options or restricted shares. The increase in annual base salaries for officers for the fiscal year ended April 28, 2006 was established by the Compensation Committee in May 2005 and, on average, reflected increases of approximately 9.5% over fiscal 2005 levels. In February 2006, each officer voluntarily agreed to a 10% reduction in salary until such time as we report positive quarterly earnings before non-cash charges. The Compensation Committee determined that no increase in salary for our officers was appropriate for fiscal 2007.

      Bonuses. The Compensation Committee generally establishes performance objectives for executive officer bonuses at the same time that annual salary levels are established for the fiscal year. Bonus performance objectives are generally tied to a combination of companywide and individual performance goals. Based upon Cyberonics’ financial performance during the fiscal year ended April 28, 2006, the Compensation Committee approved bonuses to executive officers solely based on individual performance goals, resulting in bonuses that averaged 25% of their potential bonuses.

      Overachievement Bonus. Executive officers are eligible to receive a discretionary annual overachievement bonus if Cyberonics overachieves specified performance goals. Based upon Cyberonics’ financial performance during the fiscal year ended April 28, 2006, the Compensation Committee did not award any overachievement bonuses for executive officers.

      Restricted Stock Awards. The Compensation Committee approved grants of long-term incentive compensation in the form of restricted stock shares in fiscal 2006 to executive officers in light of the responsibilities of the executive officers and their current stakes in our long-term success. These grants are reflected in footnote 1 to the “Summary Compensation Table” of the proxy statement. The Compensation Committee considered grants of long-term incentive compensation in the form of restricted stock shares in fiscal 2007 to executive officers and determined that no such grants were appropriate at that time.

      Compensation of Chief Executive Officer. In the fiscal year ended April 28, 2006, the Compensation Committee believed that the compensation of the Chief Executive Officer, Mr. Cummins, should be closely

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tied to the success of Cyberonics, and should provide Mr. Cummins with a stake in the future success of Cyberonics. As described under “Employment Agreements” above, Mr. Cummins entered into a five-year employment agreement with Cyberonics in August 2005. In considering the adoption of Mr. Cummins’ employment agreement, the Board of Directors engaged the services of Towers Perrin to conduct an independent compensation review, including a review of salary, bonus and stock option grants for our Chief Executive Officer. Towers Perrin submitted its recommendations to the Compensation Committee and recommended an increase in salary for Mr. Cummins. The recommendation was based on Towers Perrin’s survey of comparable high growth medical device, pharmaceutical and biotechnology companies. The compensation package in the new employment agreement is approximately equal to the seventy-fifth percentile of the peer group surveyed by Towers Perrin and as reflected in the employment agreement. Under the employment agreement, Mr. Cummins’ base salary was increased to $600,000 from $395,000 in the fiscal year ended April 28, 2006. Mr. Cummins received a grant of 75,000 shares of restricted stock, vesting 15,000 shares at the end of each year over a five-year period, in connection with the execution of the employment agreement. The agreement also provided that Mr. Cummins would receive on the first anniversary of the date of execution of this employment agreement, a grant of 75,000 shares of restricted stock vesting 18,750 shares at the end of each year over a four-year period; and on the second anniversary of the execution date, a grant of 75,000 shares of restricted stock vesting 25,000 shares at the end of each year over a three-year period. For the fiscal year ended April 28, 2006, Mr. Cummins was not awarded a bonus, based on our performance.

      On November 17, 2006, Mr. Cummins resigned from all positions with Cyberonics and its Board of Directors. In connection with Mr. Cummins’ resignation, Cyberonics entered into a Resignation Agreement, dated November 17, 2006, with Mr. Cummins (the Cummins Resignation Agreement). The Cummins Resignation Agreement provided for the payment of approximately $1.7 million in cash within five days, the issuance of 75,000 unregistered shares of Cyberonics’ common stock to Mr. Cummins, the acceleration of vesting for outstanding options and restricted stock grants and the payment of certain benefits. The Cummins Resignation Agreement also provided for the payment to Mr. Cummins of an amount equal to the cash value of 75,000 shares of Cyberonics’ common stock within one week of the filing of Cyberonics’ Annual Report on Form 10-K for the fiscal year ended April 28, 2006 and for the payment of cash for certain tax payments that will be incurred by Mr. Cummins as provided in Paragraph 6(f) of his employment agreement.

Respectfully submitted by the Compensation Committee of the Board of Directors of Cyberonics,

Stanley H. Appel, M.D.

Tony Coelho*

Kevin S. Moore*

Reese S. Terry*

*  Effective November 2006, Messrs. Coelho, Moore and Terry are no longer members of the Compensation Committee of the Board of Directors of Cyberonics, Inc.

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Stock Performance Graph

      The graph and table below compare the cumulative total stockholder return of our common stock from April 27, 2001 through April 28, 2006 to the cumulative total return over such period of (1) the Standard & Poor’s 500 Index and (2) the Standard & Poor’s 500 Health Care Equipment Index. The graph assumes that $100 was invested in April 2001 in our common stock and in each of the comparative indices.

      The information contained in the graph below shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Equity Compensation Plan Information

      The following table sets forth certain information regarding our equity compensation plans as of April 28, 2006:

				Weighted-		Number of Securities
				Average Exercise		Remaining Available for
		Number of Securities to		Price of		Future Issuance Under
		be Issued Upon		Outstanding		Equity Compensation
		Exercise of Outstanding		Options,		Plans (Excluding
		Options, Warrants and		Warrants and		Securities Reflected in
		Rights		Rights		Column (A))
Plan Category		(A)		(B)		(C)
Equity compensation plans approved by security holders(1)			2,751,405	$	18.2337		401,056
Equity compensation plans not approved by security holders			4,359,062		20.0518		702,351
	Total		7,110,467	$	19.3483		1,103,407

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(1)  The Cyberonics, Inc. Amended 1988 Stock Incentive Plan, the Cyberonics, Inc. Amended and Restated 1996 Stock Option Plan, the Cyberonics, Inc. 1998 Stock Option Plan and the Cyberonics, Inc. New Employee Equity Inducement Plan were approved by our Board and became effective in March 1988, November 1996, October 1998 and June 2003, respectively. In addition to these plans, we have entered into stand-alone stock agreements with Messrs. Totah, Cheney and Rudolph. Options granted under the 1988 Stock Option Plan, the 1996 Stock Option Plan, the New Employee Equity Inducement Plan and the stand-alone agreements generally vest ratably over four or five years following their date of grant. Options granted under the 1998 Stock Option Plan generally vest seven years from the grant date but can accelerate based upon the achievement of specific milestones related to regulatory approval and the achievement of company objectives. Options granted have a maximum term of 10 years.

Security Ownership of Certain Beneficial Owners and Management

      The following table sets forth, as of November 30, 2006, except where otherwise noted, certain information with respect to the amount of our common stock beneficially owned (as defined by the SEC’s rules and regulations) by (1) each person known by us to own beneficially more than 5% of the outstanding shares of our common stock, (2) each of our directors, (3) each of our executive officers and (4) all current executive officers and directors as a group. Except as otherwise noted below, we are not aware of any agreements among our stockholders that relate to voting or investment of our shares of our common stock.

		Amount and Share of
		Beneficial			Percent of
Name and Address of Beneficial Owner		Ownership(1)			Class(2)
Boston Scientific			3,570,000			13.9	%
	One Boston Scientific Place
	Natick, MA 01760-1537
FMR Corp.			2,818,300	(3)		11.0	%
	82 Devonshire Street
	Boston, MA 02109
Metropolitan Capital Advisors, Inc. and The Committee for Concerned Cyberonics, Inc. Shareholders			1,844,312	(3)		7.2	%
	c/o Bedford Falls Investors, L.P.
	660 Madison Avenue, 20th Floor
	New York, NY 10021
MFS Investment Management			1,833,770	(3)		7.1	%
	500 Boylston Street
	Boston, MA 02116-3741
Granahan Investment Management, Inc.			1,459,720	(3)		5.7	%
	275 Wyman Street, Suite 270
	Waltham, MA 02451-1289
Robert P. Cummins(4)			1,498,750			5.6	%
Pamela B. Westbrook(5)			176,548			*
John A. Riccardi(6)			4,666			*
Michael A. Cheney(7)			185,784			*
W. Steven Jennings(8)			65,168			*
Shawn P. Lunney(9)			146,020			*
George E. Parker(10)			113,026			*
Richard Rudolph, M.D.(11)			160,416			*
Randal L. Simpson(12)			108,916			*
David S. Wise(13)			118,926			*
Stanley H. Appel, M.D.(14)			156,132			*
Tony Coelho(15)			119,832			*

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	Amount and Share of
	Beneficial		Percent of
Name and Address of Beneficial Owner	Ownership(1)		Class(2)
Guy C. Jackson(16)		32,266		*
Kevin S. Moore(17)		859,399		3.3	%
Hugh M. Morrison(18)		—		—
Alan J. Olsen(19)		45,807		*
Michael J. Strauss, M.D., M.P.H.(20)		92,332		*
Reese S. Terry, Jr.(21)		520,162		2.0	%
All current executive officers and directors as a group (16 persons)(22)		4,404,150		15.5	%

* Less than 1%.

(1)	Beneficial ownership is determined in accordance with the SEC’s rules and generally includes voting or investment power with respect to securities. Shares of our common stock subject to options and warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of shares beneficially owned by the person holding such options, but are not deemed outstanding for computing the percentage of any other person. Restricted stock not yet vested is included in the total shares outstanding but excluded from both the total shares held by the beneficial holder and the total shares deemed outstanding for computing the percentage of the person holding such restricted stock. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
(2)	Based on total shares outstanding of 25,711,387 at November 30, 2006.
(3)	This amount is based upon Schedule 13 reports filed by the named beneficial owner with the SEC as of November 30, 2006.
(4)	Includes 10,000 shares held in trusts for the benefit of Mr. Cummins’ children of which Mr. Cummins serves as trustee and 10,000 shares held directly by Mr. Cummins’ wife. Also includes 1,250,000 shares subject to options exercisable on or before January 29, 2007, which include 100,000 options held in trusts for the benefit of Mr. Cummins’ children and 50,000 options held by Mr. Cummins’ wife. Mr. Cummins resigned as our Chairman of our Board, Chief Executive Officer and President and as a director on November 17, 2006. For a description of the compensation paid to Mr. Cummins in connection with his resignation, including acceleration of vesting for outstanding options and restricted stock grants, see “Employment Agreements — Robert P. Cummins.”
(5)	Includes 166,139 shares subject to options exercisable on or before January 29, 2007. Ms. Westbrook resigned as our Vice President, Finance and Administration and Chief Financial Officer on November 19, 2006. For a description of the compensation paid to Ms. Westbrook in connection with her resignation, including acceleration of vesting for outstanding options and restricted stock grants, see “Employment Agreements — Pamela B. Westbrook.”
(6)	Includes 4,666 shares subject to options exercisable on or before January 29, 2007. Mr. Riccardi was appointed Interim Chief Financial Officer in November 2006.
(7)	Includes 185,634 shares subject to options exercisable on or before January 29, 2007.
(8)	Includes 65,168 shares subject to options exercisable on or before January 29, 2007.
(9)	Includes 121,548 shares subject to options exercisable on or before January 29, 2007.

(10)	Includes 111,926 shares subject to options exercisable on or before January 29, 2007. Mr. Parker was appointed Interim Chief Operating Officer in November 2006.
(11)	Includes 160,416 shares subject to options exercisable on or before January 29, 2007.
(12)	Includes 108,108 shares subject to options exercisable on or before January 29, 2007.
(13)	Includes 116,926 shares subject to options exercisable on or before January 29, 2007.

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(14)	Includes 91,332 shares subject to options exercisable on or before January 29, 2007.
(15)	Includes 111,332 shares subject to options exercisable on or before January 29, 2007.
(16)	Includes 28,766 shares subject to options exercisable on or before January 29, 2007.
(17)	Includes (a) 25,266 shares subject to options exercisable on or before January 29, 2007 and (b) 823,133 shares as being beneficially owned by The Clark Estates, Inc., with respect to which Mr. Moore disclaims beneficial ownership except to the extent of his pecuniary interest therein.
(18)	Mr. Morrison joined our Board in November 2006.
(19)	Includes 41,332 shares subject to options exercisable on or before January 29, 2007.
(20)	Includes 91,332 shares subject to options exercisable on or before January 29, 2007.
(21)	Includes 97,400 shares held in trust for the benefit of Mr. Terry’s children of which Mr. Terry serves as trustee. Also includes 46,332 shares subject to options exercisable on or before January 29, 2007. Mr. Terry was appointed Interim Chief Executive Officer in November 2006.
(22)	Includes 2,726,223 shares subject to options held by executive officers and directors, which options are exercisable on or before January 29, 2007. Also includes shares that may be determined to be beneficially owned by executive officers and directors. See Notes 2 through 21 above.

Item 13. Certain Relationships and Related Transactions

      Certain of our stockholders, including Messrs. Cummins and Terry, Dr. Appel and venture capital firms formerly affiliated with Mr. Cummins, are entitled to certain registration rights with respect to the common stock held by them.

      Our Bylaws provide that we are required to indemnify our officers and directors to the fullest extent permitted by Delaware law, including those circumstances in which indemnification would otherwise be discretionary, and that we are required to advance expenses to our officers and directors as incurred. Further, we have entered into indemnification agreements with our officers and directors. We believe that our charter and bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers.

      In July 2005, we hired Sandra Matherly, RN, NP, the sister of Robert P. Cummins (our former President, Chairman of our Board and Chief Executive Officer) as a case manager. During the fiscal year ended April 28, 2006, the sum of compensation expenses, benefits and employer payroll taxes due for the employment of Ms. Matherly was approximately $65,900. Additionally, Ms. Matherly received stock option grants on July 18, 2005 and February 20, 2006 for 1,000 and 500 options at a cost per option of $44.98 and $28.70, respectively. The stock options vest monthly over five years from the date of grant. In compliance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” no compensation expense was recorded during the fiscal year ended April 28, 2006 applicable to the vested portion of these grants. We have adopted the Statement of Financial Accounting Standard No. 123R, “Share Based Payment,” as of April 29, 2006, using the Modified Prospective Method. We will recognize compensation expense for the portion of these grants that vest subsequent to the adoption date accordingly.

      All future transactions between us and our officers, directors, principal stockholders and affiliates must be approved by a majority of our Board, including a majority of the independent and disinterested outside directors on our Board, and will be on terms no less favorable to us than could be obtained from unaffiliated third parties.

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Item 14. Principal Accountant Fees and Services

      Set forth below is the aggregate fees billed by KPMG LLP, our independent auditor, for each of our last two fiscal years.

	52 Weeks Ended		52 Weeks Ended
	April 28, 2006(4)		April 29, 2005
Audit Fees(1)	$	1,225,176	$	774,700
Audit-Related Fees(2)		127,514		6,000
Tax Fees(3)		42,500		47,000
Total	$	1,395,190	$	827,700

(1)	Audit Fees are fees we paid to KPMG LLP for professional services related to the audit of our consolidated financial statements included in our Annual Report on Form 10-K and review of financial statements included in our Quarterly Reports on Form 10-Q, and for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
(2)	Audit-Related Fees are fees paid to KPMG LLP for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and employee benefit plans that are not reported above under “Audit Fees.”
(3)	Tax Fees are fees paid to KPMG LLP for tax compliance, tax advice and tax planning.
(4)	Amounts reported for the fiscal year ended April 28, 2006 are estimates provided for audit services that will be completed prior to the filing of our Annual Report on Form 10-K.

      Consistent with the Audit Committee Charter, all services provided by KPMG LLP were pre-approved by the Audit Committee, which has determined that the services provided by KPMG LLP were compatible with maintaining KPMG LLP’s independence.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

      1. Exhibits

INDEX TO EXHIBITS

      The exhibits marked with the asterisk symbol (*) are filed with this Form 10-K. The exhibits marked with the cross symbol (†) are management contracts or compensatory plans or arrangements filed pursuant to Item 601(b)(10)(iii) of Regulation S-K.

					SEC File or
Exhibit					Registration		Exhibit
Number			Document Description	Report or Registration Statement	Number		Reference
	3	.1	Amended and Restated Certificate of Incorporation of Cyberonics, Inc.	Cyberonics, Inc.’s Registration Statement on Form S-3 filed on February 21, 2001		333-56022		3.1
	3	.2	Bylaws of Cyberonics, Inc.	Cyberonics, Inc.’s Current Report on Form 8-K filed on September 12, 2000		000-19806		3.1
	3	.3	Amendment No. 1 to the Bylaws of Cyberonics, Inc.	Cyberonics, Inc.’s Current Report on Form 8-K filed on March 30, 2001		000-19806		3.1
	4	.1	Second Amended and Restated Preferred Shares Rights Agreement dated August 21, 2000 between Cyberonics, Inc. and BankBoston, N.A. (formerly known as The First National Bank of Boston), including the Form of First Amended Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Cyberonics, Inc., Form of Rights Certificate and Stockholder Rights Plan attached thereto as Exhibits A, B and C, respectively	Cyberonics, Inc.’s Current Report on Form 8-K filed on September 12, 2000		000-19806		4.1
	4	.2	Amendment No. 1 to Second Amended and Restated Preferred Share Rights Agreement dated April 26, 2001	Cyberonics, Inc.’s Annual Report and Transition Report on Form 10-K for the fiscal period ended April 27, 2001 and the transition period from July 1, 2000 to April 27, 2001		000-19806		4.2
	4	.3	Amendment No. 2 to Second Amended and Restated Preferred Share Rights Agreement dated October 31, 2001	Cyberonics, Inc.’s Annual Report on Form 10-K for the fiscal period ended April 30, 2004		000-19806		4.3
	4	.4	Amendment No. 3 to Second Amended and Restated Preferred Share Rights Agreement dated December 9, 2003	Cyberonics, Inc.’s Current Report on Form 8-K filed on December 12, 2003		000-19806		99.2
	4	.5	Amendment No. 4 to Second Amended and Restated Preferred Share Rights Agreement dated January 9, 2004	Cyberonics, Inc.’s Current Report on Form 8-K filed on January 13, 2004		000-19806		99.2
	4	.6	Indenture dated September 27, 2005 between Cyberonics, Inc. and Wells Fargo Bank, National Association, as Trustee	Cyberonics, Inc.’s Current Report on Form 8-K filed on October 3, 2005		000-19806		10.1
	4	.7	Registration Rights Agreement dated September 27, 2005 between Cyberonics, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as the Initial Purchaser	Cyberonics, Inc.’s Current Report on Form 8-K filed on October 3, 2005		000-19806		10.2
	4	.8	Form of Confirmation of OTC Convertible Note Hedge executed September 21, 2005 to be effective September 27, 2005	Cyberonics, Inc.’s Current Report on Form 8-K filed on October 3, 2005		000-19806		10.3
	4	.9	Form of Confirmation of OTC Warrant Transaction executed September 21, 2005 to be effective September 27, 2005	Cyberonics, Inc.’s Current Report on Form 8-K filed on October 3, 2005		000-19806		10.4

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					SEC File or
Exhibit					Registration		Exhibit
Number			Document Description	Report or Registration Statement	Number		Reference
	10	.1*	License Agreement dated March 15, 1988 between Cyberonics, Inc. and Dr. Jacob Zabara
	10	.2*	License Agreement dated August 22, 2000 between Cyberonics, Inc. and Dr. Mitchell S. Roslin
	10	.3*	Lease Agreement dated December 5, 2002 between Cyberonics, Inc., as Lessee, and Space Center Operating Associates, LP, as Lessor, commencing on December 8, 2002 for Space “A” and January 1, 2004 for Space “B”, as amended March 3, 2003 (First Amendment), October 2, 2003 (Second Amendment), March 11, 2004 (Third Amendment), March 17, 2004 (Subordination, Non-Disturbance and Attornment), March 19, 2004 (Transfer of Ownership to Triple Net Properties, LLC), March 23, 2005 (Fourth Amendment), May 5, 2005 (Fifth Amendment) and July 13, 2005 (Sixth Amendment)
	10	.4	Letter Agreement dated March 28, 1997 between The Clark Estates, Inc. and Cyberonics, Inc.	Cyberonics, Inc.’s Annual Report on Form 10-K for the fiscal period ended June 30, 1997		000-19806		10.11
	10	.5	Purchase Agreement dated September 21, 2005 between Cyberonics, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as the Initial Purchaser	Cyberonics, Inc.’s Current Report on Form 8-K filed on September 27, 2005		000-19806		10.1
	10	.6	Credit Agreement between Cyberonics, Inc. and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as Administrative Agent and as Lender and as Sole Bookrunner and Sole Lead Arranger, and the additional Lenders thereto dated January 13, 2006	Cyberonics, Inc.’s Current Report on Form 8-K filed on January 19, 2006		000-19806		10.1
	10	.7	Consent and Amendment Agreement effective October 31, 2006 to the Credit Agreement between Cyberonics, Inc. and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., individually as Lender, Administrative Agent, Sole Bookrunner and Sole Lead Arranger, and the additional Lenders thereto	Cyberonics, Inc.’s Current Report on Form 8-K filed on November 6, 2006		000-19806		10.1
	10	.8	Consent and Amendment Agreement effective July 27, 2006 to the Credit Agreement between Cyberonics, Inc. and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., individually as Lender, Administrative Agent, Sole Bookrunner and Sole Lead Arranger, and the additional Lenders thereto	Cyberonics, Inc.’s Current Report on Form 8-K filed on July 27, 2006		000-19806		10.1
	10	.9	Consulting Agreement between Cyberonics, Inc. and BK Consulting, an assumed name used by Reese S. Terry, Jr., a founder and member of the Board of Directors of Cyberonics, Inc., dated August 25, 2005	Cyberonics, Inc.’s Current Report on Form 8-K filed on August 30, 2005		000-19806		99.1
	10	.10	Amendment to Consulting Agreement between Cyberonics, Inc. and BK Consulting dated August 23, 2006	Cyberonics, Inc.’s Current Report on Form 8-K filed on August 25, 2006		000-19806		10.1

75

					SEC File or
Exhibit					Registration		Exhibit
Number			Document Description	Report or Registration Statement	Number		Reference
	10	.11	Termination of Consulting Agreement between Cyberonics, Inc. and BK Consulting effective November 19, 2006	Cyberonics, Inc.’s Current Report on Form 8-K filed on December 13, 2006		000-19806		10.1
	10	.12	Consulting Agreement dated November 19, 2006 between Cyberonics, Inc. and Pamela B. Westbrook	Cyberonics, Inc.’s Current Report on Form 8-K filed on November 20, 2006		000-19806		10.3
	10	.13†	Cyberonics, Inc. Amended and Restated 1996 Stock Option Plan	Cyberonics, Inc.’s Registration Statement on Form S-8 filed on April 29, 1999		333-77361		4.1
	10	.14†	First Amendment to the Cyberonics, Inc. Amended and Restated 1996 Stock Option Plan dated October 2, 2000	Cyberonics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000		000-19806		10.2
	10	.15†	Second Amendment to the Cyberonics, Inc. Amended and Restated 1996 Stock Option Plan dated March 21, 2001	Cyberonics, Inc.’s Annual Report on Form 10-K for the fiscal period ended April 30, 2004		000-19806		10.12
	10	.16†	Third Amendment to the Cyberonics, Inc. Amended and Restated 1996 Stock Option Plan dated July 27, 2001	Cyberonics, Inc.’s Registration Statement on Form S-8 filed on January 22, 2002		333-81158		4.4
	10	.17†	Fourth Amendment to the Cyberonics, Inc. Amended and Restated 1996 Stock Option Plan dated January 2002	Cyberonics, Inc.’s Registration Statement on Form S-8 filed on January 22, 2002		333-81158		4.5
	10	.18†	Fifth Amendment to the Cyberonics, Inc. Amended and Restated 1996 Stock Option Plan dated July 19, 2002	Cyberonics, Inc.’s Registration Statement on Form S-8 filed on July 25, 2002		333-97095		4.1
	10	.19†	Cyberonics, Inc. Amended and Restated 1997 Stock Plan	Cyberonics, Inc.’s Registration Statement on Form S-8 filed on March 8, 2001		333-56694		4.5
	10	.20†	First Amendment to the Cyberonics, Inc. Amended and Restated 1997 Stock Plan dated March 21, 2001	Cyberonics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended July 26, 2002		000-19806		10.1
	10	.21†	Second Amendment to the Cyberonics, Inc. Amended and Restated 1997 Stock Plan dated November 21, 2002	Cyberonics, Inc.’s Proxy Statement for the Annual Meeting of Stockholders filed on October 15, 2002		000-19806		Annex B
	10	.22†	Cyberonics, Inc. 1998 Stock Option Plan	Cyberonics, Inc.’s Registration Statement on Form S-8 filed on November 3, 1998		333-66691		4.1
	10	.23†	First Amendment to the Cyberonics, Inc. 1998 Stock Option Plan dated March 21, 2001	Cyberonics, Inc.’s Annual Report on Form 10-K for the fiscal period ended April 30, 2004		000-19806		10.23
	10	.24†	Cyberonics, Inc. New Employee Equity Inducement Plan	Cyberonics, Inc.’s Registration Statement on Form S-8 filed on August 27, 2003		333-108281		4.3
	10	.25†	Cyberonics, Inc. 2005 Stock Plan	Cyberonics, Inc.’s Proxy Statement for the Special Meeting of Stockholders filed on April 14, 2005		000-19806		Annex A
	10	.26†*	Release Agreement dated December 27, 2006 between Cyberonics, Inc. and Stanley H. Appel, M.D.
	10	.27†*	Amendment to Stock Option Agreement dated December 27, 2006 between Cyberonics, Inc. and Stanley H. Appel, M.D.
	10	.28†*	Stand Alone Stock Option Agreement dated July 6, 2001 between Cyberonics, Inc. and Michael A. Cheney
	10	.29†	Severance Agreement effective January 1, 2002 between Cyberonics, Inc. and Michael A. Cheney	Cyberonics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended January 25, 2002		000-19806		10.1
	10	.30†*	Employment Agreement effective June 15, 2006 between Cyberonics, Inc. and Michael A. Cheney

76

					SEC File or
Exhibit					Registration		Exhibit
Number			Document Description	Report or Registration Statement	Number		Reference
	10	.31†*	Stock Option Agreement Amendment and Bonus Agreement dated December 24, 2006 between Cyberonics, Inc. and Michael A. Cheney
	10	.32†*	Indemnification Agreement effective August 1, 2003 between Cyberonics, Inc. and Robert P. Cummins
	10	.33†	Employment Agreement effective August 5, 2005 between Cyberonics, Inc. and Robert P. Cummins	Cyberonics, Inc.’s Current Report on Form 8-K filed on August 9, 2005		000-19806		99.1
	10	.34†*	Letter Agreement Regarding Advancement of Attorney’s Fees effective September 28, 2006 between Cyberonics, Inc. and Robert P. Cummins
	10	.35†	Resignation Agreement effective November 17, 2006 between Cyberonics, Inc. and Robert P. Cummins	Cyberonics, Inc.’s Current Report on Form 8-K filed on November 20, 2006		000-19806		10.1
	10	.36†	Severance Agreement effective June 1, 2003 between Cyberonics, Inc. and William Steven Jennings	Cyberonics, Inc.’s Annual Report on Form 10-K for the fiscal period ended April 25, 2003		000-19806		10.21
	10	.37†*	Officer Stock Option Plan Agreement dated June 2, 2003 between Cyberonics, Inc. and William Steven Jennings
	10	.38†*	Employment Agreement effective June 15, 2006 between Cyberonics, Inc. and William Steven Jennings
	10	.39†*	Stock Option Agreement dated November 1, 1996 between Cyberonics, Inc. and Shawn P. Lunney
	10	.40†*	Amendment to Stock Option Agreement dated December 27, 2006 between Cyberonics, Inc. and Shawn P. Lunney
	10	.41†	Severance Agreement effective May 1, 2001 between Cyberonics, Inc. and Shawn P. Lunney	Cyberonics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended July 27, 2001		000-19806		10.4
	10	.42†*	Employment Agreement effective June 15, 2006 between Cyberonics, Inc. and Shawn P. Lunney
	10	.43†*	Release Agreement dated December 27, 2006 between Cyberonics, Inc. and Shawn P. Lunney
	10	.44†*	Indemnification Agreement effective June 28, 1999 between Cyberonics, Inc. and Alan J. Olsen
	10	.45†	Severance Agreement effective July 14, 2003 between Cyberonics, Inc. and George E. Parker	Cyberonics, Inc.’s Annual Report on Form 10-K for the fiscal period ended April 30, 2004		000-19806		10.40
	10	.46†*	Officer Stock Option Plan Agreement dated July 14, 2003 between Cyberonics, Inc. and George E. Parker
	10	.47†	Employment Agreement effective July 14, 2003 between Cyberonics, Inc. and George E. Parker	Cyberonics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended October 24, 2003		000-19806		10.1
	10	.48†*	First Amendment to Employment Agreement effective June 15, 2006 between Cyberonics, Inc. and George E. Parker

77

					SEC File or
Exhibit					Registration		Exhibit
Number			Document Description	Report or Registration Statement	Number		Reference
	10	.49†*	Stand Alone Stock Option Agreement dated August 23, 2001 between Cyberonics, Inc. and Richard L. Rudolph, M.D.
	10	.50†	Severance Agreement effective January 1, 2002 between Cyberonics, Inc. and Richard L. Rudolph, M.D.	Cyberonics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended January 25, 2002		000-19806		10.3
	10	.51†*	Employee Restricted Stock Agreement dated July 22, 2005 between Cyberonics, Inc. and Richard L. Rudolph, M.D.
	10	.52†*	Employment Agreement effective June 15, 2006 between Cyberonics, Inc. and Richard L. Rudolph, M.D.
	10	.53†*	Stock Option Agreement Amendment and Bonus Agreement dated December 28, 2006 between Cyberonics, Inc. and Richard L. Rudolph, M.D.
	10	.54†	Severance Agreement effective October 27, 2003 between Cyberonics, Inc. and Randal L. Simpson	Cyberonics, Inc.’s Annual Report on Form 10-K for the fiscal period ended April 30, 2004		000-19806		10.41
	10	.55†	Employment Agreement effective October 27, 2003 between Cyberonics, Inc. and Randal L. Simpson	Cyberonics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended January 23, 2004		000-19806		10.1
	10	.56†*	First Amendment to Employment Agreement effective June 15, 2006 between Cyberonics, Inc. and Randal L. Simpson
	10	.57†*	Stock Option Agreement Amendment and Bonus Agreement dated December 29, 2006 between Cyberonics, Inc. and Randal L. Simpson
	10	.58†*	Employment Agreement effective June 15, 2006 between Cyberonics, Inc. and Pamela B. Westbrook
	10	.59†*	Letter Agreement Regarding Advancement of Attorney’s Fees effective October 12, 2006 between Cyberonics, Inc. and Pamela B. Westbrook
	10	.60†	Resignation Agreement effective November 19, 2006 between Cyberonics, Inc. and Pamela B. Westbrook	Cyberonics, Inc.’s Current Report on Form 8-K filed on November 20, 2006		000-19806		10.2
	10	.61†*	Indemnification Agreement effective August 1, 2003 between Cyberonics, Inc. and David S. Wise
	10	.62†	Severance Agreement effective September 17, 2003 between Cyberonics, Inc. and David S. Wise	Cyberonics, Inc.’s Annual Report on Form 10-K for the fiscal period ended April 30, 2004		000-19806		10.42
	10	.63†	Employment Agreement effective September 17, 2003 between Cyberonics, Inc. and David S. Wise	Cyberonics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended October 24, 2003		000-19806		10.2
	10	.64†*	First Amendment to Employment Agreement effective June 15, 2006 between Cyberonics, Inc. and David S. Wise
	10	.65†*	New Employee Equity Inducement Plan Agreement dated September 17, 2003 between Cyberonics, Inc. and David S. Wise
	10	.66†*	Form of Indemnification Agreement for directors of Cyberonics, Inc.
	10	.67†	Form of Director Restricted Stock Agreement effective June 1, 2005	Cyberonics, Inc.’s Quarterly Form 10-Q for the quarter ended July 29, 2005		000-19806		10.1

78

					SEC File or
Exhibit					Registration		Exhibit
Number			Document Description	Report or Registration Statement	Number		Reference
	10	.68†*	Form of Amendment to Director Stock Option Agreement dated December 2006 between Cyberonics, Inc. and the directors listed on the schedule attached thereto
	10	.69†*	Form of Stock Option Agreement under the Cyberonics, Inc. Amended and Restated 1996 Stock Option Plan between Cyberonics, Inc. and the executive officers listed on the schedule attached thereto
	10	.70†*	Form of Stock Option Agreement under the Cyberonics, Inc. 2005 Stock Plan between Cyberonics, Inc. and the executive officers listed on the schedule attached thereto
	10	.71†	Form of Employee Restricted Stock Agreement under the Cyberonics, Inc. 2005 Stock Plan (one-year vesting)	Cyberonics, Inc.’s Quarterly Form 10-Q for the quarter ended July 29, 2005		000-19806		10.2
	10	.72†*	Form of Employee Restricted Stock Agreement under the Cyberonics, Inc. 2005 Stock Plan (five-year vesting) and the executive officers listed on the schedule attached thereto
	21	.1*	List of Subsidiaries of Cyberonics, Inc.
	23	.1*	Consent of Independent Registered Public Accounting Firm
	24	.1*	Powers of Attorney (included on the Signature Page to this Annual Report on Form 10-K)
	31	.1*	Certification of the Chief Executive Officer of Cyberonics, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2*	Certification of the Chief Financial Officer of Cyberonics, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1*	Certification of the Chief Executive Officer and Chief Financial Officer of Cyberonics, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

      2. Financial Statements and Schedules. All schedules required by Regulation S-X have been omitted as not applicable or not required, or the information required has been included in the notes to the financial statements.

      The Consolidated Financial Statements of Cyberonics, Inc. and its subsidiary, and the Report of Independent Registered Public Accounting Firm are included in this Form 10-K beginning on page F-1:

Description	Page No.
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-4
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)		F-5
Consolidated Statements of Cash Flows		F-6
Notes to Consolidated Financial Statements		F-7

79

SIGNATURES

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

Cyberonics, Inc.

By:  /s/ John A. Riccardi

John A. Riccardi

Interim Chief Financial Officer

Date: January 5, 2007

POWER OF ATTORNEY

      KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Reese S. Terry, Jr. and John A. Riccardi, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes, any do or cause to be done by virtue hereof.

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

Signature	Title	Date
/s/ REESE S. TERRY, JR. Reese S. Terry, Jr.	Interim Chief Executive Officer (Principal Executive Officer)	January 5, 2007
/s/ JOHN A. RICCARDI John A. Riccardi	Interim Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	January 5, 2007
/s/ STANLEY H. APPEL, M.D. Stanley H. Appel, M.D.	Director	January 5, 2007
/s/ TONY COELHO Tony Coelho	Director	January 5, 2007
/s/ GUY C. JACKSON Guy C. Jackson	Director	January 5, 2007
/s/ KEVIN S. MOORE Kevin S. Moore	Director	January 5, 2007
/s/ ALAN J. OLSEN Alan J. Olsen	Director	January 5, 2007

80

Signature	Title	Date
/s/ MICHAEL J. STRAUSS, M.D. Michael J. Strauss, M.D.	Director	January 5, 2007
/s/ HUGH M. MORRISON Hugh M. Morrison	Director	January 5, 2007
/s/ REESE S. TERRY, JR. Reese S. Terry, Jr.	Director	January 5, 2007

81

CONSOLIDATED FINANCIAL STATEMENTS

April 28, 2006, April 29, 2005 (Restated) and April 30, 2004 (Restated)

TOGETHER WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S REPORT

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Cyberonics, Inc.:

      We have audited the accompanying consolidated balance sheets of Cyberonics, Inc. and subsidiary as of April 28, 2006 and April 29, 2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the 52 weeks ended April 28, 2006 and April 29, 2005 and the 53 weeks ended April 30, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cyberonics, Inc. and subsidiary as of April 28, 2006 and April 29, 2005, and the results of their operations and their cash flows for the 52 weeks ended April 28, 2006 and April 29, 2005 and the 53 weeks ended April 30, 2004, in conformity with U.S. generally accepted accounting principles.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Cyberonics, Inc.’s internal control over financial reporting as of April 28, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated January 5, 2007, expressed an unqualified opinion on management’s assessment of, and an adverse opinion on the effective operation of, internal control over financial reporting.

      The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring losses from operations, received a Notice of Default and demand letter and Notice of Acceleration for the $125 million senior subordinated convertible notes and incurred a potential default of the $40 million Line of Credit. These matters raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

      As discussed in Note 1, the consolidated financial statements as of April 29, 2005 and for the 52 weeks ended April 29, 2005 and for the 53 weeks ended April 30, 2004 have been restated.

/s/ KPMG LLP

Houston, Texas

January 5, 2007

F-2

CYBERONICS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

				April 28, 2006			April 29, 2005
							As Restated
ASSETS
Current Assets:
	Cash and cash equivalents			$	92,355,071		$	38,675,892
	Restricted cash				1,000,000			—
	Short-term marketable securities				—			22,800,000
	Accounts receivable, net				21,341,942			16,476,084
	Inventories				17,304,794			8,545,385
	Prepaid and other current assets				5,274,133			3,355,778
			Total Current Assets		137,275,940			89,853,139
	Property and equipment, net				10,322,289			8,854,063
	Other assets				4,702,055			148,195
		Total Assets		$	152,300,284		$	98,855,397
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Line of credit			$	2,500,000		$	3,000,000
	Accounts payable				5,190,385			6,620,464
	Accrued liabilities				12,655,970			13,375,565
	Convertible notes				125,000,000			—
	Other				1,175,606			53,599
			Total Current Liabilities		146,521,961			23,049,628
Long Term Liabilities:
	Other				1,148,457			209,928
		Total Long Term Liabilities			1,148,457			209,928
		Total Liabilities			147,670,418			23,259,556
Commitments and Contingencies
Stockholders’ Equity:
	Preferred Stock, $.01 par value per share; 2,500,000 shares authorized; no shares issued and outstanding				—			—
	Common Stock, $.01 par value per share; 50,000,000 shares authorized; 25,781,349 issued and 25,480,349 outstanding at April 28, 2006; and 24,781,456 shares issued and outstanding at April 29, 2005				257,813			247,815
	Additional paid-in capital				244,648,193			227,190,470
	Common stock warrants				25,200,000			—
	Hedges on convertible notes				(38,200,000	)		—
	Deferred compensation				(9,167,093	)		(2,896,798	)
	Treasury stock, 301,000 common shares, at cost				(9,993,200	)		—
	Accumulated other comprehensive loss				(649,698	)		(548,689	)
	Accumulated deficit				(207,466,149	)		(148,396,957	)
			Total Stockholders’ Equity		4,629,866			75,595,841
			Total Liabilities and Stockholders’ Equity	$	152,300,284		$	98,855,397

See accompanying notes to Consolidated Financial Statements

F-3

CYBERONICS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

			52 Weeks Ended			52 Weeks Ended			53 Weeks Ended
			April 28, 2006			April 29, 2005			April 30, 2004
						As Restated			As Restated
Net sales			$	123,441,575		$	103,442,570		$	110,721,499
Cost of sales				15,822,045			15,674,040			16,386,487
		Gross Profit		107,619,530			87,768,530			94,335,012
Operating Expenses:
	Selling, general and administrative			137,310,196			86,972,068			72,198,977
	Research and development			29,541,707			20,092,810			17,582,527
		Total Operating Expenses		166,851,903			107,064,878			89,781,504
		Earnings (Loss) From Operations		(59,232,373	)		(19,296,348	)		4,553,508
Interest income				3,211,956			1,072,488			469,924
Interest expense				(3,018,969	)		(444,270	)		(565,702	)
Other income, net				69,460			84,736			390,997
Earnings (loss) before income taxes				(58,969,926	)		(18,583,394	)		4,848,727
Income tax expense				99,266			26,113			230,789
	Net Earnings (Loss)		$	(59,069,192	)	$	(18,609,507	)	$	4,617,938
Basic earnings (loss) per share			$	(2.37	)	$	(0.77	)	$	0.20
Diluted earnings (loss) per share			$	(2.37	)	$	(0.77	)	$	0.18
Shares used in computing basic earnings (loss) per share				24,916,938			24,036,736			22,921,031
Shares used in computing diluted earnings (loss) per share				24,916,938			24,036,736			25,954,640

See accompanying notes to Consolidated Financial Statements

F-4

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND

COMPREHENSIVE INCOME (LOSS)

																						Accumulated
																						Other
		Common Stock									Common		Hedges on									Comprehensive						Total
								Additional			Stock		Convertible			Deferred			Treasury			Income			Accumulated			Stockholders’
		Shares			Amount			Paid-In Capital			Warrants		Notes			Compensation			Stock			(Loss)			Deficit			Equity
Balance at April 25, 2003 as previously reported			22,385,736		$	223,857		$	174,325,339		$	—	$	—		$	(1,023,750	)	$	—		$	(448,226	)	$	(124,565,217	)	$	48,512,003
Restatement of noncash compensation expense applicable to prior years			—			—			14,330,361			—		—			(4,490,190	)		—			—			(9,840,171	)		—
Balance at April 25, 2003 as restated			22,385,736			223,857			188,655,700			—		—			(5,513,940	)		—			(448,226	)		(134,405,388	)		48,512,003
	Stock options exercised		974,837			9,749			11,947,259			—		—			—			—			—			—			11,957,008
	Issuance of common stock under Employee Stock Purchase Plan		65,980			660			1,010,110			—		—			—			—			—			—			1,010,770
	Issuance of restricted stock		30,844			308			712,872			—		—			(713,180	)		—			—			—			—
	Deferred compensation related to stock options		—			—			443,428			—		—			(443,428	)		—			—			—			—
	Amortization of deferred compensation and expense of certain stock options		—			—			—			—		—			3,081,283			—			—			—			3,081,283
	Net Earnings, as restated		—			—			—			—		—			—			—			—			4,617,938			4,617,938
	Translation adjustment		—			—			—			—		—			—			—			(198,522	)		—			(198,522	)
	Comprehensive income, as restated		—			—			—			—		—			—			—			—			—			4,419,416
Balance at April 30, 2004 as restated			23,457,397			234,574			202,769,369			—		—			(3,589,265	)		—			(646,748	)		(129,787,450	)		68,980,480
	Stock Options exercised		1,241,889			12,419			16,674,877			—		—			—			—			—			—			16,687,296
	Issuance of common stock under Employee Stock Purchase Plan		82,420			824			1,335,684			—		—			—			—			—			—			1,336,508
	Cancellation of restricted stock		(250	)		(2	)		(6,620	)		—		—			6,622			—			—			—			—
	Deferred compensation relating to stock options		—			—			6,417,160			—		—			(6,417,160	)		—			—			—			—
	Amortization of deferred compensation and expense of certain stock options		—			—			—			—		—			7,103,005			—			—			—			7,103,005
	Net Loss, as restated		—			—			—			—		—			—			—			—			(18,609,507	)		(18,609,507	)
	Translation adjustment		—			—			—			—		—			—			—			98,059			—			98,059
	Comprehensive loss, as restated		—			—			—			—		—			—			—			—			—			(18,511,448	)
Balance at April 29, 2005 as restated			24,781,456			247,815			227,190,470			—		—			(2,896,798	)		—			(548,689	)		(148,396,957	)		75,595,841
	Stock options exercised		637,191			6,371			8,694,565			—		—			—			—			—			—			8,700,936
	Issuance of common stock under Employee Stock Purchase Plan		88,970			890			1,777,939			—		—			—			—			—			—			1,778,829
	Issuance of restricted stock		278,732			2,787			9,651,358			—		—			(9,654,145	)		—			—			—			—
	Cancellation of restricted stock		(5,000	)		(50	)		(174,662	)		—		—			174,712			—			—			—			—
	Deferred compensation relating to stock options		—			—			(2,491,477	)		—		—			2,491,477			—			—			—			—
	Amortization of deferred compensation and expense of certain stock options		—			—			—			—		—			717,661			—			—			—			717,661
	Purchase of Treasury stock		—			—			—			—		—			—			(9,993,200	)		—			—			(9,993,200	)
	Sale of common stock warrants		—			—			—			25,200,000		—			—			—			—			—			25,200,000
	Purchase of convertible note hedge		—			—			—			—		(38,200,000	)		—			—			—			—			(38,200,000	)
	Net Loss		—			—			—			—		—			—			—			—			(59,069,192	)		(59,069,192	)
	Translation adjustment		—			—			—			—		—			—			—			(101,009	)		—			(101,009	)
	Comprehensive loss		—			—			—			—		—			—			—			—			—			(59,170,201	)
Balance at April 28, 2006			25,781,349		$	257,813		$	244,648,193		$	25,200,000	$	(38,200,000	)	$	(9,167,093	)	$	(9,993,200	)	$	(649,698	)	$	(207,466,149	)	$	4,629,866

See accompanying notes to Consolidated Financial Statements

F-5

CYBERONICS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

				52 Weeks Ended			52 Weeks Ended			53 Weeks Ended
				April 28, 2006			April 29, 2005			April 30, 2004
							As Restated			As Restated
Cash Flows From Operating Activities:
	Net earnings (loss)			$	(59,069,192	)	$	(18,609,507	)	$	4,617,938
	Non-cash items included in net earnings (loss):
		Depreciation			3,350,988			3,274,843			3,978,340
		Gain on disposal of assets			(81,433	)		(50,066	)		(114,947	)
		Unrealized (gain) loss in foreign currency transactions			(104,542	)		15,758			439,683
		Amortization of deferred compensation			717,661			7,103,005			3,081,283
		Amortization of financing costs			419,497			—			—
		Other non-cash items			(232,752	)		—			—
Changes in operating assets and liabilities:
	Accounts receivable, net				(4,995,947	)		747,906			(2,566,387	)
	Inventories				(8,767,305	)		(758,512	)		(1,648,759	)
	Other current assets				(1,488,869	)		(668,745	)		(1,304,933	)
	Other assets, net				(84,653	)		33,435			62,062
	Accounts payable and accrued liabilities				(250,778	)		4,678,684			(2,948,931	)
	Other				(288,884	)		263,527			—
			Net Cash Provided By (Used In) Operating Activities		(70,876,209	)		(3,969,672	)		3,595,349
Cash Flows From Investing Activities:
	Purchase of short-term marketable securities				—			(10,400,229	)		(16,300,464	)
	Proceeds from sale of short-term marketable securities				22,800,000			2,500,693			1,400,000
	Restricted cash				(1,000,000	)		—			—
	Purchases of property and equipment				(4,298,859	)		(3,713,637	)		(2,600,592	)
			Net Cash Provided By (Used In) Investing Activities		17,501,141			(11,613,173	)		(17,501,056	)
Cash Flows From Financing Activities:
	Increase (decrease) in borrowing against line of credit				(500,000	)		(7,031,000	)		1,661,000
	Payment related to line of credit origination costs				(499,814	)		—			—
	Payments on capital lease obligations				(192,378	)		(141,066	)		(132,133	)
	Proceeds from issuance of Convertible Notes, net of issuance costs				120,700,414			—			—
Sale of Common Stock Warrants					25,200,000			—			—
Purchase of Convertible Note Hedge					(38,200,000	)		—			—
Proceeds from issuance of Common Stock					10,479,765			18,023,804			12,967,778
Purchase of treasury stock					(9,993,200	)		—			—
			Net Cash Provided By Financing Activities		106,994,787			10,851,738			14,496,645
Effect of exchange rate changes on cash and cash equivalents					59,460			(56,268	)		(703,976	)
			Net Increase (Decrease) in Cash and Cash Equivalents		53,679,179			(4,787,375	)		(113,038	)
Cash and cash equivalents at beginning of period					38,675,892			43,463,267			43,576,305
Cash and cash equivalents at end of period				$	92,355,071		$	38,675,892		$	43,463,267
Supplementary Disclosures of Cash Flow Information:
	Cash paid for interest			$	2,213,594		$	416,986		$	418,042
	Cash paid for income taxes			$	98,414		$	53,312		$	348,558
Supplemental Disclosure of Non-cash Activity:
	Financed purchases of capital assets with notes payable			$	497,698		$	—		$	—

See accompanying notes to Consolidated Financial Statements

F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Restatements

      Stock-Based Compensation Expense. On June 8, 2006, a published analyst research report raised questions about certain stock options granted to some of our officers and employees. On June 9, 2006, the staff of the Securities and Exchange Commission (“SEC”) informed us that it had initiated an informal inquiry into our stock option grants and we hired an outside law firm to represent us in the matter. Thereafter, we received a subpoena dated June 26, 2006, from the Office of the U.S. Attorney for the Southern District of New York (“U.S. Attorney”) seeking documents related to our stock option grants. We have been cooperating in both the SEC staff’s and U.S. Attorney’s investigations.

      We initiated our own internal investigation into these matters. On June 26, 2006, our Board designated the Audit Committee, which consists entirely of independent members of the Board, to undertake a review of our stock option grants and related practices, procedures and accounting during the period from 1993 through the conclusion of the investigation. The Audit Committee undertook its investigation with the assistance of independent counsel and accounting experts retained by its counsel. The results of the Audit Committee’s investigation were announced on November 20, 2006 after the Audit Committee reported its findings to the Board. The Audit Committee concluded that certain stock options granted primarily during the period 1998 to 2003 were not accounted for correctly in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) applicable at the time the grants were issued. As a result of the Audit Committee’s investigation, and after additional review and consultation with our independent registered public accountants, we are restating prior fiscal periods to reflect additional stock-based compensation expense relating to stock option grants made during the period from fiscal years 1994 through 2006.

      We are restating consolidated financial statements and applicable disclosures for the fiscal years ended April 30, 2004 and April 29, 2005, as well as the applicable quarters for 2005 and 2006 fiscal years. A cumulative adjustment related to restatements for fiscal years 1994 through 2003 is reflected in the restated beginning accumulated deficit for the fiscal year ended April 30, 2004. These non-cash adjustments do not have any impact on our previously reported net sales, cash or cash equivalents.

      The types of errors that were identified during the review processes are as follows:

      (1) Incorrect measurement dates were used for certain stock option grants made principally during the period from 1998 to 2003. Under Accounting Principles Board Standard No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), the date of final approval of a stock option is the basis for determining the “measurement date” to be used in comparing the exercise price of the option to the fair value of our common stock on the measurement date. In accordance with APB 25, with respect to periods prior to April 29, 2006, we should have recorded compensation expense in an amount per share subject to each option to the extent the fair market value of our stock on the measurement date exceeded the exercise price of the option. We have determined that in some instances we previously used an incorrect measurement date and failed to record such compensation expense.

      The stock option grant process in place during this time period required the Compensation Committee to approve all stock option grants. This was frequently accomplished through the use of unanimous written consents that were prepared by management and sent by overnight delivery to Compensation Committee members to review, execute and return. For certain grants issued during this period, the date of effective approval by the Compensation Committee was subsequent to the grant date as recorded in our records and used as the measurement date in preparing our consolidated financial statements. Electronic data available for unanimous written consent documents executed by the Compensation Committee during the time period from 1998 to 2003 indicated that the documents were created and therefore approved on a date later than the grant dates. With respect to grants for which the electronic data indicated such dating issues, but for which other contemporaneous documentation exists that establishes the date of final approval by all Compensation Committee members (such as, for example, signed and dated approval faxes), we relied on that other documentation to determine the date of effective approval and the appropriate measurement date. With respect to grants for which the

F-7

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

electronic data indicated such dating issues, but for which no such other contemporaneous documentation exists, we used a measurement date corresponding to the date on which the unanimous written consent document was last saved electronically plus four calendar days to allow for the approval process that was conducted using overnight shipping of approval documents to and from Compensation Committee members. Under APB 25, to the extent that the fair market value of our stock on the revised measurement date exceeded the exercise price of the option, we were required to recognize compensation expense with respect to that option at the time of the grant. The cumulative effect of these measurement date revisions on our consolidated financial statements through April 29, 2005 is approximately $5.3 million in aggregate pre-tax non-cash stock-based compensation expense.

      In light of the significant judgment used in establishing revised measurement dates, alternate approaches to the one used could have resulted in different pre-tax non-cash stock-based compensation expense charges than those recorded in the restatement.

      In addition, we also identified certain grants where evidence other than electronic unanimous written consent data exists that supports a measurement date other than the grant date. These grants were issued in 2001 and 2002, resulting in additional pre-tax non-cash stock-based compensation expense through April 29, 2005, of approximately $1.1 million.

      (2) The existence of multiple documents with different dates evidencing approval for the same grants resulted in a scenario that is considered re-pricing under GAAP. Our internal investigation identified several grants to directors, officers and employees where it appeared that the approval criteria under GAAP were met on multiple dates. The documents evidencing approval included communications between management and members of the Compensation Committee and subsequently completed unanimous written consent forms signed by the Compensation Committee members. Ultimately, grants were issued to individuals at the price determined by using as the measurement date the date of that subsequently completed unanimous written consent, resulting in a price lower than the price that would have resulted from use of the earlier dated documents to evidence approval of the grant. It is not clear which documents were intended to constitute final approval.

      Based on the existence of multiple approval documents with a subsequent approval at a lower stock price, these grants were deemed to involve re-pricing within the meaning of the applicable accounting literature. Variable accounting treatment has been applied in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Interpretation 44, “Accounting for Certain Transactions involving Stock Compensation” (“FIN 44”), which was effective July 1, 2000 and provided for a look back period to December 15, 1998 for re-priced stock options.

      The effect of accounting for these grants as having been re-priced is to increase our cumulative compensation expense through April 29, 2005 by approximately $8.6 million to account for the additional pre-tax non-cash stock-based compensation expense.

      (3) The cancellation of certain stock option grants that were subsequently re-issued at a lower price than the original grant constituted re-pricing that rendered the grants subject to variable accounting treatment. On certain occasions from fiscal year 1999 through fiscal year 2001, we canceled certain stock option grants and subsequently reissued new grants. Therefore, these grants were deemed to be re-priced and are subject to variable accounting treatment in accordance with FIN 44.

      The cumulative impact of this type of error on the consolidated financial statements through April 29, 2005 is approximately $1.9 million in additional pre-tax non-cash stock-based compensation expense.

      (4) Stock option grants issued to non-employees were either not recorded or were recorded incorrectly. From fiscal year 1997 through fiscal year 2001, we issued certain stock option grants to

F-8

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

various consultants. Compensation expense for some of the grants was recorded at the time the grants were issued; however, the grants were not correctly recorded in accordance with GAAP in effect at the time of the grants. Compensation expense was not recorded at all for the remaining grants.

      The cumulative impact of this type of error on the consolidated financial statements through April 29, 2005 is approximately $1.0 million in additional pre-tax non-cash stock-based compensation expense.

      (5) Other miscellaneous errors related to stock options. The cumulative impact for all other types of errors on the consolidated financial statements through April 29, 2005 is approximately $0.5 million in additional pre-tax non-cash stock-based compensation expense.

      The cumulative effect of the restatement adjustment on our consolidated balance sheet at April 29, 2005 was an increase in additional paid-in capital of approximately $18.4 million and an increase in accumulated deficit of $18.4 million. There was no impact on net sales, cash or cash equivalents.

      The following table discloses the impact of additional non-cash charges for stock-based compensation expense on pre-tax and after-tax net earnings (loss) for the fiscal years 1994 through 2005.

	Restatement Impact in
Fiscal Year	Statement of Operations(1)
1994	$	(4,667	)
1995		(29,641	)
1996		(40,189	)
1997		(116,709	)
1998		(245,233	)
1999		(419,229	)
2000		(678,124	)
2001		(936,379	)
2002		(2,093,214	)
2003		(5,276,786	)
2004		(2,141,571	)
2005		(6,391,159	)
Total	$	(18,372,901	)

(1)  There is no tax effect in the restatement due to the deferred tax valuation allowance.

      The total restatement impact, through fiscal year ended April 29, 2005, is approximately $18.4 million of additional pre-tax non-cash stock-based compensation expense.

F-9

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The table below discloses the impact of the restatement applicable to the Consolidated Statements of Operations:

CONSOLIDATED STATEMENTS OF OPERATIONS

			52 Weeks Ended						53 Weeks Ended
			April 29, 2005						April 30, 2004
			As Reported			As Restated			As Reported			As Restated
Net sales			$	103,442,570		$	103,442,570		$	110,721,499		$	110,721,499
Cost of sales				15,575,741			15,674,040			16,295,562			16,386,487
		Gross Profit		87,866,829			87,768,530			94,425,937			94,335,012
Operating Expenses:
	Selling, general and administrative			81,430,943			86,972,068			70,597,149			72,198,977
	Research and development			19,341,075			20,092,810			17,133,709			17,582,527
		Total Operating Expenses		100,772,018			107,064,878			87,730,858			89,781,504
		Earnings (Loss) From Operations		(12,905,189	)		(19,296,348	)		6,695,079			4,553,508
Interest income				1,072,488			1,072,488			469,924			469,924
Interest expense				(444,270	)		(444,270	)		(565,702	)		(565,702	)
Other income, net				84,736			84,736			390,997			390,997
Earnings (loss) before income taxes				(12,192,235	)		(18,583,394	)		6,990,298			4,848,727
Income tax expense				26,113			26,113			230,789			230,789
	Net Earnings (Loss)		$	(12,218,348	)	$	(18,609,507	)	$	6,759,509		$	4,617,938
Basic earnings (loss) per share			$	(0.51	)	$	(0.77	)	$	0.29		$	0.20
Diluted earnings (loss) per share			$	(0.51	)	$	(0.77	)	$	0.26		$	0.18
Shares used in computing basic earnings (loss) per share				24,036,736			24,036,736			22,921,031			22,921,031
Shares used in computing diluted earnings (loss) per share				24,036,736			24,036,736			26,053,330			25,954,640

F-10

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The table below discloses the impact of the restatement applicable to the Consolidated Balance Sheet:

CONSOLIDATED BALANCE SHEET

					April 29, 2005
					As Reported			As Restated
ASSETS
Current Assets:
	Cash and cash equivalents				$	38,675,892		$	38,675,892
	Short-term marketable securities					22,800,000			22,800,000
	Accounts receivable, net					16,476,084			16,476,084
	Inventories					8,545,385			8,545,385
	Prepaid and other current assets					3,355,778			3,355,778
				Total Current Assets		89,853,139			89,853,139
	Property and equipment, net					8,854,063			8,854,063
	Other assets					148,195			148,195
			Total Assets		$	98,855,397		$	98,855,397
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Line of credit				$	3,000,000		$	3,000,000
	Accounts payable					6,620,464			6,620,464
	Accrued liabilities					13,375,565			13,375,565
	Other					53,599			53,599
				Total Current Liabilities		23,049,628			23,049,628
Long Term Liabilities:
		Other				209,928			209,928
			Total Long Term Liabilities			209,928			209,928
				Total Liabilities		23,259,556			23,259,556
Commitments and Contingencies
Stockholders’ Equity:
	Preferred Stock, $.01 par value per share; 2,500,000 shares authorized; no shares issued and outstanding					—			—
	Common Stock, $.01 par value per share; 50,000,000 shares authorized; 24,781,456 shares issued and outstanding at April 29, 2005					247,815			247,815
	Additional paid-in capital					205,999,521			227,190,470
	Deferred compensation					(78,750	)		(2,896,798	)
	Accumulated other comprehensive loss					(548,689	)		(548,689	)
	Accumulated deficit					(130,024,056	)		(148,396,957	)
				Total Stockholders’ Equity		75,595,841			75,595,841
				Total Liabilities and Stockholders’ Equity	$	98,855,397		$	98,855,397

F-11

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The table below discloses the impact of the restatement applicable to the Consolidated Statements of Cash Flows:

CONSOLIDATED STATEMENTS OF CASH FLOWS

				52 Weeks Ended						53 Weeks Ended
				April 29, 2005						April 30, 2004
				As Reported			As Restated			As Reported			As Restated
Cash Flows From Operating Activities:
	Net earnings (loss)			$	(12,218,348	)	$	(18,609,507	)	$	6,759,509		$	4,617,938
	Non-cash items included in net earnings (loss):
		Depreciation			3,274,843			3,274,843			3,978,340			3,978,340
		Gain on disposal of assets			(50,066	)		(50,066	)		(114,947	)		(114,947	)
		Unrealized (gain) loss in foreign currency transactions			15,757			15,758			439,684			439,683
		Amortization of deferred compensation			711,847			7,103,005			939,711			3,081,283
Changes in operating assets and liabilities:
	Accounts receivable, net				747,906			747,906			(2,566,387	)		(2,566,387	)
	Inventories				(758,512	)		(758,512	)		(1,648,759	)		(1,648,759	)
	Other current assets				(668,745	)		(668,745	)		(1,304,933	)		(1,304,933	)
	Other assets, net				33,435			33,435			62,062			62,062
	Accounts payable and accrued liabilities				4,678,684			4,678,684			(2,948,931	)		(2,948,931	)
	Other				263,527			263,527			—			—
			Net Cash Provided By (Used In) Operating Activities		(3,969,672	)		(3,969,672	)		3,595,349			3,595,349
Cash Flows From Investing Activities:
	Purchase of short-term marketable securities				(10,400,229	)		(10,400,229	)		(16,300,464	)		(16,300,464	)
	Proceeds from sale of short-term marketable securities				2,500,693			2,500,693			1,400,000			1,400,000
	Purchases of property and equipment				(3,713,637	)		(3,713,637	)		(2,600,592	)		(2,600,592	)
			Net Cash Provided By (Used In) Investing Activities		(11,613,173	)		(11,613,173	)		(17,501,056	)		(17,501,056	)
Cash Flows From Financing Activities:
	Increase (decrease) in borrowing against line of credit				(7,031,000	)		(7,031,000	)		1,661,000			1,661,000
	Payments on capital lease obligations				(141,066	)		(141,066	)		(132,133	)		(132,133	)
	Proceeds from issuance of Common Stock				18,023,804			18,023,804			12,967,778			12,967,778
			Net Cash Provided By Financing Activities		10,851,738			10,851,738			14,496,645			14,496,645
Effect of exchange rate changes on cash and cash equivalents					(56,268	)		(56,268	)		(703,976	)		(703,976	)
	Net Increase (Decrease) in Cash and Cash Equivalents				(4,787,375	)		(4,787,375	)		(113,038	)		(113,038	)
Cash and cash equivalents at beginning of period					43,463,267			43,463,267			43,576,305			43,576,305
Cash and cash equivalents at end of period				$	38,675,892		$	38,675,892		$	43,463,267		$	43,463,267

F-12

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table sets forth the computation of basic and diluted net earnings (loss) per share of common stock:

	52 Weeks Ended						53 Weeks Ended
	April 29, 2005						April 30, 2004
	As Reported			As Restated			As Reported		As Restated
Numerator:
Net earnings (loss)	$	(12,218,348	)	$	(18,609,507	)	$	6,759,509	$	4,617,938
Denominator:
Basic weighted average shares outstanding		24,036,736			24,036,736			22,921,031		22,921,031
Effect of dilutive securities		—			—			3,132,299		3,033,609
Diluted weighted average shares outstanding		24,036,736			24,036,736			26,053,330		25,954,640
Basic earnings (loss) per share	$	(0.51	)	$	(0.77	)	$	0.29	$	0.20
Diluted earnings (loss) per share	$	(0.51	)	$	(0.77	)	$	0.26	$	0.18

      The table below discloses the impact of the restatement on earnings (loss) before income taxes and income tax expense:

		52 Weeks Ended						53 Weeks Ended
		April 29, 2005						April 30, 2004
		As Reported			As Restated			As Reported			As Restated
Earnings (loss) before income taxes:
	Domestic	$	(11,638,574	)	$	(17,917,356	)	$	7,419,794		$	5,386,171
	Foreign		(553,661	)		(666,038	)		(429,496	)		(537,444	)
		$	(12,192,235	)	$	(18,583,394	)	$	6,990,298		$	4,848,727
Income tax expense:
	Federal	$	—		$	—		$	52,224		$	52,224
	State and local		—			—			160,315			160,315
	Foreign		26,113			26,113			18,250			18,250
		$	26,113		$	26,113		$	230,789		$	230,789

      The following is a reconciliation of the statutory federal income tax rate to our effective income tax rate expressed as a percentage of earnings (loss) before income taxes:

	52 Weeks Ended						53 Weeks Ended
	April 29, 2005						April 30, 2004
	As Reported			Restated			As Reported			Restated
U.S. statutory rate		(34.0	)%		(34.0	)%		34.0	%		34.0	%
Change in deferred tax valuation allowance		31.8			29.2			(34.0	)		(40.0	)
Foreign taxes		0.2			0.1			0.3			0.4
State and local tax provision		0.0			0.0			2.3			3.2
Other, net		2.2			4.8			0.7			6.0
		0.2	%		0.1	%		3.3	%		3.6	%

F-13

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Significant components of our deferred tax assets are as follows:

			April 29, 2005
			As Reported			As Restated
Deferred tax assets:
	Federal net operating loss carryforwards		$	51,666,992		$	52,902,151
	Foreign net operating loss carryforwards			5,921,787			5,852,370
	State net operating loss carryforwards and other			4,100,938			4,649,674
	Federal tax credit carryforwards			4,511,029			4,511,029
	Deferred compensation expense			763,284			3,610,438
	Accrued expenses			335,588			331,654
	Reserves			401,503			396,796
	Property and equipment			349,102			345,010
	Inventory costs capitalized			277,335			274,084
		Total deferred tax assets		68,327,558			72,873,206
Deferred tax valuation allowance				(68,327,558	)		(72,873,206	)
		Net deferred tax assets	$	—		$	—

Note 2. Summary of Significant Accounting Policies and Related Data

      Nature of Operations. We are headquartered in Houston, Texas and design, develop, manufacture and market the Cyberonics VNS Therapy System (“VNS Therapy System”), an implantable medical device which delivers a unique therapy, Vagus Nerve Stimulation, for the treatment of refractory epilepsy, treatment-resistant depression and other debilitating neurological disorders. Cyberonics has regulatory approval to market and sell the VNS Therapy System for refractory epilepsy in the United States, Canada, Europe, Australia and other markets. In 2001, we obtained regulatory approval for commercial distribution of the VNS Therapy System for the treatment of depression in the European market and in Canada. On July 15, 2005, Food and Drug Administration (“FDA”) approved the VNS Therapy System as an adjunctive long-term treatment of chronic or recurrent depression for patients 18 years of age or older who are experiencing a major depressive episode and have not had an adequate response to four or more adequate antidepressant treatments.

      We operate our business as a single segment with similar economic characteristics, technology, manufacturing processes, customers, distribution and marketing strategies, regulatory environments and shared infrastructures. We are a neurostimulation business focused on creating new markets, developing other indications for VNS Therapy covered by our method patents and expanding our business into other neuromodulation opportunities.

      Consolidation. The accompanying consolidated financial statements include Cyberonics and our wholly-owned subsidiary, Cyberonics Europe, NV, and have been prepared on a going concern basis. All significant intercompany accounts and transactions have been eliminated.

      Use of Estimates. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Critical estimates that require management’s judgment relate to the allowance for doubtful accounts, estimates of any obsolete inventory, useful lives for property and equipment, impairment of any long-lived assets, sales returns and allowances, product warranties, stock option expenses and income tax valuation allowances.

F-14

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Foreign Currency Translation. The assets and liabilities of Cyberonics Europe, NV are generally translated into U.S. dollars at exchange rates in effect on reporting dates, while capital accounts and certain obligations of a long-term nature payable to the parent company are translated at historical rates. Statement of Operations items are translated at average exchange rates in effect during the financial statement period. The gains and losses that result from this process are shown in the accumulated other comprehensive income (loss) section of stockholders’ equity and comprehensive income (loss), and are not included in the determination of the results of operations. Gains and losses resulting from foreign currency transactions denominated in currency other than the functional currency are included in other income and expense.

      Cash Equivalents. We consider all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.

      Restricted Cash. We classify as Restricted Cash highly liquid investments that otherwise would qualify as cash equivalents, but that have been set aside as collateral and that are unavailable for immediate withdrawal, until certain conditions are met.

      Investments in Short-term Marketable Securities. Included in short-term investments are auction rate securities classified as available-for-sale securities. Our investment in these securities are recorded at cost, which approximates fair market value due to their variable interest rates, which typically reset every seven to 35 days, and, despite the long-term nature of their stated contractual maturities, we have the ability to quickly liquidate these securities. As a result, we had no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from these current investments.

      Fair Value of Financial Instruments. The carrying amounts reported in the Consolidated Balance Sheets for cash equivalents, short-term marketable securities, accounts receivable, accounts payable and line of credit approximate their fair values due to the short-term maturity of these financial instruments. The fair value of our senior convertible notes is discussed in “Note 8. Convertible Notes” in the Notes to the Consolidated Financial Statements.

      Accounts Receivable. Activity in our allowance for doubtful accounts consists of the following:

	52 Weeks Ended			52 Weeks Ended			53 Weeks Ended
	April 28, 2006			April 29, 2005			April 30, 2004
Balance at beginning of period	$	275,457		$	279,699		$	292,176
Increase (Decrease) in allowance		51,245			75,374			(9,137	)
Reductions for write-offs		(92,224	)		(79,616	)		(3,340	)
Balance at end of period	$	234,478		$	275,457		$	279,699

      Inventories. We state our inventories at the lower of cost, first-in first-out (“FIFO”) method or market. Cost includes the acquisition cost of raw materials and components, direct labor and overhead net of obsolescence provisions.

      Property and Equipment. Property and equipment are carried at cost, less accumulated depreciation. Maintenance, repairs and minor replacements are charged to expense as incurred; significant renewals and betterments are capitalized. We compute depreciation using the straight-line method over useful lives ranging from two to nine years. Property and equipment under capital leases are stated at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value at the inception of the lease. Property and equipment under capital leases are depreciated using the straight-line method over the shorter of the lease term or the estimated useful life of the property.

      Leases. Statement of Financial Accounting Standards Board (“SFAS”) No. 13 “Accounting for Leases,” establishes standards of financial accounting and reporting for leases by lessees and lessors. We are a party to the contract of leased facilities and other lease obligations recorded in compliance with SFAS No. 13.

F-15

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Long-Lived Assets. SFAS No. 144, “Accounting for the Impairment or Disposals of Long-Lived Assets,” provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also establishes the criteria for classifying an asset as held for sale and sets the scope of business to be disposed of that qualifies for reporting as discontinued operations as well as changes the timing of recognizing losses on such operations.

      Stock Options. We have adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.”

      Because of this election, we continue to account for our employee stock-based compensation plans under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and the related interpretations. We have adopted SFAS No. 123 (revised 2004) starting on April 29, 2006 using The Black-Scholes option pricing model and The Modified Prospective Method which requires the compensation cost to be recognized under SFAS 123(R) for grants issued after the adoption date and the unvested portion of grants issued prior to the adoption date. As a result of the adoption of SFAS 123(R) we anticipate recognizing non-cash share-based compensation expense of approximately $20 million during fiscal year 2007 excluding the potential impact associated with the resignations of certain former officers and employees. This estimate is affected by assumptions regarding a number of complex and subjective variables. The deferred compensation is amortized over the vesting period of each unit of stock-based compensation.

      The following table illustrates the effect on net earnings (loss) and earnings (loss) per share if we had applied the fair value recognition provisions of SFAS No. 123 and SFAS No. 148 to stock-based employee compensation.

		52 Weeks Ended			52 Weeks Ended						53 Weeks Ended
		April 28, 2006			April 29, 2005						April 30, 2004
					As Reported			As Restated			As Reported			As Restated
Net earnings (loss) as reported		$	(59,069,192	)	$	(12,218,348	)	$	(18,609,507	)	$	6,759,509		$	4,617,938
Add: Stock-based employee compensation expense included in reported net earnings (loss), net of related tax effects if applicable			717,661			711,847			7,103,005			939,711			3,081,282
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects, if applicable			(26,384,997	)		(20,986,285	)		(21,924,138	)		(18,832,682	)		(19,723,779	)
	Pro forma net loss	$	(84,736,528	)	$	(32,492,786	)	$	(33,430,640	)	$	(11,133,462	)	$	(12,024,559	)
Earnings (loss) per share:
	Basic	$	(2.37	)	$	(0.51	)	$	(0.77	)	$	0.29		$	0.20
	Basic — pro forma	$	(3.40	)	$	(1.35	)	$	(1.39	)	$	(0.49	)	$	(0.52	)
	Diluted	$	(2.37	)	$	(0.51	)	$	(0.77	)	$	0.26		$	0.18
	Diluted — pro forma	$	(3.40	)	$	(1.35	)	$	(1.39	)	$	(0.49	)	$	(0.52	)

      Revenue Recognition. We sell our products through a combination of a direct sales force in the United States and certain European countries and through distributors elsewhere. We recognize revenue when title to the goods and risk of loss transfer to customers, providing there are no remaining performance obligations required of us or any matters requiring customer acceptance. We record estimated sales returns and discounts as a reduction of net sales in the same period revenue is recognized. Our revenues are dependent upon sales to

F-16

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

new and existing customers pursuant to our current policies. Changes in these policies or sales terms could impact the amount and timing of revenue recognized.

      Research and Development. All research and development costs are expensed as incurred.

      Product Warranty. We offer warranties on our leads and generators for one to two years from the date of implant, depending on the product in question. We provide at the time of shipment for costs estimated to be incurred under our product warranties. Provisions for warranty expenses are made based upon projected product warranty claims.

      Changes in our liability for product warranties during the 52 weeks ended April 28, 2006, April 29, 2005 and the 53 weeks ended April 30, 2004 are as follows:

									Balance at
	Balance at		Warranty						the End
	the Beginning		Expense			Warranties			of the
Year	of the Year		Recognized			Settled			Year
2006	$	46,991	$	10,312		$	(10,312	)	$	46,991
2005		50,935		29,077			(33,021	)		46,991
2004		160,581		(66,536	)		(43,110	)		50,935

      License Agreements. We have executed licensing agreements under which we have secured the rights provided under certain patents. Royalties, payable under the terms of these agreements, are expensed as incurred.

      Income Taxes. We account for income taxes under the asset and liability method. Under this method, deferred income taxes reflect the impact of temporary differences between financial accounting and tax basis of assets and liabilities. Such differences relate primarily to the deductibility of certain accruals and reserves and the effect of tax loss and tax credit carryforwards not yet utilized. Deferred tax assets are evaluated for realization based on a more-likely-than-not criterion in determining if a valuation allowance should be provided.

      Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change of tax rates is recognized in operations in the period that includes the enactment date.

      Net Earnings (Loss) Per Share. SFAS No. 128, “Earnings Per Share” requires dual presentation of earnings per share (“EPS”): basic EPS and diluted EPS. Basic EPS is computed by dividing net earnings or loss applicable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS includes dilutive stock options and unvested restricted stock that are considered common stock equivalents using the treasury stock method.

F-17

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table sets forth the computation of basic and diluted net earnings (loss) per share of common stock:

	52 Weeks Ended			52 Weeks Ended			53 Weeks Ended
	April 28, 2006			April 29, 2005			April 30, 2004
				As Restated			As Restated
Numerator:
Net earnings (loss)	$	(59,069,192	)	$	(18,609,507	)	$	4,617,938
Denominator:
Basic weighted average shares outstanding		24,916,938			24,036,736			22,921,031
Effect of dilutive securities		—			—			3,033,609
Diluted weighted average shares outstanding		24,916,938			24,036,736			25,954,460
Basic earnings (loss) per share	$	(2.37	)	$	(0.77	)	$	0.20
Diluted earnings (loss) per share	$	(2.37	)	$	(0.77	)	$	0.18

      Excluded from the computation of diluted EPS for the 52 weeks ended April 28, 2006 and April 29, 2005 were outstanding options and unvested restricted stock to purchase approximately 7,260,000 and 6,927,000 common shares, respectively, because to include them would have been anti-dilutive due to the net loss. Excluded from the computation of diluted EPS for the 53 weeks ended April 30, 2004 were outstanding options to purchase approximately 426,000 common shares because to include them would have been anti-dilutive, meaning the exercise price exceeded fair market value.

      We issued $125 million of Senior Subordinated Convertible Notes due in 2012 (“Notes”) during the quarter ended October 28, 2005 and, in conjunction with the Notes, purchased Call Options (the “Note Hedge”) and sold common stock warrants (“Warrants”). The Notes are convertible into approximately three million shares of our common stock. Dilution is measured in accordance with the “if converted” method of SFAS No. 128, “Earnings Per Share,” which assumes conversion of the Notes and adjusts net earnings (loss) for interest expense net of tax; however, due to net operating losses the Notes are anti-dilutive and are not included in the computation of diluted EPS. We purchased the Note Hedge to buy approximately three million shares of our common stock at an exercise price of $41.50 per share. Purchased call options are anti-dilutive and are not included in the computation of diluted EPS. We issued Warrants to sell approximately three million shares of our common stock at an exercise price of $50.00 per share. In accordance with the treasury stock method of SFAS No. 128, “Earnings Per Share,” the Warrants are not included in the computation of diluted EPS because the Warrants’ exercise price was greater than the average market price of the common stock.

      Comprehensive Income (Loss). Comprehensive income (loss) is the total of net earnings (loss) and all other non-owner changes in equity.

      Reclassifications. Certain reclassifications have been made to prior period consolidated financial statements to conform with the April 28, 2006 presentation.

Note 3.     Going Concern

      The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. Since inception, we have incurred an accumulated deficit of approximately $207 million. We have incurred substantial expenses, primarily for research and development activities that include product and process development, clinical trials and related regulatory activities, sales and marketing activities, manufacturing start-up costs and systems infrastructure. For the fiscal years ended April 28, 2006 and April 29, 2005 we have had a net loss of $59 million and $19 million, respectively. To fund our operations, in

F-18

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

fiscal 2006, we incurred additional indebtedness through the issuance of $125 million of senior subordinated convertible notes and the establishment of a $40 million line of credit.

      On July 31, 2006, we received a notice of default and demand letter (“Notice of Default”) dated July 28, 2006 from Wells Fargo Bank, National Association (the “Trustee”), pursuant to which the Trustee asserted that we were in default of our obligations under the Indenture dated September 27, 2005 (“Indenture”), between us, as issuer, and the Trustee, as trustee, with respect to our Notes, as a result of our failure (1) to timely file with the SEC this Form 10-K by July 12, 2006 and (2) to deliver a copy of the 2006 Form 10-K to the Trustee by July 27, 2006. On October 2, 2006, we received a notice of acceleration and demand letter (“Notice of Acceleration”) dated September 27, 2006 from the Trustee informing us that, pursuant to the Indenture, the Trustee has declared the Notes due and payable at their principal amount together with accrued and unpaid interest, and fees and expenses, and it demands that all such principal, interest, fees and expenses under the Notes be paid to the Trustee immediately. We believe that neither a default nor an “event of default” has occurred under the Indenture. However, if an event of default has occurred under the Indenture, all unpaid principal and accrued interest on the outstanding Notes will be due and payable. Accordingly, until this matter is resolved, we have included them as a current liability on our Consolidated Balance Sheet as of April 28, 2006. In addition, if an event of default has occurred under the Indenture, we would also be in default of the $40 million Line of Credit. If principal and interest on our indebtedness must be repaid immediately, we do not have the cash resources available to repay the debt. If we were not able to renegotiate the terms of the indenture or to secure additional financing, this could raise substantial doubt regarding our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Note 4. Inventories

      Inventories consist of the following:

	April 28, 2006		April 29, 2005
Raw materials	$	10,709,541	$	4,543,744
Finished goods		4,960,028		2,693,390
Work-in-process		1,635,225		1,308,251
	$	17,304,794	$	8,545,385

Note 5. Property and Equipment

      Property and equipment consist of the following:

	April 28, 2006			April 29, 2005
Computer equipment	$	9,158,340		$	7,644,161
Manufacturing equipment		8,057,989			6,643,037
Leasehold improvements		4,040,486			3,308,585
Furniture and fixtures		3,735,069			3,218,068
Office equipment		1,417,397			967,320
Construction in progress		1,145,828			1,755,377
Offsite programming equipment		—			3,197,432
		27,555,109			26,733,980
Accumulated depreciation		(17,232,820	)		(17,879,917	)
	$	10,322,289		$	8,854,063

F-19

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 6. Line of Credit

      On January 13, 2006, we established a $40 million revolving line of credit. The credit facility has a three-year term ending January 13, 2009 and is collateralized by accounts receivable, inventory, subsidiary stock, general intangibles, equipment and other collateral. The collateral does not include our intellectual property and provides the lender only limited rights and remedies with respect to the funds raised in the September 2005 debt offering. We agree to maintain a minimum liquidity defined as the sum of the revolving loan limit minus the revolving loan outstanding plus the unrestricted cash and cash equivalent balances of $25 million and provide periodic certifications of compliance in connection with the facility. The amount available under the facility is limited to 85% of the eligible accounts receivable and a portion of eligible inventory. As of April 28, 2006, our available borrowing capacity was approximately $27,099,000 with a loan balance of $2.5 million. Interest is payable at a base rate offered for loans in United States dollars for the period of one month under the British Bankers Association LIBOR rates, plus a base margin rate of 1.75% on the greater of the outstanding loan balance or the agreed-upon minimum loan balance. The rates effective as of April 28, 2006 were a LIBOR rate of 4.97% and a base rate margin of 1.75% for a combined rate of 6.72%. The minimum loan balance is $2.5 million through May 31, 2006; $5 million through September 30, 2006; $7.5 million through January 31, 2007 and $10 million through January 13, 2009. The fees associated with the credit facility include a one-time commitment fee of $400,000, a collateral fee ranging from 0.25% — 1.0% of the outstanding loan balance and other usual and customary fees associated with this type of facility.

      On April 29, 2005, we had a revolving credit facility of $20,000,000 with a one-year term that ended in September 2005. The credit facility was collateralized by accounts receivable, inventory, equipment, documents of title, general intangibles, subsidiary stock and other collateral. The amount available to borrow under the facility was limited to 80% of eligible accounts receivable and a portion of eligible inventory. As of April 29, 2005, the eligible balance of our accounts receivable was approximately $13,493,000. We had borrowings of $3,000,000 outstanding under the credit facility and an available borrowing capacity of approximately $7,794,000. Interest was payable in the amount of the Chase Bank rate of 5.75% on the greater of $3,000,000 or the average of the net balance owed by us at the close of each day during the period. Under the terms of the revolving credit facility, we agreed to maintain liquidity (being the aggregate of availability under the credit facility and our cash on hand) equal to or greater than $10,000,000. An unused line of credit fee was payable at the rate of 0.5%.

      As disclosed by us in a Current Report on Form 8-K filed on July 27, 2006, we were not able to file timely our 2006 Form 10-K for the year ended April 28, 2006 pending completion of a review by the Audit Committee of our Board of Directors regarding previous option grants and resolution of any disclosure and accounting issues arising from the results of the review, and we entered into a Consent and Amendment Agreement with the Administrative Agent and Lenders which provided that certain events will not constitute a default under the Credit Agreement prior to October 31, 2006. Such events include, among others, (1) our failure to file timely with the SEC our 2006 Form 10-K and our First Quarter Form 10-Q for the fiscal quarter ended July 28, 2006 and (2) our failure to maintain compliance with the NASDAQ listing standards because of our failure to file such SEC reports.

      As disclosed by us in a Notification of Late Filing on Form 12b-25 filed on September 1, 2006, we were not able to file our First Quarter Form 10-Q pending completion of the Audit Committee’s review of previous option grants and resolution of any disclosure and accounting issues arising from the results of the review. On October 31, 2006, we entered into a Consent and Amendment Agreement with the Administrative Agent and Lenders which provided that certain events will not constitute a default under the Credit Agreement prior to December 31, 2006. Such events include, among other events, (1) our failure to file timely with the SEC our 2006 Form 10-K and our quarterly reports on Form 10-Q, including the First Quarter Form 10-Q; (2) our failure to maintain compliance with the NASDAQ listing standards because of our failure to file such SEC reports; and (3) our receipt of a notice of default and demand from the Trustee in connection with the

F-20

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Indenture as a result of our failure to timely file and deliver our 2006 Form 10-K as purportedly required by the Indenture, so long as there is no determination by a court and we have not otherwise acknowledged that a default has occurred under the Indenture.

      On December 29, 2006, we entered into a Consent and Amendment Agreement with the Administrative Agent and Lenders which provided that the failure to file timely with the SEC our 2006 Form 10-K will not constitute a default under the Credit Agreement prior to January 8, 2007. The Consent and Amendment Agreement with the Administrative Agent and Lenders further provided that certain events will not constitute a default under the Credit Agreement prior to February 28, 2007. Such events include, among other events, (1) we failed to file timely with the SEC our 2006 quarterly reports on Form 10-Q, including the First Quarter Form 10-Q and the Second Quarter Form 10-Q; (2) our failure to maintain compliance with the NASDAQ listing standards because of our failure to file such SEC reports; and (3) our receipt of a notice of default and demand from the Trustee in connection with the Indenture as a result of our failure to timely file and deliver our 2006 Form 10-K as purportedly required by the Indenture, so long as there is no determination by a court and we have not otherwise acknowledged that a default has occurred under the Indenture. The Consent and Amendment Agreement with the Administrative Agent and Lenders further provided that for the term of the Consent and Amendment Agreement our borrowing under the Line of Credit is limited to $7.5 million. As of December 31, 2006, loans aggregating $7.5 million in principal amount representing the minimum for which we must pay interest, were outstanding under the credit agreement. On February 1, 2007 we will be required to pay interest on the minimum loan balance of $10 million.

Note 7. Accrued Liabilities

      Accrued liabilities consist of the following:

	April 28, 2006		April 29, 2005
Payroll and other compensation	$	6,839,060	$	7,021,246
Other		1,364,772		2,282,899
Royalties		1,061,893		789,530
Tax accruals		963,426		678,620
Business insurance		862,387		623,330
Professional services		680,683		870,843
Clinical costs		529,582		1,109,097
Accrued interest		354,167		—
	$	12,655,970	$	13,375,565

Note 8. Convertible Notes

      On September 27, 2005, we issued $125 million of Notes. Interest on the Notes at the rate of 3% per year on the principal amount is payable semi-annually in arrears in cash on March 27 and September 27 of each year, beginning March 27, 2006. The Notes are unsecured and subordinated to all of our existing and future senior debt and equal in right of payment with our existing and future senior subordinated debt. Holders may convert their notes, which were issued in the form of $1,000 bonds, into 24.0964 shares of our common stock per bond, which equal to a conversion price of approximately $41.50 per share, subject to adjustments, at any time prior to maturity. Holders who convert their Notes in connection with certain fundamental changes may be entitled to a make-whole premium in the form of an increase in the conversion rate. A fundamental change will be deemed to have occurred upon a change of control, liquidation or a termination of trading. The make-whole premium, depending on the price of the stock and the date of the fundamental change, may range from 6.0241 to 0.1881 shares per bond, when the stock price ranges from $33.20 to $150.00, respectively. If a

F-21

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

fundamental change of our company occurs, the holder may require us to purchase all or a part of their Notes at a price equal to 100% of the principal amount of the Notes to be purchased plus accrued and unpaid interest if any. We may, at our option, instead of paying the fundamental change purchase price in cash, pay it in our common stock valued at a 5% discount from the market price of our common stock for the 20 trading days immediately preceding and including the third day prior to the date we are required to purchase the Notes, or in any combination of cash and shares of our common stock. This offering provided net proceeds of approximately $121 million. We used the proceeds for (1) a simultaneous share buyback of 301,000 shares at $33.20 for a total of $9,993,200 and (2) the net cost of $13 million of Note and warrants, which transactions were designed to limit our exposure to potential dilution from conversion of the Notes. These transactions resulted in net cash proceeds of $98,257,000. The estimated fair value of the Notes was $107,000,000 as of April 28, 2006. Market quotes obtained from brokers were used to estimate the fair value of this debt.

      On September 27, 2005, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”) in connection with our issuance of the Notes. Under the Registration Rights Agreement, we were required to file a registration statement for the Notes and the shares into which the Notes are convertible on or before July 14, 2006 and to use reasonable best efforts to cause the registration statement to become effective on or before October 12, 2006. Due to delays in completing our consolidated financial statements for the fiscal year ended April 28, 2006, we have not been able to file the required registration statement. As a result of failing to file the registration statement on a timely basis, we are obligated by the terms of the Registration Rights Agreement to pay specified liquidated damages to the holders of the Notes for the period during which the failure continues. Such liquidated damages per year equal 0.25% of the principal amount of the outstanding Notes during the first 90-day period (a total of $78,125 for the first 90 days) and 0.50% of the principal amount of the outstanding Notes for the period commencing 91 days following the failure to file the registration statement (an additional $156,250 if the registration statement is not filed and effective during the first 180 days). The liquidated damages are payable in arrears on each date on which interest payments are payable.

Convertible Notes Indenture Default Notice

      Pursuant to the Indenture, we are required to deliver to the Trustee “within 15 days after we file them” with the SEC copies of all Form 10-Ks and other information, documents and other reports that we are required to file with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). On July 31, 2006, we received the Notice of Default from the Trustee, pursuant to which the Trustee asserts that we are in default under the Indenture as a result of our failure (1) to timely file with the SEC our 2006 Form 10-K by July 12, 2006 and (2) to deliver a copy of the 2006 Form 10-K to the Trustee by July 27, 2006.

      On October 2, 2006, we received a Notice of Acceleration from the Trustee informing us that, pursuant to the Indenture, the Trustee has declared the Notes due and payable at their principal amount together with accrued and unpaid interest, and fees and expenses, and it demands that all such principal, interest, fees and expenses under the Notes be paid to the Trustee immediately.

      We believe that neither a default nor an “event of default” have occurred under the Indenture. Section 9.6 of the Indenture requires us to deliver to the Trustee “within 15 days after it files them” with the SEC copies of all Form 10-Ks and other information, documents and other reports that we are required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. Section 9.6 of the Indenture specifically requires us to deliver a copy of our 2006 Form 10-K within 15 days after the date it is filed with the SEC. This Indenture provision does not require us to file the 2006 Form 10-K by any particular date. We will furnish to the Trustee copies of our 2006 Form 10-K within 15 days after we file such report with the SEC. We believe that this action will comply fully with the Indenture.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      To clarify our rights and responsibilities under the Indenture, we filed a declaratory judgment action on October 3, 2006 styled Cyberonics, Inc. v. Wells Fargo Bank, N.A., as Trustee Under Indenture, No. 06-63284, in the 165th District Court of Harris County, Texas. In the lawsuit, we seek a declaration that no event of default has occurred under the Indenture and request attorney fees under the Declaratory Judgment Act.

      On December 19, 2006, the Trustee served us with a copy of a summons and complaint in an action styled, Wells Fargo Bank, N.A. v. Cyberonics, Inc., No. 06-CV-15272, pending in the United States District Court for the Southern District of New York, alleging that we have breached the Indenture.

      If our interpretation of Section 9.6 of the Indenture is determined to be incorrect, a default and, therefore, an “event of default” will have occurred under the Indenture. If an event of default has occurred under the Indenture, all unpaid principal and accrued interest on the outstanding Notes will be due and payable immediately unless we negotiate an amendment to the terms of the Indenture. Until this matter is resolved, we have included these Notes as a current liability on our consolidated balance sheet as of April 28, 2006.

Note 9. Convertible Note Hedge and Warrants

      On September 27, 2005, we issued $125 million of Notes, purchased the Note Hedge and sold Warrants. The Notes are convertible into approximately three million shares of our common stock. We purchased the Note Hedge to enable the purchase of approximately three million shares of our common stock at an exercise price of $41.50 per share. We issued the Warrants to sell approximately three million shares of our common stock at an exercise price of $50.00 per share. The purpose of the purchase of the Note Hedge and the sale of the Warrants was to limit our exposure to potential dilution from conversion of the Notes subject to the Note offering. The Note Hedge and the Warrants are recorded in stockholders’ equity on the consolidated balance sheet.

Note 10. Stockholders’ Equity

      Preferred Stock. We have 2,500,000 shares of undesignated Preferred Stock authorized and available for future issuance, of which none have been issued through April 28, 2006. With respect to the shares authorized, our Board of Directors, at its sole discretion, may determine, fix and alter dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any such series and may determine the designation, terms and conditions of the issuance of any such shares.

      Deferred Compensation. In June 2000, our Board of Directors granted 450,000 options at $18.00 per share to purchase shares of common stock under a proposed modification to the 1997 Stock Option Plan that was subject to stockholder approval. On December 29, 2000, the stockholders approved the modification to the plan and we recorded approximately $2.4 million in deferred compensation relating to the options. The charge reflects the difference between the exercise price and the fair market value of the stock on the date stockholder approval was received. The deferred compensation was amortized to expense over the five-year vesting period of the options. The amortization of this deferred compensation expense was completed during the first quarter of fiscal year 2006. Approximately $79,000 of compensation expense was recognized for the vested portion of this option grant during fiscal year 2006. Approximately $473,000 of compensation expense was recognized for the vested portion of this option grant during fiscal years 2005 and 2004, respectively.

      In fiscal year 2004, our Board of Directors granted 30,844 shares of restricted stock at market rates that vest in one year and recorded approximately $713,000 in deferred compensation. The amortization of this deferred compensation was completed during fiscal year 2005. Therefore, no compensation expense was recognized in fiscal 2006. Approximately $239,000 of compensation expense was recognized for the vested portion of these restricted stock grants during fiscal year 2005 and $467,000 for the fiscal year 2004, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In fiscal year 2005, our Board of Directors did not grant any shares of restricted stock.

      In fiscal year 2006, our Board of Directors granted approximately 278,700 shares of restricted stock at market rates that vest over one or five years and recorded approximately $9,654,000 in deferred compensation. Approximately $1,972,000 of compensation expense was recognized for the vested portion of these restricted stock grants during fiscal year 2006. Pursuant to the employment agreement with the Chief Executive Officer, we agreed to make our best efforts to issue an additional 150,000 shares of restricted stock, with 75,000 shares each to be granted on the first and second anniversary of the employment agreement, or August 5, 2006 and August 5, 2007, respectively. We recognized expense of approximately $738,000 related to this agreement in fiscal year 2006.

      The amortization of deferred compensation applicable to stock option grants is recorded over the vesting period. We recognized pre-tax non-cash stock-based compensation expense of $717,661, $7,103,005 and $3,081,283 for the fiscal years ended April 28, 2006, April 29, 2005 and April 30, 2004, respectively.

      Preferred Share Purchase Rights. In January 1997, our Board of Directors declared a dividend of one Preferred Share Purchase Right (“Right”) on each outstanding share of our common stock to stockholders of record on March 10, 1997. We amended and restated the Preferred Share Rights (“Plan”) on August 21, 2000. The Rights will become exercisable following the tenth day after a person or group of affiliated persons (an “Acquiring Person”), acquires beneficial ownership of 15% or more of our common stock or announces commencement of a tender offer, the consummation of which would result in such person or group of persons becoming an Acquiring Person (a “Triggering Event”). Each Right entitles the holder thereof to buy 1/1000 of a share of our Series A Participating Preferred Stock at an exercise price of $150 (the “Exercise Price”). We will be entitled to redeem the Rights at $.01 per Right at any time prior to a Triggering Event. If, prior to redemption of the Rights, a person becomes an Acquiring Person, each Right (except for Rights owned by the Acquiring Person, which will thereafter be void) will entitle the holder thereof to purchase, at the Right’s then current exchange price, that number of shares of our common stock, or, in certain circumstances as determined by our Board, cash, other property or other securities) having a market value at that time of twice the Right’s exercise price. In the event a person becomes an Acquiring Person and we sell more than 50% of our assets or earning power or we are acquired in a merger or other business combination, proper provision must be made so that a holder of a Right which has not theretofore been exercised (except for Rights owned by the Acquiring Person, which will thereafter be void), will thereafter have the right to receive, upon exercise of a Right, shares of common stock of the acquiring company having a value equal to two times the then current Exercise Price. At any time after a Triggering Event and prior to acquisition by such Acquiring Person of 50% or more of the outstanding common stock, our Board of Directors may exchange the Rights (other than Rights owned by the Acquiring Person or its affiliates) for our common stock at an exchange ratio of one share of common stock per Right. In April 2001, we amended the Plan to designate the State of Wisconsin Investment Board (“SWIB”) as an Exempt Person under the terms of the Plan as long as SWIB is the Beneficial Owner of less than 20%. In December 2003, we amended the Plan to designate Boston Scientific Corporation (“BSX”) as an Exempt Person under the terms of the Plan as long as BSX is the Beneficial Owner of less than 20% of our common stock, or such percentage that is less than 20% as shall be held by BSX as of the close of business on January 15, 2004. In January 2004, we amended the Plan to designate BSX as an Exempt Person under the terms of the Plan as long as BSX is the Beneficial Owner of less than 20% of our common stock, or such percentage that is less than 20% as shall be held by BSX on the tenth business day following the earlier of the expiration or termination of the Hart Scott Rodino Antitrust Improvements Act waiting period, but in no event later than February 28, 2004.

Note 11. Stock Incentive and Purchase Plans

      Stock Options. We have reserved an aggregate of 14,850,000 shares of our common stock through April 28, 2006, for issuance pursuant to our 1996 Stock Plan, our 1997 Stock Plan, our 1998 Stock Option

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Plan, the new Employee Equity Inducement Plan and the 2005 Stock Plan (the “Stock Option Plans”). Options granted under the Stock Option Plans generally vest ratably over four or five years following their date of grant. The vesting of certain options occurs up to seven years from the grant date. Options granted under the Stock Option Plans have maximum terms of 10 years. The 1997 Stock Plan allows issuance of either nonstatutory or incentive stock options, while all other stock plans provide for issuance of nonstatutory stock options. The 1997 Stock Plan and the 2005 Stock Plan also allow for the issuance of restricted stock.

      The following is a summary of our stock option and restricted stock activity for the 52 weeks ended April 28, 2006 and April 29, 2005, and the 53 weeks ended April 30, 2004, respectively.

				Outstanding					Exercisable
							Weighted					Weighted
							Average					Average
	Shares						Exercise					Exercise
	Reserved			Shares			Price		Shares			Price
Balance at April 25, 2003		2,490,408			7,012,684		$	13.97		3,363,843		$	12.76
Shares reserved		750,000			—			—		—			—
Granted		(1,519,844	)		1,519,844			23.57		—			—
Options becoming exercisable		—			—			—		1,250,625			—
Exercised		—			(974,837	)		12.25		(974,837	)		—
Canceled or forfeited		627,540			(627,540	)		16.27		—			—
Balance at April 30, 2004		2,348,104			6,930,151			16.11		3,639,631			13.99
Shares canceled		(154,999	)		—			—		—			—
Granted		(1,456,781	)		1,456,781			22.62		—			—
Options becoming exercisable		—			—			—		1,259,445			—
Exercised		—			(1,241,889	)		13.67		(1,241,889	)		—
Canceled or forfeited		217,567			(217,567	)		19.01		—			—
Balance at April 29, 2005		953,891			6,927,476			17.87		3,657,187			15.41
Shares reserved		1,000,000			—			—		—			—
Canceled reserves		(30,302	)		—			—		—			—
Granted		(1,399,245	)		1,399,245			28.55		—			—
Options becoming exercisable		—			—			—		1,282,601			—
Exercised		—			(637,191	)		13.66		(637,191	)		—
Canceled or forfeited		579,063			(579,063	)		30.22		—			—
Balance at April 28, 2006		1,103,407			7,110,467		$	19.35		4,302,597		$	17.12

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Had the compensation cost for these plans been determined pursuant to the alternative method under SFAS No. 123 and SFAS No. 148, our pro forma net loss and loss per share would have been as follows:

		52 Weeks Ended			52 Weeks Ended			53 Weeks Ended
		April 28, 2006			April 29, 2005			April 30, 2004
					As Restated			As Restated
Net earnings (loss)		$	(59,069,192	)	$	(18,609,507	)	$	4,617,938
Add: Stock-based employee compensation expense included in reported net earnings (loss), net of related tax effects if applicable			717,661			7,103,005			3,081,283
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects, if applicable			(26,384,997	)		(21,924,138	)		(19,723,779	)
	Pro forma net loss	$	(84,736,528	)	$	(33,430,640	)	$	(12,024,558	)
Earnings (loss) per share:
	Basic	$	(2.37	)	$	(0.77	)	$	0.20
	Basic — pro forma	$	(3.40	)	$	(1.39	)	$	(0.52	)
	Diluted	$	(2.37	)	$	(0.77	)	$	0.18
	Diluted — pro forma	$	(3.40	)	$	(1.39	)	$	(0.52	)

      The weighted average fair value of options granted at prices equal to our market value in fiscal periods 2006, 2005 and 2004 was $26.48, $14.99 and $14.95, respectively.

      For SFAS No. 123 and SFAS No. 148 purposes, the fair values of each option grant are estimated using the Black-Scholes option pricing model with the following weighted average assumptions used for grants: risk-free interest rates of 3.8%, 3.6% and 3.0% for fiscal years 2006, 2005 and 2004, respectively, expected life of 6.2, 5.8 and 6.3 years for options in fiscal years 2006, 2005 and 2004, respectively, expected volatility of 84.6%, 88.9% and 88.9% for fiscal years 2006, 2005 and 2004, respectively, and no expected dividend yields.

      Because the SFAS Nos. 123 and 148 method of accounting has not been applied to options granted prior to July 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Additionally, the pro forma amounts reported in stock-based compensation expense above include $313,911, $235,854 and $178,371 related to the purchase discount offered under our Employee Stock Purchase Plan (“ESPP”) during fiscal years 2006, 2005 and 2004, respectively. The weighted average fair values of restricted shares granted to employees were $36.16, $14.99 and $14.93 during fiscal years 2006, 2005 and 2004, respectively.

      The consolidated financial statements presented have been restated. For additional information, see the “Note 1. Restatements.”

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Our outstanding options are segregated into the following ten categories in accordance with SFAS No. 123:

Options Outstanding and Exercisable by Price Range

As of April 28, 2006

									Options Exercisable
									Options Exercisable as of
	Options Outstanding								April 28, 2006
	Outstanding as of
	April 28, 2006				Weighted-		Average				Weighted-
					Average		Remaining				Average
Range of Exercise Prices	Vested		Unvested		Exercise Price		Contractual Life		Shares		Exercise Price
$ 0.000000 - $ 4.665000		118,270		270,889	$	1.0688		6.6647		118,270	$	3.5170
$ 4.665100 - $ 9.330000		302,206		6,344	$	6.6173		2.7035		302,206	$	6.5608
$ 9.330100 - $13.995000		731,794		366,303	$	12.8669		6.0485		731,794	$	12.6309
$13.995100 - $18.660000		1,850,148		241,915	$	16.1350		4.7956		1,850,148	$	16.1870
$18.660100 - $23.325000		718,656		595,457	$	19.8058		7.0355		718,656	$	20.0218
$23.325100 - $27.990000		244,468		294,904	$	25.5557		7.4960		244,468	$	25.4758
$27.990100 - $32.655000		158,360		446,343	$	29.1848		8.4628		158,360	$	28.9970
$32.655100 - $37.320000		69,357		188,391	$	35.6798		8.3563		69,357	$	35.3220
$37.320100 - $41.985000		61,057		219,259	$	38.3897		8.6004		61,057	$	38.2262
$41.985100 - $46.650000		48,281		178,065	$	43.3700		8.6682		48,281	$	43.4180
		4,302,597		2,807,870	$	19.3483		6.3336		4,302,597	$	17.1243

      During fiscal year 2004, our Board of Directors approved grants outside of the existing stock option plans. The grants, which totaled 450,000 were approved for new officers as inducements essential to their entering into employment with us. No such grants were approved for 2005 or 2006.

      Stock Purchase Plan. Under the Cyberonics, Inc. ESPP, 950,000 shares of our common stock were reserved for issuance. Subject to certain limits, ESPP allows eligible employees to purchase shares of our common stock through payroll deductions of up to 15% of their respective current compensation at a price equaling 95% of the stock price at the end of the purchase period. Purchase periods, under provisions of the Stock Purchase Plan, are six months in length and begin on the first business days of June and December. At April 28, 2006, 420,269 shares remain available for future issuances under the ESPP.

      Stock Recognition Program. In May 1992, our Board of Directors established the Cyberonics Employee Stock Recognition Program. Since its inception, a total of 8,200 shares of our common stock have been reserved for issuance as special recognition grants. The shares are granted to employees for special performances and/or contributions at the discretion of our President, based on nominations made by fellow employees. At April 28, 2006, 2,230 shares remain available for future issuances under the program.

Note 12. New Accounting Pronouncements

      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an Amendment to ARB No. 43, Chapter 4.” This statement amends the guidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that “...under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges...” This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this statement requires that allocation of fixed production overheads to the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 as of April 29, 2006 did not have a material impact on our consolidated operating results or financial position.

      In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” (“SFAS 153”) an amendment to Opinion APB No. 29. The guidance in APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 as of April 29, 2006 did not have a material impact on our consolidated operating results or financial position.

      In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”). This statement is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” This statement supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in Statement No. 123 as originally issued and Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” This statement does not address the accounting for employee share ownership plans, which are subject to American Institute of Certified Public Accountants (“AICPA”) Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership Plans.” We have adopted SFAS 123(R) starting on April 29, 2006 using The Black-Scholes Option Pricing Model and The Modified Prospective Method which requires the compensation cost to be recognized under SFAS 123(R) for grants issued after the adoption date and the unvested portion of grants issued prior to the adoption date. As a result of the adoption of SFAS 123(R), we anticipate recognizing non-cash share-based compensation expense of approximately $20 million during fiscal year 2007 excluding the potential impact associated with the resignation of certain former officers and employees. This estimate is affected by assumptions regarding a number of complex and subjective variables.

      In March 2005, FASB issued Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143” (“FIN No. 47”). This interpretation clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred — generally upon acquisition, construction or development and (or) through the normal operation of the asset. Uncertainty about the timing and (or) method of settlement of a conditional

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. This Interpretation is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN No. 47 as of April 28, 2006 did not have a material impact on our consolidated operating results or financial position.

      In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of Accounting Principles Board (APB) Opinion No. 20 and FASB Statement No. 3.” This statement replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This statement requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in nondiscretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after April 28, 2006 for us.

      In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). This statement clarifies which interest-only and principal-only strips are not subject to FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” and amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” to allow qualifying special purpose entities to hold derivative financial instruments pertaining to a beneficial interest other than another derivative financial instrument. This Statement also permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, requires evaluation of interests in securitized financial assets to identify interests that are freestanding or embedded derivatives, and clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. This statement allows for fair value measurement of financial instruments resulting in financial instruments that are more simply and appropriately valued. The statement is effective for financial instruments acquired or remeasured in fiscal years beginning after September 15, 2006. The adoption of SFAS 155 is not expected to have a material impact on our consolidated operating results or financial position.

      In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140” (“SFAS 156”). This statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” as it pertains to accounting for separately recognized servicing assets and servicing liabilities. It requires an entity to recognize assets and liabilities associated with obligations undertaken to service financial assets; valuation of the separately identified assets or liabilities at fair value at inception, if possible; allows for valuation at fair value at the reporting date or amortization in proportion to and over the period of net servicing income or loss and including an impairment or increase based on the fair value at the reporting date; allows for a one-time reclassification of available-for-sale securities to trading securities at its adoption; and separate presentation of, and disclosures for, servicing assets and servicing liabilities. The impact of this statement is to more closely match the valuation of servicing assets and liabilities with their related derivative instruments used to mitigate their inherent risks. The statement is effective as of the beginning of fiscal years beginning after September 15, 2006. The adoption of SFAS 156 is not expected to have a material impact on our consolidated operating results or financial position.

      In June 2006, FASB issued FAS Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” This Interpretation clarifies the accounting

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CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of this interpretation is required for fiscal years beginning after December 15, 2006. We are still evaluating the potential impact that the adoption of FIN 48 as of April 27, 2007 will have on our consolidated operating results or financial position.

      In September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 establishes an approach that requires quantification of financial statement errors based on the effects of each of the company’s balance sheet and statement of operations and the related financial statement disclosures. We are required to adopt SAB 108 in our annual financial statements covering the fiscal years ending after November 15, 2006. We are currently evaluating the impact that the adoption of SAB 108 may have on our consolidated results of operations and financial position.

Note 13. Income Taxes

      The U.S. and foreign components of earnings (loss) before income taxes and the provision for income taxes are presented in this table:

		52 Weeks Ended			52 Weeks Ended			53 Weeks Ended
		April 28, 2006			April 29, 2005			April 30, 2004
					As Restated			As Restated
Earnings (loss) before income taxes:
	Domestic	$	(57,271,372	)	$	(17,917,356	)	$	5,386,171
	Foreign		(1,698,554	)		(666,038	)		(537,444	)
		$	(58,969,926	)	$	(18,583,394	)	$	4,848,727
Provision for current income tax expense:
	Federal	$	—		$	—		$	52,224
	State and local		39,730			—			160,315
	Foreign		59,536			26,113			18,250
		$	99,266		$	26,113		$	230,789

      The following is a reconciliation of the statutory federal income tax rate to our effective income tax rate expressed as a percentage of earnings (loss) before income taxes:

	52 Weeks Ended			52 Weeks Ended			53 Weeks Ended
	April 28, 2006			April 29, 2005			April 30, 2004
				As Restated			As Restated
U.S. statutory rate		(34.0	)%		(34.0	)%		34.0	%
Change in deferred tax valuation allowance		31.6			32.1			(39.3	)%
Foreign taxes		0.1			0.1			0.4	%
State and local tax provision		0.1			0.0			3.2	%
Other, net		2.4			1.9			5.3	%
		0.2	%		0.1	%		3.6	%

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      Significant components of our deferred tax assets are as follows:

			April 28, 2006			April 29, 2005
						As Restated
Deferred tax assets:
	Federal net operating loss carryforwards		$	74,861,125		$	52,902,151
	Foreign net operating loss carryforwards			6,380,628			5,852,370
	State net operating loss carryforwards and other			6,543,275			4,649,674
	Federal tax credit carryforwards			4,309,541			4,511,029
	Deferred compensation expense			3,710,945			3,610,438
	Accrued expenses			609,128			331,654
	Charitable contribution carryforwards			507,781			—
	Reserves			283,444			396,796
	Property and equipment			312,930			345,010
	Inventory costs capitalized			310,055			274,084
		Total deferred tax assets		97,828,852			72,873,206
Deferred tax valuation allowance				(97,828,852	)		(72,873,206	)
		Net deferred tax assets	$	—		$	—

      At April 28, 2006, we have net operating loss carryforwards of approximately $224 million for federal income tax purposes, which expire during the years 2006 through 2025, and tax credit carryforwards of approximately $4 million for federal income tax purposes which expire during the years 2006 through 2021. At April 28, 2006, we had net operating loss carryforwards of approximately $85 million for state and local income tax purposes, which expire at various dates beginning in 2006. In August 2004, we experienced an ownership change as defined in Section 382 of the Internal Revenue Code (“IRC”). Our ability to utilize credit carryforwards to offset future tax liabilities and utilize certain net operating losses to offset future taxable income may be limited pursuant to IRC Section 382. We purchased the Note Hedge to buy approximately three million shares of our common stock at an exercise price of $41.50 per share in connection with the issuance of our Notes during the quarter ended October 28, 2005. The Note and the Note Hedge are considered a synthetic debt instrument under the rules of Treasury Regulation 1.1275-6. Tax benefits derived from Note Hedge amortization will be recorded in equity.

      A valuation allowance is established if it is more-likely-than-not that all or a portion of the deferred tax assets will not be realized. We have historically experienced significant operating losses and operate in an industry subject to rapid technological changes. We believe there is sufficient uncertainty regarding future taxable income and realizability of deferred tax assets such that a valuation allowance is required to fully offset deferred tax assets for the 52 weeks ended April 28, 2006. We continually review the adequacy and necessity of the valuation allowance in accordance with the provision of SFAS No. 109 “Accounting for Income Taxes.” Of the total valuation allowance at April 28, 2006, approximately $25.4 million relates to stock option compensation deductions and $0.7 million relates to amortization of the Note Hedge. The tax benefit associated with stock option compensation deductions will be credited to equity when realized. The valuation allowance increased approximately $25.0 million and $16.5 million for the 52 weeks ended April 28, 2006 and April 29, 2005, respectively, due primarily to an increase in the federal net operating loss carryforwards for tax years 2005 and 2004.

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Note 14. Employee Retirement Savings Plan

      We sponsor an employee retirement savings plan (the “Plan”) which qualifies under Section 401(k) of the IRC. The Plan is designed to provide eligible employees with an opportunity to make regular contributions into a long-term investment and savings program. Substantially all U.S. employees are eligible to participate in the Plan beginning with the first quarterly open enrollment date following start of employment. In July 2004, we started matching 50% of employees’ contributions up to 6% of eligible earnings. We incurred expenses applicable to the contributions to this plan in the amounts of approximately $1,450,000, $750,000 and $0 for the fiscal years 2006, 2005 and 2004, respectively.

Note 15. Commitments and Contingencies

      Post-market Clinical Surveillance. As a condition of the July 1997 PMA Approval, FDA required us to conduct a five-year post-approval study for the epilepsy indication. This study is complete and the final report was submitted to FDA on November 19, 2002. Pursuant to the post-market surveillance conditions specified as part of our FDA marketing approval, we are required to conduct two clinical studies on treatment-resistant depression patients. One study of 460 patients, D-21, is a randomized controlled study assessing three different stimulation paradigms. The other study, the TRD Registry, is a longitudinal registry that will follow 1,000 VNS patients and 1,000 non-VNS patients for up to five years. Enrollment in both studies has commenced and is ongoing. We expense the costs related to these long-term follow-up activities as they are incurred and establish accruals for such costs incurred but not paid as of the respective balance sheet dates.

      License Agreements. We have executed a license agreement which provides us with worldwide exclusive rights under five U.S. patents (and their international counterparts) covering the method and devices of the VNS Therapy System for vagus nerve and other cranial nerve stimulation for the control of epilepsy and other movement disorders, as well as a number of other conditions and disorders. The license agreement provides that we will pay a royalty equal to the greater of $36,000 per year or at the rate of three percent of net sales of licensed products during fiscal years 2004 through 2011, after which the royalty rate will decline to one percent for the remaining term of the licensed patents. These patents expire between 2011 and 2022. The license agreement runs for successive three-year terms, renewable at our election. The license agreement, and its periods of extension, may not be terminated by the licensor without cause. Our royalty payments pursuant to this agreement are expensed as incurred.

      We have an agreement with an inventor on two patents co-owned by us pursuant to which we are obligated to pay 1.0% of the first $10 million of net obesity sales covered by one of the patents and 0.5% of net obesity sales thereafter. The agreement also obligates us to pay minimum royalties of $25,000 per year for five years commencing January 1, 2000 and up to $325,000 in additional advanced royalties based on achievement of certain milestones.

      Royalty expenses for the 52 weeks ended April 28, 2006 and April 29, 2005 and the 53 weeks ended April 30, 2004 were $3,618,000, $3,106,000 and $4,034,000, respectively.

      Lease Agreements. We lease facilities in Houston, Texas and several sales offices in Europe under noncancelable operating leases, as well as transportation and office equipment under noncancelable operating leases. The lease terms provide for tenant improvement allowances which are recorded as deferred rent and amortized, straight-line, as reductions to rent expense over the term of the lease. At April 28, 2006 and April 29, 2005, we had approximately $209,000 and $264,000 of deferred rent, respectively. Scheduled rent increases and rent holidays are recognized on a straight-line basis over the term of the lease.

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      Future minimum payments relating to these agreements at April 28, 2006 are as follows:

52/53 Weeks Ending on the last Friday of April:
2007	$	2,248,218
2008		3,059,187
2009		2,950,622
2010		2,832,101
2011 and thereafter		5,734

      Our rental expense for the 52 weeks ended April 28, 2006 and April 29, 2005 and the 53 weeks ended April 30, 2004 amounted to approximately $3,013,000, $2,850,000 and $2,174,000, respectively.

      We have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such a capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited, however, we believe the fair value of these indemnification agreements is minimal.

      Other Commitments. At April 28, 2006, we had approximately $117,000 in noncancelable commitments related to domestic marketing programs planned for our VNS Therapy System during fiscal year 2007.

Note 16. Litigation

      We are named as a defendant in lawsuits or the subject of governmental inquires from time to time arising in the ordinary course of business. The outcome of such lawsuits or other proceedings cannot be predicted with certainty and may have a material adverse effect on our consolidated financial position or results of operations.

Senate Finance Committee Investigation

      In May 2005, we received a letter from the Senate Finance Committee (“SFC”) advising us that it is examining FDA’s handling of our PMA-Supplement for the use of VNS Therapy to address TRD. Following our responses to the May letter, we received a second letter from the SFC in July 2005, to which we responded by providing the requested documents and information. In February 2006, the SFC published a Committee Staff Report entitled, “Review of FDA’s Approval Process for the Vagus Nerve Stimulation System for Treatment-Resistant Depression.” The report notes that a senior FDA official approved our VNS Therapy System for TRD despite the conclusion of more than 20 FDA scientists, medical officers and management staff who reviewed our application and that the application did not demonstrate reasonable assurance of safety and effectiveness sufficient for approval in TRD. The report concludes that the FDA did not disclose to the public the scientific dissent within the FDA regarding the effectiveness of the VNS Therapy System for TRD and that the FDA has not ensured that the public has all of the accurate, science-based information regarding the VNS Therapy System for TRD it needs. The report does not accuse us of any misconduct and does not conclude that FDA violated any law, regulation or procedure by approving VNS Therapy for TRD; however, the report states that the SFC staff received a range of allegations regarding FDA and Cyberonics and that allegations other than those addressed in the report may be addressed at a later date. The report follows a year-long investigation conducted by the staff of the SFC, including letters we received in May 2005 and July 2005 requesting documents and information. We cooperated with the SFC staff and provided the requested documents and information.

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Securities Class Action Lawsuit

      On June 17, 2005, a putative class action lawsuit was filed against us and certain of our officers and Robert P. Cummins, then Chairman and Chief Executive Officer, in the United States District Court for the Southern District of Texas. The lawsuit is styled Richard Darquea v. Cyberonics Inc., et al., Civil Action No. H:05-cv-02121. A second lawsuit with similar allegations, styled Stanley Sved v. Cyberonics, Inc., et al., Civil Action No. H:05-cv-2414 was filed on July 12, 2005. On July 28, 2005, the court consolidated the two cases under Civil Action No. H-05-2121, styled In re Cyberonics, Inc. Securities Litigation, and entered a scheduling order. On September 28, 2005, the court appointed EFCAT, Inc., John E. and Cecelia Catogas, Blanca Rodriguez, and Mohamed Bakry as lead plaintiffs and also appointed lead plaintiffs’ counsel.

      The lead plaintiffs filed a consolidated amended complaint on November 30, 2005. The complaint generally alleged, among other things, that the defendants violated Sections 10(b) and 20(a) of the Exchange Act by making false and misleading statements regarding our Vagus Nerve Stimulation Therapy System device (the “VNS Device”) as a therapy for TRD. On January 30, 2006, the defendants filed a motion to dismiss the consolidated complaint on the basis that the complaint fails to allege facts that state any claim for securities fraud. On July 20, 2006, the District Court granted our motion to dismiss the consolidated complaint, allowing the plaintiffs 30 days to file an amended complaint. The court found that the plaintiffs failed to meet their burden to plead a securities fraud claim with particularity, including failures to allege with particularity a material misstatement or omission, to allege facts sufficient to raise a strong inference of intent or severe recklessness, and to allege sufficiently the causal connection between the plaintiffs’ loss and the defendants’ actions. The court noted that “the deficiencies in Plaintiffs’ complaint might well extend beyond the point of cure,” but nonetheless granted plaintiffs the right to amend their complaint in light of the strong presumption of law favoring a right to amend.

      On August 18, 2006, the lead plaintiffs filed a First Amended Complaint for Violation of the Securities Laws. The complaint generally alleges, among other things, that the defendants violated Sections 10(b) and 20(a) of the Exchange Act by making false and misleading statements regarding the VNS Device as a therapy for treatment-resistant depression (“TRD”). Lead plaintiffs allege that the defendants failed to disclose that certain individuals associated with the U.S. Food and Drug Administration (“FDA”) had safety and efficacy concerns about the use of the VNS Device for the treatment of depression and questioned the adequacy of evidence of safety and effectiveness we presented to the FDA, that the defendants misrepresented the prospect for payer reimbursement for the VNS Device, that the defendants concealed executive compensation and governance issues, and that the defendants falsely stated that an analyst’s statements about options granted in June 2004 were inaccurate and without merit. Lead plaintiffs seek to represent a class of all persons and entities, except those named as defendants, who purchased or otherwise acquired our securities during the period February 5, 2004 through August 1, 2006. The amended complaint seeks unspecified monetary damages and equitable or injunctive relief, if available.

      On October 2, 2006, the defendants filed a motion to dismiss the amended complaint on the basis that the complaint fails to allege facts that state any claim for securities fraud. The lead plaintiffs filed an opposition to the motion to dismiss on October 23, 2006, and the defendants filed a reply to the opposition on November 6, 2006. On October 31, 2006, a week before the defendants filed their reply in connection with the motion to dismiss the amended complaint, the Los Angeles County Employees Retirement Association filed a motion seeking to intervene and asking the court to require the lead plaintiffs to republish notice of the amended class action claims. On November 28, 2006, the court issued an order compelling republication of notice and staying the proceeding pending determination of the lead plaintiff pursuant to the Private Securities Litigation Reform Act. On December 18, 2006, the lead plaintiffs published notice of the filing of the first amended complaint, stating that investors who purchased our securities during the expanded class period (February 5, 2004 through August 1, 2006, inclusive) may move the court for consideration to be appointed as lead plaintiff

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within 60 days. We intend to vigorously defend this lawsuit; however, an adverse result in this lawsuit could have a material adverse effect on us, our consolidated financial position, results of operations and cash flows.

Governmental Investigations of Options Granting Practices

      On June 9, 2006, the staff of the SEC advised us that it had commenced an informal inquiry of some of our stock option grants. On June 26, 2006, we received a subpoena from the Office of the United States Attorney for the Southern District of New York requesting documents related to our stock option grants’ practices and procedures. On October 23, 2006, the SEC staff made an additional request for certain documents and information related to our revised guidance on February 8, 2006 and our financial results announced on May 1, 2006, our sales for the quarter ended April 28, 2006, coverage or potential coverage of our VNS Therapy System by Blue Cross and Blue Shield of Alabama and Aetna and aging of our accounts receivable since January 1, 2003. We are cooperating with the SEC staff and the U.S. Attorney’s Office. Our Board directed the Audit Committee to conduct an independent investigation of our stock option grants, practices and procedures, including compliance with Generally Accepted Accounting Principles and all applicable statutes, rules and regulations, and the Audit Committee retained independent counsel to assist it in completing that review.

      The Audit Committee, with the assistance of its independent counsel and their forensic accountants, has completed its review of our stock option grants, practices and procedures. The Audit Committee concluded that incorrect measurement dates were used for certain stock option grants made principally during the period from 1998 through 2003. Based on the Audit Committee’s investigation, subsequent internal analysis and discussions with our independent registered public accountants, our Board concluded on November 18, 2006, that we needed to restate certain of our historical consolidated financial statements to record non-cash charges for compensation expense relating to past stock option grants. The effects of these restatements are reflected in the consolidated financial statements, including unaudited quarterly data. None of the restatements have any impact on net cash provided by (used in) operating activities. For additional information see “Note 1. Restatements.” Selected quarterly financial information is also presented in “Note 19. Quarterly Financial Information — Unaudited” for fiscal years 2006 and 2005.

NASDAQ Delisting Notice

      On July 13, 2006, we filed a Notification of Late Filing on Form 12b-25 with the SEC disclosing our inability to file timely our 2006 Form 10-K without unreasonable effort or expense. Pursuant to that filing, the deadline for us to file our 2006 Form 10-K was extended to July 27, 2006. On July 27, 2006, we filed a Current Report on Form 8-K indicating that we were unable to file our 2006 Form 10-K with the SEC by July 27, 2006 because we required additional time to complete our previously announced review being conducted by the Audit Committee of our Board of Directors regarding option grants and to resolve any disclosure and accounting issues that may arise from the results of the review.

      On July 31, 2006, we received a Staff Determination Letter from NASDAQ indicating that we failed to comply with the filing requirement for continued listing set forth in Marketplace Rule 4310(c)(14) as a result of the delay in filing our 2006 Form 10-K, and that our securities were, therefore, subject to delisting from The NASDAQ Global Market. On August 3, 2006, we requested a hearing before a NASDAQ Listing Qualifications Panel (NASDAQ Panel) to review the NASDAQ Staff’s Determination Letter. On August 4, 2006, we received formal notice from NASDAQ that the delisting action has been stayed pending a written decision from the NASDAQ Panel.

      On September 8, 2006, we received a second Staff Determination Letter indicating that we also failed to comply with the filing requirement for continued listing set forth in Marketplace Rule 4310(c)(14) as a result of the delay in filing our Form 10-Q for our fiscal quarter ended July 28, 2006 (“First Quarter Form 10-Q”) and that our securities were, therefore, subject to delisting from The NASDAQ Global Market.

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      On September 14, 2006, the NASDAQ Panel conducted a hearing to review the NASDAQ Staff’s Determination Letter.

      On November 6, 2006, we received a letter from the NASDAQ Panel informing us that the NASDAQ Panel has determined to grant our request for continued listing on The NASDAQ Stock Market subject to two conditions: (1) on or before November 17, 2006, we must submit additional information to NASDAQ; and (2) on or before December 31, 2006, we must file with the SEC our 2006 Form 10-K and our First Quarter Form 10-Q and any required restatements of our prior financial statements. On November 17, 2006, we submitted the requested additional information to NASDAQ. On December 13, 2006, we received a third Staff Determination Letter from NASDAQ. This third Staff Determination Letter indicated that we also failed to comply with the filing requirement for continued listing set forth in Marketplace Rule 4310(c)(14) as a result of the delay in filing our Quarterly Report on Form 10-Q for our fiscal quarter ended October 27, 2006 (“Second Quarter Form 10-Q”) and that our securities are, therefore, subject to delisting from The NASDAQ Global Market. This third letter advises us to present our views with respect to this additional deficiency to the NASDAQ Panel in writing no later than December 20, 2006.

      On December 19, 2006, we sent a letter to the NASDAQ Panel describing the current status of our efforts to regain compliance with the NASDAQ filing requirements and requesting an extension until January 27, 2007 to file our 2006 Form 10-K, First Quarter Form 10-Q and Second Quarter Form 10-Q. On December 28, 2006, we received a letter from the NASDAQ Panel extending through January 29, 2007 our deadline for filing our delinquent SEC reports; however, in the event that we are not able to file our delinquent report with the SEC on or before January 29, 2007, there can be no assurance that NASDAQ will grant an additional extension of time to meet our filing requirements or that our common stock will remain listed on The NASDAQ Global Market.

Stockholder Derivative Litigation

      We are named as a nominal defendant in a stockholder derivative lawsuit brought on behalf of the company styled Rudolph v. Cummins, et al pending in the United States District Court for the Southern District of Texas, Houston Division, naming several of our current and former officers and members of our Board as defendants, alleging purported improprieties in our issuance of stock options and the accounting related to such issuances. The operative Amended Complaint also purports to state a putative class action claim against the individual defendants for violation of Section 14(a) of the Exchange Act, as well as claims against the individual defendants for breach of fiduciary duty, gross mismanagement and corporate waste, against the officer defendants for unjust enrichment, and against certain individual defendants for insider trading.

      We are also named as nominal defendant in five stockholder derivative lawsuits brought on behalf of the company in the District Court of Harris County, Texas, including Smith v. Cummins, pending in the 189th District Court, Adel v. Cummins, pending in the 234th District Court, McKeehan v. Cummins, pending in the 11th District Court, Nussbaum v. Cummins, pending in the 215th District Court, and Wunschel v. Cummins, pending in the 165th District Court. These cases collectively name as defendants each of the current members of our Board, excluding Hugh M. Morrison, several of our former directors, including Thomas A. Duerden and Ronald A. Matricaria, and several of our current and former officers, including Robert P. Cummins, Pamela B. Westbrook, Michael A. Cheney, David S. Wise, Alan D. Totah, Richard P. Kuntz, Richard L. Rudolph, David F. Erinakes, Shawn P. Lunney and Rick L. Amos. They allege purported improprieties in our issuance of stock options and the accounting related to such issuances.

      On November 18, 2006, our Board formed a Special Litigation Committee (“SLC”) to investigate, analyze and evaluate the derivative claims raised in these lawsuits and to determine the actions, if any, we should take with respect to the derivative claims, including whether to pursue, to seek to dismiss or to attempt to resolve the derivative claims in the best interests of us and our stockholders. Our Board appointed as

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Chairman of the SLC, Hugh M. Morrison, an independent Board member who was appointed to our Board on November 9, 2006. On December 18, 2006, we moved to stay all proceedings in the federal and state derivative lawsuits pending the completion of the SLC process.

Indenture Default Litigation

      On January 13, 2006, we established a $40 million revolving line of credit with Merrill Lynch Capital (“Credit Agreement”), a division of Merrill Lynch Business Financial Services Inc. (“Administrative Agent”) and the lenders who are party thereto (“Lenders”). The credit facility has a three-year term ending January 13, 2009 and is collateralized by accounts receivable, inventory, subsidiary stock, general intangibles, equipment and other collateral. The collateral does not include our intellectual property and provides the lender only limited rights and remedies with respect to the funds raised in our September 2005 debt offering. Pursuant to the terms of the Credit Agreement, we agreed to maintain a minimum liquidity, which is defined as the sum of the revolving loan limit minus the revolving loan outstanding plus the unrestricted cash and cash equivalent balances of $25 million, and to provide periodic certifications of compliance in connection with the facility. The amount available under the facility is limited to 85% of the eligible accounts receivable and a portion of eligible inventory. As of April 28, 2006 our available borrowing capacity was approximately $27,099,000 with a loan balance of $2.5 million. As discussed more fully in “Note 6 — Line of Credit,” we have been unable to timely file our 2006 Form 10-K, our First Quarter Form 10-Q and the Second Quarter Form 10-Q.

      On December 29, 2006, we entered into a Consent and Amendment Agreement with the Administrative Agent and Lenders which provided that the failure to file timely with the SEC our 2006 Form 10-K will not constitute a default under the Credit Agreement prior to January 8, 2007. The Consent and Amendment Agreement with the Administrative Agent and Lenders further provided that certain events will not constitute a default under the Credit Agreement prior to February 28, 2007. Such events include, among other events, (1) we failed to file timely with the SEC our 2006 quarterly reports on Form 10-Q, including the First Quarter Form 10-Q and the Second Quarter Form 10-Q; (2) our failure to maintain compliance with the NASDAQ listing standards because of our failure to file such SEC reports; and (3) our receipt of a notice of default and demand from the Trustee in connection with the Indenture as a result of our failure to timely file and deliver our 2006 Form 10-K as purportedly required by the Indenture, so long as there is no determination by a court and we have not otherwise acknowledged that a default has occurred under the Indenture. The Consent and Amendment Agreement with the Administrative Agent and Lenders further provided that for the term of the Consent and Amendment Agreement our borrowing under the Line of Credit is limited to $7.5 million. On February 1, 2007 we will be required to pay interest on the minimum loan balance of $10 million.

      On September 27, 2005, we issued the Notes. Interest on the Notes at the rate of 3% per year on the principal amount is payable semi-annually in arrears in cash on March 27 and September 27 of each year, beginning March 27, 2006. The Notes are unsecured and subordinated to all of our existing and future senior debt and equal in right of payment with our existing and future senior subordinated debt. Holders may convert their notes, which were issued in the form of $1,000 bonds, into 24.0964 shares of our common stock per bond, which equal to a conversion price of approximately $41.50 per share, subject to adjustments, at any time prior to maturity.

      On July 31, 2006, we received the Notice of Default from the Trustee, pursuant to which the Trustee asserted that we were in default of our obligations under the Indenture with respect to our Notes, as a result of our failure (1) to timely file with the SEC this Form 10-K by July 12, 2006 and (2) to deliver a copy of the 2006 Form 10-K to the Trustee by July 27, 2006. On October 2, 2006, we received the Notice of Acceleration from the Trustee informing us that, pursuant to the Indenture, the Trustee has declared the Notes due and payable at their principal amount together with accrued and unpaid interest, and fees and expenses, and it

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demands that all such principal, interest, fees and expenses under the Notes be paid to the Trustee immediately. To clarify our rights and responsibilities under the Indenture, we filed a declaratory judgment action on October 3, 2006 styled Cyberonics, Inc. v. Wells Fargo Bank, N.A., as Trustee Under Indenture, No. 06-63284, in the 165th District Court of Harris County, Texas. In the lawsuit, we seek a declaration that no event of default has occurred under the Indenture and request attorney fees under the Declaratory Judgment Act. We are also a defendant in an action styled Wells Fargo Bank, N.A. v. Cyberonics, Inc. No. 06-CV-15272, pending in the United States District Court of the Southern District of New York, alleging that we have breached the indenture. If our interpretation of the Indenture is determined to be incorrect, a default and, therefore, an “event of default” will have occurred under the Indenture.

      If an event of default has occurred under the Indenture, all unpaid principal and accrued interest on the outstanding Notes will be due and payable immediately unless we negotiate an amendment to the terms of the Indenture. If the principal and accrued interest on the outstanding Notes must be repaid immediately, we may not have or be able to obtain access to the funds needed to repay the indebtedness, and we may be forced to seek protection under the Bankruptcy Code.

      If principal and interest on our indebtedness must be repaid immediately, we do not have the cash resources available to repay the debt. If we were not able to secure additional financing, our ability to continue as a going concern would be uncertain.

Note 17. Concentrations

      Our cash equivalents, marketable securities and trade accounts receivable represent potential concentrations of credit risk.

      We minimize potential concentrations of credit risk in cash equivalents and marketable securities by placing investments in high quality financial instruments and, as required by our corporate investment policy, limiting the amount of investment in any one issuing party. At April 28, 2006, management believes that we have no significant concentrations of credit risk related to these assets and have incurred no material impairments in the carrying values of its cash equivalents and marketable securities.

      Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of customers and their dispersion across a number of geographic areas. However, essentially all trade receivables are concentrated in the hospital and healthcare sectors in the U.S. and several other countries and, accordingly, are exposed to their respective business, economic and country-specific variables. Although we do not currently foresee a concentrated credit risk associated with these receivables, repayment is dependent upon the financial stability of these industry sectors and the respective countries’ national economies and healthcare systems.

      We rely upon sole source suppliers for certain of the key components, materials and contract services used in manufacturing the VNS Therapy System. We periodically experience discontinuation or unavailability of components, materials and contract services which may require us to qualify alternative sources or, if no such alternative sources are identified, change our product design. We believe that pursuing and qualifying alternative sources and/or redesigning specific components of the VNS Therapy System, if or when necessary, could consume significant resources. In addition, such changes generally require regulatory submissions and approvals. Any extended delays in or an inability to secure alternative sources for these or other components, materials and contract services could result in product supply and manufacturing interruptions, which could significantly harm our business.

      We rely upon favorable reimbursement, coverage and coding for VNS Therapy. Essentially all patients implanted with VNS Therapy for the treatment of epilepsy are covered by private payers, Medicare or Medicaid. VNS Therapy for epilepsy has specifically approved codes for physicians, surgeons and hospitals. We are actively pursuing favorable coverage decisions to expand reimbursement to include VNS Therapy for

F-38

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TRD. Our long-term growth is highly dependent upon progress in obtaining favorable national and regional coverage policies in TRD and maintaining adequate coverage policies in epilepsy.

Note 18. Geographic Information

		Net Sales
		52 Weeks Ended		52 Weeks Ended		53 Weeks Ended
		April 28, 2006		April 29, 2005		April 30, 2004
United States		$	107,906,412	$	90,281,978	$	100,224,277
International			15,535,163		13,160,592		10,497,222
	Total	$	123,441,575	$	103,442,570	$	110,721,499

		Long-Lived Assets
		April 28, 2006		April 29, 2005
United States		$	14,502,293	$	8,659,804
International			522,051		342,454
	Total	$	15,024,344	$	9,002,258

      Sales are classified according to the country of destination, regardless of the shipping point.

      All assets located outside of the U.S. are classified as “International.”

F-39

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 19. Quarterly Financial Information — Unaudited

      The following table sets forth certain unaudited condensed quarterly financial data for the 52 weeks ended April 28, 2006 and April 29, 2005. This information has been prepared on the same basis as the consolidated financial statements and all necessary adjustments have been included in the amounts below to present fairly the selected quarterly information when read in conjunction with the consolidated financial statements and notes thereto. Historical quarterly financial results and trends may not be indicative of future results. The table below also discloses the impact of the restatement on quarterly financial information. See also “Note 1. Restatements”.

Consolidated Balance Sheets for the Fiscal Year Ended April 28, 2006

				July 29, 2005						October 28, 2005						January 27, 2006
				(1)			(1)			(2)			(2)			(3)			(3)
				As Reported			As Restated			As Reported			As Restated			As Reported			As Restated
ASSETS
	Current Assets:
		Cash and cash equivalents		$	26,688,131		$	26,688,131		$	118,914,091		$	118,914,091		$	99,491,659		$	99,491,659
		Restricted cash									—			—			—			—
		Short-term marketable securities			16,500,000			16,500,000			—			—			—			—
		Accounts receivable, net			18,083,871			18,083,871			20,284,545			20,284,545			20,051,838			20,051,838
		Inventories			11,300,770			11,300,770			14,863,660			14,863,660			16,807,039			16,807,039
		Prepaid and other current assets			2,548,996			2,548,996			2,000,325			2,000,325			4,896,376			4,896,376
			Total Current Assets		75,121,768			75,121,768			156,062,621			156,062,621			141,246,912			141,246,912
		Property and equipment, net			9,116,984			9,116,984			10,184,760			10,184,760			10,605,311			10,605,311
		Other assets			243,311			243,311			4,732,125			4,732,125			5,141,653			5,141,653
			Total Assets	$	84,482,063		$	84,482,063		$	170,979,506		$	170,979,506		$	156,993,876		$	156,993,876
LIABILITIES AND STOCKHOLDERS’ EQUITY
	Current Liabilities:
		Line of credit		$	3,000,000		$	3,000,000		$	—		$	—		$	—		$	—
		Accounts payable			7,858,420			7,858,420			11,630,790			11,630,790			6,714,141			6,714,141
		Accrued liabilities			14,115,533			14,115,533			14,850,836			14,850,836			17,699,402			17,699,402
		Convertible notes			—			—			—			—			—			—
		Other			51,359			51,359			1,640,404			1,640,404			1,615,180			1,615,180
			Total Current Liabilities		25,025,312			25,025,312			28,122,030			28,122,030			26,028,723			26,028,723
	Long-Term Liabilities:
		Convertible notes			—			—			125,000,000			125,000,000			125,000,000			125,000,000
		Other			175,477			175,477			636,692			636,692			879,482			879,482
			Total Long-Term Liabilities		175,477			175,477			125,636,692			125,636,692			125,879,482			125,879,482
			Total Liabilities	$	25,200,789		$	25,200,789		$	153,758,722		$	153,758,722		$	151,908,205		$	151,908,205
	Stockholders’ Equity:
		Preferred Stock			—			—			—			—			—			—
		Common Stock			250,690			250,690			253,464			253,464			254,597			254,597
		Additional paid-in capital			213,128,901			234,637,114			218,952,529			238,616,390			220,801,312			240,381,709
		Common stock warrants			—			—			25,200,000			25,200,000			25,200,000			25,200,000
		Hedge on convertible notes			—			—			(38,200,000	)		(38,200,000	)		(38,200,000	)		(38,200,000	)
		Deferred compensation			(4,569,569	)		(7,151,991	)		(7,393,807	)		(9,650,725	)		(6,772,299	)		(8,717,095	)
		Treasury stock			—			—			(9,993,200	)		(9,993,200	)		(9,993,200	)		(9,993,200	)
		Accumulated other comprehensive loss			(643,622	)		(643,622	)		(643,015	)		(643,015	)		(646,468	)		(646,468	)
		Accumulated deficit			(148,885,126	)		(167,810,917	)		(170,955,187	)		(188,362,130	)		(185,558,271	)		(203,193,872	)
			Total Stockholders’ Equity		59,281,274			59,281,274			17,220,784			17,220,784			5,085,671			5,085,671
			Total Liabilities and Stockholders’ Equity	$	84,482,063		$	84,482,063		$	170,979,506		$	170,979,506		$	156,993,876		$	156,993,876

(1)	25,068,972 shares issued and 25,068,972 outstanding as of July 29, 2005.
(2)	25,346,407 shares issued and 25,045,407 outstanding as of October 28, 2005.
(3)	25,459,645 shares issued and 25, 158,645 outstanding as of January 27, 2006.

F-40

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATED BALANCE SHEETS

Consolidated Balance Sheets for the Fiscal Year Ended April 29, 2005:

			July 30, 2004						October 29, 2004						January 28, 2005
			(5)			(5)			(6)			(6)			(7)			(7)
			As Reported			As Restated			As Reported			As Restated			As Reported			As Restated
ASSETS
Current Assets:
	Cash and cash equivalents		$	62,233,437		$	62,233,437		$	54,458,773		$	54,458,773		$	55,259,194		$	55,259,194
	Short-term marketable securities			—			—			—			—			—			—
	Accounts receivable, net			15,769,213			15,769,213			16,111,455			16,111,455			16,703,683			16,703,683
	Inventories			7,655,691			7,655,691			7,367,563			7,367,563			7,112,508			7,112,508
	Prepaid and other current assets			2,293,172			2,293,172			1,870,882			1,870,882			3,178,679			3,178,679
		Total Current Assets		87,951,513			87,951,513			79,808,673			79,808,673			82,254,064			82,254,064
	Property and equipment, net			7,850,074			7,850,074			8,117,685			8,117,685			7,755,497			7,755,497
	Other assets			138,084			138,084			135,766			135,766			144,883			144,883
		Total Assets	$	95,939,671		$	95,939,671		$	88,062,124		$	88,062,124		$	90,154,444		$	90,154,444
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Line of credit		$	9,777,258		$	9,777,258		$	3,000,824		$	3,000,824		$	3,000,000		$	3,000,000
	Accounts payable			4,655,106			4,655,106			3,723,382			3,723,382			3,993,250			3,993,250
	Accrued liabilities			9,958,235			9,958,235			11,213,498			11,213,498			12,528,600			12,528,600
		Convertible notes		—			—			—			—			—			—
	Other			106,660			106,660			71,686			71,686			36,137			36,137
		Total Current Liabilities		24,497,259			24,497,259			18,009,390			18,009,390			19,557,987			19,557,987
Long-Term Liabilities:
	Other						—			—			—			—			—
		Total Long-Term Liabilities		—			—			—			—			—			—
		Total Liabilities		24,497,259			24,497,259			18,009,390			18,009,390			19,557,987			19,557,987
Stockholders’ Equity:
	Preferred Stock			—			—			—			—			—			—
	Common Stock			238,396			238,396			238,715			238,715			239,648			239,648
Additional paid-in capital				193,094,906			210,823,119			193,412,166			208,093,246			194,636,230			211,537,566
Deferred compensation				(543,742	)		(4,447,577	)		(315,000	)		(3,816,902	)		(196,875	)		(3,353,853	)
Treasury stock,				—			—			—			—			—			—
Accumulated other comprehensive loss				(632,708	)		(632,708	)		(542,459	)		(542,459	)		(524,571	)		(524,571	)
Accumulated deficit				(120,714,440	)		(134,538,818	)		(122,740,688	)		(133,919,866	)		(123,557,975	)		(137,302,333	)
		Total Stockholders’ Equity		71,442,412			71,442,412			70,052,734			70,052,734			70,596,457			70,596,457
		Total Liabilities and Stockholders’ Equity	$	95,939,671		$	95,939,671		$	88,062,124		$	88,062,124		$	90,154,444		$	90,154,444

(4)	23,839,573 shares issued and 23, 839,573 outstanding as of July 30, 2004.
(5)	23,871,448 shares issued and 23,871,448 outstanding as of October 29, 2004.
(6)	23,964,780 shares issued and 23,964780 outstanding as of January 28, 2005.

F-41

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Consolidated Quarterly Statements of Operations for the Fiscal Year Ended April 28, 2006:

																					For the 13 Weeks
			For the 13 Weeks Ended						For the 13 Weeks Ended						For the 13 Weeks Ended						Ended
			July 29, 2005						October 28, 2005						January 27, 2006						April 28, 2006
			As Reported			As Restated			As Reported			As Restated			As Reported			As Restated
Net sales			$	27,019,459		$	27,019,459		$	29,070,298		$	29,070,298		$	31,304,205		$	31,304,205		$	36,047,613
Cost of sales				3,760,900			3,781,222			3,791,078			3,806,528			3,868,591			3,882,778			4,351,516
		Gross Profit		23,258,559			23,238,237			25,279,220			25,263,770			27,435,614			27,421,427			31,696,097
Operating Expenses:
	Selling, general and administrative			36,018,060			36,377,804			40,274,020			38,593,690			34,590,677			34,644,483			27,694,219
	Research and development			6,252,508			6,425,332			7,402,409			7,584,441			7,439,619			7,600,284			7,967,651
		Total Operating Expenses		42,270,568			42,803,136			47,676,429			46,142,130			42,030,296			42,244,767			35,661,870
		Loss From Operations		(19,012,009	)		(19,564,899	)		(22,397,209	)		(20,878,360	)		(14,594,682	)		(14,823,340	)		(3,965,773	)
Interest income				412,798			412,798			616,221			616,221			1,139,165			1,139,165			1,043,772
Interest expense				(93,407	)		(93,407	)		(487,758	)		(487,758	)		(1,150,418	)		(1,150,418	)		(1,287,386	)
Other income (expense), net				(148,464	)		(148,464	)		234,869			234,869			4,651			4,651			(21,596	)
Loss before income taxes			$	(18,841,082	)	$	(19,393,972	)	$	(22,033,877	)	$	(20,515,028	)	$	(14,601,284	)	$	(14,829,942	)	$	(4,230,983	)
Income tax expense				19,988			19,988			36,184			36,184			1,800			1,800			41,294
	Net Loss		$	(18,861,070	)	$	(19,413,960	)	$	(22,070,061	)	$	(20,551,212	)	$	(14,603,084	)	$	(14,831,742	)	$	(4,272,277	)
Basic loss per share			$	(0.76	)	$	(0.78	)	$	(0.88	)	$	(0.59	)	$	(0.59	)	$	(0.60	)	$	(0.17	)
Diluted loss per share			$	(0.76	)	$	(0.78	)	$	(0.88	)	$	(0.59	)	$	(0.59	)	$	(0.60	)	$	(0.17	)
Shares used in computing basic loss per share				24,892,661			24,829,661			25,063,925			25,063,925			24,872,249			24,872,249			25,032,043
Shares used in computing diluted loss per share				24,829,661			24,829,661			25,063,925			25,063,925			24,872,249			24,872,249			25,032,043

F-42

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Consolidated Quarterly Statements of Operations for the Fiscal Year Ended April 29, 2005:

			For the 13 Weeks Ended						For the 13 Weeks Ended						For the 13 Weeks Ended						For the 13 Weekends Ended
			July 30, 2004						October 29, 2004						January 28, 2005						April 29, 2005
			As Reported			As Restated			As Reported			As Restated			As Reported			As Restated			As Reported			As Restated
Net sales			$	25,149,322		$	25,149,322		$	25,420,794		$	25,420,794		$	26,212,509		$	26,212,509		$	26,659,945		$	26,659,945
Cost of sales				4,783,132			4,815,778			3,721,452			3,744,486			3,753,623			3,775,223			3,317,534			3,338,553
		Gross Profit		20,366,190			20,333,544			21,699,342			21,676,308			22,458,886			22,437,286			23,342,411			23,321,392
Operating Expenses:
	Selling, general and administrative			18,637,780			20,271,550			19,117,311			16,338,280			18,963,636			21,291,452			24,712,216			29,070,786
	Research and development			4,726,337			4,902,556			4,678,369			4,789,167			4,535,300			4,751,064			5,401,069			5,650,023
		Total Operating Expenses		23,364,117			25,174,106			23,795,680			21,127,447			23,498,936			26,042,516			30,113,285			34,720,809
		Earnings (Loss) From Operations		(2,997,927	)		(4,840,562	)		(2,096,338	)		548,861			(1,040,050	)		(3,605,230	)		(6,770,874	)		(11,399,417	)
Interest income				152,592			152,592			221,313			221,313			292,963			292,963			405,620			405,620
Interest expense				(125,134	)		(125,134	)		(111,186	)		(111,186	)		(100,672	)		(100,672	)		(107,278	)		(107,278	)
Other income, net				66,279			66,279			(35,268	)		(35,268	)		35,455			35,455			18,270			18,270
Earnings (loss) before income taxes				(2,904,190	)		(4,746,825	)		(2,021,479	)		623,720			(812,304	)		(3,377,484	)		(6,454,262	)		(11,082,805	)
Income tax expense				4,542			4,542			4,769			4,769			4,983			4,983			11,819			11,819
	Net Earnings (Loss)		$	(2,908,732	)	$	(4,751,367	)	$	(2,026,248	)	$	618,951		$	(817,287	)	$	(3,382,467	)	$	(6,466,081	)	$	(11,094,624	)
Basic earnings (loss) per share			$	(0.12	)	$	(0.20	)	$	(0.08	)	$	0.03		$	(0.03	)	$	(0.14	)	$	(0.26	)	$	(0.45	)
Diluted earnings (loss) per share			$	(0.12	)	$	(0.20	)	$	(0.08	)	$	0.02		$	(0.03	)	$	(0.14	)	$	(0.26	)	$	(0.45	)
Shares used in computing basic earnings (loss) per share				23,649,269			23,649,269			23,856,708			23,856,708			23,933,766			23,933,766			24,636,669			24,636,669
Shares used in computing diluted earnings (loss) per share				23,649,269			23,649,269			23,856,708			25,401,570			23,933,766			23,933,766			24,636,669			24,636,669

F-43

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 20. Subsequent Events

Governmental Investigation of Options Granting Practices and Other Matters

      The staff of the SEC commenced an informal inquiry of some of our stock option grants and certain other matters. The U.S. Attorney served us with a subpoena for documents related to our stock option grants. For a description of these SEC inquiries and related matters, see “Note 16. Litigation” — section “Governmental Investigation of Options Granting Practices.”

NASDAQ Delisting Notice

      We have received three Staff Determination Letters from the NASDAQ staff informing us that our stock is subject to delisting from The NASDAQ Global Market because we have not timely filed our 2006 Form 10-K, our First Quarterly Form 10-Q, and our Second Quarterly Form 10-Q. For a detailed discussion of these letters and the circumstances surrounding their receipt, see “Note 16. Litigation — NASDAQ Delisting Notice.”

Stockholder Derivative Litigation

      We are a nominal defendant in six stockholder derivative lawsuits pending in federal and state court in Texas. For a detailed discussion of these lawsuits, see “Note 16. Litigation — Stockholder Derivative Litigation.”

Convertible Notes Indenture Default Notice

      Pursuant to the Indenture, we are required to deliver to the Trustee “within 15 days after we file them” with the SEC copies of all Forms 10-K and other information, documents and other reports that we are required to file with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended. On July 31, 2006, we received the Notice of Default from the Trustee, pursuant to which the Trustee asserts that we are in default under the Indenture as a result of our failure (1) to timely file with the SEC our 2006 Form 10-K by July 12, 2006 and (2) to deliver a copy of the 2006 Form 10-K to the Trustee by July 27, 2006.

      On October 2, 2006, we received the Notice of Acceleration from the Trustee informing us that, pursuant to the Indenture, the Trustee has declared the Notes due and payable at their principal amount together with accrued and unpaid interest, and fees and expenses, and it demands that all such principal, interest, fees and expenses under the Notes be paid to the Trustee immediately.

      We believe that neither a default nor an “event of default” have occurred under the Indenture. Section 9.6 of the Indenture requires us to deliver to the Trustee “within 15 days after it files them” with the SEC copies of all Forms 10-K and other information, documents and other reports that we are required to file with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended. Section 9.6 of the Indenture specifically requires us to deliver a copy of our 2006 Form 10-K within 15 days after the date it is filed with the SEC. This Indenture provision does not require us to file the 2006 Form 10-K by any particular date. We will furnish to the Trustee copies of our 2006 Form 10-K within 15 days after we file such report with the SEC. We believe that this action will comply fully with the Indenture.

      To clarify our rights and responsibilities under the Indenture, we filed a declaratory judgment action on October 3, 2006 styled Cyberonics, Inc. v. Wells Fargo Bank, N.A., as Trustee Under Indenture, No. 06-63284, in the 165th District Court of Harris County, Texas. In the lawsuit, we seek a declaration that no event of default has occurred under the Indenture and request attorney fees under the Declaratory Judgment Act.

F-44

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      On December 19, 2006, the Trustee served us with a copy of a summons and complaint in an action styled, Wells Fargo Bank, N.A. v. Cyberonics, Inc., No. 06-CV-15272, pending in the United States District Court for the Southern District of New York, alleging that we have breached the Indenture.

      If our interpretation of Section 9.6 of the Indenture is determined to be incorrect, a default and, therefore, an “event of default” will have occurred under the Indenture. If an event of default has occurred under the Indenture, all unpaid principal and accrued interest on the outstanding Notes will be due and payable immediately unless we negotiate an amendment to the terms of the Indenture.

Excise Tax Remediation Under Internal Revenue Code Section 409A

      Section 409A of the Internal Revenue Code imposes an excise tax on a grantee’s gain from the exercise of a stock option granted with an exercise price less than the fair market value of the stock on the date of the grant. The excise tax applies only to that portion of a grant that vests after December 31, 2004, and any grants that vest after December 31, 2004 and are exercised on or before December 31, 2005 are exempt from the excise tax. The proposed regulations under section 409A permit us to avoid the excise tax by adjusting the exercise price for an affected grant up to the fair market value on the date of the grant. As to Section 16 officers, the adjustment must be implemented by December 31, 2006. As to non-Section 16 officers, the adjustment must be implemented by December 31, 2007.

      As discussed in “Note 16. Litigation — Governmental Investigations of Options Granting Practices,” the Audit Committee recently concluded that incorrect measurement dates were used for certain of our stock option grants. Unless the exercise price for certain of these grants is adjusted to the fair market value on the date of the grant, the grantees will be subject to the section 409A excise tax. Our Board of Directors has approved a plan to offer a payment to current and former Section 16 officers, exclusive of members of our Board of Directors, Mr. Robert P. Cummins (“Mr. Cummins”), former Chief Executive Officer and Chairman of the Board and Ms. Pamela B. Westbrook (“Ms. Westbrook”), former Chief Financial Officer in consideration of the officer’s agreement to amend their stock option agreements to adjust the exercise price to the fair market value on the date of the grant. The cost of this plan is estimated to be approximately $0.5 million.

      Our Board of Directors is considering a similar plan to offer a payment to each affected current and former employee. If approved, we intend to implement the plan during the remainder of fiscal year 2007.

Departure of Directors or Certain Officers

      On November 17, 2006, Mr. Cummins resigned from all positions with us and our Board. In connection with Mr. Cummins’ resignation, we entered into a Resignation Agreement, dated November 17, 2006, with Mr. Cummins (the “Cummins Resignation Agreement”). The Cummins Resignation Agreement provided for the payment of approximately $1.7 million in cash within five days, the issuance of 75,000 unregistered shares of our common stock to Mr. Cummins, the acceleration of vesting for outstanding options and restricted stock grants and the payment of certain benefits. The Cummins Resignation Agreement also provided for the payment to Mr. Cummins of an amount equal to the cash value of 75,000 shares of our common stock within one week of the filing of this Form 10-K for the fiscal year ended April 28, 2006 and for the payment of cash for certain tax payments that will be incurred by Mr. Cummins as provided in paragraph 6(f) of his employment agreement.

      On November 19, 2006, Ms. Westbrook resigned from all positions with us. In connection with Ms. Westbrook’s resignation, we entered into a Resignation Agreement, dated November 19, 2006, with Ms. Westbrook (the “Westbrook Resignation Agreement”). The Westbrook Resignation Agreement provided for the payment of $300,000 in cash to Ms. Westbrook within five days and the acceleration and vesting of any stock options and restricted stock that would have vested within the next 12 months if Ms. Westbrook had

F-45

CYBERONICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

remained employed by us. Also on November 19, 2006, we entered into a consulting agreement with Ms. Westbrook (the “Westbrook Consulting Agreement”). The Westbrook Consulting Agreement provides that Ms. Westbrook will advise us with respect to financial matters, including the preparation and filing of this Form 10-K and Quarterly Reports on Form 10-Q for the quarters ended July 28, 2006 and October 27, 2006. We agreed to pay Ms. Westbrook $1,200 per day for these services.

Stock Repurchase Program

      In May 2006, our Board authorized the repurchase of up to 3.0 million shares of our Common Stock in amounts, and at time and prices to be determined and approved by the Board of Directors. No repurchases of our Common Stock have been made under the stock repurchase program.

F-46

INDEX TO EXHIBITS

      The exhibits marked with the asterisk symbol (*) are filed with this Form 10-K. The exhibits marked with the cross symbol (†) are management contracts or compensatory plans or arrangements filed pursuant to Item 601(b)(10)(iii) of Regulation S-K.

					SEC File or
Exhibit					Registration		Exhibit
Number			Document Description	Report or Registration Statement	Number		Reference
	3	.1	Amended and Restated Certificate of Incorporation of Cyberonics, Inc.	Cyberonics, Inc.’s Registration Statement on Form S-3 filed on February 21, 2001		333-56022		3.1
	3	.2	Bylaws of Cyberonics, Inc.	Cyberonics, Inc.’s Current Report on Form 8-K filed on September 12, 2000		000-19806		3.1
	3	.3	Amendment No. 1 to the Bylaws of Cyberonics, Inc.	Cyberonics, Inc.’s Current Report on Form 8-K filed on March 30, 2001		000-19806		3.1
	4	.1	Second Amended and Restated Preferred Shares Rights Agreement dated August 21, 2000 between Cyberonics, Inc. and BankBoston, N.A. (formerly known as The First National Bank of Boston), including the Form of First Amended Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Cyberonics, Inc., Form of Rights Certificate and Stockholder Rights Plan attached thereto as Exhibits A, B and C, respectively	Cyberonics, Inc.’s Current Report on Form 8-K filed on September 12, 2000		000-19806		4.1
	4	.2	Amendment No. 1 to Second Amended and Restated Preferred Share Rights Agreement dated April 26, 2001	Cyberonics, Inc.’s Annual Report and Transition Report on Form 10-K for the fiscal period ended April 27, 2001 and the transition period from July 1, 2000 to April 27, 2001		000-19806		4.2
	4	.3	Amendment No. 2 to Second Amended and Restated Preferred Share Rights Agreement dated October 31, 2001	Cyberonics, Inc.’s Annual Report on Form 10-K for the fiscal period ended April 30, 2004		000-19806		4.3
	4	.4	Amendment No. 3 to Second Amended and Restated Preferred Share Rights Agreement dated December 9, 2003	Cyberonics, Inc.’s Current Report on Form 8-K filed on December 12, 2003		000-19806		99.2
	4	.5	Amendment No. 4 to Second Amended and Restated Preferred Share Rights Agreement dated January 9, 2004	Cyberonics, Inc.’s Current Report on Form 8-K filed on January 13, 2004		000-19806		99.2
	4	.6	Indenture dated September 27, 2005 between Cyberonics, Inc. and Wells Fargo Bank, National Association, as Trustee	Cyberonics, Inc.’s Current Report on Form 8-K filed on October 3, 2005		000-19806		10.1
	4	.7	Registration Rights Agreement dated September 27, 2005 between Cyberonics, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as the Initial Purchaser	Cyberonics, Inc.’s Current Report on Form 8-K filed on October 3, 2005		000-19806		10.2
	4	.8	Form of Confirmation of OTC Convertible Note Hedge executed September 21, 2005 to be effective September 27, 2005	Cyberonics, Inc.’s Current Report on Form 8-K filed on October 3, 2005		000-19806		10.3
	4	.9	Form of Confirmation of OTC Warrant Transaction executed September 21, 2005 to be effective September 27, 2005	Cyberonics, Inc.’s Current Report on Form 8-K filed on October 3, 2005		000-19806		10.4
	10	.1*	License Agreement dated March 15, 1988 between Cyberonics, Inc. and Dr. Jacob Zabara
	10	.2*	License Agreement dated August 22, 2000 between Cyberonics, Inc. and Dr. Mitchell S. Roslin

					SEC File or
Exhibit					Registration		Exhibit
Number			Document Description	Report or Registration Statement	Number		Reference
	10	.3*	Lease Agreement dated December 5, 2002 between Cyberonics, Inc., as Lessee, and Space Center Operating Associates, LP, as Lessor, commencing on December 8, 2002 for Space “A” and January 1, 2004 for Space “B”, as amended March 3, 2003 (First Amendment), October 2, 2003 (Second Amendment), March 11, 2004 (Third Amendment), March 17, 2004 (Subordination, Non-Disturbance and Attornment), March 19, 2004 (Transfer of Ownership to Triple Net Properties, LLC), March 23, 2005 (Fourth Amendment), May 5, 2005 (Fifth Amendment) and July 13, 2005 (Sixth Amendment)
	10	.4	Letter Agreement dated March 28, 1997 between The Clark Estates, Inc. and Cyberonics, Inc.	Cyberonics, Inc.’s Annual Report on Form 10-K for the fiscal period ended June 30, 1997		000-19806		10.11
	10	.5	Purchase Agreement dated September 21, 2005 between Cyberonics, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as the Initial Purchaser	Cyberonics, Inc.’s Current Report on Form 8-K filed on September 27, 2005		000-19806		10.1
	10	.6	Credit Agreement between Cyberonics, Inc. and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as Administrative Agent and as Lender and as Sole Bookrunner and Sole Lead Arranger, and the additional Lenders thereto dated January 13, 2006	Cyberonics, Inc.’s Current Report on Form 8-K filed on January 19, 2006		000-19806		10.1
	10	.7	Consent and Amendment Agreement effective October 31, 2006 to the Credit Agreement between Cyberonics, Inc. and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., individually as Lender, Administrative Agent, Sole Bookrunner and Sole Lead Arranger, and the additional Lenders thereto	Cyberonics, Inc.’s Current Report on Form 8-K filed on November 6, 2006		000-19806		10.1
	10	.8	Consent and Amendment Agreement effective July 27, 2006 to the Credit Agreement between Cyberonics, Inc. and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., individually as Lender, Administrative Agent, Sole Bookrunner and Sole Lead Arranger, and the additional Lenders thereto	Cyberonics, Inc.’s Current Report on Form 8-K filed on July 27, 2006		000-19806		10.1
	10	.9	Consulting Agreement between Cyberonics, Inc. and BK Consulting, an assumed name used by Reese S. Terry, Jr., a founder and member of the Board of Directors of Cyberonics, Inc., dated August 25, 2005	Cyberonics, Inc.’s Current Report on Form 8-K filed on August 30, 2005		000-19806		99.1
	10	.10	Amendment to Consulting Agreement between Cyberonics, Inc. and BK Consulting dated August 23, 2006	Cyberonics, Inc.’s Current Report on Form 8-K filed on August 25, 2006		000-19806		10.1
	10	.11	Termination of Consulting Agreement between Cyberonics, Inc. and BK Consulting effective November 19, 2006	Cyberonics, Inc.’s Current Report on Form 8-K filed on December 13, 2006		000-19806		10.1
	10	.12	Consulting Agreement dated November 19, 2006 between Cyberonics, Inc. and Pamela B. Westbrook	Cyberonics, Inc.’s Current Report on Form 8-K filed on November 20, 2006		000-19806		10.3
	10	.13†	Cyberonics, Inc. Amended and Restated 1996 Stock Option Plan	Cyberonics, Inc.’s Registration Statement on Form S-8 filed on April 29, 1999		333-77361		4.1

					SEC File or
Exhibit					Registration		Exhibit
Number			Document Description	Report or Registration Statement	Number		Reference
	10	.14†	First Amendment to the Cyberonics, Inc. Amended and Restated 1996 Stock Option Plan dated October 2, 2000	Cyberonics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000		000-19806		10.2
	10	.15†	Second Amendment to the Cyberonics, Inc. Amended and Restated 1996 Stock Option Plan dated March 21, 2001	Cyberonics, Inc.’s Annual Report on Form 10-K for the fiscal period ended April 30, 2004		000-19806		10.12
	10	.16†	Third Amendment to the Cyberonics, Inc. Amended and Restated 1996 Stock Option Plan dated July 27, 2001	Cyberonics, Inc.’s Registration Statement on Form S-8 filed on January 22, 2002		333-81158		4.4
	10	.17†	Fourth Amendment to the Cyberonics, Inc. Amended and Restated 1996 Stock Option Plan dated January 2002	Cyberonics, Inc.’s Registration Statement on Form S-8 filed on January 22, 2002		333-81158		4.5
	10	.18†	Fifth Amendment to the Cyberonics, Inc. Amended and Restated 1996 Stock Option Plan dated July 19, 2002	Cyberonics, Inc.’s Registration Statement on Form S-8 filed on July 25, 2002		333-97095		4.1
	10	.19†	Cyberonics, Inc. Amended and Restated 1997 Stock Plan	Cyberonics, Inc.’s Registration Statement on Form S-8 filed on March 8, 2001		333-56694		4.5
	10	.20†	First Amendment to the Cyberonics, Inc. Amended and Restated 1997 Stock Plan dated March 21, 2001	Cyberonics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended July 26, 2002		000-19806		10.1
	10	.21†	Second Amendment to the Cyberonics, Inc. Amended and Restated 1997 Stock Plan dated November 21, 2002	Cyberonics, Inc.’s Proxy Statement for the Annual Meeting of Stockholders filed on October 15, 2002		000-19806		Annex B
	10	.22†	Cyberonics, Inc. 1998 Stock Option Plan	Cyberonics, Inc.’s Registration Statement on Form S-8 filed on November 3, 1998		333-66691		4.1
	10	.23†	First Amendment to the Cyberonics, Inc. 1998 Stock Option Plan dated March 21, 2001	Cyberonics, Inc.’s Annual Report on Form 10-K for the fiscal period ended April 30, 2004		000-19806		10.23
	10	.24†	Cyberonics, Inc. New Employee Equity Inducement Plan	Cyberonics, Inc.’s Registration Statement on Form S-8 filed on August 27, 2003		333-108281		4.3
	10	.25†	Cyberonics, Inc. 2005 Stock Plan	Cyberonics, Inc.’s Proxy Statement for the Special Meeting of Stockholders filed on April 14, 2005		000-19806		Annex A
	10	.26†*	Release Agreement dated December 27, 2006 between Cyberonics, Inc. and Stanley H. Appel, M.D.
	10	.27†*	Amendment to Stock Option Agreement dated December 27, 2006 between Cyberonics, Inc. and Stanley H. Appel, M.D.
	10	.28†*	Stand Alone Stock Option Agreement dated July 6, 2001 between Cyberonics, Inc. and Michael A. Cheney
	10	.29†	Severance Agreement effective January 1, 2002 between Cyberonics, Inc. and Michael A. Cheney	Cyberonics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended January 25, 2002		000-19806		10.1
	10	.30†*	Employment Agreement effective June 15, 2006 between Cyberonics, Inc. and Michael A. Cheney
	10	.31†*	Stock Option Agreement Amendment and Bonus Agreement dated December 24, 2006 between Cyberonics, Inc. and Michael A. Cheney
	10	.32†*	Indemnification Agreement effective August 1, 2003 between Cyberonics, Inc. and Robert P. Cummins
	10	.33†	Employment Agreement effective August 5, 2005 between Cyberonics, Inc. and Robert P. Cummins	Cyberonics, Inc.’s Current Report on Form 8-K filed on August 9, 2005		000-19806		99.1

					SEC File or
Exhibit					Registration		Exhibit
Number			Document Description	Report or Registration Statement	Number		Reference
	10	.34†*	Letter Agreement Regarding Advancement of Attorney’s Fees effective September 28, 2006 between Cyberonics, Inc. and Robert P. Cummins
	10	.35†	Resignation Agreement effective November 17, 2006 between Cyberonics, Inc. and Robert P. Cummins	Cyberonics, Inc.’s Current Report on Form 8-K filed on November 20, 2006		000-19806		10.1
	10	.36†	Severance Agreement effective June 1, 2003 between Cyberonics, Inc. and William Steven Jennings	Cyberonics, Inc.’s Annual Report on Form 10-K for the fiscal period ended April 25, 2003		000-19806		10.21
	10	.37†*	Officer Stock Option Plan Agreement dated June 2, 2003 between Cyberonics, Inc. and William Steven Jennings
	10	.38†*	Employment Agreement effective June 15, 2006 between Cyberonics, Inc. and William Steven Jennings
	10	.39†*	Stock Option Agreement dated November 1, 1996 between Cyberonics, Inc. and Shawn P. Lunney
	10	.40†*	Amendment to Stock Option Agreement dated December 27, 2006 between Cyberonics, Inc. and Shawn P. Lunney
	10	.41†	Severance Agreement effective May 1, 2001 between Cyberonics, Inc. and Shawn P. Lunney	Cyberonics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended July 27, 2001		000-19806		10.4
	10	.42†*	Employment Agreement effective June 15, 2006 between Cyberonics, Inc. and Shawn P. Lunney
	10	.43†*	Release Agreement dated December 27, 2006 between Cyberonics, Inc. and Shawn P. Lunney
	10	.44†*	Indemnification Agreement effective June 28, 1999 between Cyberonics, Inc. and Alan J. Olsen
	10	.45†	Severance Agreement effective July 14, 2003 between Cyberonics, Inc. and George E. Parker	Cyberonics, Inc.’s Annual Report on Form 10-K for the fiscal period ended April 30, 2004		000-19806		10.40
	10	.46†*	Officer Stock Option Plan Agreement dated July 14, 2003 between Cyberonics, Inc. and George E. Parker
	10	.47†	Employment Agreement effective July 14, 2003 between Cyberonics, Inc. and George E. Parker	Cyberonics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended October 24, 2003		000-19806		10.1
	10	.48†*	First Amendment to Employment Agreement effective June 15, 2006 between Cyberonics, Inc. and George E. Parker
	10	.49†*	Stand Alone Stock Option Agreement dated August 23, 2001 between Cyberonics, Inc. and Richard L. Rudolph, M.D.
	10	.50†	Severance Agreement effective January 1, 2002 between Cyberonics, Inc. and Richard L. Rudolph, M.D.	Cyberonics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended January 25, 2002		000-19806		10.3
	10	.51†*	Employee Restricted Stock Agreement dated July 22, 2005 between Cyberonics, Inc. and Richard L. Rudolph, M.D.
	10	.52†*	Employment Agreement effective June 15, 2006 between Cyberonics, Inc. and Richard L. Rudolph, M.D.

					SEC File or
Exhibit					Registration		Exhibit
Number			Document Description	Report or Registration Statement	Number		Reference
	10	.53†*	Stock Option Agreement Amendment and Bonus Agreement dated December 28, 2006 between Cyberonics, Inc. and Richard L. Rudolph, M.D.
	10	.54†	Severance Agreement effective October 27, 2003 between Cyberonics, Inc. and Randal L. Simpson	Cyberonics, Inc.’s Annual Report on Form 10-K for the fiscal period ended April 30, 2004		000-19806		10.41
	10	.55†	Employment Agreement effective October 27, 2003 between Cyberonics, Inc. and Randal L. Simpson	Cyberonics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended January 23, 2004		000-19806		10.1
	10	.56†*	First Amendment to Employment Agreement effective June 15, 2006 between Cyberonics, Inc. and Randal L. Simpson
	10	.57†*	Stock Option Agreement Amendment and Bonus Agreement dated December 29, 2006 between Cyberonics, Inc. and Randal L. Simpson
	10	.58†*	Employment Agreement effective June 15, 2006 between Cyberonics, Inc. and Pamela B. Westbrook
	10	.59†*	Letter Agreement Regarding Advancement of Attorney’s Fees effective October 12, 2006 between Cyberonics, Inc. and Pamela B. Westbrook
	10	.60†	Resignation Agreement effective November 19, 2006 between Cyberonics, Inc. and Pamela B. Westbrook	Cyberonics, Inc.’s Current Report on Form 8-K filed on November 20, 2006		000-19806		10.2
	10	.61†*	Indemnification Agreement effective August 1, 2003 between Cyberonics, Inc. and David S. Wise
	10	.62†	Severance Agreement effective September 17, 2003 between Cyberonics, Inc. and David S. Wise	Cyberonics, Inc.’s Annual Report on Form 10-K for the fiscal period ended April 30, 2004		000-19806		10.42
	10	.63†	Employment Agreement effective September 17, 2003 between Cyberonics, Inc. and David S. Wise	Cyberonics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended October 24, 2003		000-19806		10.2
	10	.64†*	First Amendment to Employment Agreement effective June 15, 2006 between Cyberonics, Inc. and David S. Wise
	10	.65†*	New Employee Equity Inducement Plan Agreement dated September 17, 2003 between Cyberonics, Inc. and David S. Wise
	10	.66†*	Form of Indemnification Agreement for directors of Cyberonics, Inc.
	10	.67†	Form of Director Restricted Stock Agreement effective June 1, 2005	Cyberonics, Inc.’s Quarterly Form 10-Q for the quarter ended July 29, 2005		000-19806		10.1
	10	.68†*	Form of Amendment to Director Stock Option Agreement dated December 2006 between Cyberonics, Inc. and the directors listed on the schedule attached thereto
	10	.69†*	Form of Stock Option Agreement under the Cyberonics, Inc. Amended and Restated 1996 Stock Option Plan between Cyberonics, Inc. and the executive officers listed on the schedule attached thereto
	10	.70†*	Form of Stock Option Agreement under the Cyberonics, Inc. 2005 Stock Plan between Cyberonics, Inc. and the executive officers listed on the schedule attached thereto

					SEC File or
Exhibit					Registration		Exhibit
Number			Document Description	Report or Registration Statement	Number		Reference
	10	.71†	Form of Employee Restricted Stock Agreement under the Cyberonics, Inc. 2005 Stock Plan (one-year vesting)	Cyberonics, Inc.’s Quarterly Form 10-Q for the quarter ended July 29, 2005		000-19806		10.2
	10	.72†*	Form of Employee Restricted Stock Agreement under the Cyberonics, Inc. 2005 Stock Plan (five-year vesting) and the executive officers listed on the schedule attached thereto
	21	.1*	List of Subsidiaries of Cyberonics, Inc.
	23	.1*	Consent of Independent Registered Public Accounting Firm
	24	.1*	Powers of Attorney (included on the Signature Page to this Annual Report on Form 10-K)
	31	.1*	Certification of the Chief Executive Officer of Cyberonics, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2*	Certification of the Chief Financial Officer of Cyberonics, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1*	Certification of the Chief Executive Officer and Chief Financial Officer of Cyberonics, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EX-10.1

Exhibit 10.1

LICENSE AGREEMENT

     This License Agreement (“Agreement”) is entered into as of March 15, 1988 by and between CYBERONICS, INC., a Delaware corporation, having a principal place of business at 827 W. Main Street, League City, TX 77573 (“Licensee”), and DR. JACOB ZABARA, an individual residing at 200 Locust Street, #22F, Philadelphia, PA 19106 (“Licensor”).

     WHEREAS, Licensor owns a patent relating to Neurocyberenetic Prosthesis Technology (U.S. Patent No. 4,702,254) and other pending patent applications and know-how, and technology relating thereto (collectively referred to as the “Technology”); and,

     WHEREAS, Licensee wishes to obtain all exclusive license under the Licensed Patents as hereinafter defined and under the Technology generally to further test and develop the Technology and to manufacture and market products based on such Technology upon the terms and conditions hereinafter set forth;

     NOW, THEREFORE, in consideration of the promises and of the mutual covenants hereinafter contained, the parties agree as follows:

     1. Definitions.

          (a) The term “Licensed Patents,” as used in this Agreement, shall mean and include both individually and collectively the United States and foreign patents and patent applications listed in Schedule A attached to this Agreement, such additional United States and foreign patent applications acquired by Licensor on improvements and variations upon inventions disclosed in said listed applications or other inventions “in the field of nerve stimulation, and such additional patent applications as may be filed by Licensor pursuant to Section 7 of this Agreement, all Letters Patent which shall issue on said applications and any division thereof, and all reissues, continuations, or extensions of said Letters Patent.

          (b) The term “Product,” as used in this Agreement, shall mean a product or portion of a product that (i) embodies a device invention claimed in a Licensed Patent (or which had been “claimed” in a Licensed Patent which has been declared invalid), or (ii) which is specifically intended to be used to practice a method claimed in a Licensed Patent (or which had been “claimed” in a Licensed Patent which has been declared invalid) and which is manufactured and sold by or for Licensee (or its sublicensees); provided that at the time and in the territory of manufacture or sale of such Product a Licensed Patent is pending or in force claiming such device or method (or such device or method had been “claimed” in a Licensed Patent previously valid in the territory of manufacture or sale but which has been declared invalid).

     2. Licensor’s Representations & Warranties. Licensor represents and warrants that:

          (a) He owns the Licensed Patents and has the legal power and authority to extend the rights granted to Licensee pursuant to this Agreement and he has not assigned, licensed, pledged or compromised the Licensed Patents or made any commitments or offers inconsistent with or in derogation of the rights created by this Agreement.

          (b) Neither the Licensed Patents nor any claims contained therein have been declared invalid or unenforceable and to the best of Licensor’s knowledge there are no patent infringement suits or asserted patent infringement claims pertaining to the Licensed Patents and there are no suits or claims attacking the validity of any Licensed Patent, and Licensor knows of no basis for any such claim.

          (c) Licensor has no knowledge of any information likely to have a material effect on the validity or enforceability of any Licensed Patent or any claim thereof which was not disclosed to the Patent Office of the respective countries in which Patent Applications were filed during the prosecution of the application from which any Licensed Patent matured or, with respect to pending applications, from which any Licensed Patent may mature.

     3. License.

          (a) Licensor hereby grants to Licensee, and Licensee hereby accepts from Licensor, upon the terms and conditions herein after specified, the exclusive, worldwide right and license under the Licensed Patents and Technology to further test and develop the Technology, to make, to have made, to use, to sell, to lease, to implant, and to have implanted and otherwise dispose of Products and to sublicense the rights created hereby pursuant to the terms of Section 5 hereof. Such license shall be perpetual unless this Agreement is terminated pursuant to Section 3.0 hereof.

          (b) Any person, firm, or corporation purchasing Products from Licensee or any Sublicensee hereunder, and its successors and assigns, shall automatically enjoy a royalty-free right under the Licensed Patents to implant and/or have implanted and to use the particular Product, and to manufacture, purchase, implant, and use any auxiliary products which may be necessary or desirable to provide a complete implant.

     4. Royalties, Records and Reports.

          (a) Licensee agrees to pay to Licensor, in consideration for the license granted pursuant to this Agreement, royalties on the Net Sales Value (as hereinafter defined) of all Products sold during the term of this Agreement at the rate of six percent (6.0%) on the first $12,000,000 of Net Sales Value and three percent (3.0%) on all Net Sales Value after said $12,000,000, cumulative and not annual, for the life of U.S. Patent No, 4,702,254, including any extensions, renewals, continuations, divisions, or continuations-in-part thereof. Upon expiration of the last to expire of U.S. Patent No. 4,702,254 (including any extensions or renewals thereof) or any continuation, division or continuation-in-part thereof, the royalty rate payable pursuant to this Section 4(a) shall be reduced to two percent (2.0%) on the first $12,00.0,000 of Net Sales Value and one percent (1.0%) on all Net Sales Value after said $12,000,000, cumulative and not annual. It is understood and agreed that Licensee shall have no obligation to make any payment to Licensor under this Section 4(a) or Section 4(d) from and after the date on which all of the Licensed Patents (including any extensions or renewals thereof) have expired or have been declared invalid by any judicial decree, order or final judgment beyond right of further appeal, except royalties at the percentile rate specified in this Section 4(a) or Section 4(b), as the case may be, on the Net Sales Value of Products sold under the license created by Section 3 of this

-2-

Agreement prior to such date, and upon such date the license granted by Section 3 hereof shall be fully paid.

          (b) If U.S. Patent No. 4,702,254 and all continuations, divisions, and continuations-in-part thereof are held invalid by any judicial decree, order or final judgment beyond further right i of appeal, the-percentile rate at which royalties shall be payable to Licensor pursuant to Section 4(a) shall be retroactively reduced to two percent (2.0%) on the first $12,000,000 of Net Sales Value and one percent (1.0%) on all Net Sales Value after said $12,000,000 with respect to Products sold after the filing of a claim in a court of competent jurisdiction which claim results in the invalidation of U.S. Patent No. 4,702,254 and all continuations, divisions and continuations-in-part thereof (the “Claim”).

          (c) In the event of U.S. Patent No. 4,702,254 .and all continuations, divisions and continuations-in-part thereof being declared invalid, and notwithstanding anything to the contrary contained herein, no further royalty payments shall be made to Licensor until such time as the aggregate royalties payable on products sold after filing of the Claim at the percentile rate specified in Section 4(b) are equal to the actual aggregate royalties already paid to Licensor on products sold after filing of the claim, at which time royalty payments as provided in this Section 4 shall resume. The right created by this Section 4(c) shall be a right to recover excess royalties paid during the pendency of the claim from future royalties payable to Licensor hereunder only; Licensee shall have no right, claim or cause of action against Licensee to recover such excess royalties from Licensor.

          (d) Licensor agrees to pay Licensee a minimum royalty of $36,000 per year ($12,000 per year if the events specified in Section 4(b) occur), payable on a monthly basis until a Product is first sold and on a quarterly basis thereafter. Payments made pursuant to this Section 4(d) shall be paid at the beginning of the month or quarter, as the case may be, and shall be deducted from any royalties payable pursuant to Section 4(a) and shall not constitute an additional royalty obligation of Licensee.

          (e) The term “Net Sales Value,” as used in this Section 4, shall mean the full amount actually received by Licensee or its sublicensees (exclusive of sales by Licensee to its sublicensees) for Products sold by Licensee or its sublicensees to customers less the sum of the following, where applicable:

     (i) Discounts allowed, commissions paid in lieu of trade discounts, and commissions paid to independent sales representatives or agents, in the amounts customary in the trade;

     (ii) Sales and/or use taxes (or other taxes equivalent thereto), duties or any other taxes or levies directly imposed by any governmental authority upon and with reference to particular sales;

     (iii) Outbound transportation costs prepaid or allowed by way of freight equalization or otherwise;

     (iv) Cartons, packing, and crating charged separately ;

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     (v) Amounts refunded, allowed, or credited in connection with shortages, returns, or defective, articles;

          (f) Where proceeds from the sale of Products are received in currency other than United States Dollars, the Net Sales Value of such foreign sales shall be the U.S. Dollar equivalent of such proceeds determined by multiplying the foreign currency actually received by the applicable exchange rate in effect on the last day in the quarter in which such proceeds were received, as published in the Wall Street Journal for such date.

          (g) Only one royalty shall be payable on a Product at the applicable percentile rate specified in Section 4(a) or 4(b), as the case may be, regardless of the number of Licensed Patents or use of Technology under which such Product has been manufactured, used or sold. In those cases where a Product is sold as a part of an article which includes additional materials or components, the production of which does not use the inventions of the Licensed Patents, the Net Sales Value shall be based on the sales price at which Licensee would sell the Product independently of such other materials or components in an arm’s length transaction.

          (h) Licensee agrees to keep full, true, and accurate records and books of account containing all particulars which may be necessary to show the royalties payable to Licensor. Such books of account shall be kept at Licensee’s principal place of business and shall be available, upon thirty (30) days notice, for inspection during business hours, by independent auditors reasonably acceptable to Licensee appointed and paid by Licensor provided, however, that if upon audit it is determined that Licensor is entitled, to., receive an additional royalty amount in excess of five percent (5%) over the amount previously paid during the period subject to “audit, then Licensee shall pay the reasonable fees and expenses of such independent auditors. Such records shall be retained by Licensee for a period of six (6) years following the end of the calendar year to which they pertain; provided, however, that Licensor’s right to inspect such records pursuant to this Section 4(h) shall be limited to the right to inspect records pertaining to the two-year period ending on the close of the calendar quarter immediately preceding such inspection. Only one such inspection shall be made in any calendar year. The auditors shall disclose to Licensor only the gross sales value of Products sold, the deductions therefrom, the Net Sales Value thereof, and the amount of royalties due and payable to Licensor thereon, along with any necessary supporting evidence. Any information obtained by the auditors from any such inspection shall be kept confidential by Licensor and the auditors and shall be used only for the purpose of determining the correctness of the statements of Net Sales value and royalties due and payable to Licensor. The auditors shall be employed expressly upon such terms and conditions.

          (i) Licensee agrees that on or before the 60th day after the close of each of its quarterly accounting periods throughout the term of this Agreement, Licensee shall forward to Licensor a statement, certified by an Officer of Licensee, of the receipts for Products sold by Licensee for which payment is received during the accounting period preceding the period in which each such statement is rendered, the aggregate in each category of deductions which have been made therefrom pursuant to the provisions of section 4(e) above, and the royalties payable thereon. Licensee shall concurrently forward to Licensor a Statement of the receipts for Products sold by sublicensees for which Licensee received royalty or other licensing fees from such sublicensees during the accounting period preceding the period in which each such statement is

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rendered, the aggregate in each category of deductions which have been made therefrom pursuant to Section 4(e) above, and the royalties payable thereon. Licensee shall simultaneously pay to Licensor the amount of royalties due.

          (j) The parties agree that any subsequent downward adjustments of Licensee’s and its sublicensees’ receipts from any particular sale of Products upon which royalties have been paid, due to Product failure or inadequacy, cancellation of purchase orders or contracts, or any other event causing Licensee to make a financial refund to its customers, either in whole or in part, will be credited against any future receipts on which royalties become payable.

     5. Sublicensing.

          (a) Licensee shall have the exclusive right under the Licensed Patents to grant sublicenses to others provided, however, that with respect to Products sold by any such sublicensee, Licensee shall pay to Licensor royalties equal to the royalties that would have been payable with respect to such Product sales had such sales been made by Licensee. The Net Sales Value of sales made by any sublicensees shall be aggregated with the Net Sales Value of Sales made by Licensee for determination of the applicable royalty rate payable pursuant to Section 4(a) or 4(b), as the case may be.

          (b) Licensee shall consult with Licensor regarding any prospective sublicensees. Notwithstanding the foregoing, the granting by Licensee of sublicenses under the Licensed Patents shall be in the sole discretion of Licensee, and Licensee shall have the sole power to determine whether or not to grant sublicenses, to whom such sublicensees shall be granted and the royalty rates and terms and conditions of such sublicenses.

     6. Assignment.

          (a) This Agreement and the licenses and rights hereunder are not assignable by either party without the prior written consent of the other party, which consent will not be unreasonably withheld; provided, however, that without obtaining Licensor’s consent, Licensee may assign its rights and obligations hereunder to a successor in interest who acquires substantially all of the business of Licensee whether by sale of substantially all of the assets, sale of stock, merger or other form or corporate reorganization.

          (b) This Agreement shall inure to the benefit of and be binding upon Licensor and Licensee, and their respective successors and assigns.

     7. Future Filings; Patent Expenses.

          (a) In the event that Licensee should wish Licensor to file any patent applications corresponding to any of the Licensed patents in specific countries other than those enumerated in Schedule A or file any patent applications on improvements and variations upon inventions disclosed in the Licensed Patents or other inventions in the field of nerve stimulation, it shall advise Licensor in writing, naming such countries or improvements, variations or inventions, as the case may be. Licensor shall thereupon file patent applications as requested. All such patent applications and patents shall be filed in the name of and, be the property of

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Licensor and shall be included in the Licensed Patents. Licensee shall pay the reasonable expenses, including reasonable fees for patent counsel, for filing, prosecuting, and paying annuities or applicable maintenance fees on such requested patent applications, on any patent applications relating to the Technology pending as of the date thereof and shall pay the issuance fee of and any applicable maintenance fee on any patent issued thereon. In the event Licensee elects to discontinue pursuing any patent application or applications (whether or not such applications have been prepared or filed) it shall so notify Licensor in writing and Licensor shall discontinue pursuing such application or applications (or may pursue such application or applications at its own expense); provided, however, that Licensee shall pay the reasonable expenses, including reasonable fees for patent counsel, incurred prior to Licensee notifying Licensor of its election not to pursue an application or applications. Licensor further agrees that he will not file any patent applications relating to the Licensed Patents, the Technology or the field of nerve stimulation without the consent of Licensee; provided, however, that if such consent is withheld, Licensor may file such application but shall bear all expenses associated with such filing or any patent issuing thereon.

          (b) In the event that Licensee notifies Licensor that Licensee would like Licensor to file any patent applications pursuant to Section 7(a) and Licensor fails to take reasonable steps within a reasonable amount of time to prepare and file such application or applications, Licensee reserves the right hereunder to retain its own patent counsel to prepare and prosecute any such patent applications, and Licensor hereby agrees to assist and cooperate with Licensee’s patent counsel in the preparation and prosecution of such patent applications; provided, however, that notwithstanding Licensee’s retention of patent counsel, Licensee shall pay the reasonable fees of Licensor’s patent counsel actually incurred in connection with reviewing any patent applications prepared by Licensee’s patent counsel.

     8. Covenants.

          (a) Licensor shall promptly furnish Licensee with copies of all applications for Letters Patent licensed hereunder and shall keep Licensee promptly informed as to their prosecution, sending Licensee copies of Patent Office actions and amendments to such applications.

          (b) Licensor covenants that for the term of this Agreement he will use his best efforts to renew and maintain all Licensed Patents (at Licensee’s expense as provided in Section 7 hereof).

          (c) Licensor covenants that for the term of this Agreement he will not assign, license, pledge or compromise the Licensed Patents nor make any commitments or offers inconsistent with or in derogation of the rights created by this Agreement.

          (d) Licensee covenants that for the term of this Agreement it will use its best efforts to develop and market a Product or Products.

     9. Term. This Agreement shall expire at the earlier of (i) the end of the full term of each Letters Patent included in the Licensed Patents or (ii) at such time as all of the Licensed Patents shall have been declared invalid by any judicial decree, order or final judgment beyond

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further right of appeal; provided, however, that the license created hereby shall survive expiration of this Agreement as provided in Section 3(a) hereof.

     10. Termination.

          (a) This Agreement may be terminated by Licensee as follows:

     (i) For the first three (3) years of this Agreement, Licensee may terminate this Agreement without cause on the first, second or third anniversary of execution hereof by Licensee provided Licensee gives written notice to Licensor of its intention to terminate no later than sixty (60) days before such anniversary.

     (ii) If this Agreement is not terminated within the first three years as set forth above, this Agreement shall run for successive three-year periods starting from the third anniversary of execution thereof by Licensee and may not be terminated by Licensee without cause during such three-year periods but may be terminated without cause by Licensee at the end of each such three-year period provided Licensee gives notice of its intention to terminate no later than sixty (60) days before the expiration of such three-year period;

     (iii) In addition to the foregoing, this Agreement may be terminated by Licensee in the event that Licensor shall have materially breached any provision hereof, provided that Licensee shall first give written notice of its intention to terminate which notice shall state the grounds thereof and provided further that Licensor shall have sixty (60) days to cure any alleged breach.

          (b) This Agreement may be terminated by Licensor for cause only and provided that Licensor shall first give written notice of his intention to terminate which notice shall state the grounds thereof. Licensee shall have sixty (60) days from receipt of any such notice to cure any alleged breach. Subject to the provisions of Section 11 hereof, “Cause” for purposes of this Section 10(b) shall be defined as:

     (i) Failure of Licensee to make royalty payments as provided in Section 4 hereof;

     (ii) Failure to begin feasibility clinical studies of the Technology (such as would be permitted under the “Custom Devise” exemption of the United States Food and Drug Administration (“FDA”)) within one (1) year of the date hereof if stimulators developed and purchased from an independent producer are used or two (2) years from the date hereof if a stimulator developed by Licensee is used;

     (iii) Failure to begin formal clinical studies of the Technology (such as would be permitted under the Investigational Device Exemption of the FDA) within three (3) years from the date hereof;

     (iv) Failure to file a Pre-Market Approval Application with the FDA within six (6) years from the date hereof.

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          (c) Upon termination of this Agreement pursuant to this Section 10, all licenses, rights, and obligations hereunder shall cease and terminate and Licensee shall immediately cease manufacturing and selling Products; provided, however, that the licenses and rights granted under Section 3 hereof shall continue as to all Products previously manufactured during the term of this Agreement, or actually in manufacture upon the date of termination, for the full terms of the Letters Patent under which such Product is manufactured, provided that royalties are paid with respect to such Products pursuant to Section 4 hereof.

     11. Force Majeure. The time by which, the conditions subsequent specified in Sections 10(b)(ii) — (iv) must be satisfied shall be extended for a period of time equal to the period of any delay resulting from delays or difficulties arising in connection with the clinical studies and/or obtaining requisite regulatory approval provided such delays or difficulties are due to events beyond the control of Licensee.

     12. Marketing Requirements. Licensee shall provide with all Products such notice or notices of the Licensed Patents reasonably contemplated to comply with the laws of the countries under which such Letters Patent have issued.

     13. Technical Assistance. Licensor shall assist, consult, and cooperate with Licensee in the development, design, engineering, manufacturing/testing and inspection of the Products. Licensor shall provide such assistance to Licensee at such times and for such duration as Licensee shall reasonably request, provided such assistance does not interfere with Licensor’s responsibilities as a faculty member of Temple University. For two (2) years from the date of this Agreement, such assistance shall be provided to Licensee without compensation (other than reimbursement of out-of-pocket expenses reasonably incurred in connection with providing such assistance). Following such initial two-year period, Licensor shall continue to provide such assistance as Licensee may reasonably request and shall be compensated therefor as provided in the separate consulting agreement executed concurrently herewith.

     14. Patent Enforcement. Licensee may bring any action for infringement of the Licensed Patents either in Licensor’s name alone or jointly with Licensor and Licensor agrees to assist Licensee in any such action upon Licensee’s request. Any such action brought by Licensee shall be solely at Licensee’s expense, and any amounts recovered thereby shall be divided between Licensee and Licensor as follows:

          (a) Licensee shall first recoup all expenses and legal fees expended in such action,

          (b) The amount recovered, net of Licensee’s expenses and fees as provided in Section 14(a), shall be divided eighty percent (80%) to Licensee and twenty percent (20%) to Licensor.

     15. Public Statements.

          (a) Licensor agrees not to publish or caused to be published any article, study, analysis, or other writing concerning the Technology or stimulation of the vagus nerve for the treatment of epilepsy and not to deliver or permit others to deliver any oral presentation prepared by Licensor containing information concerning the Technology or stimulation of the vagus nerve

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for the treatment of epilepsy (such writings and presentations being referred to as “Public Statements”) prior to the earlier of (i) three years from the date hereof, or (ii) the clinical investigators publishing or presenting the results of the clinical studies of the Technology conducted on the initial is patients. After such publication by the clinical investigators or three years, whichever is earlier, Licensor shall not, for the term of this Agreement, make any Public Statement without first obtaining the written consent of Licensee, which consent shall not be unreasonably withheld. The restrictions on Licensor’s right to make Public statements created by this Section 15(a) shall, terminate immediately in the event that all of the clinical investigators withdraw from the clinical study.

          (b) Licensee agrees that Licensor may have access to technical data generated in connection with scientific studies concerning the Technology conducted by or on behalf of Licensor and, subject to Section 15(a), may use such data in writings or oral presentations concerning the Technology. Licensee further agrees that Licensor will be named as a co-author in any article, study, analysis or other writing concerning the Technology if Licensor actively participated in the underlying research. Licensee further agrees that Licensor shall have the right to review any article, study, analysis or other writing prepared by or on behalf of Licensee prior to publication; provided, however, that Licensee reserves the right to publish or present any such article, study, analysis or writing notwithstanding Licensor’s objections thereto.

     16. General.

          (a) Modification. This Agreement may be modified only by a writing signed by each party.

          (b) Nonwaiver. The failure of any party to enforce at any time any of the provisions hereof shall not be construed to be a waiver of the right of such party thereafter to enforce any such provision.

          (c) Notices. Notices under this Agreement shall be sufficient only if mailed by certified or registered United States mail, return receipt requested, or personally delivered to the parties at their addresses first set forth above or as amended by notice pursuant to this subsection. Notice by mail shall be deemed received three (3) days after deposit.

          (d) Entire Agreement. This Agreement terminates the letter of intent between Licensor, Reese Terry, Cyberonics, Inc., a Texas corporation (“Cyberonics Texas”), as amended and assigned from Cyberonics Texas to Licensee, and supersedes all proposals, oral or written, all negotiations, conversations or discussions between or among the parties relating to this Agreement and all past course of dealing or industry custom. The terms and conditions of this Agreement shall prevail, notwithstanding any variance with the written instrument, submitted by any party.

          (e) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument.

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     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above.

LICENSOR: DR. JACOB ZABARA

/s/ Jacob Zabara

LICENSEE: CYBERONICS, INC.
     a Delaware corporation

/s/ Reese S. Terry, Jr.

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SCHEDULE A

UPDATED ATTACHMENT TO
JACOB ZABARA LICENSE AGREEMENT

December 31, 1991

			Date
4,702,254	US	NeuroCybernetic Prosthesis	Oct. 27, 1987
4,867,164	US	NeuroCybernetic Prosthesis	Sept. 19, 1989
5,0258,807	US	NeuroCybernetic Prosthesis	June 25, 1991
577,549	Australia	NeuroCybernetic Prosthesis	March 3, 1989
1,259,379	Canada	NeuroCybernetic Prosthesis	September 12, 1989
0,156,854	Eurpoean	NeuroCybernetic Prosthesis	September 5, 1990
	Austria, Belgium, Switzerland, Germany, France, United
	Kingdom, Liechtenstein, Luxembourg, Netherlands, Sweden
503,504/84	Japan	Application Number	September 11, 1984

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EX-10.2

Exhibit 10.2

LICENSE AGREEMENT

     THIS AGREEMENT (“Agreement”) dated as of August 22, 2000 (the “Effective Date”) by and between Mitchell S. Roslin, M.D., a citizen of the United States of America residing in New York, NY (“Licensor”), and Cyberonics, Inc., a Delaware corporation with offices in Houston, Texas (“Licensee”).

Recitals:

     Licensee is engaged in designing, developing, investigating, testing, and marketing specialized medical devices primarily used or to be used for treating disorders by nervous system stimulation, and owns basic patents related to the use of nerve stimulation for eating, endocrine and other disorders, including patents on the use of vagus nerve stimulation (VNS) to treat obesity;

     Licensor is medical doctor licensed to practice medicine in the State of New York, and is a co-inventor with Burke T. Barrett of Licensee and Ramesh Reddy, M.D. on a United States patent application for bi-lateral VNS for the treatment of obesity, Serial No. 09/346,396, filed on or about July 1, 1999, and/or continuations or divisions thereof, and a PCT counterpart application thereof (collectively, “the ‘396 Application”), the original animal studies for which were initiated by Licensor with participation, assistance, support, advice and devices of Licensee; and

     Licensee and Licensor desire to enter into an agreement under which Licensee will acquire from Licensor the exclusive right and license to practice the inventions) covered by the ‘396 Application to the fullest extent of Licensor’s right, title and interest in and to the invention(s), and in and to all other inventions conceived, made, reduced to practice, owned or controlled by Licensor in the field of nervous system stimulation, on the terms and conditions set forth in this Agreement.

     In consideration of the foregoing recitals, and the mutual undertakings set forth herein, Licensee and Licensor (collectively, “the Parties”) do hereby AGREE AS FOLLOWS:

Article I. Definitions. As used in this Agreement, terms shall have the following meanings:

     1.01 “Confidential Information” shall mean information of Licensee relating to its business plans, experimental products, research or development activities, financial information, identity of customers and key personnel, marketing and distribution, and other transactions, actual or prospective, treated by Licensee as secret and protected as such by confidentiality or nondisclosure agreements or the like and by applicable marking of documents and other tangible items with words indicative of information of confidential or secret content and with applicable notice where the content is communicated orally or visually.

     1.02 “FDA” shall mean the U.S. Food and Drug Administration, which has responsibility under the law for, among other things, establishing protocol for clinical investigation of medical devices and granting Investigational Device Exemption (“IDE”), determining from results of clinical investigation whether a medical device is safe and effective for treating a disease or disorder, and

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granting Pre-Market Approval (“PMA”) of medical devices.

     1.03 “Invention” shall mean an advance, innovation, discovery, or improvement in a product, process, method, or technique, whether patentable or not, conceived, made, or reduced to practice by Licensor, alone or with others, or owned or controlled in whole or in part by Licensor, at any time during the term of this Agreement, in the field of nervous system stimulation.

     1.04 “Licensed Patents” shall mean United States patent application Serial No. 09/346,396 filed July 1, 1999 in the names of Mitchell Roslin and others for “Treatment of Obesity by Bilateral Vagus Nerve Stimulation”, and all continuations, continuations in part and divisions thereof, all patents issued, reissued, reexamined, and renewed (e.g., by payment of maintenance fees or annuities, as the case may be) thereon, and all counterparts (i.e., corresponding applications and patents) and equivalents (i.e., statutorily protected or designated by status of invention, characterized as other than a patent application or patent) thereof filed or issued in other countries (including but not limited to nationalizations under the Patent Cooperation Treaty (PCT) in the name (with or without others), on behalf, or with concurrence of Licensor; and any and all Inventions, whether or not applications for patent, patents or equivalents are filed thereon, and, if filed, such patent, patents or equivalents. The Licensed Patents as of the Effective Date hereof are set forth in Exhibit A (attached hereto and integrated herein), subject to modification from time to time to add newly arising, filed or issued Licensed Patents as provided herein.

     1.05 “Licensed Products” shall mean any and all products, devices, apparatus, and systems, and “Licensed Methods” shall mean any and all methods, techniques, and processes, covered by any claim(s) of the Licensed Patents.

     1.06 “Net Sales” shall mean gross sales of Licensed Products by Licensee or its sublicensee(s), as the case may be, less taxes and tariffs (by whatever name they may be designated) imposed by governmental authorities on the manufacture, sale, importation, lease or storage of Licensed Products and actually paid by Licensee (or its sublicensee(s)); packing and freight charges (including insurance costs for transportation) actually included in Licensee’s (or its sublicensee’(s’)) invoices for Licensed Products; and credits for returns, discounts, and allowances actually granted by Licensee (or it sublicensee(s)) to customers for Licensed Products. In the event that a Licensed Product is disposed of in a transaction with a third party other than an arms length sale between unrelated parties, the transaction shall be treated and accounted for by Licensee and its sublicensees, as applicable, as a typical sale at the average gross sales price of the Licensed Product by Licensee or the sublicensee, as the case may be, in the market in which such transaction occurred.

     1.07 “License Fee” shall mean a fee paid to Licensee by a sublicensee for the privilege of receiving a sublicense, which is neither based on Net Sales by the sublicensee nor deductible from royalties paid or payable to Licensee by the sublicensee for its Net Sales.

Article II. Grant of License.

     2.01 Exclusive License. Licensor agrees to grant and hereby does grant to Licensee the

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exclusive worldwide right and license to all of Licensor’s rights in and to the Licensed Patents, including but not limited to the exclusive worldwide right and license to make, have made, use, sell, import, export and otherwise dispose of the Licensed Products, and to practice the Licensed Methods.

     2.02 Right to grant Sublicenses. The license granted to Licensee hereunder shall include the exclusive right to grant sublicenses to third parties for the exercise of any or all of the rights granted in the Licensee’s license in any territory constituting a country, portion of a country, or countries of the world.

Article III. Royalties; Advances; Audit.

     3.01 Royalties.

     (a) Licensee shall pay Licensor Royalties at the royalty rate specified in Exhibit B applied to (i) Net Sales of Licensed Products by Licensee and its sublicensees and (ii) any License Fees received by Licensee on account of sublicenses.

     (b) Royalties shall be deemed earned when sales are made, but shall be due and payable quarterly in United States dollars, within 90 days after the end of the fiscal quarter of Licensee in which the applicable sales were made. Only one Royalty shall be due per Licensed Product sold, regardless of the number of Licensed Patents and/or claims that may apply or the number of times a Licensed Product may be used to practice Licensed Methods.

     (c) With each quarterly payment of Royalties, Licensee shall furnish a quarterly report to Licensor setting forth its own and its sublicensees’ cumulative gross sales, permitted deductions and resulting Net Sales of the Licensed Products, License Fees and the Royalty payment due thereon for the applicable fiscal quarter. If no sales of Licensed Products were made in the quarter by Licensee or its sublicensees, the report shall so state.

     3.02 Advances.

     (a) Annual. Licensee shall pay Licensor annual advances (“Annual Advances”) against earned Royalties in the amount of $25,000.00 each, to be paid on January 1 of each year, retroactive to January 1, 2000, for a period of five years ending December 31, 2004 (totaling $125,000.00), or until the first sale of a Licensed Product, whichever occurs first. Annual Advances shall be deducted from Royalties earned at any time during the term of this Agreement (or payable thereafter as provided herein).

     (b) Milestone. Licensee shall also pay Licensor advances for each of the following milestones against future earned Royalties (“Milestone Advances”), within 30 days after the respective milestone is first reached during the term of this Agreement, in the following amounts (up to a maximum cumulative amount of $325,000.00): (1) $25,000.00 upon the first implant by Licensor of a Licensee VNS device in a patient in the pilot clinical study of VNS as a treatment for obesity

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(which milestone the parties acknowledge has been reached as of the date hereof), (2) $50,000.00 upon completion of a 30-patient pilot clinical study of VNS as a treatment for obesity, (3) $100,000.00 upon completion of a pivotal or Phase III clinical study of VNS as a treatment for obesity that would support a Premarket Approval (PMA) application to FDA and submission of the results of that study as part of a PMA application submission to the FDA, and (d) $150,000.00 upon FDA approval of VNS for the treatment of obesity. A prerequisite for the payment of each Milestone Advance, in addition to actual achievement of the respective milestone, is that Licensor shall have performed the implant for milestone (1), and, except in the event of either his death or a disability that prevents him from doing so, Licensor shall have been an active advisor and clinical investigator in the achievement of each of milestones (2), (3) and (4). Milestone Advances shall be deducted from Royalties earned at any time during the term of this Agreement (or payable thereafter as provided herein).

     (c) Deductibility. To the extent that either or both the Annual Advances and Milestone Advances cannot be deducted from earned Royalties because of an insufficiency of Net Sales of Licensed Products, the non-deducted amounts of such advance payments shall not be refundable by Licensor.

     3.03 Audit.

     (a) Licensee shall maintain books and records according to generally accepted accounting principles bearing on its sales of the Licensed Products, and shall, on not less than 30 days’ advance notice of Licensor’s intent to audit, make same available for inspection and audit on its own premises during Licensee’s regular business hours. Any such audit(s) shall be performed by a CPA designated and paid by Licensor(Licensor’s auditor), not more often than annually during the term of this Agreement, with respect to applicable sales made in the preceding calendar year.

     (b) Licensee shall promptly pay any deficiency in Royalties payable to Licensor uncovered by audit, with interest at an annual rate of 1% over the prime rate, calculated from the date(s) the underpaid amount(s) should have been paid. If the deficiency exceeds 10% of the Royalties actually earned for the year under audit, Licensee shall reimburse Licensor’s cost of the audit. Licensor’s agreement with its auditor shall require the auditor not to disclose to third parties Confidential Information of Licensee obtained from the audit, and Licensee may require Licensor’s auditor to sign a non-disclosure agreement to that effect prior to allowing the audit.

     3.04 Change of Control. In the event that Licensee undergoes a change in control (measured as a change in legal or beneficial ownership, or a combination thereof, by a single entity of more than 50% of Licensee’s capital stock entitled to vote for the election of directors) from that which existed at the Effective Date, Licensor shall, upon the occurrence of the change of control, be within 60 days after the change of control is effected, due in cash the difference between $450,000.00 and the sum of any Annual Advances or Milestone Advances that have been made as of the occurrence of the change of control (such difference being the “Accelerated Change of Control Payment”). Upon payment of the Accelerated Change of Control Payment, Licensor will no longer be entitled to any additional Annual Advances or Milestone Advances and a total of $450,000 (including any Royalties

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that have already been deducted as of the occurrence of the change of control) will be deducted from Royalties earned at any time during the term of this Agreement (or payable thereafter as provided herein).

Article IV. Prosecution and Maintenance of Licensed Patents.

     4.01 Prosecution. Licensee shall have the right to prosecute or have prosecuted and bear the entire cost of prosecuting the ‘396 Application, and all other applications among the Licensed Patents, including any applications for patent or counterpart applications Licensee may elect to file or have designated and Licensee shall pay all government fees designated for maintaining the pendency of such applications and of patents maturing therefrom.

     4.02 Notice. Licensor shall give Licensee notice of each and every Invention within 30 days after conception thereof; and shall not make an Invention public without first having given Licensee both notice thereof and a reasonable opportunity to file a patent application on the Invention.

Article V. Infringement.

     5.01 Of Patents of Third Parties by Licensee or Its Sublicensees. Licensee and/or its sublicensees shall defend at their own expense all suits brought against them for infringement of third party patents by their respective manufacture, use, sale, or other disposition of Licensed Products. In no event shall Licensee enter into a settlement containing terms purporting to affect the validity or scope of a Licensed Patent without obtaining prior written consent of Licensor, which shall not be withheld unreasonably.

     5.02 Of the Licensed Patents by Third Parties. During the term of this Agreement, Licensee shall have the option but not the obligation, at its own expense, to investigate and prosecute infringements of the Licensed Patents. Licensee shall be entitled to the entirety of any recovery by way of settlement or award of money damages based on a claim of infringement of a Licensed Patent (collectively, “Claim”), provided, however, that any such recovery shall be treated as Net Sales and subject to Licensor Royalties. If Licensee declines to take action against an alleged infringer, it shall so notify Licensor who shall then have the right to prosecute the infringer at its own expense, and in that event, Licensor and Licensee shall share equally the amount of the recovery, if any, after deduction of Licensor’s costs, including attorney fees, incurred for such prosecution.

     5.03 Joinder and Cooperation of Licensee. Licensee may join Licensor as a party plaintiff in any suit or counterclaim instituted by Licensee for infringement or in defense of validity of a Licensed Patent, provided that Licensee shall indemnify and hold harmless Licensor from and against any damages, losses, awards, costs, and expenses (including attorney’s fees) accrued as a result of or arising from or in connection with such joinder. Whether joined or not, Licensor agrees upon Licensee’s request to provide reasonable assistance and cooperation to Licensee in advancing a Claim or in defending the validity of a Licensed Patent, subject only to Licensee’s reimbursement or direct payment of costs incurred by Licensor for or in connection with such assistance and cooperation.

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     5.04 Non-refundable Royalties; Adjustment. Licensee shall not be entitled to a refund of Royalties paid to Licensor, but if one or more (but less than all) of the Licensed Patents is held by final decision of a court of last resort (as the result of an appeal or a failure to timely prosecute an appeal) to be invalid or unenforceable, Licensor and Licensee shall promptly negotiate an equitable downward adjustment of the royalty rate as to the remaining patents which shall apply to future Net Sales and Exhibit B shall be modified in writing accordingly.

Article VI. Representations and Warranties.

     6.01 By Licensor. Licensor represents and warrants to Licensee that, as of the Effective Date of this Agreement:

     (a) Licensor owns an undivided interest in the Licensed Patents and has complete power and authority to enter into this Agreement and to grant the rights and licenses granted herein to Licensee.

     (b) Licensor is not aware of any information which is material to the patentability or validity of the ‘396 application that he not already brought to the attention of Licensee.

     (c) Licensor has not entered into any agreement or understanding with any third party that conflicts with this Agreement or the rights and licenses granted herein to Licensee.

     6.02 By Licensee. Licensee represents and warrants to Licensor that, as of the Effective Date of this Agreement:

     (a) Licensee has complete power and authority to enter into this Agreement, and to accept and perform all of its other obligations on the terms and conditions set forth herein.

     (b) Licensee does not require any approval from any third party to enter into this Agreement.

     (c) Licensee’s entry into this Agreement will not conflict with any other agreement or understanding it has with a third party.

     (d) Licensee will defend, indemnify and hold harmless Licensor from and against any liability for manufacture, use, sale, or other activity relating to the Licensed Products or practice of the Licensed Methods, including without limitation all costs, fees (including attorney’s fees), awards, damages, fines, and penalties finally awarded against Licensee or Licensor for any Claim of personal injury, death, emotional distress, property damage, or any other casualty or risk whatsoever. Licensor shall promptly notify Licensee of any Claim or communication relating thereto made to Licensor, shall furnish reasonable assistance and information to Licensee for defense or settlement of such claim, and shall give Licensee authority to assume control of the defense or settlement of the Claim including the right to appoint counsel to implement such defense or settlement.

     6.03 Disclaimers. Nothing contained in this Agreement shall constitute a representation or warranty by Licensor that:

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     (a) a patent will issue from any application encompassed within the Licensed Patents or Improvement Patents; or

     (b) the Licensed Patents are valid or enforceable; or

     (c) the manufacture, use, sale, or other activity relating to the Licensed Products or practice of the Licensed Methods will be free from infringement of third party patent(s).

Article VII. Term and Termination.

     7.01 Term. This Agreement shall commence on the Effective Date, and shall remain in force until the last Licensed Patent expires or is held invalid or unenforceable, unless terminated earlier as provided herein.

     7.02 Termination.

     (a) Licensor or Licensee may terminate this Agreement and the licenses and rights granted to Licensee herein by notice given to the other at any time after 90 days from date of notice to the other of a breach which has not been cured prior to the termination notice; provided, however, if the breach is other than a failure to pay money and cannot reasonably be cured within 90 days but the party charged with having committed the breach has taken reasonable steps to effect a cure within that period and is acting with diligence to complete the cure, then the notice period for breach shall be extended until the cure is effected, not to exceed an additional 60 days. The licenses and rights granted herein shall terminate upon termination of this Agreement.

     (b) Upon termination of this Agreement, Licensee and its sublicensees shall have the right to sell or otherwise dispose of its and their then remaining inventory of the Licensed Products, subject to compliance with all applicable provisions of Article III above, including the continued payment of Royalties.

     7.03 Surviving Provisions. The provisions of Articles III, V (to the extent of any then-remaining obligations of the Parties), VI, section 7.02(b), and sections 8.01, 8.03, 8.05, and 8.06, shall survive expiration or termination of this Agreement.

Article VIII. General.

     8.01 Notices. Any and all notices or other communications required or permitted to be given under any of the provisions of this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or the earlier of (i) 6 business days after the mailing thereof (postage prepaid, first class mail) and (ii) the actual receipt thereof if delivered by facsimile transmission or if mailed by first class registered mail, return receipt requested, addressed:

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If to Licensor:	Mitchell S. Roslin, M.D.
	149 Beach 144 Street
	Far Rockaway, NY 11694
With copy to:	Matthew I. Roslin, Esq.
	Executive Vice President
	MED3000 Group, Inc.
	Foster Plaza 10
	680 Andersen Drive
	Pittsburgh, PA 15220
	(Facsimile No: 412-937-9221)
If to Licensee:	Cyberonics, Inc.
	16511 Space Center Boulevard, Suite 600
	Houston, TX 77058 Attention: Robert P. Cummins
	(Facsimile No: 281-218-9332)
With copy to:	Blank Rome Comisky & McCauley LLP
	900 17th Street, N.W., Suite 1000
	Washington, D.C. 20006
	Attention: Donald R. Greene, Esq.
	(Facsimile No: 202-463-6915)

or to such changed address as shall have been designated by notice.

     8.02 Assignment. Licensor shall not assign any rights or delegate any duties under this Agreement. Except for an assignment to a successor in interest to Licensee’s business to which this Agreement relates, Licensee shall not assign this Agreement without the prior written consent of Licensor, which shall not be unreasonably withheld or delayed. Except as otherwise provided herein, this Agreement shall be binding on and inure to the benefit of each Party and their respective heirs, personal representatives, executors, successors and assigns.

     8.03 Confidentiality. Licensor shall protect and preserve the confidentiality of all Licensee’s Confidential Information which Licensor may learn in the course of performance under this Agreement, and Licensor agrees not to disclose any such Confidential Information to any third party or use it for his own benefit or the benefit of any third party without the prior written consent of an authorized officer of Licensee.

     8.04 Cooperation. Each Party shall cooperate, and shall take such further action and shall execute and deliver such further documents as may be reasonably requested by the other Party in order to carry out the provisions and purposes of this Agreement.

     8.05 Construction and Law. This Agreement shall be governed and construed in accordance with the laws of the State of Texas, U.S.A. applicable to contracts made and to be performed therein.

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Article and section headings contained in this Agreement are for purposes of convenience of reference only, and are not intended to define or limit the contents of the respective Articles or sections or to be otherwise used for construction of the Agreement.

     8.06 Entire Agreement. This Agreement embodies the entire understanding of the Parties respecting the subject matter hereof, and supersedes all prior and contemporaneous agreements between them respecting that subject matter. This Agreement may not be modified except by a written agreement specifically referring to this Agreement and signed by both Parties. No waiver of any breach or default hereunder shall be considered valid unless given in writing and signed by the Party giving such waiver, and no waiver shall be deemed a waiver of any other contemporaneous or subsequent breach or default.

     IN WITNESS WHEREOF, the parties have executed this Agreement or caused it to be executed by their respective duly authorized representatives, in one or more counterparts, all of which taken together shall be deemed one original, as of the Effective Date hereof.

LICENSEE:
CYBERONICS, INC.
By	/s/ Pamela B. Westbrook Pamela B. Westbrook. Vice President,
	Finance and Administration & CFO
LICENSOR:
/s/ Mitchell S. Roslin
Mitchell S. Roslin, M.D.

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EXHIBIT A

LICENSED PATENTS

•  U.S. Patent Application Serial No. 09/346,396, filed July 1, 1999 in the U.S. Patent and Trademark Office (PTO).

•  Patent Cooperation Treaty (PCT) Application Serial No. US/00/____ , filed June 30, 2000 in United States Receiving Office, based on U.S. Serial No. 09/346,396.

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EXHIBIT B

ROYALTY RATE

The royalty rate payable under Article III of this Agreement shall be:

1.0 % on the first US$10 million of Net Sales of the Licensed Products; and 0.5% of Net Sales of the Licensed Products thereafter.

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EX-10.3

Exhibit 10.3

LEASE AGREEMENT

THIS LEASE AGREEMENT (“Lease”) is entered into by and between Landlord and Tenant, each as defined below in Section 1.

1.	THE PARTIES
	Landlord’s Name and type of entity:	Space Center Operating Associates, L.P. a New Mexico limited partnership
	Landlord’ Address for Notices:	c/o BGK Texas Property Management, Inc. 1235 North Loop West, Suite 1025 Houston, Texas 77008
	Landlord’s Payment Address:	c/o BGK Texas Property Management, Inc. 1235 North Loop West, Suite 1025 Houston, Texas 77008
	Tenant’s Name and type of entity:	Cyberonics, Inc. a Texas corporation
	Tenant’s Address for Notices:	100 Cyberonics Boulevard, Suite 600 Houston, Texas 77058
2.	DEFINITIONS AND BASIC TERMS
The following definitions and basic terms shall have the indicated meanings when used in this Lease:

a.	Building:	The building known as the Cyberonics Building located on the land described on Exhibit “A” attached hereto and whose street address is 16511 Space Center Boulevard.
b.	Premises:	Suites 106, 107, 110 115, 127, 130, 140, 143, 150, 160, 202, 300, 400, 500, and 600 in the Building, The Premises are outlined on the plan attached to the Lease as Exhibit “B-l” and Exhibit “B-2”.
c.	Property:	The Building, the parcel of land upon which the Building is situated and any other improvements located thereon.
d.	Tenant’s Rentable Square Feet:	122,513 rentable square feet as herein defined and referred to as Space “A” containing 95,327 rentable square feet and Space “B” containing 27,186 rentable square feet.
e.	Total Rentable Square Feet in the Building:	144,346
f.	Tenant’s Proportionate Share:	For the period between December 8, 2002 through December 31, 2003, Tenant’s Proportionate Share shall be 66.0406%, Commencing January 1, 2004, Tenant’s Proportionate Share shall increase to 84.8745%. Tenant’s Proportionate Share is defined as the percentage obtained by dividing (i)

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		Tenant’s Rentable Square Feet by (ii) the total Rentable Square Feet in the Building.
g.	Commencement Date:	The Commencement Date for Space “A” (95,327 square feet) shall be December 8, 2002.
		The Commencement Date for Space “B” (27,186 square feet) shall be the date that Landlord delivers possession of Space “B” to Tenant vacant and in its “AS-IS” condition, which is estimated to be January 1, 2004, but in no event will be earlier than January 1, 2004.
h.	Term:	The Term for Space “A” shall be for a period of Eighty-four (84) months and twenty-four (24) days commencing on the Commencement Date for Space “A” and ending at 5:00 p.m. December 31, 2009 subject to adjustment and earlier termination as provided in the Lease.
		The Term for Space “B” shall be for a period of Seventy-two (72) months commencing on the Commencement Date for Space “B” and ending at 5:00 p.m. December 31, 2009 subject to adjustment and earlier termination as provided in the Lease.
i .	Base Rent:

	Space “A”		Space “B”			Total			Annual
	Tenant’s Rentable		Tenant’s Rentable			Tenant’s Rentable			Base Rent		Monthly
Lease Period	Square Feet		Square Feet			Square Feet			(PSF/YR)		Base Rent
12/08/02 -12/31/03		95,327		0			95,327		$	17.00	$	135,046.58
01/01/04-12/31/04		95,327		27,186	*		122,513	*	$	17.20	$	175,601.97	*
01/01/05-12/31/05		95,327		27,186			122,513		$	17.30	$	176,622.91
01/01/06- 12/31/06		95,327		27,186			122,513		$	18.25	$	186,321.85
01/01/07-12/31/07		95,327		27,186			122,513		$	18.50	$	188,874.21
01/01/08 -12/31/08		95,327		27,186			122,513		$	18.75	$	191,426.56
01/01/09-12/31/09		95,327		27,186			122,513			S19.00	$	193,978.92

*The foregoing is based on a Commencement Date for Space “B” of January 1, 2004. If the actual Commencement Date for Space “B” is a later date for any reason, Base Rent with respect to Space “B” shall not commence until the actual Commencement Date.

j.	Additional Rent:	Additional Rent is defined in Section 6.
k.	Rent:	Base Rent, Additional Rent and all other sums that Tenant may owe to Landlord under this Lease.
l.	Security Deposit:	$64,526.17
m.	Expense Stop/ Base Year:	Expense Stop: $0 Base Year: 2003 for both Space “A” and Space “B”.
n.	Permitted Use:	General Office Purposes, business and commercial use, scientific research and development and high technology manufacturing and testing of medical devices and related equipment.
o.	Property Management Company/Address:	BGK Texas Property Management, Inc. 1235 North Loop West, Suite 1025 Houston, Texas 77008
p.	Maximum Construction Allowance:	(See Exhibit “E-l” and “E-2”)
q.	Landlord’s Broker (name and address):	N/A

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r.	Tenant’s Broker (name and address):	Mr. Don R. Kugle Clear Lake Asset Management, Inc. 2019 Enterprise Avenue League City, Texas 77573
s.	Guarantor(s) (name and address):	None
t.	Parking Spaces:	Based on four (4) parking space per 1,000 square feet of rentable area 31 reserved parking spaces based on 25 spaces per 1,000 square feet rentable area.
u.	Parking Rent:	$ -0- per month per Parking Space.

3.	LEASE OF PREMISES
	Landlord, in consideration of the Rent to be paid and the covenants and agreements to be performed by Tenant, does hereby lease unto Tenant the Premises, together with the non-exclusive right and easement to use the parking, if any, and any other common facilities in or on the Building and the Property (including, without limitation, the driveways, sidewalks, loading and unreserved parking areas, lobbies, and hallways) which may from time to time be furnished by Landlord, in common with Landlord and the tenants and occupants of the Building, and their respective agents, employees, customers and invitees; subject however to reasonable restrictions by Landlord as to the use of such common facilities. In addition, Tenant shall have the non-exclusive right to use (but not modify or alter) for the purpose of installing Tenant’s cabling its Proportionate Share of the plenums, risers, and electric closets located in the Building in connection with Tenant’s use and occupancy of the Premises, at no additional cost, subject to Landlord’s reasonable right of approval with respect to the type of use of such space and compliance with all of the terms and provisions of Section 10 below.
4.	TERM
	Tenant is currently occupying Space “A”. If any present occupant of Space “B” holds over and Landlord cannot deliver possession of Space “B” to Tenant on or before January 1, 2004 then (a) Landlord shall not be in default hereunder or be liable for damages therefore and (b) Tenant shall accept possession of Space “B” when Landlord tenders possession thereof to Tenant vacant and in its “AS-IS” condition. Notwithstanding the foregoing, if Landlord fails to deliver possession of Space “B” to Tenant in its required condition by March 1, 2004, the Tenant may terminate this Lease with respect to Space “B” only by delivering written notice thereof to Landlord before Landlord delivers possession of Space “B” to Tenant. By occupying the Premises, Tenant shall be deemed to have accepted the Premises in their condition as of the date of such occupancy, except for completion of any punch-list items and latent defects. Tenant shall execute and deliver to Landlord, within ten days after Landlord has requested same, a letter confirming (i) the Commencement Date with respect to Space “A” and Space “B”, (ii) that Tenant has accepted the Premises, and (iii) that Landlord has performed all of its obligations with respect to the Premises (except for punch-list items specified in such letter).
5.	PAYMENT OF RENT
	a. Payment. Tenant shall timely pay to Landlord, without demand deduction, abatement or offset (except as otherwise expressly set forth herein), the Base Rent, Additional Rent and all other rent at Landlord’s Payment Address. Base Rent shall be payable monthly in advance in United States dollars.
	The first monthly installment of Base Rent (for the period from December 8, 2002 through December 31, 2002) shall be due and payable on the Commencement Date for Space “A”; thereafter, monthly installments of Base Rent for Space “A” and Space “B” shall be due on the first day of each succeeding calendar month during the Term. Base Rent for any fractional month shall be prorated based on 1/365 of the current annual Base Rent for each day of the partial month this Lease is in effect, and shall be due on the respective Commencement Date for Space “A” and Space “B”.

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	b. Late Payments. With respect to each payment that is over five (5) business days late, Landlord may charge Tenant a fee equal to 6% of any delinquent payment to reimburse Landlord for its cost and inconvenience incurred as a consequence of Tenant’s delinquency. In addition, Landlord may charge interest at the lessor of the Prime Rate (defined below) plus two percent (2%) or the maximum rate permitted by applicable law for all payments which are over five (5) business days late. In no event, however, shall the charges permitted under this Section or elsewhere in this Lease, to the extent the same are considered to be interest under applicable law, exceed the maximum rate of interest permitted by applicable law. As used herein, the “Prime Rate” means the prime rate of interest published in the “Money Rates” section of The Wall Street Journal, Southwest Edition on the due date for the payment in question.
6.	ADDITIONAL RENT
	a. Payment of Additional Rent. Tenant shall pay as Additional Rent an amount equal to Tenant’s Proportionate Share multiplied by the difference of (a) the total annual Operating Expenses, as defined below, for the calendar year in question and (b) the Operating Expenses for the Base Year, in each case adjusted in accordance with Section 6d. Landlord may collect such amount in a lump sum, due within 30 days after Landlord furnishes to Tenant an annual Operating Expense Statement as defined below. Alternatively, Landlord may make a good faith estimate of the Additional Rent to be due by Tenant for any calendar year or part thereof during the Term, and, unless Landlord delivers to Tenant a revision of the estimated Additional Rent, Tenant shall pay to Landlord, on the Commencement Date and on the first day of each calendar month thereafter, an amount equal to the estimated Additional Rent for such calendar year or part thereof divided by the number of months in such calendar year during the Term. From time to time during any calendar year (but not more than once in any calendar year), Landlord may estimate and re-estimate the Additional Rent to be due by Tenant for that calendar year and deliver a copy of the estimate or re-estimate to Tenant. Thereafter, the monthly installments of Additional Rent payable by Tenant shall be appropriately adjusted in accordance with the estimations so that, by the end of the calendar year in question, Tenant shall have paid all of the Additional Rent as estimated by Landlord. Any amounts paid based on such an estimate shall be subject to adjustment pursuant to Section 6c when actual Operating Expenses are available for each calendar year.
	For purposes of calculating Additional Rent under this Section 6, the Controllable Operating Expenses (defined below) for each calendar year after the Base Year that may be included in Operating Expenses for such calendar year shall not be more than 4% greater than the Controllable Operating Expenses for the previous calendar year. “Controllable Operating Expenses” shall mean all items of Operating Expenses which are within the reasonable control of Landlord, but specifically excluding taxes, utilities, insurance, costs incurred to comply with governmental requirements, wages and salaries affected by the minimum wage, and other costs beyond the reasonable control of Landlord.
	b. Operating Expenses. “Operating Expenses” shall mean all expenses and disbursements of every kind (subject to the limitations set forth below) which Landlord incurs, pays or becomes obligated to pay in connection with the ownership, operation, and maintenance of the Property (including any parking facilities), determined in accordance with generally accepted accounting principles (“GAAP”), including but not limited to the following:

(i) all taxes and assessments and governmental charges whether federal, state, county or municipal, and whether they be by taxing or management districts or authorities presently taxing or by others, subsequently created or otherwise, and any other taxes and assessments attributable to the Property (or its operation), and the grounds, parking areas, driveways, and alleys on the Property, excluding, however, federal and state taxes on income (collectively, “Property Taxes”); if the present method of taxation changes so that in lieu of the whole or any part of the Property Taxes, there is levied on Landlord a capital tax directly on the rents received therefrom or a franchise tax, assessment, or charge based, in whole or in part, upon such rents for the Property, then all such taxes, assessments, or charges, or the part thereof so based, shall be included within the term “Property Taxes”;

(ii) wages and salaries (including management fees not to exceed those consistent with market conditions in the area in which the Building is located) of all employees at or below the level of building manager fully engaged in the operation, repair, replacement, maintenance, and security of the Property, including taxes, insurance and benefits relating thereto;

(iii) all supplies and materials used in the operation, maintenance, repair, non-capital replacement, and security of the Property;

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(iv) cost of all capital improvements made to the Property which can reasonably be expected to reduce the normal operating costs of the Property; provided, that any amortization for capital improvements made primarily for the purpose of reducing operating expenses shall not exceed the amount which Landlord reasonably estimates has been saved during such year as a result of a reduction of operating expenses related to the installation of such capital improvements, as well as all capital improvements made in order to comply with any law hereafter promulgated by any governmental authority, in each case, as amortized over the useful economic life of such improvements as set forth in the manufacturer’s specifications therefor or, if the manufacturer’s specifications do not specify a useful life, then the useful life thereof determined in accordance with GAAP;

(v) cost of all utilities, other than the cost of utilities actually reimbursed to landlord by the Building’s tenants;

(vi) cost of any insurance or insurance related expense applicable to the Property and Landlord’s personal property used in connection therewith;

(vii) cost of repairs, non-capital replacements, and general maintenance of the Property; and

(viii) cost of service or maintenance contracts with independent contractors for the operation, maintenance, repair, non-capital replacement, or security of the Property (including, without limitation, alarm service, window cleaning, and elevator maintenance).

There are specifically excluded from the definition of the term “Operating Expenses” the following costs:

(1) capital improvements made to the Property, other than capital improvements described in subparagraph (iv) above and except for items which, though capital for accounting purposes, are properly considered maintenance and repair items, such as painting of common areas, replacement of carpet in elevator lobbies, and the like;

(2) repair, replacements and general maintenance paid by proceeds of insurance or by Tenant or other third parties, and alterations attributable solely to tenants of the Property;

(3) interest, amortization or other payments on loans by Landlord;

(4) depreciation of the Building, other improvements located on the Property and other property used in the operation and maintenance thereof;

(5) leasing commissions;

(6) legal expenses, other than those incurred for the general benefit of the Property’s tenants (eg., tax disputes);

(7) renovating or otherwise improving tenant space for other tenants of the Property or vacant space in the Building (except common areas);

(8) correcting defects in the construction of the Building;

(9) federal income taxes imposed on or measured by the income of Landlord from the operation of the Property; and

(10) the additional exclusions from Operating Expenses listed on Exhibit “K” attached hereto.

c. Operating Expense Statement. Landlord shall provide an annual Operating Expense statement including a statement of Landlord’s actual Operating Expenses for the previous year adjusted as provided in Section 6d. If the annual Operating Expense Statement reveals that Tenant paid more for Additional Rent than the actual amount due in the year for which such statement was prepared, then Landlord shall promptly credit (or reimburse, if the Lease has terminated and Tenant is not in default) Tenant for such excess. Likewise, if Tenant paid less than the actual amount due, then Tenant shall promptly pay Landlord such deficiency. This provision applies only to Tenant’s Additional Rent and shall never require a refund or credit of Base Rent.

d. Building Occupancy. With respect to any calendar year or partial calendar year in which the Building is not occupied to the extent of at least ninety-five percent (95%) of the Total Rentable Square

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	Feet in the Building thereof, the Operating Expenses for such period shall be increased to the amount which would have been incurred had the Building been occupied to the extent of ninety-five percent (95%) of the Total Rentable Square Feet in the Building thereof. Operating Expenses grossed-up under this Section 6d shall include only those Operating Expenses that vary with occupancy of the Building.
	e. Taxes. Upon written request from Tenant, Landlord shall provide to Tenant a copy of the assessed value of the Property as determined by the applicable governmental authority. If Tenant requests, Landlord shall protest or appeal the appraised value of the Property in accordance with applicable law. However, if Landlord reasonably believes that such protest would not be successful in reducing taxes for the time period in question, Landlord shall promptly notify Tenant thereof and thereafter permit Tenant, at its expense, to protest or appeal the appraised value of the Property. Subject to the preceding sentence, Tenant waives all rights under the Texas Property Tax Code, now or hereafter in effect, including all rights under Section 41.413 thereof, granting to tenants of real property or lessees of tangible personal property the right to protest the appraised value, or receive notice of reappraisal, of all or any part of the Property, irrespective of whether Landlord has elected to protest such appraised value.
	f. Tenant Inspection Right. After giving Landlord 10-days’ prior written notice thereof, Tenant may inspect or audit Landlord’s records relating to Operating Expenses for any periods of time within two (2) years before the audit or inspection; provided, however, in no event will Landlord be obligated to permit any such inspection or audit to be performed by a consultant or firm that is compensated by Tenant on a contingent fee or percentage of recovery basis. Tenant may not conduct an inspection or have an audit performed more than once during any calendar year. If such inspection or audit reveals that an error was made in calculating Operating Expenses, then Landlord shall refund to Tenant any overpayment of any such costs, or Tenant shall pay to Landlord any underpayment of any such costs, as the case may be, within 30 days after notification thereof. Tenant shall pay the cost of such audit or inspection unless the total Operating Expenses for the time period in question are finally determined to be in error by more than 5% in the aggregate, in which case Landlord shall pay Tenant’s reasonable out-of-pocket audit costs. Tenant shall maintain the results of each such audit or inspection confidential.
7.	SECURITY DEPOSIT
	Contemporaneously with the execution of this Lease, Tenant’s security deposits totaling 564,526.17 shall be transferred from any and all prior Lease Agreements, which shall be held by Landlord without liability for interest and as security for the performance by Tenant of its obligations under this Lease. The Security Deposit is not an advance payment of Rent or a measure or limit of Landlord’s damages upon an Event of Default (defined below). Following an Event of Default and prior to Tenant’s cure of the same, Landlord may, from time to time and without prejudice to any other remedy, use all or a part of the Security Deposit to perform any obligation which Tenant was obligated, but failed, to perform hereunder. Following any such application of the Security Deposit, Tenant shall pay to Landlord on demand the amount so applied in order to restore the Security Deposit to its original amount. Provided that Tenant has performed all of its obligations in accordance with Chapter 93 of the Texas Property Code, Landlord shall return to Tenant the balance of the Security Deposit not applied to satisfy Tenant’s obligations within a reasonable time (but in no event more than thirty (30) days). If Landlord transfers its interest in the Premises and the transferee assumes Landlord’s obligations under this Lease, then Landlord may assign the Security Deposit to the transferee and Landlord thereafter shall have no further liability for return of the Security Deposit.
8.	USE
	Tenant shall occupy and use the Premises only for the Permitted Use and shall comply with all laws, orders, rules, and regulations relating to the use, condition, and occupancy of the Premises. The Premises shall not be used for any use which is disreputable or creates extraordinary fire hazards or results in an increased rate of insurance on the Building or its contents or the storage of any hazardous materials or substances (other than materials and substances used in connection with Tenant’s business in compliance with applicable laws). If, because of Tenant’s acts, the rate of insurance on the Building or its contents increases, then Tenant shall pay to Landlord the amount of such increase on demand, and acceptance of such payment shall not constitute a waiver of any of Landlord’s rights. Tenant shall conduct its business and control its agents, employees, and invitees in such a manner as not to create any nuisance or unreasonably interfere with other tenants or Landlord in its management of the Building.

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9.	TENANT IMPROVEMENTS
	Landlord will provide a tenant improvement allowance as described in Exhibit “E” attached hereto and made a part hereof:
10.	ALTERATIONS
	All improvements to the Premises made after the Commencement Date shall be installed at the expense of Tenant only (except for the tenant improvement allowance to be provided by Landlord pursuant to Exhibit “E”) in accordance with plans and specifications which have been previously submitted to and approved in writing by Landlord, which approval shall not be unreasonably withheld, delayed or conditioned. After the initial Tenant improvements are made, no alterations or physical additions in or to the Premises may be made without Landlord’s prior written consent, which shall not be unreasonably withheld or delayed; however, Landlord may withhold its consent to any alteration or addition that would adversely affect the Building’s structure (i.e., the Building’s exterior walls, roof, elevator shafts, footings, foundations, structural portions of load bearing walls, structural floors and subfloors and structural columns and beams), or the Building’s HVAC, plumbing, electrical, or mechanical systems. Tenant shall not paint or install lighting or decorations, signs, window or door lettering, or advertising media of any type on or about the Premises that is visible from outside the Premises without Landlord’s prior consent. Notwithstanding the foregoing, Tenant shall not be required to obtain Landlord’s consent for repainting or recarpeting the Premises so long as the installation thereof does not involve any core drilling or otherwise adversely affect the Building structure, in each case provided that (1) Tenant delivers to Landlord written notice thereof and plans and specifications therefor prior to commencing any such alterations, additions, or improvements and (2) such alterations, additions and improvements will not adversely affect (A) the Building’s structure, the provision of services to other Building tenants, or the Building’s electrical, plumbing, HVAC, life safety or mechanical systems, (B) the exterior appearance of the Building, or (C) the appearance of the Building’s common areas or elevator lobby areas. All alterations, additions, or improvements (whether temporary or permanent in character, and including all air-conditioning equipment and all other equipment that is in any manner connected to the Building’s plumbing system, but excluding any manufacturing, testing or production equipment or trade fixtures of Tenant (which manufacturing, testing and production equipment and trade fixtures may be removed from the Premises by Tenant) made in or upon the Premises, either by Landlord or Tenant, shall be Landlord’s property at the end of the Term and shall remain on the Premises (unless Landlord requires removal of same by giving written notice thereof at the time Landlord approves the plans and specifications with respect thereto) without compensation to Tenant. Approval by Landlord of Tenant’s plans and specifications prepared in connection with any improvements in the Premises shall not constitute a representation or warranty as to the adequacy or sufficiency of such plans and specifications, or the improvements to which they relate, for any use, purpose, or condition, but such approval shall merely be the consent of Landlord as required hereunder. Tenant shall be responsible for the cost of all action required to cause the Premises (other than restrooms and drinking fountains in the Premises) to comply with the requirements of the Americans with Disabilities Act of 1990 (the “ADA”), and all rules, regulations, and guidelines promulgated thereunder, as the same may be amended from time to time, to the extent such action is necessitated by any installations, additions, or alterations made in or to the Premises at the request of or by Tenant or by Tenant’s use of the Premises (other than retrofit whose cost has been particularly identified as being payable by Landlord in an instrument signed by Landlord and Tenant). If Landlord’s prior consent is required under this Section 10, such consent shall not be unreasonably withheld, conditioned or delayed; however, Landlord may withhold its consent to any such painting or installation which would affect the appearance of the exterior of the Building or of any common areas of the Building. Landlord shall be responsible for the cost of compliance with the ADA for all portions of the Property not subject to the Premises or other leases with tenants.
	The Tenant shall have the continuing right to act as either construction manager or general contractor for any remodeling within its Premises. Any an all remodeling or renovations shall be done only with prior written approval by the Landlord (not to be unreasonably withheld, conditioned or delayed) based on plans submitted to Landlord by Tenant or its agents. All construction/remodeling shall adhere to all State and City code requirements inclusive of ADA regulations. Landlord will have the right to inspect such construction at any time.
	If Tenant desires to perform any work in the Premises thai requires Landlord’s approval or consent under Section 10 and submits to Landlord plans and specifications therefor or change orders thereto, then Landlord shall within seven (7) business days after its receipt of such plans and specifications and within five (5) business days after its receipt of any such change orders with respect thereto, notify

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Tenant whether it approves or disapproves the same; any notice of disapproval shall be accompanied by a statement in reasonable detail of the reasons therefor.

11. LANDLORD’S SERVICES

a. Services. landlord shall furnish to Tenant the services outlined on Exhibit “D” attached hereto Landlord shall maintain the common areas of the Building in reasonably good order and condition.

b.	Excess Utility Use. Tenant shall continue to pay for separately metered electrical consumption for the following areas: (a) the 5-ton condensing unit in the Server Room on the 5th floor, (b) the Termatron Units I and II on the 1st floor, (c) the Microbiology Lab Equipment in Suite 106 on the 1st floor and Tenant shall pay monthly for electrical consumption on any other future non-office equipment which will be monitored by the installation of separate meters.
	Landlord shall use reasonable efforts to furnish electrical current for computers, electronic data processing equipment, special lighting, and other equipment whose electrical energy consumption exceeds Building Standard Capacity (defined below) through the then-existing feeders and risers serving the Building and the Premises, and Tenant shall pay to Landlord the cost of such service within ten (10) days after Landlord has delivered to Tenant an invoice therefor. The amount of such additional consumption shall be paid by Tenant and shall be determined by a separate meter in the Premises which shall be installed by Landlord, at Tenant’s expense. Tenant shall not install any electrical equipment requiring special wiring or exceeding Building Standard Capacity unless approved in advance by Landlord. The use of electricity in the Premises shall not exceed the capacity of existing feeders and risers to or wiring in the Premises without Landlord’s consent and approval Any risers or wiring required to meet Tenant’s excess electrical requirements shall, upon Tenant’s written request, be installed by Landlord, at Tenant’s cost, if, in Landlord’s sole and absolute judgment, the same are necessary and shall not cause permanent damage or injury to the Building or the Premises, cause or create a dangerous or hazardous condition, entail excessive or unreasonable alterations, repairs, or expenses, or interfere with or disturb other tenants of the Building. If Tenant uses machines or equipment (other than general office machines, computers and electronic data processing equipment) in the Premises which materially and adversely affect the temperature otherwise maintained by the air conditioning system or otherwise overload any utility, and Tenant is unable or unwilling to (1) reduce consumption or otherwise eliminate the cause of the increase in temperature otherwise maintained by the air conditioning system or (2) install a supplemental air conditioning system, Landlord may install supplemental air conditioning units or other supplemental equipment in the Premises, and the cost thereof, including the cost of installation, operation, use, and maintenance, shall be paid by Tenant to Landlord within ten (10) days after Landlord has delivered to Tenant an invoice therefor.
	Landlord agrees to furnish Tenant electricity for ordinary office uses equivalent to six (6) watts per rentable square foot connected load (“Building Standard Capacity”). Any electricity use for ordinary office use which exceeds Building Standard Capacity will be billed by Landlord for such excess use with the exception of those areas separately metered and billed.

c. Change. Landlord’s obligation to furnish services under Section 11a shall be subject to the rules and regulations of the supplier of such services and all governmental rules and regulations. Landlord may change services as necessary to comply with such rules or regulations provided that following any such change Landlord shall be able to (and shall) furnish services substantially the same as those required under Section 11a and Exhibit “D”.

d. Restoration of Services; Abatement. Landlord shall use reasonable efforts to restore any service that becomes unavailable. Any unavailability shall not render Landlord liable for any damages caused thereby, nor shall be a constructive eviction of Tenant, constitute a breach of any implied warranty, or, except as provided in the next sentence, entitle Tenant to any abatement of Tenant’s obligations hereunder. However, if Tenant is prevented from making reasonable use of all or any portion of the Premises for more than five (5) consecutive days because of the unavailability of any such service, Tenant shall be entitled to a reasonable abatement of Rent as to the portion of the Premises in question for each day following the fifth (5^th) day such unavailability commenced that Tenant is so prevented from making reasonable use of the Premises. Tenant agrees to promptly notify Landlord in writing of any interruption of services.

If at any time (1) Landlord fails to deliver electrical service, elevator service, HVAC service, sewer service or water service to the Premises (the “Critical Services”) for five (5) consecutive business days after Tenant advises Landlord in writing that the Critical Services are not being provided to the Premises, (2) the unavailability of such Critical Services prevents Tenant from conducting its business

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in the Premises in a manner reasonably comparable to that conducted immediately before such unavailability, and (3) Landlord has not commenced to cure such cessation of Critical Services or has failed to prosecute such cure with reasonable diligence, Tenant shall be entitled to restore such service. Landlord shall reimburse Tenant for its actual, out-of-pocket costs therefor within thirty (30) days after delivery to Landlord of a reasonably detailed invoice and, if requested by Landlord, receipts, bills paid affidavits, and appropriate releases of liens, failing which default interest shall accrue thereon from the date due until the date paid at the Prime Rate plus two percent (2%). Furthermore, subject to Force Majeure, if any Critical Service is not provided to a portion of the Premises for a period of 60 consecutive days and Landlord has not commenced to cure such cessation of Critical Services or has failed to prosecute such cure with reasonable diligence, Tenant shall have the right to terminate this Lease (in its entirety or as to the affected portion of the Premises) by giving Landlord written notice of such termination prior to the date on which such Critical Service is restored to the entire Premises. If the unavailability of such Critical Services is caused by a Taking (defined below) or a Casualty (defined below), then the provisions of this paragraph shall not be applicable thereto; rather, the provisions of Sections 16 and 17 (as the case may be) shall apply. If any such failure to provide such Critical Services prevents Tenant from operating its business in the Premises, Tenant may arrange for such services directly from the supplier thereof.

e. Additional Services. Should Tenant desire any additional services beyond those described here or service outside the normal times Landlord provides such services, Landlord may (at Landlord’s option), upon reasonable advance notice from Tenant, furnish such services and Tenant shall pay Landlord’s actual cost plus 10% overhead for the additional services provided. By way of illustration and not limitation, special equipment requiring abnormal use of water or electricity used as a power source for data processing machines, including air conditioning costs therefor, large business machines and similar equipment of high electrical consumption shall not be standard and the costs thereof shall be paid by Tenant within ten (10) days after Landlord delivers to Tenant an invoice therefor. Landlord shall, at Tenant’s sole cost and expense, install separate meters for measuring consumption of non-standard services within the Premises.

12.	REPAIRS
	a. Landlord’s Repair Obligations. Promptly following receipt of written notice from Tenant of the necessity therefor, landlord shall make necessary repairs to maintain the structure of the Premises and the Building. “Structure” or “structural” for purposes of this Lease shall mean only the following: foundation, roof framing and roof, weight bearing columns and weight bearing walls (specifically excluding interior surfaces). If any repair in the Building is required because of any act, neglect, or fault of Tenant, its employees, licenses, or contractors, then, to the extent Landlord does not receive insurance proceeds to cover such repairs, Tenant shall pay all costs therefor within ten (10) days after Landlord has delivered the Tenant an invoice therefor.
	b. Tenant’s Repairs. Tenant agrees to promptly make all repairs (including replacements and alterations where necessary) necessary to keep the interior of the Premises in good order, repair and condition, except for those necessitated by reasonable use and wear and to repair any damage caused by Tenant or Tenant’s agents, contractors, or invitees to any of the Property. The interior shall include:

(i)	interior faces of the exterior walls of the building;
(ii)	interior face of the ceilings;
(iii)	floor coverings;
(iv)	portion of the wiring, plumbing, pipes, conduits and other water, sewerage, utility, and sprinkler fixtures and equipment in the Premises which serve the Premises exclusively; and which are not located within the floors, walls or ceiling; and
(v)	all interior glass.

c. Performance of Work. All work described in Sections 9 and 10 above and in this Section 12 shall be performed only by Landlord or by contractors and subcontractors approved in writing by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed. Prior to beginning any work, Tenant shall cause all contractors and subcontractors to procure and maintain insurance against such risks, in such amounts, and with such companies as set forth in Section 15c. Unless otherwise agreed to in writing by Landlord, all such work shall place the Property in as good or better condition as that which existed at the time of such repair and shall be performed in accordance with all legal

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	requirements and in a good and workmanlike manner so as not to damage any portion of the Property. Any such work which may affect the HVAC, electrical system, or plumbing must be approved by an engineer acceptable to Landlord, which approval shall not be unreasonably withheld, conditioned or delayed.
	d. Mechanic’s Liens. Tenant shall not permit any mechanic’s or other liens to be filed against the Premises or the Property for any obligation incurred by or at the request of Tenant. If such a lien is filed, then Tenant shall, no later than twenty (20) days after Landlord has notified Tenant thereof in writing, either pay the amount of the lien or diligently contest such lien and deliver to Landlord a bond or other security reasonably satisfactory to Landlord. If Tenant fails to timely take either such action, then Landlord may pay the lien claim without inquiry as to the validity thereof, and any amounts so paid, including expenses and interest, shall be paid by Tenant to Landlord within ten (10) days after Landlord has delivered to Tenant an invoice therefor. Tenant shall indemnify, defend (with counsel reasonably acceptable to Landlord) and hold harmless the Landlord from and against all costs (including attorneys’ fees and costs of suit), losses, liabilities, or causes of action arising out of or relating to any mechanics’ or materialmen’s liens asserted in connection with alterations, repairs, improvements or other work performed by Tenant or Tenant’s agents, contractors or employees.
13.	TRANSFERS
	a. Transfers; Consent. Except as provided in Section 13c below, Tenant shall not, without the prior written consent of Landlord (which Landlord shall not unreasonably withhold, delay or condition): (a) assign, transfer, or encumber this Lease or any estate or interest herein, whether directly or by operation of law; (b) permit any other entity to become Tenant hereunder by merger, consolidation, or other reorganization; (c) if Tenant is an entity other than a corporation whose stock is publicly traded, permit the transfer of an ownership interest in Tenant so as to result in a change in the current control of Tenant(d) sublet any portion of the Premises; (c) grant any license, concession, or other right of occupancy of any portion of the Premises; or (f) permit the use of the Premises by any parties other than Tenant (any of the events listed in clauses (a) through (f) being a “Transfer”). If Tenant requests Landlord’s consent to a Transfer, then Tenant shall provide Landlord with a written description of all terms and conditions of the proposed Transfer, copies of the proposed documentation, and the following information about the proposed transferee: name and address; reasonably satisfactory information about its business and business history; its proposed use of the Premises; banking, financial, and other credit information; and general references sufficient to enable Landlord to determine the proposed transferee’s credit worthiness and character. Landlord agrees that it shall not unreasonably withheld, condition or delay consent if (a) the nature and character of the proposed assignee or sublessee, its business and activities and intended use of the Premises are in Landlord’s reasonable judgment consistent with the current standards of the Building, (b) neither the proposed assignee or sublessee (nor any party which, directly or indirectly, controls or is controlled by or is under common control with the proposed assignee or sublessee) is a department, representative or agency of any governmental body or then an occupant of any part of the Building or a party with whom Landlord is then negotiating to lease space in the Building or in any adjacent Building owned by Landlord or an affiliate of Landlord unless Landlord can not meet the expansion needs (on a per square foot basis) of the proposed transferee in which case the proposed transferee may be an occupant of any part of the Building or a party with whom Landlord is then negotiating to lease space in the Building, (c) the form and substance of the proposed sublease or instrument of assignment is acceptable to Landlord (which acceptance by Landlord shall not be unreasonably withheld, conditioned or delayed) and is expressly subject to all of the terms and provisions of this Lease and to any matters to which this Lease is subject, (d) the proposed occupancy would not (1) materially increase the office cleaning requirements, (2) impose a materially extra burden upon the services to be supplied by Landlord to Tenant hereunder, (3) violate the current rules and regulations of the Building, (4) violate the provisions of any other leases of tenants in the Building or (5) cause alterations or additions to be made to the Building (excluding the Premises), and (e) the granting of such consent will not constitute a default under any other agreement to which Landlord is a party or by which Landlord is bound. Tenant shall reimburse Landlord for its reasonable attorneys’ fees and other out-of-pocket expenses incurred in connection with considering any request for its consent to a Transfer, up to a maximum of $500.00. If Landlord consents to a proposed Transfer, then the proposed transferee shall deliver to Landlord a written agreement whereby it expressly assumes Tenant’s obligations hereunder; however, any transferee of less than all of the space in the Premises shall be liable only for obligations under this Lease that are properly allocable to the space subject to the Transfer, and only to the extent of the rent it has agreed to pay Tenant therefor. Landlord’s consent to a Transfer shall not release Tenant from performing its obligations under this Lease, but rather Tenant and its transferee shall be jointly and severally liable therefor and Tenant shall execute any documents reasonably required by Landlord to confirm same. Landlord’s consent to any Transfer shall not waive Landlord’s rights as to any

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subsequent Transfers. If an Event of Default occurs while the Premises or any part thereof are subject to a Transfer, then Landlord, in addition to its other remedies, may until such time as the Event of Default is cured collect directly from such transferee all rents becoming due to Tenant and apply such rents against Rent. Tenant authorizes its transferees to make payments of rent directly to Landlord upon receipt of notice from Landlord to do so.

b.

Additional Compensation. Tenant shall pay to Landlord, immediately upon receipt thereof, 50% of all compensation received by Tenant for a Transfer (whether permitted or not) that exceeds the sum of (i) Rent paid by Tenant to Landlord for the applicable portion of the Premises covered thereby and (ii) Tenant’s costs reasonably incurred with unaffiliated third parties in connection with such Transfer (e.g., brokerage commissions, attorneys’ fees, tenant improvement allowances and the like). Landlord’s acceptance of such Additional Compensation shall not constitute Landlord’s approval of any Transfer that was not approved by Landlord or permitted by this Lease.

c.

Permitted Transfers. Notwithstanding Section 13a, Tenant may Transfer all or part of its interest in this Lease or all or part of the Premises (a “Permitted Transfer”) to the following without the written consent of Landlord: (1) an Affiliate of Tenant; (2) any entity in which or with which Tenant, or its corporate successors or assigns, is merged or consolidated, in accordance with applicable statutory provisions governing merger and consolidation of business entities, so long as Tenant’s obligations hereunder are assumed by the entity surviving such merger or created by such consolidation and the net worth of the surviving or created corporation is not less than the net worth of Tenant as of the execution date of this Lease; and (3) any entity acquiring all or substantially all of Tenant’s assets if such entity’s net worth after such acquisition is not less than the net worth of Tenant as of the execution date of this Lease. Tenant shall promptly notify Landlord of any such Permitted Transfer. Tenant shall remain liable for the performance of all of the obligations of Tenant hereunder, or if Tenant no longer exists because of a merger, consolidation, or acquisition, the surviving or acquiring entity shall expressly assume in writing the obligations of Tenant hereunder. Additionally, the Permitted Transferee shall comply with all of the terms and conditions of this Lease, including the Permitted Use, and the use of the Premises by the Permitted Transferee may not violate any other agreements affecting the Premises, the Building, landlord or other tenants of the Building. Within ten (10) business days after the effective date of any Permitted Transfer, Tenant agrees to furnish Landlord with copies of the instrument effecting any of the foregoing Transfers. The occurrence of a Permitted Transfer shall not waive Landlord’s rights as to any subsequent Transfers.

14.	INDEMNITY & LIABILITY LIMITATION
	a. Indemnity. Subject to Section 14b, Tenant shall, to the extent permitted by applicable law, defend, indemnify and hold harmless Landlord from all loss, claims, demand, damage, liability or expense, including, attorneys’ fees, resulting from any injury to or death of any person or any loss of or damage to any property caused by or resulting from any act, omission or negligence of Tenant or any officer, employee, agent contractor, licensee, guest, invitee or visitor of Tenant in or about the Premises or the Property. The foregoing provision shall not be construed to make Tenant responsible for loss, damage, liability or expense resulting from injuries caused by any act, omission or negligence of Landlord or of any officer, employee, agent, contractor, invitee or visitor of Landlord. Landlord shall, to the extent permitted by applicable law, defend, indemnify and hold harmless Tenant from all loss, claims, demand, damage, liability or expense, including, attorneys’ fees, resulting from any injury to or death of any person or any loss of or damage to any property caused by or resulting from any act, omission or negligence of Landlord or any officer, employee, agent contractor, licensee, guest, invitee or visitor of Landlord in or about the Premises or the Property. Except for negligence, Landlord shall not be liable for any loss or damage to person, property or Tenant’s business sustained by Tenant, or other persons, which may be caused by the Property or the Premises, or any appurtenances thereto, being out of repair or by the bursting or leakage of any water, gas, sewer or steam pipe, or by theft or by any act of neglect of any tenant or occupant of the Property, or any other person.
	b. Waiver of Claims and Subrogation. Landlord and Tenant each waives any claim it might have against the other for any damage to or theft, destruction, loss or loss of use of any property to the extent the same is insured against under any property insurance policy that covers the Building, the Premises Landlord’s or Tenant’s fixtures, personal property, leasehold improvements or business (or would have been insured against if the property insurance required under this Lease had been maintained as required) regardless of cause or origin, INCLUDING NEGLIGENCE, OTHER FAULT AND STRICT LIABILITY WITHOUT REGARD TO FAULT, OF THE OTHER PARTY HERETO AND ITS AGENTS, EMPLOYEES, OFFICERS, PARTNERS, SERVANTS OR SHAREHOLDERS. Each party also covenants that all property insurance policies carried by each

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shall contain provisions where the insurer waives their right of recovery under subrogation or otherwise against such other party and shall provide evidence thereof to the other party.

15.	INSURANCE
	a. Insurance by Landlord. Landlord shall insure the Building, including the Premises, against loss or damage by fire or other hazards by maintaining a broad form property insurance policy for the full replacement cost of the Building, with extended coverages and traditional business interruption coverage. Landlord shall not be obligated to insure against damage to Tenant’s personal property, trade fixtures or above Building standard improvements made to the Premises. Landlord shall also obtain and keep in effect commercial general liability insurance in an amount not less than $1,000,000 per occurrence.
	b. Insurance by Tenant. Tenant shall obtain and keep in effect the following insurance insuring Tenant, Landlord and all mortgagees and any other person or entity designated in writing by Landlord as having an interest in the Property (as their interests may appear):

(i) Insurance upon all property in the Premises owned by Tenant or for which Tenant is legally liable and on fixtures and above Building standard improvements installed in the Premises. Such policies shall be for an amount of the full replacement cost with broad form property coverage with “extended coverage”, including but not limited to vandalism, malicious mischief, sprinkler leakage and water damage;

(ii) Commercial general liability insurance including fire, legal liability and “insured contracts” coverage with respect to the Tenant’s operations associated with the Building and the Premises, including activities conducted by Tenant and any other person associated with the Tenant in the Premises and Tenant and any other person performing work on behalf of Tenant and those for whom Tenant is by law responsible in any other part of the Building. Such insurance shall be written with inclusive limits of not less than One Million Dollars ($1,000,000) for each occurrence for bodily injury and property damage, personal injury, or other injury. The limit of said insurance shall not, however, limit the liability of Tenant hereunder. Landlord shall be added as additional insured on all liability policies maintained by Tenant.

All policies of insurance maintained by Tenant shall be in a form acceptable to Landlord with an A.M. Best rating of at least (A-)(VIII); issued by an insurer acceptable to Landlord and licensed to do business in the State of Texas; require at least thirty (30) days written notice to Landlord of termination or material alteration. All policies must contain a severability of interest clause, a cross-liability clause or similar policy language incorporated within the controlling policy form, and shall be primary and shall not provide for contribution of any other insurance available to Landlord. If requested by Landlord, Tenant shall, upon the Commencement Date, and thereafter within fifteen (15) days prior to the expiration date of each such policy, promptly deliver to Landlord, or Landlord’s designated representative, certified copies and written evidence satisfactory to Landlord that all premiums have been paid and all polices are in effect. If Tenant fails to secure or maintain any insurance coverage required hereunder, and such failure not be corrected within forty eight (48) hours after written notice from Landlord, Landlord may, without obligation, purchase such required insurance coverage at Tenant’s expense. Tenant shall promptly reimburse Landlord for any monies so expended as additional rent.

c. Tenant’s Contractor’s Insurance. Tenant shall require any contractor of Tenant permitted to perform work in, on, or about the Premises to obtain and maintain the following insurance coverage at no expense to Landlord:

(i) Commercial general liability insurance, including the broad form general liability coverages, in the amount of One Million Dollars ($1,000,000), adding Landlord and Tenant as additional insured parties;

(ii) Worker’s compensation insurance for all contractor’s employees working in the Premises in an amount sufficient to comply with applicable laws or regulations;

(iii) Employers liability insurance in an amount not less than One Hundred Thousand Dollars ($100,000); and

(iv) Any other insurance as Tenant, Landlord or its mortgagee may reasonably require from time to time.

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	d. Tenant’s Additional Insurance. Landlord makes no representation that the limits of liability specified to be carried by Tenant under the terms of this Lease are adequate to protect Tenant against Tenant’s undertaking under this Section 15.
16.	CASUALTY
	a. Repair Estimate. If the Premises or the Building are damaged by fire or other casualty (a “Casualty”), Landlord shall, within thirty (30) days after such Casualty, deliver to Tenant a good faith estimate (the “Damage Notice”) of the time needed to repair the damage caused by the Casualty and whether sufficient insurance proceeds will be available to Landlord to restore the Building and Premises to the extent required hereunder.
	b. Landlord’s and Tenant’s Rights. If, because of a Casualty, Tenant is prevented from conducting its business in the Premises in a manner substantially comparable to that conducted immediately before such Casualty (“Substantial Casualty”), and Landlord estimates that the damage caused thereby cannot be repaired within thirty (30) days after the commencement of repair but can be repaired within 180 days after the date of the Casualty, then Landlord may, at its expense, and upon written consent from Tenant, which consent may be withheld at Tenant’s sole discretion, relocate Tenant to office space in the Building reasonably comparable to the Premises, provided that Landlord notifies Tenant of its intention to do so in the Damage Notice. If Landlord relocates Tenant, Rent shall be abated only from the date of such damage until the relocation premises are tendered to Tenant with all improvements, alterations or additions necessary to make such space substantially comparable to the Premises immediately prior to such Casualty completed, and thereafter, Tenant shall pay to Landlord the lesser of the Rent or the fair market rental value of the replacement premises (including all additional rent and expenses associated therewith). Such relocation may be for a portion of or the entire remaining Term. Landlord shall complete any such relocation within thirty (30) days after Landlord has delivered the Damage Notice to Tenant and received Tenant’s written consent. If (1) Landlord does not elect to relocate Tenant following such Substantial Casualty, (2) if Tenant does not give written consent to be relocated, or (3) Landlord estimates that the damage caused by the Casualty in question cannot be repaired within 180 days after the Casualty, then, Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within thirty (30) days after the Damage Notice has been delivered to Tenant and Tenant has declined to be relocated in writing. Following a Casualty, if Landlord does not relocate Tenant and Tenant does not terminate this Lease, then Landlord shall repair the Building or the Premises, as the case may be, as provided below, and Rent for any portion of the Premises that Tenant is unable to use in a manner substantially comparable to that used prior to the Casualty shall be reasonably abated from the date of damage until the completion of the repair. Rent shall not be abated or reduced for a Casualty which is not a Substantial Casualty. Notwithstanding the foregoing, if a Casualty damages a material portion of the Building, and Landlord makes a reasonable good faith determination that restoring the Premises would be uneconomical, or if Landlord is required to pay any material portion of the insurance proceeds arising out of the Casualty to Landlord’s Mortgagee (defined below), then Landlord may terminate this Lease by giving written notice of its election to terminate within thirty (30) days after the Damage Notice has been delivered to Tenant, and Rent shall be abated as of the date of the Casualty.
	c. Repair Obligation. If neither party so elects to terminate this Lease following a Casualty, then Landlord shall, promptly begin to restore the Building and Premises to substantially the same or better condition as they existed immediately before such Casualty; however, Landlord shall not be required to repair or replace any part of the furniture, equipment, fixtures, and other improvements which may have been placed by, or at the request of, Tenant (other than Building standard improvements existing in the Premises on the date of this Lease, which Landlord shall be obligated to restore) or other occupants in the Building or the Premises, and Landlord’s obligation to repair or restore shall be limited to the extent of the insurance proceeds actually received by Landlord for the Casualty in question plus any deductible amounts on Landlord’s property insurance policies.
17.	CONDEMNATION
	a. Eminent Domain. If any part of the Property is taken by right of eminent domain or conveyed in lieu thereof (a “Taking”), and such Taking prevents Tenant from conducting its business in the Premises in a manner substantially comparable to that conducted immediately before such Taking then Landlord may, at its expense, and upon written consent from Tenant, which consent may be withheld at Tenant’s sole discretion, relocate Tenant to space in the Building reasonably comparable to the Premises, provided that Landlord notifies Tenant of its intention to do so within thirty (30) days after the Taking. Such

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	relocation shall be for the remaining Term. Landlord shall complete any such relocation within thirty (30) days after Landlord has notified Tenant of its intention to relocate Tenant and received Tenant’s written consent. If Landlord does not elect to relocate Tenant following such Taking, or if Tenant does not give written consent to be relocated, then Tenant may terminate this Lease as of the date of such Taking by giving written notice to landlord within sixty (60) days after the Taking, and Rent shall be prorated on the later of the date of such Taking or the date Tenant actually vacates the Premises. After a Taking, if Landlord does not terminate this Lease or relocate Tenant and Tenant does not terminate this Lease, then Rent shall be abated on a reasonable basis as to that portion of the Premises which Tenant is unable to use in a manner substantially comparable to that used prior to the Taking.
	b. Taking- Landlord’s Rights. If all or any material portion of the Building becomes subject to a Taking, or if Landlord is required to pay any material portion of the proceeds received for a Taking to Landlord’s Mortgagee, then this Lease, at the option of Landlord, exercised by written notice to Tenant within thirty (30) days after such Taking, shall terminate and Rent shall be apportioned as of the date of such Taking.
	d. Award. If any Taking occurs, then Landlord shall receive the entire award or other compensation for the Property taken, and Tenant may separately pursue a claim against the condemning party for the value of Tenant’s moving costs, loss of business, and other claims it may have.
18.	RULES AND REGULATIONS
	Tenant shall comply with the rules and regulations of the Building which are attached hereto as Exhibit “C”. Landlord may, from time to time, change such rules and regulations for the safety, care, or cleanliness of the Building and related facilities, provided that such changes are reasonable and are applicable to all tenants of the Building, will not unreasonably interfere with Tenant’s use of the Premises and are enforced in a non-discriminatory manner. Tenant shall be responsible for the compliance with such rules and regulations by its employees, agents, and invitees. If any inconsistency exists or arises between the terms of this Lease and such rules and regulations, the terms of this Lease shall control.
19.	SUBORDINATION & MORTGAGEES
	a. Subordination. This Lease is subject and subordinate to any deeds of trust, mortgages or other security instruments which now or, subject to the terms and provisions of Section 19(e), hereafter encumber all of any portion of the Property or any interest of Landlord therein. No further instrument shall be required to effect such subordination, but upon request Tenant shall execute, acknowledge, and deliver to Landlord any further instruments and certificates evidencing such subordination as Landlord or any mortgagee of Landlord (the “Landlord’s Mortgagee”) shall reasonably require and which are reasonably acceptable to Tenant.
	b. Attornment. Notwithstanding Section 19a, any Landlord’s Mortgagee shall have the right at any time to subordinate any such deed of trust or mortgage to this Lease, or to any of the provisions hereof on such terms and subject to such commercially reasonable conditions as such mortgagee may consider appropriate in its reasonable discretion. At any time, before or after the institution of any proceedings for the foreclosure of any such deed of trust or mortgage, or the sale of the Building under any such deed of trust or mortgage, Tenant shall, upon request of such mortgagee, any person succeeding to the interest of such mortgagee, or the purchaser at any foreclosure sale (“Successor Landlord”), automatically become the Tenant of the Successor Landlord, without change in the terms or other provisions of this Lease; provided, however, that the Successor Landlord shall not be bound by any modification to this Lease made without the consent of Landlord’s Mortgagee, except for those amendments and modifications permitted to be made by landlord without Landlord’s Mortgagee’s consent pursuant to the terms of the loan documents between Landlord and Landlord’s Mortgagee or expressly contemplated by the terms of this Lease, or by any payment of Rent more than one (1) month in advance, except for a security deposit previously paid to Landlord (and then only if such security deposit has been deposited with and is under the control of the Successor Landlord). The agreement of Tenant to attorn to a Successor Landlord shall survive any such foreclosure sale, trustee’s sale, or conveyance in lieu thereof. Tenant shall, upon request, before or after any such foreclosure or conveyance, execute, acknowledge, and deliver to the Successor Landlord instruments evidencing such attornment as the Successor Landlord may reasonably require.
	c. Estoppel Certificates. Tenant and Landlord shall, from time to time, within ten (10) days after request from the other party, or from any mortgagee of Landlord, execute, acknowledge and deliver in

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	recordable form a certificate certifying, to the extent true, that this Lease is in full force and effect and unmodified (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications); that the Term has commenced and the full amount of the Rent then accruing hereunder and the dates to which the Rent has been paid; that Tenant has accepted possession of the Premises and that any improvements required by the terms of this Lease to be made by Landlord have been completed to the satisfaction of Tenant; the amount, if any, that Tenant has paid to Landlord as a security deposit; that no Rent under this Lease has been paid more than thirty (30) days in advance of its due date; that the address for notices to be sent to Tenant is as set forth in this Lease (or has been changed by notice duly given and is as set forth in the certificate); that Tenant, as of the date of such certificate, has no charge, lien, or claim of offset under this Lease or otherwise against Rent; that, to the knowledge of the party giving such certificate, the other party to this Lease is not then in default under this Lease; and such other matters as may be reasonably requested by the requesting party or any mortgagee of Landlord. Any such certificate may be relied upon by the requesting party, any successor of the requesting party, any mortgagees of Landlord or any prospective purchaser of the Building.
	d. Notice to Mortgagee. No act or failure to act on the part of Landlord which would entitle Tenant under the terms of this Lease, or by law, to be relieved of Tenant’s obligations hereunder or to terminate this Lease, shall result in a release of Tenant’s obligations or termination of this Lease unless (i) Tenant has given notice by certified mail to any mortgagee of Landlord whose address has been furnished to Tenant, and (ii) Tenant offers such mortgagee of Landlord a reasonable time to cure the default (in no event to be less than thirty (30) days or more than forty-five (45) days), including time to obtain possession of the Building if such should prove necessary to effect a cure. No such mortgagee of Landlord shall be obligated to Tenant to cure any default by Landlord hereunder, but if a mortgagee elects in its discretion to effect a cure Tenant shall accept same as though done by Landlord.
	e. Non-Disturbance. Notwithstanding anything to the contrary herein, Tenant’s subordination agreement shall be subject to the requirement that Landlord’s Mortgagee shall attorn to Tenant and shall not disturb Tenant’s possession of the Premises under this Lease if, at the time of any such foreclosure, trustee’s sale or conveyance in lieu thereof, by Landlord’s mortgagee, no Event of Default exists hereunder. Landlord shall, within 30 days after the date of this Lease, obtain a subordination, non-disturbance and attornment agreement in form acceptable to the current Landlord’s Mortgagee, and shall use reasonable efforts to obtain a subordination, non-disturbance and attornment agreement from any future Landlord’s Mortgagee.
20.	TAXES
	Tenant shall be liable for all taxes levied or assessed against personal property, furniture, or fixtures placed by Tenant in the Premises. If any taxes for which Tenant is liable are levied or assessed against Landlord or Landlord’s property and Landlord elects to pay the same, or if the assessed value of Landlord’s property is increased by inclusion of such personal property, furniture or fixtures and Landlord elects to pay the taxes based on such increase, then Tenant shall pay to Landlord, upon demand, that part of such taxes for which Tenant is primarily liable hereunder, Landlord shall not pay such amounts if Tenant notifies Landlord that it will contest the validity or amount of such taxes and thereafter diligently proceeds with such contest in accordance with applicable law and in a manner that is not inconsistent with the rights of Landlord or any other tenants of the Building and the non-payment thereof does not; (a) pose a threat of loss or seizure of the Building or interest of Landlord therein; or (b) result in the imposition of any fines, penalties or interest against Landlord. Notwithstanding the foregoing, Landlord may (but shall never be obligated to do so) contest the amount or validity of any such taxes.

21.	EVENTS OF DEFAULT
	The occurrence of any one of the following events will be an event of default by Tenant (an “Event of Default”) under this Lease:
	a. Tenant shall fail to pay Landlord any rental or other sum of money when due under this Lease or under any other agreement with Landlord concerning the Premises after the expiration of five (5) business days following Tenant’s receipt of written notice from Landlord that the same is past due.
	b. Tenant shall fail to maintain any insurance that this Lease requires Tenant to maintain or shall fail to deliver any certificate of such insurance when required by this Lease and Tenant shall not cure the failure within thirty (30) days after Landlord notifies Tenant thereof

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c. Tenant shall fail to perform or observe any term, covenant or condition of this Lease or any other agreement with Landlord concerning the Premises (other than a failure described in the preceding subparagraphs 21(a) and 21(b)) and Tenant shall not cure the failure within thirty (30) days after Landlord notifies Tenant thereof; but if the failure is of a nature that it cannot be cured within such thirty (30) day period, Tenant shall not have committed an event of default if Tenant commences the curing of the failure within such thirty (30) day period and thereafter diligently pursues the curing of same and completes the cure within sixty (60) days; provided, however, that if Tenant fails to perform or observe any material term, condition, covenant or provision 2 or more times in any calendar year and Landlord has given Tenant written notice staling that any subsequent failure will constitute an Event of Default without notice or opportunity to cure, then notwithstanding that such defaults have been cured by Tenant, any further similar failure with respect to the same term, condition, covenant or provision shall be deemed an Event of Default without notice or opportunity to cure.

d. Tenant or any guarantor of Tenant’s obligations under this Lease shall become insolvent, or shall admit in writing its inability to pay its debts when due, shall make a transfer in fraud of its creditors, or shall make a general assignment or arrangement for the benefit of creditors, or all or substantially all of Tenant’s assets or the assets of any guarantor of Tenant’s obligations under this Lease or Tenant’s interest in this Lease are levied on by execution or other legal process.

e. A petition shall be filed by Tenant or any guarantor of Tenant’s obligations under this Lease to have Tenant or such guarantor adjudged a bankrupt, or a petition for reorganization or arrangement under any law relating to bankruptcy shall be filed by Tenant or such guarantor, or any such petitions shall be filed against Tenant or such guarantor and shall not be removed within sixty (60) days.

f. A receiver or trustee shall be appointed for all or substantially all the assets of Tenant or of any guarantor of Tenant’s obligations under this Lease or for Tenant’s interest in this Lease.

22.	REMEDIES
	a. Upon the occurrence of any Event of Default, Landlord shall have the option, without any notice to Tenant (except as expressly provided below) and with or without judicial process, to pursue any one or more of the following remedies:

(i) Landlord may terminate this Lease by giving Tenant written notice thereof, in which event Tenant shall immediately surrender the Premises to Landlord.

(ii) Landlord may enter upon and take custodial possession of the Premises by picking the locks if necessary, lock out or remove Tenant and any other person occupying the Premises and alter the locks and other security devices at the Premises, all without Landlord being deemed guilty of trespass or becoming liable for any resulting loss or damage, except upon the negligence of Landlord, and without causing a termination or forfeiture of this Lease or of Tenant’s obligation to pay rent. Landlord shall not, in the event of a lockout by the changing of locks, be required to provide new keys to Tenant.

(iii) Landlord may terminate Tenant’s possession and not this Lease by giving Tenant written notice thereof, whereby Landlord may enter the Premises and take possession of and remove any and all trade fixtures and personal property situated in the Premises, without liability for trespass or conversion, except upon the negligence of Tenant. If Landlord takes possession of and removes personal property from the Premises, then prior to any disposition of the property by sale or until Tenant reclaims the property if no foreclosure by public or private sale is contemplated, Landlord may store the property in a public or private warehouse or elsewhere at the cost of and for the account of Tenant without the resort to legal process and without becoming liable for any resulting loss or damage, except to the extent caused by the negligence of Landlord or its agents

(iv) Landlord may perform on behalf of Tenant any obligation of Tenant under this Lease which Tenant has failed to perform, and the Landlord’s actual, out-of-pocket cost of the performance will be deemed additional rental and will be payable by Tenant to Landlord upon demand.

b. In the event Landlord enters and takes possession of the Premises without electing to terminate this Lease, Landlord will have the right to relet the Premises for Tenant, in the name of Tenant or Landlord or otherwise, on such terms as Landlord deems advisable. But Landlord will not be required to incur any expense to relet the Premises and the failure of Landlord to relet the Premises shall not reduce Tenant’s liability for monthly rentals and other charges due under this Lease or for damages. Landlord will not be obligated to relet for less than the then market value of the Premises or to relet the Premises

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when other comparable rental space in the Building is available for lease. Without causing a termination or forfeiture of this Lease after an Event of Default, Landlord may: (i) relet the Premises for a term or terms to expire at the same time as, earlier than, or subsequent to, the expiration of the Term; (ii) remodel or change the use and character of the Premises; (iii) grant rent concessions in reletting the Premises, if necessary in Landlord’s judgment, without reducing Tenant’s obligation for rentals specified in this Lease; and (iv) relet all or any portion of the Premises as a part of a larger area Subject to the next subparagraph, Landlord may retain the excess, if any, of the rent earned from reletting the Premises over the rentals specified in this Lease.

c. If Landlord has relet the Premises or relets thereafter without first terminating this Lease, Landlord will apply any future rentals from reletting (but not rental allocable to any area outside the Premises or rental allocable to the period following the Term) to reduce any amounts then due from Tenant, including but not limited to attorneys’ fees, brokerage commissions and other expenses Landlord may have incurred in connection with the collection of any rent, recovery of possession, and redecorating, altering, dividing, consolidating with adjoining premises, or otherwise preparing the Premises for reletting. The balance, if any, of the future rentals from reletting shall be retained by Landlord as compensation for reletting the Premises.

d. No re-entry or reletting of the Premises or any filing or service of an unlawful detainer action or similar action will be construed as an election by Landlord to terminate or accept a forfeiture of this Lease or to accept a surrender of the Premises after an event of default by Tenant, unless a written notice of such intention is given by Landlord to Tenant; but notwithstanding any such action without such notice, Landlord may at any time thereafter elect to terminate this Lease by notifying Tenant.

e. Upon the termination of this Lease or termination of Tenant’s possession, Landlord will be entitled to recover all unpaid rentals hereunder that have accrued through the date of termination plus the costs of performing any of Tenant’s obligations (other than the payment of rent) that should have been but were not satisfied as of the date of such termination. In addition, if the termination follows a material Event of Default (as described in the next subparagraph), Landlord will be entitled to recover, not as rent or a penalty but as compensation for Landlord’s loss of the benefit of its bargain with Tenant, the difference between (i) an amount equal to the present value of the rental and other sums that this Lease provides Tenant will pay for the remainder of the Term, and (ii) the present value of the net future rentals for such period based on the fair market rental value of the Premises.

f. After a material Event of Default, Landlord may recover from Tenant from time to time and Tenant shall pay to Landlord upon demand, whether or not Landlord has relet the Premises or terminated this Lease, (i) such reasonable expenses as Landlord may incur in recovering possession of the Premises, terminating this Lease, placing the Premises in good order and condition and altering or repairing the same for reletting; and (ii) all other reasonable costs and expenses (including brokerage commissions and legal fees) paid or incurred by Landlord in exercising any remedy or as a result of the Event of Default; As used above, a material event of default shall mean any Event of Default described in subparagraph 21 (a) above;

g. In the event that any future amount owing to Landlord or offsetting an amount owing to Landlord is to be discounted to present value under this Lease, the present value shall be determined by discounting at the rate of the greater of eight percent (8%) per annum or the Prime Rate.

h. For the purposes of any suit by Landlord brought or based on this Lease, this Lease may, at Landlord’s option, be construed to be a divisible contract to the end that successive actions may be maintained and successive periodic sums shall mature and become due hereunder, and the failure to include in any suit or action any sum or sums then matured shall not be a bar to the maintenance of any suit or action for the recovery of the sum or sums so omitted.

i. This Paragraph shall be enforceable to the extent not prohibited by applicable law, and the unenforceability of any provision in this Paragraph shall not render any other provision unenforceable. However, as provided in Section 93,002(d) of the Texas Property Code, Tenant will be presumed to have abandoned the Premises if goods, equipment, or other property, in an amount substantial enough to indicate a probable intent to abandon the Premises, is being or has been removed from the Premises and the removal is not within the normal course of Tenant’s business.

j. Landlord’s pursuit of any remedy specified in this Lease will not constitute an election to pursue that remedy only, nor preclude Landlord from pursuing any other remedy available at law or in equity, nor constitute a forfeiture or a waiver of any rent or other amount due to Landlord as described below.

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23.	LANDLORD’S LIEN
	Landlord waives all contractual, statutory, common law and constitutional liens it may have or be entitled to on Tenant’s personal property, goods, equipment, inventory, furnishings, chattels, accounts and assets.
24.	NON-WAIVER
	Landlord’s acceptance of Rent following an Event of Default (other than an Event of Default in the payment of Rent that is fully cured by such acceptance) shall not waive Landlord’s rights regarding such Event of Default. No waiver by Landlord of any violation or breach of any of the terms contained herein shall waive Landlord’s rights regarding any future violation of that term or any other term. No custom or practice which may occur or develop between the parties in connection with the terms of this Lease shall be construed to waive or lessen Landlord’s or Tenant’s right to insist upon strict performance of the terms of this Lease.
25.	SURRENDER OF PREMISES
	No act by Landlord shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless the same is in writing and signed by Landlord. At the expiration or termination of this Lease, Tenant shall immediately deliver to Landlord the Premises with all improvements located thereon in good repair and condition, reasonable wear and tear excepted (and condemnation and Casualty damage, as to which Sections 16 and 17 shall control), and shall deliver to Landlord all keys to the Premises and access cards to the Building. Tenant may remove all unattached trade fixtures, furniture, and personal property placed in the Premises by Tenant and any of Tenant’s manufacturing, testing or production equipment or trade fixtures (but Tenant shall not remove any such item which was paid for, in whole or in part, by Landlord as evidenced by written documentation). Additionally, Tenant shall promptly remove such alterations, additions, improvements, trade fixtures, equipment, wiring, and furniture as Landlord may request at the time Landlord approves the plans and specifications therefor; however, Tenant shall not be required to remove any addition or improvement to the Premises unless Landlord has specifically required such removal in writing at the time Landlord approves the plans and specifications therefor that the improvement or addition in question shall be removed. Tenant shall repair all damage caused by such removal. All items not so removed shall be deemed to have been abandoned by Tenant and may be appropriated, sold, stored, destroyed, or otherwise disposed of by Landlord without notice to Tenant and without any obligation to account for such items If Tenant fails to surrender the Premises, Landlord shall have the right, without notice and without resorting to legal process, to enter upon and take possession of the Premises and to expel or remove Tenant and its effects. The provisions of this Section shall survive the end of the Term.
26.	HOLDING OVER
	If Tenant fails to vacate the Premises at the end of the Term, then Tenant shall be at will and, in addition to all other damages and remedies to which Landlord may be entitled for such holding over, Tenant shall pay Base Rent equal to the greater of (a) 150% of the monthly Base Rent payable during the last month of the Term, or (b) the prevailing rental rate in the Building for similar space. In such event, Tenant shall pay Rent on a monthly basis and shall not be entitled to a daily proration. In the event of any unauthorized holding over in excess of sixty (60) days, Tenant shall also indemnify, defend (with counsel reasonably acceptable to Landlord) and hold harmless Landlord against all claims for damages against Landlord as a result of Tenant’s possession of the Premises, including, without limitation, claims for damages by any other tenant to which Landlord may have leased all or any part of the Premises effective upon the termination of this Lease.
27.	RIGHTS RESERVED BY LANDLORD
	Provided that the exercise of such rights does not unreasonably interfere with Tenant’s occupancy of the Premises, Landlord has the following rights, exercisable without notice to Tenant and without causing an eviction (constructive or actual) or disturbance of Tenant’s possession of the Premises and without giving rise to any claim for setoff or abatement of rent:

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	a. to install signs on the exterior and interior of the Building (but not in the Premises unless required by applicable law);
	b. to designate and approve, prior to installation, all types of window shades, blinds, drapes, awnings, window ventilators and other similar equipment, and to control all internal lighting that may be visible from the exterior of the Building;
	c. to enter upon the Premises at reasonable hours and following reasonable notice (which may be verbal) to inspect, clean or make repairs or alterations (without implying any obligation to do so) and to show the Premises to prospective lenders, purchasers and during the last nine months of the Term to prospective tenants and, if the Premises are vacated, to prepare them for reoccupancy; however, Landlord, its employees, agents and contractors shall not be entitled to enter any areas identified by Tenant as “controlled access areas” unless accompanied by a representative of Tenant (except in the case of an emergency); Landlord shall use reasonable efforts to minimize any disruption to Tenant’s business during any such entry;
	d. to retain and use in appropriate instances keys to all doors into and within the Premises (Tenant will not change or add locks without the prior written consent of Landlord) with the exception of the file room which contains confidential patient medical information (and are hereby identified as controlled access areas). Landlord and Tenant have agreed that said file room shall have a separate key which will be kept in a combination lock box in the management office; said key(s) and combination lock box shall be at the sole cost and expense of the Tenant. The combination of said lock box will be known only to an authorized party within Cyberonics (to be designated by Cyberonics), the Properly Manager of the Building, and the President of BGK Texas Management, Inc. to be used only in the case of an emergency(ies). It is also agreed that in the case of an emergency BGK Texas Management, Inc. will contact a member of Cyberonics’ staff to be present, if possible, prior to entry to said room or as soon as possible after entry of said room;
	e. to decorate and to make repairs, alterations, additions or improvements (whether structural or otherwise) to and about the Building and, for such purposes, to enter upon the Premises, to temporarily close doors, entryways, public space and corridors in the Building, to temporarily suspend Building Services and facilities and to change the arrangement and location of entrances or passageways, doors and doorways, corridors, elevators, stairs, toilets, or other Common Areas, all without abatement of rent or impairing Tenant’s obligations so long as the Premises remain reasonable accessible and fit for the use expressly permitted in this Lease, and in each instance Landlord shall use reasonable efforts to minimize disruption to Tenant’s business in the Premises and will provide Tenant reasonable advance notice to the extent practicable;
	f. to grant to anyone the exclusive right to conduct any business or render any service in or to the Building (including the exclusive right to sell any food or beverages), provided such exclusive right does not exclude Tenant from the use expressly permitted in this Lease;
	g. to approve the weight, size and location of safes and other heavy equipment and articles in the Premises and to require that all such items and all furniture be moved into and out of the Building and Premises at the times and in the manner directed by Landlord (movements of Tenant’s property into or out of the Building and within the building are entirely at the risk and responsibility of Tenant); and
	h. to take any measures (without implying any obligation to do so) Landlord deems advisable for the security of the Building and its occupants, including the evacuation of the Building for drill purposes and the closing of the Building after normal business hours, subject, however, to Tenant’s right to admittance when the Building is closed under reasonable regulations prescribed by Landlord from time to time.
	Notwithstanding the foregoing, (i) the building name is defined by rights granted to Tenant by Landlord under provisions of Exhibit “H” and shall be subject to such rights during the Term of this Lease; accordingly, Landlord shall not have the right to change the name of the Building during the Term of this Lease, and (ii) Tenant has been granted approval by Landlord for the street name change to “Cyberonics Boulevard”; accordingly, Landlord shall not have any right to change the street name during the Term of this Lease;
28.	LANDLORD’S DEFAULT
	a. All covenants of Tenant in this Lease are independent covenants, not conditioned upon Landlord’s satisfaction of its obligations hereunder, except to the extent otherwise specifically provided herein.

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	Tenant waives any statutory lien it may have against the rent due under this Lease or against Landlord’s property in Tenant’s possession.
	b. If Landlord defaults in the performance of any of its obligations under this Lease, Landlord will have thirty (30) days to cure after Tenant notifies Landlord of the default; or if the default is of a nature to require more than thirty (30) days to remedy, Landlord will have the time reasonably necessary to cure it up to an additional 60 days.
	c. Whenever a period of time is prescribed in this Lease for action to be taken by Landlord or Tenant, Landlord or Tenant, as the case may be, will not be liable or responsible for, and there shall be excluded from the computation for any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, Applicable Laws or any other causes of any kind whatsoever which are beyond the reasonable control of Landlord or Tenant, as applicable (collectively, “Force Majeure”); provided, however, with respect to Tenant’s obligation to pay Base Rent, Additional Rent and any other amounts due under this Lease, Tenant shall not be excused for any reason from making such payments when due under this Lease.
29.	RELOCATION — Intentionally Deleted
30.	PARKING
	Tenant shall be permitted to use its Parking Spaces in the parking garage or facility associated with the Building (the “Parking Garage”) during the Term for vehicular parking, subject to such terms, conditions and regulations as are from time to time applicable to patrons of the Parking Garage. If, for any reason, Landlord fails or is unable to provide, or Tenant is not permitted to use, all or any portion of the parking spaces to which it is entitled hereunder, then Tenant for so long as Tenant does not have the use thereof, shall be entitled to a reasonable credit against Tenant’s Rent (which shall never exceed Tenant’s actual out of pocket cost of alternative and reasonable parking). This credit shall be in full settlement of all claims that Tenant might otherwise have against Landlord because of Landlord’s failure or inability to provide Tenant with such parking spaces. If Tenant sublets any portion of the Premises or assigns any of its interest in this Lease, then the parking spaces allocated to Tenant hereunder shall be reduced of the period of such subletting or for the remainder of the Term in the event of an assignment to the extent the ratio between the rentable square feet of the Premises and the parking spaces granted to Tenant hereunder exceeds the Building standard ratio of parking space per rentable square foot as established by Landlord from time to time.
31.	MISCELLANEOUS
	a. Landlord Transfer. Landlord may transfer, in whole or in part, the Building and any of its rights under this Lease. If Landlord assigns its rights under this Lease, then Landlord shall thereby be released from any further obligations hereunder.
	b. Landlord’s Liability. The liability of Landlord to Tenant for any default by Landlord under the terms of this Lease shall be limited to Tenant’s actual direct, but not consequential, damages therefor and Tenant specifically agrees to look solely to Landlord’s interest in the Property for the recovery of any judgment from Landlord, it being agreed that Landlord, its officers, directors, shareholders, partners, agents and employees shall never be personally liable for any such judgment.
	c. Brokerage. Landlord and Tenant each warrant to the other that it has not dealt with any broker or agent in connection with the negotiation or execution of this Lease except Landlord’s Broker and Tenant’s Broker. Tenant and Landlord shall each indemnify the other against all costs, expenses, attorneys’ fees, and other liability for commissions or other compensation claimed by any broker or agent claiming the same by, through, or under the indemnifying party. Commissions payable to Tenant’s Broker shall be paid by Landlord only if a written commission agreement has been executed by and between Landlord and such broker. Landlord shall be responsible for payment of all commissions to Landlord’s Broker and Tenant’s Broker.
	d. Notices. All notices and other communications given pursuant to this Lease shall be in writing and shall be (i) mailed by first class, United States Mail, postage prepaid, certified, with return receipt requested, and addressed to the parties hereto at the address specified in Section 1 of the Lease, (ii) hand delivered or sent by local courier or national overnight delivery service to the intended address, or (iii) sent by facsimile transmission or telex followed by a confirmatory letter given in a manner permitted under (i) or (ii) above. All notices to Landlord shall be delivered to the addresses set forth in the Section 1 and to Landlord’s property management company at the address set forth in the Section 2 and

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all notices to Tenant shall be to Tenant’s address(es) set forth in Section 1. Notice sent by certified mail, postage prepaid, shall be deemed received two days after being deposited in the United States Mail; notices sent by hand delivery or overnight courier shall be deemed received upon delivery to the address of the addressee and notices sent by facsimile or telex shall be deemed received when and if actually received by the individual to whom the notice is to be directed. The parties hereto may change their addresses for notice or payment by giving notice thereof to the other in conformity with this provision.

e. Severability. It is the parties intention that this Lease be enforceable and that it comply with all applicable laws. If any clause or provision of this Lease is illegal, invalid, or unenforceable under present or future laws, then the remainder of this Lease shall not be affected thereby and in lieu of such clause or provision, there shall be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid, or unenforceable clause or provision as may be possible and be legal, valid, and enforceable.

f. Amendments; and Binding Effect. This Lease may not be amended except by instrument in writing signed by Landlord and Tenant. No provision of this Lease shall be deemed to have been waived by either party unless such waiver is in writing signed by such party. The terms and conditions contained in this Lease shall inure to the benefit of and be binding upon the parties hereto, and upon their respective successors in interest and legal representatives, except as otherwise herein expressly provided. This Lease is for the sole benefit of Landlord and Tenant, and, other than Landlord’s mortgagee, no third party shall be deemed a third party beneficiary hereof.

g. Tenant’s Right of Possession. Tenant shall peaceably and quietly hold and enjoy the Premises for the Term, without hindrance from Landlord or any party claiming by, through, or under Landlord, subject to the terms and conditions of this Lease.

h. Joint and Several Liability. If there is more than one Tenant, then the obligations hereunder imposed upon Tenant shall be joint and several. If there is a guarantor of Tenant’s obligations hereunder, then the obligations hereunder imposed upon Tenant shall be the joint and several obligations of Tenant and such guarantor, and Landlord need not first proceed against Tenant before proceeding against such guarantor nor shall any such guarantor be released from its guaranty for any reason whatsoever.

i. Captions. The captions contained in this Lease are for convenience of reference only, and do not limit or enlarge the terms and conditions of this Lease.

j. No Merger. There shall be no merger of the leasehold estate hereby created with the fee estate in the Premises or any part thereof if the same person or entity acquires or holds, directly or indirectly, this Lease or any interest in this Lease and the corresponding fee estate or any interest in such fee estate.

k. No Offer. The submission of this Lease to Tenant shall not be construed as an offer, nor shall Tenant have any rights under this Lease unless Landlord executes a copy of this Lease and delivers it to Tenant.

l. Exhibits. All exhibits added and attachments attached hereto are incorporated herein by this reference.

Exhibit A	-  Legal Description
Exhibit B-1	-  Outline of Premises (Space “A”)
Exhibit B-2	-  Outline of Premises (Space “B”)
Exhibit C	-  Building Rules and Regulations
Exhibit D	-  Landlord’s Services
Exhibit E-1	-  Tenant Improvements / Common Area Improvements
Exhibit E-2	-  Unamortized Cost Schedule
Exhibit F	-  Option to Renew
Exhibit G	-  Right of First Refusal
Exhibit H	-  Signage
Exhibit I	-  Security and Access Control
Exhibit J	-  Access and Use of Garage Roof
Exhibit K	-  Additional Exclusions from Operating Expenses

m. Entire Agreement. This Lease constitutes the entire agreement between Landlord and Tenant regarding the subject matter hereof and supersedes all oral statements and prior writings relating thereto. Except for those set forth in this Lease, no representations, warranties, or agreements have been made by Landlord or Tenant to the other with respect to this Lease or the obligations of Landlord or Tenant in connection therewith.

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	n. Property Management. Landlord’s Property Management Company is identified in Section 2 of the Lease. Tenant acknowledges that the Property Management Company is an independent contractor hired by Landlord to operate the Building.
	o. Choice of Law. This Lease shall be governed by the laws of the state in which the Land is located and by the applicable laws of the United States of America.
	p. Construction and Interpretation. This Lease shall not be construed in favor of either Landlord or Tenant regardless of who prepared the same. Whenever the terms “hereof,” “hereby,” “herein,” or words of similar import are used herein they shall be construed as referring to this Lease in its entirety rather than to a particular section or provision. References to Sections and Exhibits refer to the sections of, and exhibits to, this Lease. Whenever the term “including” is used herein, it shall be interpreted as meaning “including, but not limited to.”
	q. Tenant’s Liability. Except with respect to Tenant’s indemnity obligations set forth in Section 26, the liability of Tenant to Landlord for any monetary damages arising from any Event of Default under the terms of this Lease shall be limited to Landlord’s actual direct, but not consequential, special or punitive damages therefor. Nothing in this Section 31q shall affect or limit Landlord’s right to file legal actions to recover possession of the Premises or for injunctive relief against Tenant.
32.	REPRESENTATIONS, WARRANTIES AND COVENANTS OF TENANT
	Tenant represents, warrants and covenants that it is now in a solvent condition; that no bankruptcy or insolvency proceedings are pending or contemplated by or against Tenant or any guarantor of Tenant’s obligations under this Lease; that all reports, statements and other data furnished by Tenant to Landlord in connection with this Lease are true and correct in all material respects; that the execution and delivery of this Lease by Tenant does not contravene, result in a breach of, or constitute a default under any contract or agreement to which Tenant is a party or by which Tenant may be bound and does not violate or contravene any law, order, decree, rule or regulation to which Tenant is subject; and that there are no judicial or administrative actions, suits, or proceedings pending or threatened against or affecting Tenant or any guarantor of Tenant’s obligations under this Lease. If Tenant is a corporation or partnership, each of the persons executing this Lease on behalf of Tenant represents and warrants that Tenant is duly organized and existing, is qualified to do business in the state in which the Premises are located, has full right and authority to enter into this Lease, that the persons signing on behalf of Tenant are authorized to do so by appropriate corporate or partnership action and that the terms, conditions and covenants in this Lease are enforceable against Tenant. If Tenant is a corporation, Tenant shall deliver certified resolutions to Landlord, upon request, evidencing that the execution and delivery of this Lease has been duly authorized and properly executed, and will deliver such other evidence of existence, authority and good standing as Landlord shall require.
33.	ENVIRONMENTAL PROVISIONS
	a. Terms defined below in this Section shall have the following meanings:

(i) “Applicable Environmental Laws” means all applicable federal, state and other laws, ordinances, rules and regulations of any governmental entity pertaining to health or the environment, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (as amended, hereinafter called “CERCLA”), the Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling act of 1980, the Solid Waste Disposal Act Amendments of 1980, and the Hazardous and Solid Waste Amendments of 1984 (as amended, hereinafter called “RCRA”), the Texas Water Code and the Texas Solid Waste Disposal Act.

(ii) “Expenses” means all liabilities, obligations, losses, damages, penalties, claims, actions, suits, proceedings, costs, expenses (including reasonable attorneys’ fees), costs of settlement and disbursements of any kind and nature whatsoever.

(ii) “Hazardous substance” and “release” shall have the meanings specified in CERCLA, and the terms “solid waste” and “disposal” (or “disposed”) shall have the meanings specified in RCRA; provided, in the event either CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such

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amendment and provide further, to the extent that the laws of the State of Texas establish a meaning for “hazardous substance”, “release,” “solid waste,” or disposal” which is broader than that specified in either CERCLA or RCRA, such broader meaning shall apply.

(iv) “Indemnified Party” means each of Landlord and any successors and assigns as to all or any portion of the Land or Premises or any interest therein, and any affiliate, officer, agent, director, employee or servant of any of them.

b. Tenant warrants and represents that to Tenant’s knowledge Tenant’s intended use of the Premises will not violate Applicable Environmental Laws. Tenant shall not cause or permit the Premises or Tenant to be in violation of, or do anything or permit anything to be done which will subject the Landlord or the Premises or the Land to any remedial obligations under any Applicable Environmental Laws, assuming disclosure to the applicable governmental authorities of all relevant facts, conditions and circumstances, if any, pertaining to the Premises, the Property and Tenant. Tenant shall promptly notify Landlord in writing of any existing, pending or, to the knowledge of Tenant, threatened investigation or inquiry by any governmental authority in connection with any violation of Applicable Environmental Laws by Tenant or the Premises. Tenant shall take all steps necessary to determine during the Term of this Lease that no hazardous substances or solid wastes are being disposed of or otherwise released on or to or from the Premises in a manner that would violate Applicable Environmental Laws. Landlord may enter upon the Premises at any time and without notice to verify compliance with this Section if Landlord believes in good faith that a violation of this Section may have occurred or be threatened. Any violation of this Section by Tenant that remain uncured after expiration of all applicable notice, grace and cure periods shall constitute an “event of default” under this Lease.

c. Tenant hereby agrees to assume liability for and to pay, indemnify, protect and hold harmless every Indemnified Party on an after-tax basis from any and all Expenses imposed, incurred or asserted (regardless of whether the Indemnified Party shall be indemnified by any other person or entity) in any way relating to or arising out of (a) a violation of Applicable Environmental Laws by the Premises or by Tenant during the term of this Lease or during any period of holdover by Tenant after the Term of the Lease, or (b) a disposal or other release of any hazardous substance or solid waste in violation of Applicable Environmental Laws on, to or from the Premises during the Term of the Lease or during any such period of holdover. The Tenant acknowledges that it has been given ample time to consult with counsel in agreeing to the indemnity set forth in this Lease and fully understands it. This indemnity shall survive the termination or expiration of this Lease. The foregoing indemnity shall not render Tenant liable to any Indemnified Party for any Expenses that such Indemnified Party many incur as a result of its own willful misconduct or gross negligence.

d. If an Indemnified Party notifies Tenant of any claim or notice of the commencement of any action, administrative or legal proceeding, or investigation as to which the indemnity may apply, Tenant shall assume on behalf of the Indemnified Party and conduct with due diligence and in good faith the defense thereof with counsel reasonable satisfactory to the Indemnified Party; provided, that the Indemnified party shall have the right to be represented therein by advisory counsel of its own selection and at its own expense; and provided further, that if any such claim, action, proceeding or investigation involves both Tenant and the Indemnified Party and the Indemnified Party shall have reasonably concluded that there may be legal defenses available to it which are different from, additional to, or inconsistent with those available to Tenant, then the Indemnified Party shall have the right to select separate counsel to participate in the defense of such claim, action, proceeding or investigation on its own behalf at Tenant’s expense.

e. If any claim, action, proceeding or investigation arises as to which the indemnity provided for may apply, and Tenant fails to assume promptly (and in any event within ten (10) days after being notified of the claim, action, proceeding or investigation) the defense of the Indemnified Party, then the Indemnified Party may contest the claim, action, proceeding or investigation counsel selected by the Indemnified Party. All reasonable costs and expenses incurred by the Indemnified Party in connection with any such contest, settlement, or payment shall be payable within 30 days after receipt of a reasonably detailed invoice with respect thereto.

f. Other than as disclosed in that certain Phase I Site Assessment dated November 20, 2000 and prepared by Consolidated Consulting Group, Landlord is not aware of the existence of any Hazardous Substance present in the Building in violation of any Applicable Environmental Laws.

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34. EFFECT OF THIS LEASE ON PRIOR LEASE

Landlord and Tenant agree that effective as of December 8, 2002 (the “Effective Date”), this Lease amends, restates, replaces and supersedes the Original Leases (as hereinafter defined), and that accordingly the Original Leases will be deemed terminated and of no further force and effect as of the Effective Date. Notwithstanding the foregoing to the contrary, the parties agree that the Original Leases will continue to govern the rights and obligations of the parties with respect to all matters pertaining to Tenant’s tenancy in the Building arising prior to the Effective Date.

               The term “Original Leases” shall mean all of the following:

               1. Lease by and between Space Assets II, Inc., a Delaware Corporation and Cyberonics, Inc., a Texas Corporation effective as of the 19^th day of August 1997 of certain office space in the building known as Space Center II located at 16511 Space Center Boulevard, Houston, Texas, as amended by the following:

a.	First Amendment dated as of the 25th day of March, 1998
b.	Second Amendment dated as of the 1st day of July, 1998
c.	Third Amendment dated as of the 1st day of November 1998
d.	Fourth Amendment dated as of the 1st day of March 1999
e.	Fifth Amendment dated as of the 1st day of July 1999
f.	Sixth Amendment dated as of the 1st day of May 2000
g.	Seventh Amendment dated as of the 1st day of May 2000
h.	Eighth Amendment dated as of the 15th day of May 2000
i.	Ninth Amendment dated as of the 1st day of May 2001
j.	Tenth Amendment dated as of the 20th day of February 2001
k.	Eleventh Amendment dated as of the 1st day of May 2001
l.	Twelfth Amendment dated as of the 3rd day of September 2001
m.	Thirteenth Amendment dated as of the 1st day of March 2002
n.	Fourteenth Amendment dated as of the 1st day of July 2002

               2. Lease Agreement dated June 25, 1998 by and between Space Assets II, Inc. and Webb, Murray and Associate, Inc., as assigned pursuant to that certain Assignment and Assumption of Lease by and between Webb, Murray and Associate, Inc. and Cyberonics, Inc. dated as of December 10, 2001.

               3. Lease Agreement dated January 3, 2000 by and between Space Assets II, Inc. and SAT Corporation, as assigned pursuant to that certain Assignment and Assumption of Lease by and between SAT Corporation and Cyberonics, Inc. dated March 1, 2002.

               4. Lease Agreement dated January 1, 1999 by and between Space Assets II, Inc. and OAO Corporation, as amended on the 7^th day of February 2000 and on the 1^st day of March 2002, and as assigned pursuant to that certain Assignment and Assumption of Lease by and between OAO Corporation and Cyberonics, Inc. dated July 1, 2002.

               5. Lease Agreement dated October 2, 2001 by and between Space Center Operating Associates, L.P. and Cyberonics, Inc.

TO THE EXTENT PERMITTED BY APPLICABLE LAW, LANDLORD AND TENANT EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY THAT THE PREMISES ARE SUITABLE FOR TENANT’S INTENDED COMMERCIAL PURPOSE, AND TENANT’S OBLIGATION TO PAY RENT HEREUNDER IS NOT DEPENDENT UPON THE CONDITION OF THE PREMISES OR THE PERFORMANCE BY LANDLORD OF ITS OBLIGATIONS HEREUNDER, AND, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, TENANT SHALL CONTINUE TO PAY THE RENT, WITHOUT ABATEMENT, SETOFF, DEDUCTION, NOTWITHSTANDING ANY BREACH BY LANDLORD OF ITS DUTIES OR OBLIGATIONS HEREUNDER, WHETHER EXPRESS OR IMPLIED. NOTHING IN THIS PARAGRAPH SHALL BE CONSTRUED TO DIMINISH THE OBLIGATIONS OF LANDLORD THAT ARE EXPRESSLY SET FORTH ELSEWHERE IN THIS LEASE

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EXECUTED as indicated below and effective on the latter of the dates indicated below.

LANDLORD:

SPACE CENTER OPERATING ASSOCIATES, LP
By: BGK Equities, Inc., General Partner
By:	/s/ J. Peter Mehlert
Name: J. Peter Mehlert
Title:	President BGK Texas Property MGMT, INC. AS AGENT FOR
Date: 12/5/02
TENANT:
CYBERONICS, INC.
By:	/s/ Pamela B. Westbrook
Name: Pamela B. Westbrook
Title: Vice President, Finance & Administration, C.F.O.
Date: November 27, 2002

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EXHIBIT “A”

LEGAL DESCRIPTION

16511 SPACE CENTER BLVD.

Being a 2.4148 acre tract of land in the Sarah Deel League, Abstract No 13, Harris County, Texas, and being a portion of unrestricted Reserve “E” of Armand Section One as per plat recorded in Volume 268, Page 141 of the Harris County Map Records being a portion of those lands sold to Tiffany Bay, Ltd., as described in deed recorded under Harris County Clerk’s File No. G 459791 and a portion of that land sold to Bay Colony, Ltd as described in deed recorded under Harris County Clerk’s File No F 886937 and a portion of that 2.1905 acre tract of land sold to G. Phillip Albright, Trustee, as described in deed recorded under Harris County Clerk’s File No. H 591231 and all of that 0.3566 acre tract sold to G. Phillip Albright and Walker L. Nichols, Jr. as described in deed recorded under Harris County Clerk’s File No. H 849875 and being more particularly described by metes and bounds as follows with bearings based on said deed.

BEGINNING at a 5/8 inch iron rod found marking the most northerly cut-back corner of the intersection of the northeasterly right-of-way line of Space Center Boulevard, 100.00 feet wide, with the southeasterly right-of-way line of Skywalker Drive, 60.00 feet wide; said point also marking the western most corner of the herein described tract and said Reserve “E”;

THENCE along the southeasterly right-of-way line of said Skywalker Drive, N 23° 14' 14" E, 260.00 feet to a point marking the westerly north corner of the herein described tract;

THENCE departing the southeasterly right-of-way line of said Skywalker Drive, S 66° 45' 44" E, 206 00 feet to a point for corner;

THENCE S 23° 14' 16" W, 10.00 feet to a point for corner;

THENCE S 66° 45' 44" E, 191.04 feet to a point for corner;

THENCE S 23° 14' 17" W, a distance of 257.93 feet to a 5/8 inch iron rod found marking the south corner of the herein described tract and a point in the northeasterly right-of-way line of said Space Center Boulevard as established by right-of-way deed recorded under Harris County Clerk’s File No H 429026; said point being in a curve concave to the northeast;

THENCE westerly 74.34 feet along the northeasterly right-of-way line of said Space Center Boulevard and along the arc of said curve concave to the northeast having a radius of 1334.35 feet, a central angle of 03° 11' 31" and whose cord bears N 68° 21' 30" W, 74.33 feet to a 5/8 inch iron rod found marking the point of tangency of said curve concave to the northeast;

THENCE continuing along the northeasterly right-of-way line of said Space Center Boulevard, N 66° 45' 44" W, 312.74 feet to a 5/8 inch iron rod found marking the southerly cut-back corner of the intersection of the northeasterly right-of-way line of Space Center Boulevard with the southeasterly right-of-way line of said Skywalker Drive;

THENCE along the cut-back N 21° 45' 45" W, 14.14 feet to the POINT OF BEGINNING and containing 2.4148 acres of land.

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EXHIBIT “B-1” -1
FIRST FLOOR LEASED PREMISES — SPACE “A”
(CROSS HATCHED AREAS)

EXHIBIT “B-1” -2
SECOND FLOOR LEASED PREMISES — SPACE “A”
(CROSS HATCHED AREA)

EXHIBIT “B-1” -3
FOURTH FLOOR LEASED PREMISES — SPACE “A”
(CROSS HATCHED AREA)

EXHIBIT “B-1” -4
FIFTH FLOOR LEASED PREMISES — SPACE “A”
(CROSS HATCHED AREA)

EXHIBIT “B-1” -5
SIXTH FLOOR LEASED PREMISES — SPACE “A”
(CROSS HATCHED AREA)

EXHIBIT “B-2” -1
FIRST FLOOR LEASED PREMISES — SPACE “B”
(CROSS HATCHED AREAS)

EXHIBIT “B-2” -2
THIRD FLOOR LEASED PREMISES — SPACE “B”
(CROSS HATCHED AREA)

EXHIBIT “C”

BUILDING RULES AND REGULATIONS

  1. Sidewalks, doorways, vestibules, halls, stairways and similar areas shall not be obstructed by tenants or their officers, agents, servants, and employees, or used for any purpose other than ingress and egress to and from their respective leased premises and for going from one part of the Building to another part of the Building.

  2. Plumbing fixtures and appliances shall be used only for the purposes for which constructed, and no sweepings, rubbish, rags or other unsuitable material shall be thrown or placed therein. Any stoppage or damage resulting to any such fixtures or appliances from misuse on the part of a tenant or such tenant’s officers, agents, servants, and employees shall be paid by such tenant.

  3. No signs, posters, advertisements, or notices shall be painted or affixed by or on behalf of any tenant on any of the windows or doors, or other part of the Building, except lettering of such color, size and style and in such places, as shall be first approved in writing by the Landlord’s Building manager. No nails, hooks or screws (other than those which are necessary to hang paintings, prints, pictures or other similar items on the Premises’ interior walls) shall be driven into or inserted in any part of the Building, except by building maintenance personnel.

  4. Directories may be placed by the Landlord, at Landlord’s own expense, in conspicuous places in the Building. No other directories shall be permitted.

  5. Corridor doors, when not in use, shall be kept closed.

  6. All deliveries of furniture, freight, office-equipment or other materials for dispatch or receipt by Tenant must be made a licensed commercial movers via the service entrance of the Building in a manner and during hours set by Landlord from time to time. Prior approval must be obtained from the Landlord’s Building manager for any deliveries that might interfere with the free movement of others through the public corridors and elevators of the Building. All hand trucks shall be equipped with rubber tires and rubber side guards.

  7. Each tenant shall cooperate with Building employees in keeping the Building and their respective leased premises neat and clean.

  8. Nothing shall be swept or thrown into the corridors, halls, elevator shafts or stairways. No birds or animals (other than handicapped assistance animals) shall be brought into or kept in or about the Building.

  9. Tenants shall not use or keep in the Building any illuminating material, unless it is battery powered, UL approved.

10. Tenants, employees, or agents, or anyone else who desire to enter the Building after normal working hours will be required to close doors into the Building behind them. Locks to such doors will not be tampered with.

11. All electrical fixtures hung in the Premises must be fluorescent or of another type reasonably approved by Landlord and of a quality, type, design, bulb, color, size and general appearance approved by Landlord.

12. Normal business hours for the Building shall be 6:30 a.m. through 6:30 p.m. on weekdays, excluding legal holidays and 8:00 a.m. to 1:00 p.m. on Saturday.

13. References to “holidays” and “legal holidays” in the leases to tenants in the Building shall include the following:

January 1st	New Year’s Day
Last Monday in May	Memorial Day
July 4th	Independence Day
First Monday in September	Labor Day

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Fourth Thursday in November	Thanksgiving
December 25th	Christmas

14. The Landlord reserves the right to rescind any of these rules, other than the definition of what constitutes “holidays” or “legal holidays” for purposes of this Lease (as to any particular tenant or as to all tenants generally) and to make such other and further rules and regulations as in the judgment of Landlord shall from time to time be needed for the safety, protection, care and cleanliness of the Building, the operation thereof, the preservation of good order therein, and the protection and comfort of its tenants, their agents, employees and invitees, which rules when made and notice thereof given to a tenant shall be binding upon him in like manner as if originally herein prescribed. In the event of any conflict, inconsistency, or other difference between the terms and provisions of these Rules and Regulations (as now or hereafter in effect) and the terms and provisions of any lease now or hereafter in effect between Landlord and any other tenant in the Building, Landlord shall have the right to rely on the term or provision in either such lease or such Rules and Regulations which is most restrictive on such tenant.

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EXHIBIT “D”

LANDLORD’S SERVICES

The following services will be provided by Landlord:

1. water (hot and cold) at those points of supply provided for general use of tenants of the Building;

2. heated and refrigerated air conditioning as appropriate, at such temperatures and in such amounts as are standard for comparable office buildings and in any such air conditions shall be sufficient to maintain the temperature in the Premises between 72 degrees Fahrenheit and 74 degrees Fahrenheit at less than 65% relative humidity, from 6:30 a.m. to 6:30 p.m., Monday through Friday, and from 8:00 a.m. to 1:00 p.m. on Saturdays;

3. janitorial service to the Premises on weekdays other than holidays for Building-standard installations (Landlord reserves the right to bill Tenant separately for extra janitorial service required for non-standard installations) and such window washing as may from time to time in Landlord’s judgment be reasonably required;

4. elevators for ingress and egress to the floor on which the Premises are located, in common with other tenants, provided that Landlord may reasonably limit the number of elevators to be in operation at times other than during customary business hours and on holidays;

5. replacement of ballasts and fluorescent tubes in building-standard ceiling mounted fixtures installed by Landlord and incandescent bulb replacement in all public areas of the Building;

6. electrical current to furnish electricity seven days per week, twenty-four hours per day, with a capacity of not less than Building Standard Capacity;

7. landscaping; and

8. snow and ice removal from primary ingress, egress and parking areas.

Landlord shall provide such services and maintain the common areas and the Building’s systems and structure at a level at least as good as the level of service that is typical in other similar class office buildings in the submarket in which the Building is located.

As used in this Lease, “holidays” and “legal holidays” shall mean the following:

January 1st	New Year’s Day
Last Monday in May	Memorial Day
July 4th	Independence Day
First Monday in September	Labor Day
Fourth Thursday in November	Thanksgiving
December 25th	Christmas

After Hours HVAC

Landlord will furnish Building standard air conditioning and heating between 6:30 a.m. and 6:30 p.m. from Monday through Friday and, if requested, between 8:00 a.m. and 1:00 p.m. on Saturdays, all exclusive of holidays. Upon request of Tenant made at least four (4) hours in advance of the time for which such service is requested, Landlord will furnish air conditioning and heating at other times (that is, at times other than the times specified above), in which event Tenant shall reimburse Landlord for the cost of furnishing such services.

Tenant shall reimburse Landlord at the rate of Twenty-Five and No/100 Dollars ($25.00) per hour per control zone when air conditioning or heating is furnished by Landlord to Tenant at Tenant’s request

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pursuant to the Lease at times other than those stated above. However, such rate is based upon the Kilowatt Hour Rate (as hereinafter defined) for electricity as of the date of this Lease (the “Base Rate”) and if and when the Kilowatt Hour Rate increases over or decreases below the Base Rate, the aforesaid rate of $25.00 per hour per control zone shall automatically increase or decrease proportionately. The “Kilowatt Hour Rate” shall mean the actual average cost per kilowatt hour charged by the public utilities providing electricity to the Building, or, if said public utilities shall cease charging for electricity on the basis of a kilowatt hour, then the Kilowatt Hour Rate shall mean the actual average cost per unit of measurement substituted therefore by said public utilities.

For purposes of this Exhibit “D”, the control zones shall be the following:

1^st floor control zone A (1^st floor of the Building)
1^st floor control zone B (1^st floor of the Garage)
2^nd floor control zone
3^rd floor control zone
4^th floor control zone
5^th floor control zone
6^th floor control zone

32

EXHIBIT “E-1”

TENANT IMPROVEMENTS

Landlord, at Landlord’s sole cost and expense, shall furnish a Tenant Improvement Allowance of $3.00 per rentable square foot for Space “A” not to exceed a total of $285,981.00. Tenant has unamortized leasing commissions and tenant improvements on Suites 127, 150, 202, and 500 totaling $110,403.94 as outlined in Exhibit “E-2” attached hereto and made a part hereof. Landlord agrees to deduct the $110,403.94 of unamortized leasing commissions and tenant improvements from the Tenant Improvement Allowance as provided on Space “A” under this Lease. Tenant must use the remaining $175,577.06 Tenant Improvement Allowance for any and all leasehold improvements to Space “A” by no later than December 31, 2007. Any and all other costs exceeding this amount shall be at the sole cost and expense of the Tenant. Any unused portion of the said allowance cannot be applied toward Tenant’s base rent or any other amounts owing to Landlord.

Landlord, at Landlord’s sole cost and expense, shall furnish a Tenant Improvement Allowance of $3.00 per rentable square foot as of the Commencement Date (January 1, 2004) for Space “B” not to exceed a total of $81,558.00. Tenant must use the Tenant Improvement Allowance for any and all leasehold improvements to said space by no later than December 31, 2007. Any and all other costs exceeding this amount shall be at the sole cost and expense of the Tenant. Any unused portion of the said allowance cannot be applied toward Tenant’s base rent or any amounts owing to Landlord.

The Tenant Improvement Allowance as to each space shall be disbursed to Tenant upon written request from Tenant accompanied by invoices and partial or final lien waivers, as applicable, reflecting the work as to which such disbursement is applicable. Landlord shall disburse the Tenant Improvement Allowance within 30 days after any such request.

COMMON AREA IMPROVEMENTS

Landlord, at Landlord’s cost and expense, agrees to replace selected common area hallway and elevator lobby carpet and wall covering and/or wall paint with Building-standard carpet, wall covering and/or wall paint, as determined by Landlord and reasonably acceptable to Tenant, on floors one (1) and two (2) in the year 2003.

33

EXHIBIT “E-2”

UNAMORTIZED COST SCHEDULE

CLAM FILE: UNAMORTCYBX

DATE: 1 AUGUST 2002

UNAMORTIZED COSTS, CYBERONICS’ CURRENT LEASES

     CYBERONICS 5TH FLOOR (500,501)

LEASE EXPIRATION	31-Mar-03
EARLY TERMINATION	08-Dec-02
UNAMORTIZED PERIOD		3.71	MONTHS

																								TENANT		TENANT
								TERM		RENTAL		TOTAL		COMMISSION			COMMISSION		UNAMORTIZED			UNAMORTIZED		IMPROVEMENT		IMPROVEMENT		UNAMORTIZED
	SUITE		AREA		COMMENCE		EXPIRE	(MONTHS)		RATE		RENT		RATE			PAID		TERM (%)			COMMISSION		($/SF)		($)		T. I. ($)
		500		9,340	01-May-96		31-Mar-03		58.97	$	16.00	$	734,414.24		6.00	%	$	44,064.85		6.30	%	$	2,774.00	$	20.00	$	168,800.00	$	11,759.55
		501		10,071	01-Jul-98		31-Mar-03		56.97	$	16.00	$	764,982.41		6.00	%	$	45,698.94		6.52	%	$	2,991.11	$	20.00	$	201,420.00	$	13,125.99
																			TOTALS			$	5,765.11					$	24,885.54
TOTAL UNAMORTIZED COSTS:					$	30,650.65

     SATASSIGNMENT (SUITE 127)

LEASE EXPIRATION	05-Mar-05
EARLY TERMINATION	08-Dec-02
UNAMORTIZED PERIOD		26.87	MONTHS

										AVG														TENANT		TENANT
								TERM		RENTAL		TOTAL		COMMISSION			COMMISSION		UNAMORTIZED			UNAMORTIZED		IMPROVEMENT		IMPROVEMENT		UNAMORTIZED
	SUITE		AREA		COMMENCE		EXPIRE	(MONTHS)		RATE		RENT		RATE			PAID		TERM (%)			COMMISSION		($/SF)		($)		T. I. ($)
		127		3,852	06-Mar-00		05-Mar-05		59.96	$	17.50	$	336,819.30		4.00	%	$	13,472.77		44.62	%	$	6,038.75	$	11.15	$	42,949.80	$	19,250.92
																			TOTALS			$	6,038.75					$	19,250.92
TOTAL UNAMORTIZED COSTS:					$	25,269.68

     WEBB MURRAY ASSIGNMENT (SUITE 202)

LEASE EXPIRATION	20-Sep-05
EARLY TERMINATION	08-Dec-02
UNAMORTIZED PERIOD		33.41	MONTHS

										AVG														TENANT		TENANT
								TERM		RENTAL		TOTAL		COMMISSION			COMMISSION		UNAMORTIZED			UNAMORTIZED		IMPROVEMENT		IMPROVEMENT		UNAMORTIZED
	SUITE		AREA		COMMENCE		EXPIRE	(MONTHS)		RATE		RENT		RATE			PAID		TERM (%)			COMMISSION		($/SF)		($)		T. I. ($)
		202		7,493	21-Sep-98		20-Sep-05		83.98	$	14.64	$	767,814.70		6.00	%	$	46,068.88		39.79	%	$	18,330.22	$	11.68	$	87,503.25	$	34,816.44
																			TOTALS			$	18,330.22					$	34,816.44
TOTAL UNAMORTIZED COSTS:					$	53,148.66

     CYBERONICS A-13, OAO A-1 (SUITE 150)

LEASE EXPIRATION	31-Mar-03
EARLY TERMINATION	08-Dec-02
UNAMORTIZED PERIOD		12.75	MONTHS

										AVG													TENANT		TENANT
								TERM		RENTAL		TOTAL		COMMISSION			COMMISSION		UNAMORTIZED		UNAMORTIZED		IMPROVEMENT		IMPROVEMENT		UNAMORTIZED
	SUITE		AREA		COMMENCE		EXPIRE	(MONTHS)		RATE		RENT		RATE			PAID		TERM (%)		COMMISSION		($/SF)		($)		T. I. ($)
		150		1,683	07-Feb-00		31-Dec-03		46.75	$	12.28	$	80,499.10		6.00	%	$	4,629.95		27.27%	$	1,316.95	$	0.00	$	0.00	$	0.00
																			TOTALS		$	1,316.95					$	0.00
TOTAL UNAMORTIZED COSTS:					$	1,316.95

     SUMMARY OF ALL UNAMORTIZED COSTS:

SUITE	TOTAL COSTS
500/501	$	30,650.65
127	$	25,289.68
202	$	53,146.66
150	$	1,316.95
	$	110,403.94

EXHIBIT “F”

OPTION TO RENEW

Provided no Event of Default exists as of the time of commencement of any renewal thereof, Tenant shall have the option to renew the Lease (“Renewal Option”) for one (1) additional five (5)-year term (the “Renewal Term”) commencing upon the expiration of the then current Lease term. The Base Rent rate for the Renewal Term shall be at the then Prevailing Market Rental Rate at the time the Renewal Option is exercised, [but shall not be less than the Base Rent rate then in effect during the final year of the then current Lease term]. Tenant’s election to renew the Lease shall be made in writing to Landlord not more than nine (9) months or less than six (6) months prior to the expiration of the then current Lease term. Landlord shall use its good faith efforts to provide to Tenant, no earlier than fifteen (15) months and no later than twelve (12) months prior to expiration of the then current Term, a written notice reminding Tenant of the time frame within which it must exercise the Renewal Option. Failure to provide such notice by Landlord shall not constitute an event of default under this Lease nor give rise to any remedy for Tenant, whether by law or in equity. Within ten (10) business days after receipt of Tenant’s written notice of its intent to exercise its Renewal Option, Landlord shall provide Tenant with its good faith determination of the then Prevailing Market Rental Rate. Within fifteen (15) business days after receipt of Landlord’s notice of such determination, Tenant shall provide Landlord with written notice of its acceptance or rejection of Landlord determination of the then Prevailing Market Rental Rate. In the event Landlord and Tenant are unable to agree as to the Prevailing Market Rental Rate within thirty (30)-days after Tenant’s rejection of Landlord’s determination of Prevailing Market Rental Rate, Tenant shall have the option, exercisable by delivering written notice to Landlord of its election within 10 days following expiration of such 30 day period, of (a) rescinding its exercise of the Renewal Option, in which case the Renewal Option shall be null and void or (b) requiring that the determination of the Prevailing Market Rental Rate be made by brokers (and if Tenant makes such election, Tenant shall be deemed to have irrevocably renewed the Term, subject only to the determination of the Prevailing Market Rental Rate as provided below). In such event, within ten days thereafter, each party shall select a qualified commercial real estate broker wilh at least ten years experience in appraising property and buildings in the city or submarket in which the Premises are located. The two brokers shall give their opinion of prevailing rental rates within 20 days after their retention. In the event the opinions of the two brokers differ and, after good faith efforts over the succeeding 20-day period, they cannot mutually agree, the brokers shall immediately and jointly appoint a third broker with the qualifications specified above. This third broker shall immediately (within five days) choose either the determination of Landlord’s broker or Tenant’s broker and such choice of this third broker shall be final and binding on Landlord and Tenant. Each party shall pay its own costs for its real estate broker. Following the determination of the Prevailing Market Rental Rate by the brokers, the parties shall equally share the costs of any third broker. The parties shall immediately execute an amendment as set forth above.

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EXHIBIT “G”

RIGHT OF FIRST REFUSAL

Provided no Event of Default exists after any cure periods, from the time of exercising the right contained herein to the commencement of the term applicable to such space, Tenant shall be granted a continuing right of first refusal (“Right of First Refusal”) on any vacant space within the building (“Refusal Space”), subject to availability and any existing renewal, right of first refusal or first offer or expansion rights of other tenants that are superior to Tenant’s rights hereunder or which are included in any lease executed hereafter as to which Tenant failed or elected not to exercise its right of first offer under this Exhibit “G”. Provided Tenant exercises the Right of First Refusal twenty-four (24) months prior to the then current Lease expiration, the terms and conditions shall be the same as the then current Lease terms and at the current rental rates at the time Tenant exercises the option. Otherwise, this Right of First Refusal shall become operative upon receipt of written notice from Landlord that a bona fide offer has been received by Landlord from a prospective third-party tenant to lease the “Refusal Space” and Landlord is willing to accept the terms of such offer. The notice from Landlord shall include the bona fide offer of the terms and conditions under which the “Refusal Space” is being offered to lease to the prospective tenant. Upon receipt of said notice from Landlord, Tenant will then have five (5) business days to respond in writing to Landlord of its intention to exercise its right to lease such Refusal Space under the same terms of the bona fide offer to the prospective tenant. Response by Tenant in the form of a counter-proposal to the bona fide offer or a failure to respond within said five (5) business days time period will be deemed to be a rejection of Tenant’s Right of First Refusal, and Landlord shall then proceed to lease the “Refusal Space” to the prospective third-party tenant; provided, however, that if Landlord thereafter desires to lease such space to such prospective third-party tenant at a net effective rental rate (taking into consideration all economic terms of the proposed lease) that is less than 95% of the net effective rental rate that Tenant would have been required to pay under the terms of the bona fide offer as presented to Tenant, Landlord shall reoffer such space to Tenant upon such terms and conditions. If Tenant responds affirmatively, Tenant must then execute the necessary amendment to lease the “Refusal Space” under the same terms of the bona fide offer to the prospective tenant and return said amendment to Landlord within ten (10) business days after it is submitted to Tenant. Any modification to the business terms in said amendment shall constitute a rejection of Tenant’s Right of First Refusal. This Right of First Refusal may not be exercised by any subtenant of Tenant. If for any reason a lease agreement is not executed with said prospective third-party tenant within 90 days after Tenant’s rejection, Tenant’s Right of First Refusal shall be reinstated.

36

EXHIBIT “H”

SIGNAGE

Tenant will continue to have exterior building identification over the main front entrance to the Building until the Lease expiration date. As of January 1, 2004, the Tenant shall have the exclusive and sole use of the large monument sign located at the corner of Space Center Boulevard and Cyberonics Boulevard. The cost associated with the relocation of Tenant’s identification to the large marker shall be the responsibility of Landlord. The Tenant’s name shall continue to be represented on the building lobby directory with at least one (1) directory listing per floor.

Tenant shall continue to have the right to fly its corporate banner or flag on the flagpole at the corner of Space Center Boulevard and Cyberonics Boulevard below the American and Texas State flags. The Tenant will supply any such corporate flag or banner at their expense.

37

EXHIBIT “I”

SECURITY AND ACCESS CONTROL

Landlord, if so requested by Tenant, shall continue to provide Houston Police Department uniformed guards for duty at the entrance to the first floor main lobby; provided, however, that Tenant agrees that Landlord shall not be responsible for the adequacy or effectiveness of such security. The differential hourly costs of HPD officers above that of any contract security officers shall continue to be paid by Cyberonics.

38

EXHIBIT “J”

ACCESS AND USE OF GARAGE ROOF

Cyberonics shall continue to have access and use of the top level of the parking garage for sports courts and recreational facilities subject to observance of all applicable state and city codes and requirements and subject to a Waiver of landlord’s total liability for such facility. All construction and or improvements to such sports courts and recreational facilities shall require prior written approval from Landlord, which approval shell not be unreasonably withheld, delayed or conditioned, and shall be at the sole cost and expense of Cyberonics. Such above noted use of the top level of the parking garage shall be subject to termination by Landlord upon reasonable termination notification (not less than sixty (60)-days) by Landlord to Tenant based on Building parking requirements.

39

EXHIBIT “K”

ADDITIONAL EXCLUSIONS FROM OPERATING EXPENSES

     (1) costs of repairs, restoration, replacements or other work occasioned by a) fire, windstorm or other casualty of an insurable nature (whether such destruction be total or partial) b) the exercise by governmental authorities of the right of eminent domain, whether such taking be total or partial, c) the negligence or intentional tort of Landlord, or any subsidiary or Affiliate of Landlord, or any representative, employee or agent of same, or d) the act of any other tenant in the Building;

     (2) leasing commissions, attorneys’ fees (except for those reasonable attorney’s fees in connection with enforcing rules and regulations), costs disbursements and other expenses incurred in connection with negotiations for leases with tenants, other occupants, or prospective tenants or other occupants of the Building, or similar costs incurred in connection with disputes with tenants, other occupants, or prospective tenants, or similar costs and expenses incurred in connection with negotiations or disputes with management agents, purchasers or mortgagees of the Building;

     (3) allowances, concessions and other costs and expenses incurred in completing, fixturing, furnishing, renovating or otherwise improving, decorating or redecorating space or making substantial capital improvements for the benefit of one or more particular tenants (including Tenant), prospective tenants or other occupants and prospective occupants of the Building, or vacant, leasable space in the Building;

     (4) payments of principal and interest or other finance charges made on any debt and rental payments made under any ground or underlying lease or leases;

     (5) cost incurred in connection with the sales, financing, refinancing, mortgaging, selling or change of ownership of the Building, including brokerage commissions, attorneys’ and accountants’ fees, closing costs, title insurance premiums, transfer taxes and interest charges;

     (6) costs, fines, interest, penalties, legal fees or costs of litigation incurred due to the late payments of taxes, utility bills and other costs incurred by Landlord’s failure to make such payments when due;

     (7) costs incurred by Landlord for trustee’s fees, partnership organizational expenses and accounting fees except accounting fees relating to the ownership and operation of the Building;

     (8) Landlord’s general corporate overhead and general and administrative expenses;

     (9) rentals and other related expenses incurred in leasing air conditioning systems, elevators or other equipment ordinarily considered to be of a capital nature, except a) equipment not affixed to the Building which is used in providing janitorial or similar services and b) equipment rented to provide temporary services, including during interruption of Building services;

     (10) all amounts which would otherwise be included in Operating Expenses which are paid to any Affiliate of Landlord, or any representative, employee or agent of same, to the extent the costs of such services exceed the competitive rates for similar services of comparable quality rendered by persons or entities of similar skill, competence and experience;

     (11) advertising and promotional costs associated with the leasing of the Building, and costs of signs (other than directories or operational signs) in or on the Building identifying the owners of the Building;

     (12) consulting costs and expenses paid by landlord, except for reasonable costs directly related to the operation of the Building;

     (12) wages and salaries for off-site employees (however, Landlord may include in Operating Expenses its reasonable proration of expenses of off-site employees who perform a portion of their services in connection with the ownership, operation and maintenance of the Building) and employees at the Building above the level of building manager;

     (13) services, items and benefits for which Tenant or any other tenant or occupant of the Building specifically reimburses Landlord or for which Tenant or any other tenant or occupant of the Building pays third persons;

40

     (14) costs or expenses for sculpture, paintings or other works of art, including costs incurred with respect to the purchase, ownership, leasing, showing, promotion, repair and/or maintenance of same;

     (15) contributions to charitable organizations;

     (16) contributions to operating expense reserves; and

     (17) the costs of any “tap fees” or one-time lump sum sewer or water connection fees for the Building;

     The term “Affiliate” shall mean and refer to any person or entity controlling, controlled by, or under common control with another such person or entity. “Control”, as used herein, shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such controlled person or entity; the ownership, directly or indirectly, of at least fifty-one percent (51%) of the voting securities of, or possession of the right to vote, in the ordinary direction of its affairs, at least fifty-one percent (51%) of the voting interest in, any person or entity shall be presumed to constitute such control. In the case of Landlord, the term Affiliate shall include any person or entity controlling or controlled by or under common control with any general partner of Landlord or any general partner of Landlord’s general partner.

41

FIRST AMENDMENT TO LEASE

This FIRST AMENDMENT TO LEASE (“First Amendment”) is made this 3^rd day of March, 2003 by and between Space Center Operating Associates, L. P., a New Mexico limited partnership (“Landlord”) and Cyberonics, Inc., a Texas Corporation (“Tenant”).

RECITALS:

WHEREAS, Landlord and Tenant entered into that certain Office Lease Agreement (“Lease”) dated December 5, 2002, covering certain leased premises (“Premises”) in the building known as the Cyberonics Building (“Building”) located in Houston, Harris County, Texas; and

WHEREAS, Tenant now desires to expand its leased premises on the second floor of the Building herein referred to as (“Expansion Space I”); and Landlord and Tenant wish to otherwise amend the terms of the Lease to reflect the same;

AGREEMENTS:

NOW, THEREFORE, in consideration of the sum of Ten and 00/100 Dollars ($10.00) and other valuable consideration paid by each parly to the other, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant do hereby amend the Lease as follows:

1.	Premises
	Effective July 1, 2003, the Tenant’s Premises shall be amended to include Suite 203 located on the second floor of the Building known as “Expansion Space 1” identified in Exhibit “A” attached hereto and made part hereof.
2.	Tenant’s Rentable Square Feet
	Effective July 1, 2003, the Tenant’s Rentable Square Feet shall be amended to include “Expansion Space I” containing 3,947 square feet.
3.	Tenant’s Proportionate Share
	Effective July 1, 2003 the Tenant’s Proportionate Share of the Building shall be amended to 68.7750% to include “Existing Space A” and “Expansion Space I”; and effective January 1, 2004 the Tenant’s Proportionate Share shall be amended to 87.6089% to include “Existing Space B” and the “Expansion Space I”.
4.	Term
	The Term (“Expansion Term”) for “Expansion Space I” shall be for a period of seventy nine (79) months commencing July 1, 2003 and expiring December 31, 2009 to run coterminous with Tenant’s existing term.
5.	Base Rent
	The Base Rental payable for “Expansion Space I” shall be due and payable on the first day of each calendar month during the term of this Lease as follows:

	Annual Base Rental		Monthly
Lease Years	Per Rentable Square Foot		Base Rental Payment
07/01/03-12/31/03	$	17.00	$	5,591.58
01/01/04-12/31/04	$	17.20	$	5,657.37
01/01/05-12/31/05	$	17.30	$	5,690.26
01/01/06-12/31/06	$	18.25	$	6,002.73
01/01/07-12/31/07	$	18.50	$	6,084.96
01/01/08-12/31/08	$	18.75	$	6,167.19
01/01/09-12/31/09	$	19.00	$	6,249.42

- 1 -

6.	Additional Rent
	Effective July 1, 2003, the Base Year for “Expansion Space I” shall be calendar year 2003, calculated on a “grossed-up” basis to reflect a one ninety five percent (95%) occupancy.
7.	Construction Allowance
	Landlord at Landlord’s sole cost and expense, agrees to provide a Construction Allowance for leasehold improvements to “Expansion Space I” at $3.00 per rentable square foot or $11,841.00. Otherwise, Tenant agrees to accept “Expansion Space I” in its “as-is” condition. Any and all other expenses shall be at the sole cost and expense of the Tenant.

Except as modified and amended herein, all other terms and conditions of the Lease are hereby ratified and affirmed in all respects.

IN WITNESS HEREOF, the undersigned has caused this FIRST AMENDMENT TO OFFICE LEASE to be duly executed effective as of the date first written above.

LANDLORD:
SPACE CENTER OPERATING
ASSOCIATES, L.P.

By: BGK Equities, Inc General Partner

By:	/s/ J. Peter Mehlert
Name:	J. PETER MEHLERT, PRESIDENT
Title:	BGK TEXAS PROPERTY MGMT, INC.
	AS AGENT FOR

TENANT:
CYBERONICS, INC

By:	/s/ Pamela B. Westbrook
Name:	Pamela B. Westbrook
Title:	VP, Finance & Administration/CFO

- 2 -

EXHIBIT “A”

EXPANSION SPACE 1

SECOND AMENDMENT TO LEASE

This SECOND AMENDMENT TO LEASE (“Second Amendment”) is made this 2 day of October, 2003 by and between Space Center Operating Associates, L.P., a New Mexico limited partnership (“Landlord”) and Cyberonies, Inc., a Texas Corporation (“Tenant”).

RECITALS:

WHEREAS, Landlord and Tenant entered into that certain Lease Agreement (“Lease”) dated December 5, 2002, covering certain leased premises (“Premises”) in the building known as the Cyberonics Building (“Building”) located in Houston, Harris County, Texas; and

WHEREAS, Landlord and Tenant entered into that certain First Amendment to Lease (“First Amendment”) dated March 3, 2003, wherein the Premises was expanded by 3,947 square feet (“Expansion Space I”) on the second floor of the Building for an amended total of 99,274 square feet of Rentable Area; and

WHEREAS, Tenant now desires to expand its leased premises on the first floor of the Building herein referred to as (“Expansion Space II”); and Landlord and Tenant wish to otherwise amend the terms of the Lease to reflect the same;

AGREEMENTS:

NOW, THEREFORE, in consideration of the sum of Ten and 00/100 Dollars ($10.00) and other valuable consideration paid by each party to the other, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant do hereby amend the Lease as follows:

1.	Premises
	Effective February 1, 2004, the Tenant’s Premises shall be amended to include Suite 105 located on the first floor of the Building, known as “Expansion Space II” identified in Exhibit “A” attached hereto and made part hereof.
2.	Tenant’s Rentable Square Feet
	Effective February 1, 2004, the Tenant’s Rentable Square Feet shall be amended to include “Expansion Space II” containing 3,435 square feet.
3.	Tenant’s Proportionate Share
	Effective February 1, 2004 the Tenant’s Proportionate Share of the Building shall be amended to 89.9886% to include “Existing Space A”, “Existing Space B”, “Expansion Space I” and “Expansion Space II”.
4.	Term
	The Term (“Expansion Term”) for “Expansion Space II” shall be for a period of seventy one (71) months commencing February 1, 2004 and expiring December 31, 2009 to run coterminous with Tenant’s existing term.
5.	Base Rent
	The Base Rental payable for “Expansion Space II” shall be due and payable on the first day of each calendar month during the term of this Lease as follows:

-1-

	Annual Base Rental		Monthly
Lease Years	Per Rentable Square Foot		Base Rental Payment
02/01/04 - 12/31/04	$	17.20	$	4,923.50
01/01/05 - 12/31/05	$	17.30	$	4,952.13
01/01/06 - 12/31/06	$	18.25	$	5,224.06
01/01/07 - 12/31/07	$	18.50	$	5,295.63
01/01/08 - 12/31/08	$	38.75	$	5,367.19
01/01/09 - 12/31/09	$	19.00	$	5,438.75

6.	Additional Rent
	Effective February 1, 2004, the Base Year for “Expansion Space II” shall be calendar year 2003, calculated on a “grossed-up” basis to reflect a ninety five percent (95%) occupancy.
7.	Construction Allowance
	Landlord at Landlord’s sole cost and expense, agrees to provide a Construction Allowance for leasehold improvements to “Expansion Space II” at $3.00 per rentable square foot or $10,305.00. Except as provided herein, the Tenant hereby accepts the “Expansion Space” in its “as-is” condition. Additionally, any unused portion of the improvement allowance provided by Landlord cannot be applied toward base rent or any other amounts owing to Landlord.

Except as modified and amended herein, all other terms and conditions of the Lease and the First Amendment to Lease are hereby ratified and affirmed in all respects.

IN WITNESS HEREOF, the undersigned has caused this SECOND AMENDMENT TO LEASE to be duly executed effective as of the date first written above.

LANDLORD:

SPACE CENTER OPERATING
ASSOCIATES, L.P.

By: BGK Equities Inc. General Partner

By:	/s/ J. Peter Mehlert
Name:	J. PETER MEHLERT, PRESIDENT
Title:	BGK TEXAS PROPERTY MGMT, INC.
	AS AGENT FOR

TENANT:

CYBERONICS, INC.

By:	/s/ Pamela B. Westbrook
Name:	Pamela B. Westbrook
Title:	Vice President, Finance & Administration

-2-

EXHIBIT “A”
LEASED PREMISES
(CROSS HATCHED AREA)

THIRD AMENDMENT TO LEASE

This THIRD AMENDMENT TO LEASE (“Third Amendment”) is made this 11^th day of March, 2004 by and between SPACE CENTER OPERATING ASSOCIATES, L.P. a New Mexico limited partnership (“Landlord”) and CYBERON1CS, INC. a Texas Corporation (“Tenant”)

RECITALS:

WHEREAS, Landlord and Tenant entered into that certain Lease Agreement (“Lease”) dated December 5, 2002 covering certain lease premises (“Premises”) in the building known as the Cyberonics Building (“Building”) located in Houston, Harris County, Texas; and

WHEREAS, Landlord and Tenant entered into that certain First Amendment to Lease (“First Amendment”) dated March 3, 2003, wherein the Premises was expanded by 3,947 square feet (“Expansion Space I”) on the second floor of the Building for an amended total of 99,274 square feet of Rentable Area; and

WHEREAS, Landlord and Tenant entered into that certain Second Amendment to Lease (“Second Amendment”) dated, for reference purposes only as, October 13, 2003, wherein the Premises was expanded by an additional 3,435 square feet (“Expansion Space II”) on the first floor of the Building for an amended total of 102,709 square feet of Rentable Area; and

WHEREAS, the Lease and the First and Second Amendments, including any and all exhibits, addenda, riders, estoppels and letter agreements, shall hereinafter be collectively referred to as the “Lease”; and

WHEREAS, The commencement date of the “Expansion Space II” lease term has been delayed until February 9, 2004, therefore Landlord and Tenant agree to amend the terms and conditions of the Second Amendment to reflect same;

AGREEMENTS:

NOW, THEREFORE, in consideration of the sum of Ten and 00/100 Dollars ($10.00) and other valuable consideration paid by each party to the other, the receipt and sufficiency of which is hereby acknowledge, Landlord and Tenant do hereby amend the Lease as follows:

Section 2b — Premises:

Effective February 9, 2004, the Tenant’s Premises shall be amended to include Suite 105 located on the first floor of the Building, hereinafter referred to as “Expansion Space II” identified in Exhibit “A” attached hereto and made a part hereof.

Section 2d — Tenant’s Rentable Square Feet:

Effective February 9, 2004, the Tenant’s Rentable Square Feet shall be amended to include the “Expansion Space II” containing 3,435 square feet and when added to Tenant’s “Existing Space” as shown on Exhibit “B” containing 99,274 square feet shall total 102,709 square feet of Rentable Area.

Section 2f — Tenant’s Proportionate Share:

Effective February 9, 2004, the Tenant’s Proportionate Share of the Building shall be amended to 89.9886%.

Section 2g — Commencement Date:

The commencement date for the “Expansion Space II” shall be February 9, 2004.

Section 2h — Term:

The Term (“Expansion Space II Term”) shall be for a period of seventy (70) months and twenty-one (21) days, commencing on February 9, 2004 and expiring on December 31, 2009 to run coterminous with Tenant’s “Existing Space” term.

Section 2i — Base Rent:

The Base Rental payable for “the Expansion Space II” shall be due and payable on the first day of each calendar month during the “Expansion Space II Term” as follows:

	Annual Base Rental		Monthly Base
Period	Per Rentable Square Foot		Rental Payment
02/09/04 - 12/31/04	$	17.20	$	4,923.50
01/01/05 - 12/31/05	$	17.30	$	4,952.13
01/01/06 - 12/31/06	$	18.25	$	5,224.06
01/01/07 - 12/31/07	$	18.50	$	5,295.63
01/01/08 - 12/31/08	$	18.75	$	5,367.19
01/01/09 - 12/31/09	$	19.00	$	5,438.75

Section 2j — Additional Rent:

Effective February 9, 2004, the Base Year for the “Expansion Spnce II” shall be calendar year 2003, calculated on a “grossed-up” basis to reflect a ninety-five percent (95%) occupancy.

Section 2p — Maximum Construction Allowance:

Landlord, at Landlord’s sole cost and expense, agrees to provide a Construction Allowance in the amount of $3.00 per rentable square foot or $10,305.00 to be used strictly for leasehold improvements to the “Expansion Space II”. Except as provided herein, the Tenant agrees to accept the “Expansion Space II” in its “as-is” condition. Additionally, any unused portion of the construction allowance provided by Landlord cannot be applied toward base rent or any other amounts owing to Landlord.

Except as modified and amended herein, all other terms and conditions of the Lease, the First Amendment, and the Second Amendment are hereby ratified and affirmed in all respects.

IN WITNESS HEREOF, the undersigned has caused this THIRD AMENDMENT TO LEASE to be duly executed effective as of the date first written above.

LANDLORD:
SPACE CENTER OPERATING ASSOCIATES, L.P.

By: BGK Equities, Inc. General Partner

By:	/s/ J. Peter Mehlert
Name:	J. PETER MEHLERT, PRESIDENT
Title:	BGK TEXAS PROPERTY MGMT, LLC
	AS AGENT FOR

TENANT:
CYBERONICS, INC.

By:	/s/ Pamela B. Westbrook
Name:	Pamela B. Westbrook
Title:	CFO, VP - Finance & Adm

EXHIBIT “A”
LEASED PREMISES
(CROSS HATCHED AREA)

March 19, 2004

Cyberonics, Inc.
100 Cyberonics Drive, Suite 600
Houston, Texas 77058

RE: Tenant Notice Letter, Transfer of Ownership
100 Cyberonics Drive

Dear Tenant:

This notice is delivered to advise you that on March 19, 2004 the above-referenced property was sold and conveyed by Space Center Operation Associates to Triple Net Properties, LLC on behalf of NNN 100 Cyberonics Drive, LLC, a Delaware Limited Liability Company.

Rent checks are due and payable as per your lease. All payments of rents should be made payable to NNN 100 Cyberonics Drive, LLC and mailed to the following address:

NNN 100 Cyberonics Drive, LLC
c/o Triple Net Properties, LLC
PO Box 534157
Atlanta, GA 30353-4157

APRIL RENT PAYMENTS SHOULD BE MAILED TO THIS ADDRESS

We appreciate your cooperation in contacting your insurance agent, requesting that the following verbiage and entities be added as additionally insured to your certificate of insurance, NNN 100 Cyberonic Drive, LLC and Triple Net Properties, LLC are hereby added as additionally insured with respect to the premises leased at: 100 Cyberonics Drive, Houston, Texas. If your agent uses anything other than the ACCORD CERTIFICATE OF INSURANCE form, Additional Insured Endorsement CG20I1 or equivalent should be attached to the certificate. Landlord requires a 30-day notice of termination of policy. All certificates should be sent to: NNN 100 Cyberonics Drive, LLC, c/o Triple Net Properties, LLC, 2563 Bay Area Boulevard, Houston, TX. 77058

Please contact the following individuals for any request you may have:

Maintenance & Billing /Administration	Leasing	Official Notices
Connie Speakes, Property Administrator	Renee Dickens, Property Manager	Legal Department
Triple Net Properties, LLC	Triple Net Properties, LLC	Triple Net Properties, LLC
2563 Bay Area Boulevard	2563 Bay Area Boulevard	1551 N. Tustin Ave. #200
Houston, Texas 77058	Houston, Texas 77058	Santa Ana, CA 92705
(281) 486.6966 voice	(281) 486.6966 voice	(714) 667-8252
(281) 486.4546 Fax	(281) 486.4546 fax	(714) 667-6860 fax

Should a W-9 form be required for tax purposes the Tax ID number is 20-0664432.

Please update your files to include the above information. We thank you for your cooperation and welcome you to the Triple Net family.

Sincerely,
TRIPLE NET PROPERTIES, LLC
/s/ Dan O’Hare   
Dan O’Hare
Senior Asset Manager

Triple Net Properties, LLC
2563 Bay Area Boulevard
Houston, Texas 77058
281-486-6966 voice 281-486-4546 fax

     THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (the “Agreement”) is made as of the date last executed below, between Cyberonics. Inc., a Delaware corporation (“Tenant”), having an address at 16511 Space Center Boulevard, Suite 600, Houston, TX 77058 and PNC Bank, National Association (“Lender”), located at 10851 Mastin, Overland Park, Kansas, 66210.

RECITALS

A. Tenant is the tenant under that certain lease (the “Original Lease”) dated December 5, 2002, by and between Tenant and Triple Net Properties, LLC and/or its assigns as successor in interest to Space Center Operating Associates, LP (the “Landlord”), as landlord, as amended by those instruments described in Exhibit A attached hereto and made part hereof (the Original Lease, as so amended, is herein called the “Lease”), wherein Landlord leased to Tenant certain premises known as 126.460rsf on the first, second, third, fourth, fifth and sixth floors (Suites 106, 107, 110, 115, 127, 130, 140, 143, 150, 160, 202, 300, 400, 500 & 600) (the “Premises”) and located on that certain land described in Exhibit B attached hereto and made part hereof (the “Land”); and

B. Landlord is about to make, execute and deliver its Promissory Note (the “Note”) to Lender which Note shall be secured by, among other security, the lien of a mortgage or deed of trust (the “Mortgage”) encumbering the Land (such Mortgage and all other documents securing the Note are herein collectively called the “Security Documents”); and

C. Lender and Tenant desire to confirm their agreements with respect to the Lease and the Security Documents.

AGREEMENT

          NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, Lender and Tenant hereby agree and covenant as follows:

1. Subordination. The Lease and all right, title and interest in the Land created thereby (including without limitation, any purchase options, rights of first refusal or similar rights possessed by Tenant with respect to the Premises) are, shall be and shall at all times remain and continue to be subject and subordinate in all respects to the liens, terms, covenants, provisions and conditions of the Security Documents, and all renewals, modifications, extensions, consolidations and replacements thereof.

2. Non-Disturbance. So long as the Lease is in full force and effect and Tenant is not in default under the Lease (beyond any period given Tenant to cure such default) or under this Agreement:

(a) Tenant’s possession of the Premises and Tenant’s rights and privileges under the Lease (other than any purchase options, rights of first refusal or similar rights possessed by Tenant with respect to the Premises) shall not be diminished or

	interfered with by Lender, and Tenant’s occupancy of the Premises shall not be disturbed by Lender for any reason whatsoever during the term of the Lease or any extensions or renewals thereof; and
(b)	Lender will not join Tenant as a party defendant in any action or proceeding to foreclose the Mortgage or to enforce any rights or remedies of Lender under the Mortgage which would cut-off, destroy, terminate or extinguish the Lease or Tenant’s interest and estate under the Lease.

Notwithstanding the foregoing provisions of this paragraph, if it would be procedurally disadvantageous for Lender not to name or join Tenant as a party in a foreclosure proceeding with respect to the Mortgage, Lender may so name or join Tenant without in any way diminishing or otherwise affecting the rights and privileges granted to, or inuring to the benefit of, Tenant under this Agreement.

3. Attornment.

(a)

After notice is given by Lender that a default has occurred under the Mortgage and that the rentals and all other payments to be made by Tenant under the Lease should be paid to Lender, Tenant will pay to Lender, or in accordance with the directions of Lender, all rentals and other monies due and to become due to Landlord under the Lease or otherwise in respect to the Premises; such payments will be made regardless of any right of set-off, counterclaim or other defense which Tenant may have against Landlord, whether as tenant under the Lease or otherwise; and

(b)

In addition, if Lender (or its nominee or designee) shall succeed to the rights of Landlord under the Lease through possession or foreclosure action, delivery of a deed or otherwise, or another person purchases the Premises upon or following foreclosure of the Mortgage, then at the request of Lender (or its nominee or designee) or such purchaser (Lender, its nominees and designees, and such purchaser, each being a “Successor-Landlord”), Tenant shall attorn to and recognize Successor-Landlord as Tenant’s landlord under the Lease and shall promptly execute and deliver any instrument that Successor-Landlord may reasonably request to evidence such attornment. Upon such attornment, the Lease shall continue in full force and effect as, or as if it were, a direct lease between Successor-Landlord and Tenant upon all terms, conditions and covenants as are set forth in the Lease, except that Successor-Landlord shall not:

i)	be liable for any previous act or omission of Landlord under the Lease;
ii)	be subject to any off-set, defense or counterclaim which shall have previously accrued to Tenant against Landlord;
iii)	be bound by any modification of the Lease or by any previous prepayment of rent or additional rent for more than one month which Tenant might have

	paid to Landlord, unless such modification or prepayment shall have been expressly approved in writing by Lender;
iv)	be bound by any purchase options, rights of first refusal or similar rights possessed by Tenant with respect to the Premises, or
v)	be liable for any security deposited under the Lease unless such security has been physically delivered to Lender.

4. Lease Modifications. Tenant agrees that without the prior written consent of Lender, it shall not: (a) amend or modify the Lease or any extensions or renewals thereof; (b) terminate, cancel or tender a surrender of the Lease; (c) make a prepayment of any rent or additional rent in excess of one (1) month; or (d) subordinate or permit the subordination of the Lease to any lien subordinate to the Mortgage. Any such purported action without such consent shall be void as against the holder of the Mortgage.

5. Notice of Default; Opportunity to Cure.

(a)

Any notice required or permitted to be given by Tenant to Landlord shall be simultaneously given also to Lender, and any right of Tenant dependent upon notice shall take effect only after such notice to Lender is so given. Performance by Lender shall satisfy any conditions of the Lease requiring performance by Landlord, and Lender shall have a reasonable time to complete such performance as provided in section (b) below.

(b)

Without limiting the generality of the foregoing, Tenant shall promptly notify Lender of any default, act or omission of Landlord which would give Tenant the right, immediately or after the lapse of a period of time, to cancel or terminate the Lease or to claim a partial or total eviction (a “Landlord Default”). In the event of a Landlord Default, Tenant shall not exercise any rights available to it: (i) until it has given written notice of such Landlord Default to Lender; and (ii) unless Lender has failed, within a period of thirty (30) days beyond the time available to Landlord under the Lease in which to cure the breach or default by Landlord, to cure or remedy the Landlord Default or, if the same is not reasonably capable of being remedied by Lender within such period, until a reasonable period for remedying such Landlord Default has elapsed following the giving of such notice and following the time when Lender shall have become entitled under the Security Documents to remedy the same (which reasonable period shall in no event be less than the period to which Landlord would be entitled under the Lease or otherwise, after similar notice, to effect such remedy); provided that Lender shall with due diligence commence and prosecute a remedy for such Landlord Default. If Lender cannot reasonably remedy a Landlord Default until after Lender obtains possession of the Land, Tenant may not terminate or cancel the Lease or claim a partial or total eviction by reason of such Landlord Default until the expiration of a reasonable period necessary for the remedy after Lender

institutes proceedings to obtain possession of the Land through a foreclosure or otherwise, or for the appointment of a receiver for the Land, provided that Lender institutes and prosecutes such proceedings with due diligence. Lender shall have no obligation hereunder to remedy any Landlord Default.

6.	Application of Casualty and Condemnation Proceeds. Tenant hereby agrees that, notwithstanding anything to the contrary contained in the Lease, the terms and provisions of the Mortgage shall control with respect to the application of casualty insurance proceeds and condemnation awards.
7.	Notice of Lien. To the extent that the Lease entitles Tenant to notice of the existence of any mortgage and the identity of any lender, this Agreement shall constitute such notice to Tenant with respect to the Mortgage.
8.	Remedies. Upon and after the occurrence of a default under the Mortgage, Lender shall be entitled, but not obligated, to exercise the claims, rights, powers, privileges and remedies of Landlord under the Lease and shall be further entitled to the benefits of, and to receive and enforce performance of, all of the covenants to be performed by Tenant under the Lease as though Lender were named therein as Landlord.
9.	Limitation of Liability. Except as specifically provided in this Agreement, Lender shall not, by virtue of this Agreement, the Mortgage or any other instrument to which Lender may be a party, be or become subject to any liability or obligation to Tenant under the Lease or otherwise. Notwithstanding any other provisions of this Agreement, Tenant shall have no recourse against the Lender, any affiliate of Lender, any Successor Landlord, or any assets of any of them, with respect to the failure of any such party to perform its obligations under this Agreement or the Lease, other than any such party’s interest in the Land, provided that in no event shall Lender’s rights and interests under the Security Documents be deemed to be an interest in the Land.
10.	Priority.

(a)	Tenant acknowledges and agrees that this Agreement supersedes (but only to the extent inconsistent with) any provisions of the Lease relating to the priority or subordination of the Lease and the interests or estates created thereby to the Mortgage.
(b)	Tenant agrees to enter into a subordination, non-disturbance and attornment agreement with any entity which shall succeed Lender with respect to the Land, or any portion thereof, provided such agreement is substantially similar to this Agreement.

11. Notices. Any notice, consent, request or other communication required or permitted to be given hereunder shall be in writing and shall be: (a) personally delivered; (b) delivered by Federal Express or other comparable overnight delivery service; or (c) transmitted by postage prepaid registered or certified mail, return receipt requested.

	All such notices, consents, requests or other communications shall be addressed to Tenant or Lender at the `address for such party previously set forth in this Agreement, or to such other address as Tenant or Lender shall in like manner designate in writing. All notices and other communications shall be deemed to have been duly given on the first to occur of actual receipt of the same or: (i) the date of delivery if personally delivered; (ii) one (1) business day after depositing the same with the delivery service if by overnight delivery service; and (iii) three (3) days following posting if transmitted by mail. Any party may change its address for purposes hereof by notice to the other parties given in accordance with the provisions hereof.
12.	General. This Agreement may not be modified or terminated orally. This Agreement shall inure to the benefit of and be binding upon the parties hereto, their successors and assigns. The term “Lender” shall mean the then holder of any interest in the Mortgage. The term “Landlord” shall mean the then holder of the lessor’s interest in the Lease. The term “person” shall mean any individual, joint venture, corporation, partnership, trust, unincorporated association or other entity. All references herein to the Lease shall mean the Lease as modified by this Agreement and any amendments or modifications to the Lease that are consented to in writing by the Lender. Any inconsistency between the Lease and the provisions of this Agreement shall be resolved in favor of this Agreement. This Agreement shall automatically terminate upon the release or termination of the lien of the Security Documents (and all renewals, modifications, extensions, consolidations and replacements thereof) upon the Land.
13.	Waivers. Both Tenant and Lender hereby irrevocably waive all right to trial by jury in any action, proceeding or counterclaim arising out of or relating to this Agreement.
14.	Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State in which the Land is located.
15.	Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement.

     IN WITNESS WHEREOF, the parties hereto have executed this Subordination, Non-Disturbance and Attornment Agreement to be effective as of the day and year first stated above.

	“LENDER”
	PNC BANK, NATIONAL ASSOCIATION
Dated: 3/17, 2004	By:	/s/ Jeannette Butler
		Jeannette Butler, Vice-President
	“TENANT”
	Cyberonics, Inc.
	a Delaware corporation
Dated: 3/10, 2004	By:	/s/ Pamela B. Westbrook
	Printed Name: Pamela B. Westbrook
	Title:.VP, Finance & Adm          Chief Financial Officer

AGREED AND CONSENTED TO:
“LANDLORD”
NNN 100 CYBERONICS DRIVE, LLC
a Delaware Limited Liability Company
By:	/s/ Diana Laing
Printed Name: Diana Laing
Title: CFO

ACKNOWLEDGMENTS
[acknowledgment certificates should conform
to law of state where property is located]

STATE OF KANSAS	)
	) ss.
COUNTY OF JOHNSON	)

     On this, the 17^th day of March, 2003, before me, the undersigned officer, personally appeared Jeannette Butler, who acknowledged herself to be the Vice President of PNC Bank National Association, a national banking association, and that she as such Vice President being authorized to do so, executed the foregoing instrument for the purposed therein contained by signing the name of the corporation by herself as Vice President.

     IN WITNESS WHEREOF, I hereunder set hand and official seal.

/s/ TERRY RICKETTS

Notary Public

STATE OF TEXAS	)	TERRY RICKETTS
	)ss.	NOTARY PUBLIC-State of Kansas
COUNTY OF HARRIS	)	My Appt. Exp. 10/10/07

     On this, the 10^th day of MARCH, 2004, before me, the undersigned officer, personally appeared PAMELA B. WESTBROOK, who acknowledged herself to be the VP, FINANCE & ADMIN, & CFO of Cyberonics, Inc., a DELAWARE CORPORATION, and that she as such VP, FINANCE & ADMIN, & CFO being authorized to do so, executed the foregoing instrument for the purposed therein contained by herself as signing the name of the corporation by herself as VP, FINANCE & ADMIN, & CFO.

     IN WITNESS WHEREOF, I hereunder set hand and official seal.

[SEAL] DEBBY RICKAWAY	/s/ Debby Rickaway
MY COMMISSION EXPIRES               December 6, 2006	Notary Public

CALIFORNIA ALL-PURPOSE ACKNOWLEDGMENT

State of California	}	ss
County of Orange

On	March 15, 2004	before me,	Yena Han, Notary Public,
	Date		Name and Title of Officer (eg. “Jane Doo. Notary Public”)

personally appeared	Diana Laing
	Name(s) of Signer(s)

		þ Personally known to me
		o proved to me on the basis of satisfactory evidence
[ SEAL ]	YENA HAN Commission # 1402074 Notary Public- California Orange County My Comm. Expires Feb 23, 2007	to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.
		WITNESS my hand and official seal
		/s/ Yena Han
		Signature of Notary Public

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fraudulent removal and reattachment of this form to another document

Description of Attached Document

Title or Type of Document:

Document Date: Number of Pages:

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Signer’s Name:
	RIGHT THUMBPRINT OF SIGNER Top of thumb here
o Individual
o Corporate Officer — Title(s):
o Partner — o Limited o General
o Attorney-in-Fact
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Signer is Representing:

© 1999 National Notary Association • 9350 De Soto Ave. PO Box 2402 • Chalsworth. CA 91313-2402 • www.nationalnotary org      Prod No. 5907 Reorder: Call Toll-Free 1-800-876-6827

     IN WITNESS WHEREOF, I hereunder set hand and official seal.

Notary Public

EXHIBIT A

Description of Lease Amendments (see attachment)

EXHIBIT B

Legal Description

     The real property situated in the County of Harris, State of Texas, described as follows: (see attachment)

FOURTH AMENDMENT TO THE LEASE AGREEMENT

     THIS FOURTH AMENDMENT (the “Amendment”) is made and entered into as of March 23, 2005, by and between NNN 100 Cyberonics Drive, LLC, a Delaware limited liability company, NNN 100 Cyberonics Drive 1, LLC, NNN 100 Cyberonics Drive 2, LLC, NNN 100 Cyberonics Drive 3, LLC, NNN 100 Cyberonics Drive 4, LLC, NNN 100 Cyberonics Drive 5, LLC, NNN 100 Cyberonics Drive 6, LLC, NNN 100 Cyberonics Drive 7, LLC, NNN 100 Cyberonics Drive 8, LLC, NNN 100 Cyberonics Drive 9, LLC, NNN 100 Cyberonics Drive 10, LLC, NNN 100 Cyberonics Drive 11, LLC, NNN 100 Cyberonics Drive 12, LLC, NNN 100 Cyberonics Drive 13, LLC, NNN 100 Cyberonics Drive 14, LLC, each one a Delaware limited liability company (“Landlord”) acting by and through Triple Net Properties Realty, Inc. (“Agent” for Landlord) as successor in interest to Space Center Operating Associates, L.P., a New Mexico limited partnership (“Landlord”), and Cyberonics, Inc., a Delaware corporation (“Tenant”).

RECITALS

A. Landlord and Tenant are parties to that certain Lease dated December 5, 2002, which Lease has been previously amended by that certain First Amendment to the Lease Agreement dated March 3, 2002, that certain Second Amendment to the Lease Agreement dated 2003 and that certain Third Amendment dated 2004, (collectively, the “Lease”) Pursuant to the Lease, Landlord has leased to Tenant space currently containing approximately 129,895 rentable square feet (the “Original Premises”) described as Suites 105, 106, 107, 110, 115, 127, 130, 140, 143, 150, 160, 202, 203, 300, 400, 500 and 600 in the building located at 16511 Space Center Boulevard, Houston, Texas (the “Building”).

B. Prior lease documents stated Tenant is a Texas corporation. This amendment shall serve to clarify that Tenant is and has always been a Delaware corporation.

C. Tenant has requested that additional space containing approximately 560 rentable square feet described as Suite No. 102 on the first floor shown on Exhibit A hereto (the “Expansion Space”) be added to the Premises and that the Lease be appropriately amended and Landlord is willing to do the same on the following terms and conditions.

     NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:

I.

Expansion. Effective as of the Expansion Effective Date (defined below), the Premises, as defined in the Lease, is increased from 129,985 rentable square feet to 130,545 rentable square feet by the addition of the Expansion Space, and from and after the Expansion Effective Date, the Original Premises and the Expansion Space, collectively, shall be deemed the Premises, as defined in the Lease. The Term for the Expansion Space shall commence on the Expansion Effective Date and end on December 31, 2009 (“Termination Date”). The Expansion Space is subject to all the terms and conditions of the Lease.

The Expansion Effective Date shall be April 1, 2005.

100 Cyberonics — Cyberonics, Inc., 4^th Amendment 03 25 05

1

II. Base Rent.

A.	Original Premises Through Termination Date. The Base Rental, additional rent and all other charges under the Lease shall be payable as provided therein with respect to the Original Premises through and including the Termination Date.
B.	Expansion Space From Expansion Effective Date Through Termination Date. As of the Expansion Effective Date, the schedule of Base Rental payable with respect to the Expansion Space is the following:

Months of Term or	Annual Rate Per
Period	Square Foot		Monthly Base Rent
04/01/05-12/31/05	$	17.30	$	807.33
01/01/06-12/31/06	$	18.25	$	851.67
01/01/07-12/31/07	$	18.50	$	863.33
01/01/08-12/31/08	$	18.75	$	875.00
01/01/09-12/31/09	$	19.00	$	886.67

All such Base Rental shall be payable by Tenant in accordance with the terms of the Lease.

III.	Tenant’s Proportionate Share and Additional Expenses. For the period commencing with the Expansion Effective Date and ending on the Termination Date, Tenant’s Proportionate Share for the Premises is 90,4389%, based on total rentable square footage in the building of 144,346 rentable square feet. Tenant’s base year for the Expansion Space shall be the actual operating costs for calendar year 2003, calculated on a “grossed-up” basis to reflect a ninety-five percent (95%) occupancy.
IV.	Improvements to Expansion Space. Tenant has inspected the Expansion Space and agrees to accept the same “as is” without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements, provided however, that Landlord shall provide to Tenant an allowance of up to $3.00 per rentable square foot of the Expansion Space for reconstruction of the Premises including demolition, construction of drywall partitions and fire protection systems. The allowance shall be paid to Tenant upon delivery to Landlord of a Certificate of Occupancy and copies of invoices for such work, lien waivers, and any other documentation or related information reasonably required by Landlord.
V.	Tenant’s Representations and Warranties. Landlord and Tenant each represent and warrant that, as of the date of this Amendment, neither party is aware of any breach of the Lease by the other party.
VI.	Miscellaneous.

A.	This Amendment sets forth the entire agreement between the parties with respect to the matters set forth herein. There have been no additional oral or written representations or agreements.
B.	Except as herein modified or amended, the provisions, conditions and terms of the Lease shall remain unchanged and in full force and effect.

100 Cyberonics — Cyberonics, Inc., 4^th Amendment 03 25 05

2

C.	In the case of any inconsistency between the provisions of the Lease and this Amendment, the provisions of this Amendment shall govern and control.
D.	The capitalized terms used in this Amendment shall have the same definitions as set forth in the Lease to the extent that such capitalized terms are defined therein and not redefined in this Amendment.
E.	Tenant hereby represents to Landlord that Tenant has dealt with no broker in connection with this Amendment other than Donald R. Kugle, dba Clear Lake Asset Management.
F.	Each signatory of this Amendment represents hereby that he or she has the authority to execute and deliver the same on behalf of the party hereto for which such signatory is acting.

IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment as of the day and year first above written.

LANDLORD:
Triple Net Properties Realty, Inc.
Agent for Landlord
By:	/s/ Richard G. Burnett
Name:	Richard G. Burnett
Title:	Sr. Asset Manager
TENANT:
Cyberonics, Inc. a Delaware corporation
By:	/s/ Pamela B. WestBrook
Name:	Pamela B. WestBrook
Title:	VP, Finance and Administration & CFO
	Legal Approval
	P.W
	(Initial)

100 Cyberonics — Cyberonics, Inc., 4^th Amendment 03 25 05

3

EXHIBIT “A”

OUTLINE AND LOCATION OF EXPANSION SPACE

10

FIFTH AMENDMENT TO THE LEASE AGREEMENT

     THIS FIFTH AMENDMENT (the “Amendment”) is made and entered into as of May 5^th, 2005 by and between NNN 100 Cyberonics Drive, LLC, a Delaware limited liability company, NNN 100 Cyberonics Drive 1, LLC, NNN 100 Cyberonics Drive 2, LLC NNN 100 Cyberonics 3, LLC, NNN 100 Cyberonics Drive 4, LLC, NNN 100 Cyberonics Drive 5, LLC, NNN 100 Cyberonics Drive 6, LLC, NNN 100 Cyberonics Drive 7, LLC, NNN 100 Cyberonics Drive 8, LLC, NNN Cyberonics Drive 9, LLC, NNN 100 Cyberonics Drive 10, LLC, NNN 100 Cyberonics Drive 11, LLC, NNN 100 Cyberonics Drive 12, LLC, NNN 100 Cyberonics Drive 13, LLC, NNN 100 Cyberonics Drive 14, LLC, each one a Delaware limited liability company (“Landlord”) acting by and through Triple Net Properties Realty, Inc. (“Agent” for Landlord) as successor in interest to Space Center Operating Associates, L,P., a New Mexico limited partnership (“Landlord”), and Cyberonics, Inc., a Delaware corporation (“Tenant”).

RECITALS

A.

Landlord and Tenant are parties to that certain Lease dated December 5, 2002, which Lease has been previously amended by that certain First Amendment to the Lease Agreement dated March 3, 2002, that certain Second Amendment to the Lease Agreement dated 2003, that certain Third Amendment to the Lease Agreement dated 2004 and that certain Fourth Amendment to the Lease Agreement dated March 23, 2005, (collectively, the “Lease”). Pursuant to the Lease, Landlord has leased to Tenant space currently containing approximately 130,455 rentable square feet (the “Premises”) described as Suites 102, 105, 106, 107, 110, 115, 127, 130, 140, 143, 150, 160, 202, 203, 300, 400, 500 and 600 in the building located at 16511 Space Center Boulevard, Houston, Texas (the “Building”)

B.

Tenant has requested that Article I and Article III of the Fourth Amendment to the Lease Agreement dated March 23, 2005 be modified to accurately reflect the Premises rentable square feet and Tenant’s Proportionate Share and Additional Expenses prior to the Expansion Effective Date and as of the Expansion Effective Date

NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:

1. Article I. of the Fourth Amendment is deleted and replaced with the following:

I.

Expansion. Effective as of the Expansion Effective Date (defined below), the Premises, as defined in the Lease, is increased from 129,895 rentable square feet to 130,455 rentable square feet by the addition of the Expansion Space, and from and after the Expansion Effective Date, the Original Premises and the Expansion Space, collectively, shall be deemed the Premises, as defined in the Lease, The Term for the Expansion Space shall commence on the Expansion Effective Date and end on December 31, 2009 (“Termination Date”) The Expansion Space is subject to all terms and conditions of the Lease.

The Expansion Effective Date shall be April 1, 2005.

100 Cyberonics—Cyberonics, Inc., 5^th Amendment 05. 05. 05

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2. Article III. of the Fourth Amendment is deleted and replaced with the following:

III. Tenant’s Proportionate Share and Additional Expenses. For the period commencing with the Expansion Effective Date and ending on the Termination Date, Tenant’s Proportionate Share for the Premises is 90.3766%, based on total rentable square footage in the building of 144,346 rentable square feet. Tenant’s base year for the Expansion Space shall be the actual operating costs for calendar year 2003, calculated on a “grossed-up” basis to reflect a ninety-five percent (95%) occupancy.

3	Tenant’s Representations and Warranties. Landlord and Tenant each represent and warrant that, as of the date of this Amendment, neither party is aware of any breach of the Lease by the other party.
4.	Miscellaneous.

A.	This Amendment sets forth the entire agreement between the parties with respect to the matters set forth herein. There have been no additional oral or written representations or agreements.
B.	Except as herein modified or amendment, the provisions, conditions and terms of the Lease shall remain unchanged and in full force and effect.
C.	In the case of any inconsistency between the provisions of the Lease and this Amendment, the provisions of this Amendment shall govern and control.
D.	The capitalized terms used in this Amendment shall have the same definitions as set forth in the Lease to the extent that such capitalized terms are defined therein and not redefined in this Amendment.
E.	Tenant hereby represents to Landlord that Tenant has dealt with no broker in connection with this Amendment other than Donald R. Kugle, dba Clear Lake Asset Management.
F.	Each signatory of this Amendment represents hereby that he or she has the authority to execute and deliver the same on behalf of the party hereto for which such signatory is acting

IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment as of the day and year first above written.

SIGNATURES ON FOLLOWING PAGE

100 Cyberonics — Cyberonics, Inc., 5^th Amendment 05. 05. 05

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LANDLORD:
Triple Net Properties Realty, Inc. Agent for Landlord
By: Name:	/s/ Richard Burnett RICHARD BURNETT
Title:	SENIOR ASSET MANAGER
TENANT:
Cyberonics, Inc. a Delaware corporation
By:	/s/ Pamela B. Westbrook
Name:	PAMELA B. WESTBROOK
Title:	V.P. & CFO

Legal Approval

/s/ P.W (Initial)

100 Cyberonics — Cyberonics, Inc., 5^th Amendment 05. 05. 05

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SIXTH AMENDMENT TO THE LEASE AGREEMENT

     THIS SIXTH AMENDMENT (the “Amendment”) is made and entered into as of July 13^th, 2005 by and between NNN 100 Cyberonics Drive, LLC, a Delaware limited liability company, NNN 100 Cyberonics Drive 1, LLC, NNN 100 Cyberonics Drive 2, LLC NNN 100 Cyberonics 3, LLC, NNN 100 Cyberonics Drive 4, LLC, NNN 100 Cyberonics Drive 5, LLC, NNN 100 Cyberonics Drive 6, LLC, NNN 100 Cyberonics Drive 7, LLC, NNN 100 Cyberonics Drive 8, LLC, NNN Cyberonics Drive 9, LLC, NNN 100 Cyberonics Drive 10, LLC, NNN 100 Cyberonics Drive 11, LLC, NNN 100 Cyberonics Drive 12, LLC, NNN 100 Cyberonics Drive 13, LLC, NNN 100 Cyberonics Drive 14, LLC, each one a Delaware limited liability company (“Landlord”) acting by and through Triple Net Properties Realty, Inc. (“Agent” for Landlord) as successor in interest to Space Center Operating Associates, L. P., a New Mexico limited partnership (“Landlord”), and Cyberonics, Inc., a Delaware corporation (“Tenant”).

RECITALS

A.

Landlord and Tenant are parties to that certain Lease dated December 5, 2002, which Lease has been previously amended by that certain First Amendment to the Lease Agreement dated March 3, 2003, that certain Second Amendment to the Lease Agreement dated October 2, 2003, that certain Third Amendment to the Lease Agreement dated March 11, 2004, that certain Fourth Amendment to the Lease Agreement dated March 23, 2005 and that certain Fifth Amendment to Lease Agreement dated May 5, 2005, (collectively, the “Lease”). Pursuant to the Lease, Landlord has leased to Tenant space currently containing approximately 130,455 rentable square feet (the “Premises”) described as Suites 102, 105, 106, 107, 110, 115, 127, 130, 140, 143, 150, 160, 202, 203, 300, 400, 500 and 600 in the building located at 16511 Space Center Boulevard, Houston, Texas (the “Building”).

B.

Tenant has requested that additional space containing approximately 3,692 rentable square described as Suite 103 on the first floor shown on Exhibit A hereto (the “Expansion Space”) be added to the Premises and that the Lease be appropriately amended and Landlord is willing to do the same on the following terms and conditions.

NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:

I.

Expansion. Effective as of the Expansion Effective Date (defined below), the Premises, as defined in the Lease, is increased from 130,455 rentable square feet to 134,147 rentable square feet by the addition of the Expansion Space, Suite 103 and from and after the Expansion Effective Date, the Original Premises and the Expansion Space collectively, shall be deemed the Premises, as defined in the Lease. The Term for the Expansion Space shall commence on the Expansion Effective Date and end on December 31, 2009 (“Termination Date”) The Expansion Space is subject to all terms and conditions of the Lease.

The Expansion Effective Date shall be October 1, 2005, however in the event it is necessary to allow Chicago Title additional time to vacate the Expansion Space then the Expansion Effective Date shall be delayed up to ninety (90) days. Should a delay in the Effective Date, become necessary Landlord shall notify Tenant not later than September 1, 2005, providing a new Effective Date.

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II.	Base Rent.
	Expansion Space From Expansion Effective Date Through Termination Date.
	As of the Expansion Effective Date, the schedule of Base Rental payable with respect to the Expansion Space is the following:

A.	Annual Base Rent (First Year Only):	$	18.50	/RSF
	Monthly Rent Installment (First Year Only):	$	5,691.83
B.	CONSUMER PRICE INDEX ESCALATION

The Base Rent in Section II. A. is subject to increases during the Term. Base Rent due as a result of an increase in the cost of living shall be calculated in accordance with terms set forth below:

Index. The basis for computing the cost of living shall be the unadjusted Consumer Price Index for all Urban Consumers, All Items (1982-84 = 100) published by the Bureau of Labor Statistics of the United States Department of Labor (the “Index”).

Base Index Number. The Index for the third calendar month preceding the month in which the Effective Date occurs shall be the “Base Index Number”.

Current Index Number. The Index for the same month in the year of the applicable Adjustment Date shall be the “Current Index Number”.

On the first day of the month of each anniversary of the Effective Date during the term (each such date an “Adjustment Date”), Base Rent shall be adjusted as follows: (i) by an increase of three percent (3%) of the then-current amount of Base Rent, or (ii) if larger than such three percent (3%) increase, by adjustment to reflect the increase in the cost of living over the preceding term year.

If Base Rent is to be adjusted for cost of living increase pursuant to subsection (ii) hereof, the Base Rent for the term year commencing on each Adjustment Date shall be the product obtained from multiplying the amount of Annual Base Rent set forth in Section II.A. (the “Initial Base Rent”) by the fraction whose numerator is equal to the Current Index Number and whose denominator is equal to the Base Index Number; provided that in no event will Base Rent for such term year be less than the greater of initial Base Rent or adjusted Base Rent for the term year immediately preceding the Adjustment Date.

If on any Adjustment Date, the Current Index Number has not been published, the parties agree that the adjustment to Base Rent contemplated herein will be made after the Current Index Number is published, and that such adjustment will be retroactive to Adjustment Date and that pending publication of the Current Index Number the three percent (3%) Base Rent increase described in subsection (i) hereof shall apply. If, after publication of the Current Index Number, is determined that the applicable rent should be based on the cost of living increase as set forth in subsection (ii) hereof rather than on the three percent (3%) standard set forth in subsection (i) hereof, Landlord shall notify Tenant of the new adjusted Base Rent amount and Tenant shall pay Landlord any short fall between the amount of Base Rent paid subsequent to the Adjustment Date and the new amount of adjusted Base Rent hereunder as a result of the adjustment.

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If the Index is not in existence at the time the determination is to be made, the parties shall use such equivalent price index as is published by a successor government agency in lieu of the Index; or, if no such price index is published, then the parties shall use a mutually acceptable equivalent price index as is published by a non-governmental agency.

No Waiver. Any delay or failure of Landlord in computing or billing Tenant for the escalation of annual Rent as provided herein shall not constitute a waiver of or in any way impair the continuing obligation of Tenant to pay such escalation of annual Rent hereunder.

Survival. Tenant’s obligation to pay the escalated annual Rent pursuant to this clause shall continue and shall cover all periods up to the date that the Lease is scheduled to expire, and shall survive any expiration or termination of the Lease.

III.	Tenant’s Proportionate Share and Additional Expenses. For the period commencing with the Expansion Effective Date and ending on the Termination Date, Tenant’s Proportionate Share for the Premises is 92.9343%, based on total rentable square footage in the building of 144,346 rentable square feet. Tenant’s base year for the Expansion Space shall be the actual operating costs for calendar year 2003, calculated on a “grossed-up” basis to reflect a ninety-five percent (95%) occupancy.
IV.	Improvements to Expansion Space. Tenant has inspected the Expansion Space and agrees to accept the same “as is” without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements, provided however, that Landlord shall provide to Tenant an allowance of up to $3.00 per rentable square foot of the Expansion Space for reconstruction of the Expansion Space including demolition, construction of drywall partitions and fire protection systems. The allowance shall be paid to Tenant upon Delivery to Landlord of a Certificate of Occupancy and copies of invoices for such work, lien waivers and any other documentation or related information reasonably required by Landlord.
V.	Tenant’s Representations and Warranties. Landlord and Tenant each represent and warrant that, as of the date of this Amendment, neither party is aware of any breach of the Lease by the other party.
VI.	Miscellaneous.

A.	This Amendment sets forth the entire agreement between the parties with respect to the matters set forth herein. There have been no additional oral or written representations or agreements.
B.	Except as herein modified or amended, the provisions, conditions and terms of the Lease shall remain unchanged and in full force and effect.
C.	In the case of any inconsistency between the provisions of the Lease and this Amendment, the provisions of this Amendment shall govern and control.
D.	The capitalized terms used in this Amendment shall have the same definitions as set forth in the Lease to the extent that such capitalized terms are defined therein and not redefined in this Amendment.
E.	Tenant hereby represents to Landlord that Tenant has dealt with no broker in connection with this Amendment other than Donald R. Kugle, dba Clear Lake Asset Management.

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F. Each signatory of this Amendment represents hereby that he or she has the authority to execute and deliver the same on behalf of the party hereto for which such signatory is acting.

IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment as of the day and year first above written.

LANDLORD:
Triple Net Properties Realty, Inc. Agent for Landlord
By:	/s/ Richard Burnett
Name:	RICHARD BURNETT
Title:	EXECUTIVE VICE PRESIDNET
TENANT:
Cyberonics, Inc. a Delaware corporation
By: Name:	/s/ Pamela B. Westbrook PAMELA B. WESTBROOK
Title:	Vice President, Finance & Admin., CFO

Legal Approval

/s/ P.W (Initial)

100 Cyberonics — Cyberonics, Inc., 6^th Amendment Revised 08. 18. 05

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EXHIBIT “A”

OUTLINE AND LOCATION EXPANSION SPACE

EX-10.26

Exhibit 10.26

RELEASE AGREEMENT

     This Release Agreement (“Agreement”) is made and entered into this 27th day of December, 2006, by and between Cyberonics, Inc., a Delaware corporation, (“Company”) and Stanley Appel, an individual residing in Houston, Texas (“Optionee”).

     Whereas, Optionee serves as a member of the Company’s Board of Director and during such tenure entered into an agreement with the Company granting options to Optionee on December 12, 1996, as amended from time to time (singularly or collectively, the “Option Agreement(s)”); and

     Whereas, under the Option Agreement(s), Optionee had a limited period of time to exercise outstanding, vested options under the Option Agreement(s) (singularly or collectively, the “Options”) which has previously been extended until December 31, 2006; and

     Whereas, the Options are currently unexercisable because an exercise of such options would violate applicable securities laws; and

     Whereas, the Company’s Board of Directors has authorized the Company to further extend the period for Optionee’s exercise of the Options to thirty (30) days after the exercise of such Options would no longer violate applicable securities laws, all on the conditions set forth in this Agreement;

     Now, Therefore, for a good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

     1. The Company agrees to execute amendments to the Option Agreement(s) extending the period for Optionee’s exercise of the Options to thirty (30) days from the date on which the exercise of such Options would no longer violate applicable securities laws, all as set forth in the form of agreement(s) attached hereto as Exhibit(s) A.

     2. For and in consideration of the Company’s agreement in Paragraph 1, but if and only if the Company removes all restrictions to Optionee’s exercise of the Options on or about the date that the exercise of such Options would no longer violate applicable securities laws, Optionee hereby releases, remises, acquits, satisfies, and forever discharges the Company and its directors, officers, employees, shareholders, counsel and agents acting in their capacity as employees or representatives of the Company from all, and all manner of, actions, disputes, causes of action, suits, debts, accounts, bills, interest, costs, agreements, judgments, executions, claims, counter-claims, cross claims, liabilities, losses, obligations and demands whatsoever, in law or in equity, at common law, statutory or otherwise, whether now existing or hereafter arising, known and unknown, that may arise or may have arisen, related in any way to the Option Agreement(s). This release shall be binding on the heirs, successors, and assigns of Optionee.

     3. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Texas, without regard to principles of conflict of law otherwise applicable to such determination.

     4. This Agreement contains the entire agreement relating to the subject matter hereof and supersedes all prior agreements, understandings, negotiations, and discussion, oral or written, related to such subject matter. There are no warranties, representations, assurances, agreements, arrangements, or understandings, oral or written, relating to the subject matter that are not fully expressed and provided for herein, and the parties shall not be bound by or liable for any alleged statement, assurance, warranty, representation, agreement, or understanding not so set forth.

     5. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, fully enforceable counterpart for all purposes hereof, but all of which shall be constitute one and the same instrument.

     IN WITNESS WHEREOF, the undersigned parties have executed this Agreement in one or more counterparts.

OPTIONEE		CYBERONICS, INC.
/s/ Stanley Appel	By:	/s/ John A. Riccardi
Stanley Appel, M.D.		John A. Riccardi
		Vice President, Finance

Page 2

EXHIBIT A

Amendment to Stock Option Agreement and Notice

     This Amendment to Stock Option Agreement (the “Amendment”) is made on the ______ day of December, 2006 by and between Cyberonics, Inc., a Delaware corporation (the “Company”) and Stanley Appel, an individual residing in Houston, Texas Optionee”).

     Whereas, the Company and Optionee entered into a Stock Option Agreement having a grant date of December 12, 1996, which agreement includes a Notice of Stock Option Grant (the “Agreement”); and

     Whereas, the Company and Optionee previously agreed to amend the Agreement to extend the period for Optionee to exercise the option granted under the Agreement (the “Option”) to December 31, 2006;

     Whereas, the Option is currently unexercisable because an exercise of such right would violate applicable securities laws; and

     Whereas, the Company’s Board of Directors has authorized the Company to extend the period for Optionee’s exercise of the Option to thirty (30) days after the exercise of such Option would no longer violate applicable securities laws, all on the conditions set forth in this Agreement;

     Now, Therefore, for a good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

     1. The paragraph entitled, “Termination Period,” under “Notice of Stock Option Grant” is deleted in its entirety, and the following is substituted therefor:

     “The Option may be exercised within thirty (30) days after the date on which the exercise of such Option would no longer violate applicable securities laws.”

     2. This Amendment supersedes all prior agreements, amendments, understandings, negotiations, and discussion, oral or written, related to such subject matter.

     3. Except as expressly amended herein, the terms of the Agreement remain unchanged.

OPTIONEE		CYBERONICS, INC.
	By:
Stanley Appel		John A. Riccardi
		Vice President, Finance

EX-10.27

Exhibit 10.27

Amendment to Stock Option Agreement and Notice

     This Amendment to Stock Option Agreement is made on the 27th day of December, 2006 by and between Cyberonics, Inc., a Delaware corporation (the “Company”) and Stanley Appel, M.D. (“Optionee”).

     Whereas, the Company and Optionee entered into a Stock Option Agreement having a grant date of December 12, 1996, which agreement includes a Notice of Stock Option Grant (collectively, the “Agreement”); and

     Whereas, the Company and Optionee now desire to amend the Agreement to extend the period for Optionee to exercise the option granted under the Agreement to December 31, 2006;

     Now, Therefore, for a good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

     1. The paragraph entitled, “Termination Period,” under “Notice of Stock Option Grant” is deleted in its entirety, and the following is substituted therefor: “The Option may be exercised on or prior to December 31, 2006.”

     2. Except as expressly amended herein, the terms of the Agreement remain unchanged.

     IN WITNESS WHEREOF, the undersigned parties have executed this Amendment voluntarily and of their own free will.

OPTIONEE		CYBERONICS, INC.
/s/ Stanley Appel	By:	/s/ John A. Riccardi
Stanley Appel, M.D.		John A. Riccardi
		Chief Financial Officer

EX-10.28

Exhibit 10.28

CYBERONICS, INC.

STAND-ALONE STOCK OPTION AGREEMENT

I. NOTICE OF STOCK OPTION GRANT

     Michael Cheney

     You have been granted a Nonstatutory Stock Option to purchase Common Stock of the Company, subject to the terms and conditions of this Agreement, as follows:

Date of Grant	July 06, 2001
Vesting Commencement Date	July 06, 2001
Exercise Price per Share	$15.10
Total Number of Shares Granted	150,000
Total Exercise Price	$2,265,000
Term/Expiration Date:	July 06, 2011
Vesting Schedule:

     This Option shall vest and may be exercised, in whole or in part, in accordance with the following schedule:

     l/60^th of the Shares subject to the Option shall vest each month after the Vesting Commencement Date, so that the Option shall be fully vested five (5) years from the Date of Grant, subject to the Optionee continuing to be a Service Provider on such dates.

     Termination Period

     This Option may be exercised for ninety (90) days after Optionee ceases to be a Service Provider in accordance with Section 7 of this Agreement. Upon the death or Disability of the Optionee, this Option may be exercised for twelve (12) months after the Optionee ceases to be a Service Provider in accordance with Sections 8 and 9 of this Agreement. In no event shall this Option be exercised later than the Term/Expiration Date provided.

II AGREEMENT

     1. Definitions. As used herein, the following definitions shall apply:

          (a) “Agreement” means this stock option agreement between the Company and Optionee evidencing the terms and conditions of this Option.

          (b) “Applicable Laws” means the requirements relating to the administration of stock options under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction that may apply to this Option.

          (c) “Board” means the Board of Directors of the Company or any committee of the Board that has been designated by the Board to administer this Agreement.

          (d) “Code” means the Internal Revenue Code of 1986, as amended.

          (e) “Common Stock” means the common stock of the Company.

          (f) “Company” means Cyberonics, Inc., a Delaware corporation.

          (g) “Consultant” means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity.

          (h) “Director” means a member of the Board.

          (i) “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code.

          (j) “Employee” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

          (k) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          (l) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

               (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

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               (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the day of determination; or

               (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board.

          (m) “Nonstatutory Stock Option” means an Option not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

          (n) “Notice of Grant” means a written notice, in Part I of this Agreement, evidencing certain the terms and conditions of this Option grant. The Notice of Grant is part of the Option Agreement.

          (o) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

          (p) “Option” means this stock option.

          (q) “Optioned Stock” means the Common Stock subject to this Option.

          (r) “Optionee” means the person named in the Notice of Grant or such person’s successor.

          (s) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

          (t) “Service Provider” means an Employee, Director or Consultant.

          (u) “Share” means a share of the Common Stock, as adjusted in accordance with Section 10 of this Agreement.

          (v) “Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.

     2. Grant of Option. The Board hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement the Option to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the “Exercise Price”), subject to the terms and conditions of this Agreement.

     3. Exercise of Option.

          (a) Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of this Agreement.

          (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the “Exercise Notice”), which shall state the election to exercise

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the Option, the number of Shares in respect of which the Option is being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company. The Exercise Notice shall be completed by the Optionee and delivered to Secretary of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price.

          (c) Legal Compliance. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares.

     4. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:

          (a) cash or check;

          (b) promissory note;

          (c) consideration received by the Company under a cashless exercise program implemented by the Company; or

          (d) surrender of other Shares, provided Shares acquired directly from the Company, (i) have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares.

     5. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of this Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

     6. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the terms of this Agreement

     7. Termination of Relationship as a Service Provider. If the Optionee ceases to be a Service Provider (other than for death or Disability), this Option may be exercised for a period of ninety (90) days after the date of such termination (but in no event later than the expiration date of this Option as set forth in the Notice of Grant) to the extent that the Option is vested on the date of such termination. To the extent that the Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

     8. Disability of Optionee. If the Optionee ceases to be a Service Provider as a result of the Optionee’s Disability, this Option may be exercised for a period of twelve (12) months after the date of such termination (but in no event later than the expiration date of this Option as set forth in the Notice of Grant) to the extent that the Option is vested on the date of such termination. To the extent

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that Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

     9. Death of Optionee. If the Optionee dies while a Service Provider, the Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration date of this Option as set forth in the Notice of Grant), by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the Optionee was entitled to exercise the Option at the date of death. If, after death, the Optionee’s estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate.

     10.  Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale.

          (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by this Option, as well as the price per share of Common Stock covered by this Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration,” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to this Option.

          (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Board shall notify Optionee as soon as practicable prior to the effective date of such proposed transaction. The Board in its discretion may provide for the Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. To the extent it has not been previously exercised, the Option will terminate immediately prior to the consummation of such proposed.

          (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, the Option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If the Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify the Optionee in writing or electronically that the Option shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately

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prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets.

          (d) Change of Control. In the event of a Change of Control (as defined below), the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable, and any Company reacquisition option applicable to any Shares acquired upon exercise of an Option shall lapse as to all such Shares. If an Option becomes fully vested and exercisable as the result of a Change of Control, the Administrator shall notify the Optionee in writing or electronically prior to the Change of Control that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For purposes of this Plan, a “Change of Control” means the happening of any of the following events:

               (1) When any “person,” as such term is used in Sections 13(d) and 14(d) of the Exchange Act, other than the Company, a subsidiary of the Company or a Company employee benefit plan, including any trustee of such plan acting as trustee, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of directors; or

               (2) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets; or

               (3) A change in the composition of the Board of Directors of the Company, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the date the Plan is approved by the shareholders, or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company).

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     11. Notices. Any notice to be given to the Company hereunder shall be in writing and shall be addressed to the Company at its then current principal executive office or to such other address as the Company may hereafter designate to the Optionee by notice as provided in this Section. Any notice to be given to the Optionee hereunder shall be addressed to the Optionee at the address set forth beneath his signature hereto, or at such other address as the Optionee may hereafter designate to the Company by notice as provided herein, A notice shall be deemed to have been duly given when personally delivered or mailed by registered or certified mail to the party entitled to receive it.

     12. Withholding Taxes. Optionee agrees to make appropriate arrangements with the Company (or the Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all federal, state, and local income and employment tax withholding requirements applicable to the Option exercise. Optionee acknowledges and agrees that the Company may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise.

     13. Entire Agreement; Governing Law. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes in its entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of Texas.

     14. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHAKES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUES ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.

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     By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of this Agreement, Optionee has reviewed this Agreement in its entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of this Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions relating to this Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below.

OPTIONEE	CYBERONICS, INC.
Signature	Robert P. Cummins
/s/ Michael Cheney Michael Cheney	/s/ Robert P. Cummins Chairman & Chief Executive Officer
Residence Address 279 Fairview Avenue
Long Valley, NJ 07853

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EXHIBIT A

CYBERONICS, INC.

EXERCISE NOTICE

Cyberonics, Inc.
16511 Space Center Boulevard #600
Houston, Texas 77062

Attention:

     1. Exercise of Option. Effective as of today,                     , 20       , the undersigned (“Purchaser”) hereby elects to purchase                     shares (the “Shares”) of the Common Stock of Cyberonics, Inc. (the “Company”) under and pursuant to the Stock Option Agreement dated [                    ] (the “Option Agreement”). The purchase price for the Shares shall be [$                     ], as required by the Option Agreement.

     2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price for the Shares.

     3. Representations of Purchaser. Purchaser acknowledges that Purchaser has received, read and understood the Option Agreement and agrees to abide by and be bound by their terms and conditions.

     4. Rights as Shareholder. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 10 of the Option Agreement.

     5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser’s purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice.

     6. Successors and Assigns. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and this Exercise Notice shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Exercise Notice shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns.

     7. Interpretation. Any dispute regarding the interpretation of this Exercise Notice shall be submitted by Optionee or by the Company forthwith to the Board which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Board shall be final and binding on all parties.

     8. Entire Agreement; Governing Law. The Option Agreement is incorporated herein by reference. This Agreement, and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser’s interest except by means of a writing signed by the Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, of Texas.

Submitted by:	Accepted by:
OPTIONEE	CYBERONICS, INC.
Signature
Print Name
Address	Address
	Date Received:

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EX-10.30

Exhibit 10.30

EMPLOYMENT AGREEMENT

     This Employment Agreement (the “Agreement”), entered into effective as of June 15, 2006 (the “Effective Date”), by and between Cyberonics, Inc. (the “Company”) and Michael A. Cheney (“Employee”)

WITNESSETH:

     WHEREAS, the Company desires to secure the experience, abilities and service of Employee by employing Employee upon the terms and conditions specified herein; and

     WHEREAS, Employee is willing to enter into this Agreement upon the terms and conditions specified herein;

     NOW, THEREFORE, in consideration of the premises, terms and provisions set forth herein, the mutual benefits to be gained by the performance thereof and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

     SECTION 1. Employment. The Company hereby employs Employee, and Employee hereby accepts such employment, all upon the terms and conditions set forth herein.

     SECTION 2. Term. Subject to the terms and conditions of this Agreement, unless sooner terminated pursuant to Section 5 of this Agreement, Employee shall be employed by the Company commencing on the Effective Date and terminating on June 1, 2009 (the “Term”). Termination of this Agreement shall not alter or impair any rights of Employee (or his beneficiaries or heirs) with respect to payments, benefits or other rights provided by the terms of this Agreement, arising before or after the end of the Term.

     SECTION 3. Duties. Responsibilities and Location.

     A. Capacity. Employee shall serve as the Vice President, Marketing of the Company and shall report to the Chief Executive Officer of the Company.

     B. Full-Time Duties. Employee shall devote his full business time, attention and energies to the business of the Company. Notwithstanding anything herein to the contrary, Employee shall be allowed to (i) manage Employee’s personal investments and affairs and, (ii) with the written consent of the Chief Executive Officer of the Company, serve on boards or committees of civic or charitable organizations or trade associations, provided that such activities do not materially interfere with his performance of the duties and responsibilities of his position specified in Section 3 A.

     C. Offices. Employee’s primary place of work shall be at the principle executive offices of the Company located in the greater Houston, Texas metropolitan area, but Employee shall be required to travel on a basis consistent with his position

     SECTION 4. Compensation.

     A. Base Salary. During the Term, Employee shall receive an annual salary of $320,000 (the “Base Salary”) payable in accordance with the Company’s general payroll practices. Employee’s Base Salary shall be reviewed prior to the beginning of each fiscal year of the Company for increase in the discretion of the Compensation Committee of the Board of Directors (“Compensation Committee”); provided, however, that the Base Salary, as it may be increased at any time, may not thereafter be decreased,

     B. Annual Incentive Bonus. During the Term, Employee shall be eligible to participate in the Annual CEO Direct Reports Bonus Plan, with a target bonus of 50% of Employee’s annual Base Salary. A bonus, if earned, shall be payable as soon as reasonably practical following the completion of the applicable fiscal year. Bonuses for Employee shall be based on the achievement of such Company, departmental and/or individual performance goals that may be established for the applicable bonus year by the Compensation Committee.

     C Annual Overachievement Bonus. During the Term, Employee shall be eligible to participate in the Annual CEO Direct Reports Overachievement Bonus Plan as determined by the Compensation Committee. Overachievement Bonuses shall be based on the Company’s overachievement of such Company, departmental and/or individual performance goals that may be established for the applicable bonus year by the Compensation Committee.

     D. Equity Compensation. Employee will be eligible for grants of Company stock options (the “Options”) and other equity awards in the discretion of the Compensation Committee.

     E. General Benefits. Upon satisfying applicable eligibility requirements, if any, Employee will be eligible to participate in the Company’s qualified 401(k) plan, group health, group life insurance, accidental death and dismemberment, travel accident, long-term disability and short-term disability plans and other welfare and similar plans and vacation policies under terms generally applicable to other similarly situated employees of the Company and shall be eligible to receive all perquisites and other benefits provided or made available by the Company to other similarly situated executives of the Company.

     F. Reimbursements. Employee shall be entitled to receive prompt reimbursement by the Company in accordance with its business reimbursement policy in effect from time to time for all reasonable, out-of-pocket business expenses incurred by him in performing his duties under this Agreement upon the submission by Employee of such accounts and records as may be reasonably required under the Company’s business reimbursement policy.

     SECTION 5. Termination of Employment. Notwithstanding the provisions of Section 2, Employee’s employment hereunder may terminate under any of the following conditions:

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     A. Death. Employee’s employment under this Agreement shall terminate automatically upon his death.

     B Disability. Employee’s employment under this Agreement may be terminated due to his Disability. “Disability” shall mean Employee’s inability to substantially perform his duties hereunder for any period of at least 180 consecutive days due to a physical or mental incapacity. The date of termination due to Disability shall be the date Employee elects to terminate his employment service due to such Disability or, if earlier, the date the Board determines that Employee has met the definition of Disability and given written notice of such termination to Employee,

     C. Termination by Company without Cause. “The Company may terminate Employee’s employment hereunder without Cause (as hereinafter defined) on 30 days’ prior written notice to Employee.

     D. Termination by Company for Cause. Employee’s employment hereunder may be terminated for Cause by the Company. For purposes of this Agreement, “Cause” shall mean (i) the willful and continued failure by Employee to substantially perform Employee’s duties with the Company (other than any such failure resulting from Employee’s incapacity due to physical or mental illness), (ii) an act or acts of dishonesty taken by Employee and intended to result in personal enrichment of Employee at the expense of the Company, (iii) willful violation by Employee of Employee’s material obligations under this Agreement, (iv) willful violation by Employee of a material policy of the Company, including its policies regarding professional and ethical conduct, (v) Employee’s commission of one or more acts that constitute a felony, (vi) Employee is publicly censured by the Securities Exchange Commission, or (vii) Employee commits one or more acts of fraud as regards the Company. For purposes of clause (i) of this definition, no act, or failure to act, on Employee’s part shall be deemed “willful” unless done, or omitted to be done, by Employee not in good faith and without reasonable belief that Employee’s act, or failure to act, was in the best interest of the Company. The determination of whether Cause exists must be made by a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors of the Company.

     E. Termination by Employee. Employee may terminate his employment hereunder at any time on 30 days’ prior written notice to the Board.

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     SECTION 6. Payments Upon Termination.

     A. Upon termination of Employee’s employment for any reason prior to the expiration of the Term, the Company shall be obligated to pay, and Employee shall be entitled to receive:

     1. all accrued and unpaid Base Salary to the date of termination;

     2. any earned, but unpaid, bonuses for the bonus year ending prior to the date of termination;

     3. all incurred but unreimbursed business expenses for which Employee is entitled to reimbursement; and

     4. any benefits to which he is entitled under the terms of any applicable employee benefit plan or program, or applicable law.

     B. Upon termination of Employee’s employment pursuant to Section 5.C., the Company shall be obligated to pay or provide, and Employee’s estate or beneficiary shall be entitled to receive:

     1. all of the amounts and benefits described in Section 6. A.; and

     2. either (a) a lump sum payment equal to 1.5 times the sum of (i) Employee’s Base Salary, plus (ii) the most recent annual bonus earned by Employee or (b) a lump sum payment equal to 1.5 times Employee’s Base Salary and, solely for purposes of determining Employee’s vesting under any Options, the number of shares that would become vested under such Options during the 12-month period following Employee’s termination date if Employee’s employment had continued during such period shall become vested on his termination of employment date, whichever of (a) or (b) is elected by Employee in writing to the Company within five days of his termination date.

     C. In the event of any termination of employment under Section 5, Employee shall be under no obligation to seek other employment and there shall be no offset against amounts due Employee under this Agreement on account of any remuneration attributable to any subsequent employment or self-employment that he may obtain.

     D. The Company and Employee have previously or contemporaneously with this Agreement entered into a Severance Agreement which provides certain payments and benefits to Employee upon a qualified termination of employment in connection with a change of control of the Company. Notwithstanding anything in this Agreement to the contrary, to the extent Employee is entitled to receive any severance payment or benefits under the Severance Agreement any

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severance payment or benefits to which Employee is otherwise entitled to receive under this Agreement shall be reduced or offset by the severance payment or benefit payable under the Severance Agreement in such manner as is appropriate, as determined in good faith by the Board, to prevent a duplication of such payment and benefits.

     SECTION 7. Indemnification. The Company agrees to indemnify Employee to the fullest extent permitted by applicable law with respect to any acts or non-acts he may have committed during the period which he was an officer, director and/or employee of the Company or any subsidiary or affiliate thereof, or of any other entity of which he served as an officer, director or employee at the request of the Company.

     SECTION 8. Covenants of Employee. Employee covenants as follows:

     A. Confidentiality. During and after his employment with the Company and its affiliates, Employee will hold in confidence all confidential information and will not disclose it to any person other than in connection with the performance of his duties and obligations hereunder, except with the specific prior written consent of the Board of Directors or the Chief Executive Officer; provided, however, that the parties agree that this Agreement does not prohibit the disclosure of confidential information where applicable law requires, including, but not limited to, in response of subpoenas and/or orders of a governmental agency or court of competent jurisdiction. In the event that Employee is requested or becomes legally compelled under the terms of a subpoena or order issued by a court of competent jurisdiction or by a governmental body to make any disclosure of confidential information, Employee agrees that he will (i) immediately provide the Company with written notice of the existence, terms and circumstances, surrounding such request(s) so that the Company may seek an appropriate protective order or other appropriate remedy, (ii) cooperate with the Company in its efforts to decline, resist or narrow such requests and (iii) if disclosure of such confidential information is required in the opinion of counsel, exercise reasonable efforts to obtain an order or other reliable assurance that confidential treatment will be accorded to such disclosed information. “Confidential information” means any and all intellectual property of the Company (or any of its affiliates), including but not limited to: (a) trade secrets concerning the business and affairs of the Company (or any of its affiliates), product specifications, data, know-how, formulae, compositions, processes, designs, sketches, photographs, graphs, drawings, samples, inventions and ideas, past, current, and planned research and development, current and planned manufacturing or distribution methods and processes, customer lists, current and anticipated customer requirements, price lists, market studies, business plans, computer software and programs (including object code and source code), computer software and database technologies, systems, structures, and architectures (and related formulae, compositions, processes, improvements, devices, know-how, inventions, discoveries, concepts, ideas, designs, methods and information), and any other information, however documented, that is a trade secret under federal, state or other applicable law; and (b) information concerning

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the business and affairs of the Company (or any of its affiliates) (which includes historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, the names and backgrounds of key personnel, personnel training and techniques and materials), however documented; and notes, analysis, compilations, studies, summaries, and other material prepared by or for the Company (or any of its affiliates) containing or based, in whole or in part, on any information included in the foregoing.

     B. Trade Secrets. Any trade secrets of the Company will be entitled to all of the protections and benefits under the federal and state trade secret and intellectual property laws and any other applicable law. If any information that the Company deems to be a trade secret is found by a court of competent jurisdiction not to be a trade secret for purposes of this Agreement, such information will, nevertheless, be considered confidential information for purposes of this Agreement, so long as it otherwise meets the definition of confidential information. Employee hereby waives any requirement that the Company submit proof of the economic value of any trade secret or post a bond or other security.

     C. Proprietary Items. Employee will not remove from the Company’s premises (except to the extent such removal is for purposes of the performance of Employee’s duties at home or while traveling, or except as otherwise specifically authorized by the Company) any document, record, notebook, plan, model, component, device, or computer software or code, whether embodied in a disk or in any other form belonging to the Company or used in the Company’s business (collectively, the “Proprietary Items”). All of the Proprietary Items, whether or not developed by Employee, are the exclusive property of the Company. Upon termination of his employment, or upon the request of the Company during the Term, Employee will return to the Company all of the Proprietary Items and confidential information in Employee’s possession or subject to Employee’s control, and Employee shall not retain any copies, abstracts, sketches, or other physical embodiment, including electronic or otherwise, of any of the Proprietary Items or confidential information.

     D. Non-Competition and Non-Interference. During the period of his employment with the Company or its affiliates and for the one-year period after the termination of his employment with the Company and its affiliates, Employee will not, directly or indirectly:

     1. without the express prior written consent of the Board of Directors, own an interest in, manage, operate, join, control, lend money or render financial or other assistance to or participate in or be connected with, as an officer, employee, partner, stockholder, consultant or otherwise, any person that competes with the Company in the field of neurostimulation in a matter covered by a patent assigned to or held by the Company; provided, however, that following Employee’s termination of employment with the Company the foregoing restriction shall apply only

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to those areas where the Company is actually doing business on the date of such termination of employment; provided, further, that Employee may purchase or otherwise acquire for passive investment up to 3% of any class of securities of any such enterprise if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934;

     2. whether for Employee’s own account or for the account of any other person, (except for the account of the Company and its affiliates), solicit Business from any person known by Employee to be a customer of the Company or its affiliates, whether or not Employee had personal contact with such person during Employee’s employment with the Company and its affiliates;

     3. whether for Employee’s own account or the account of any other person, (i) solicit, employ, or otherwise engage as an employee, independent contractor, or otherwise, any person who is an employee of the Company or an affiliate, or in any manner induce, or attempt to induce, any employee of the Company or its affiliate to terminate his employment with the Company or its affiliate; or (ii) interfere with the Company’s or its affiliate’s relationship with any person who at any time during the Term, was an employee, contractor, supplier, or customer of the Company or its affiliate; or

     4. at any time after the termination of his employment, disparage the Company or its affiliates or any shareholders, directors, officers, employees, or agents of the Company or any of its affiliates, so long as the Company does not disparage Employee,

     E. Acknowledgements. The Company acknowledges that it is providing Employee with confidential information in order for Employee to perform his duties under this Agreement. Employee acknowledges that (a) the services to be performed by him under this Agreement are of a special, unique, unusual, extraordinary, and intellectual character, and (b) the provisions of this Section 8 are reasonable and necessary to protect the confidential information, goodwill and other business interests of the Company. If any covenant in this Section 8 is held to be unreasonable, arbitrary, or against public policy, such covenant will be considered to be divisible with respect to scope, time, and geographic area, and such lesser scope, time, or geographic area, or all of them, as a court of competent jurisdiction may determine to be reasonable, not arbitrary, and not against public policy, will be effective, binding, and enforceable against Employee. Employee hereby agrees that this covenant is a material and substantial part of this Agreement and that: (i) the geographic limitations are reasonable; (ii) the term of the covenant is reasonable; and (iii) the covenant is not made for the purpose of limiting competition per se and is reasonably related to a protectable business interest of the Company. The period of time applicable to any covenant in this Section 8 will be extended by the duration of any violation

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               by Employee of such covenant. The provisions of this Section 8 shall survive the termination of the Term of this Agreement.

     SECTION 9. Injunctive Relief and Additional Remedy. Employee acknowledges that the injury that would be suffered by the Company as a result of a breach of the provisions of Section 8 of this Agreement would be irreparable and that an award of monetary damages to the Company for such a breach would be an inadequate remedy. Consequently, the Company will have the right, in addition to any other rights it may have, to obtain a temporary restraining order and/or injunctive relief to restrain any breach or threatened breach or otherwise to specifically enforce any provision of this Agreement. Employee waives any requirement for the Company’s securing or posting of any bond in conjunction with any such remedies. Employee further agrees to and hereby does submit to in personam jurisdiction before each and every court for that purpose. Without limiting the Company’s rights under this Section or any other remedies of the Company, if Employee breaches any of the provisions of Section 8 and such breach is proven in a court of competent jurisdiction, the Company will have the right to cease making any payments or providing other benefits otherwise due Employee under this Agreement.

     SECTION 10. Amendment: Waiver. The terms and provisions of this Agreement may be modified or amended only by a written instrument executed by each of the parties hereto, and compliance with the terms and provisions hereof may be waived only by a written instrument executed by each party entitled to the benefits thereof. No failure or delay on the part of any party in exercising any right, power or privilege granted hereunder shall constitute a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege granted hereunder,,

     SECTION 11. Entire Agreement. Except as contemplated herein, this Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes any and all prior or contemporaneous written or oral agreements, arrangements or understandings between the Company and Employee.

     SECTION 12. Notices. All notices or communications hereunder shall be in writing, addressed as follows or to any address subsequently provided to the other party:

To the Company:

Cyberonics, Inc.
Attention: Vice President of Human Resources
100 Cyberonics Blvd., Suite 600
Houston, Texas 77058

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To Employee:

Michael A. Cheney
3711 Fall Grove Court
Houston, TX 77059

All such notices shall be conclusively deemed to be received and shall be effective, (i) if sent by hand delivery or overnight courier, upon receipt, (ii) if sent by telecopy or facsimile transmission, upon confirmation of receipt by the sender of such transmission or (iii) if sent by registered or certified mail, on the fifth day after the day on which such notice is mailed.

     SECTION 13. Severability. In the event that any term or provision of tills Agreement is found to be invalid, illegal or unenforceable, the validity, legality and enforceability of tine remaining terms and provisions hereof shall not be in any way affected or impaired thereby, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained therein.

     SECTION 14. Binding Effect: Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns (it being understood and agreed that, except as expressly provided herein, nothing contained in this Agreement is intended to confer upon any other person or entity any rights, benefits or remedies of any kind or character whatsoever). No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder

     SECTION 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas (except that no effect shall be given to any conflicts of law principles thereof that would require the application of the laws of another jurisdiction).

     SECTION 16, Submission to Jurisdiction. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS IN HARRIS COUNTY, TEXAS, FOR THE PURPOSES OF ANY PROCEEDING ARISING OUT OF THIS AGREEMENT.

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     SECTION 17. Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.

     SECTION 18. Tax Withholdings. The Company shall withhold from all payments hereunder all applicable taxes that it is required to withhold with respect to payments and benefits provided under this Agreement.

     SECTION 19. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

     IN WITNESS WHEREOF, the undersigned have executed this Agreement effective as of the date set forth above.

CYBERONICS, INC.
By:	/s/ Robert P. Cummins
	Robert P. Cummins
	Chairman of the Board of Directors
	and Chief Executive Officer
EMPLOYEE
By:	/s/ Michael A. Cheney                     June 19, 2006
	Michael A. Cheney

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EX-10.31

Exhibit 10.31

STOCK OPTION AGREEMENT AMENDMENT
AND
BONUS AGREEMENT

     THIS STOCK OPTION AGREEMENT AMENDMENT AND BONUS AGREEMENT (the “Agreement”) is made this 24th day of December, 2006 between Cyberonics, Inc. (the “Company”) and Michael Cheney (the “Optionee”).

     WHEREAS, the Company previously granted to the Optionee the options identified on attached Schedule A (the “Options”) to purchase shares of the Company’s common stock under the Company’s Stock Incentive Plan(s), as amended and restated, and as identified as such on Schedule A (the “Plan(s)”).

     WHEREAS, the Company and the Optionee entered into a formal Stock Option Agreement (the “Option Agreement”) evidencing each such Option.

     WHEREAS, in order to avoid adverse tax consequences under section 409A of the Internal Revenue Code, the Optionee desires to amend each of the Options to increase the exercise price per share to be in effect for the unexercised portion of that Option which is subject to section 409A and identified as such on Schedule A (the “Covered Portion”) to the higher exercise price per share indicated for that portion of such Option on Schedule A.

     WHEREAS, in order to compensate the Optionee for the increased exercise prices to be in effect for the Covered Portions of the Options, the Company is willing to pay the Optionee a special cash bonus in a dollar amount equal to the aggregate increase to the exercise prices for the Covered Portions of the Options listed on Schedule A, with the actual dollar of that bonus indicated as the Total Bonus on Schedule A and payable as provided herein.

     NOW THEREFORE, the parties hereby agree as follows:

     1. Increased Exercise Price. The exercise price per share set forth in the Option Agreement for each of the Options listed on Schedule A is hereby increased, with respect to the shares subject to the Covered Portion of that Option, to the higher exercise price per share set forth for that Option on Schedule A.

     2. Bonus. The Optionee shall become entitled to receive a cash bonus from the Company in the gross dollar amount indicated as his or her Total Bonus on attached Schedule A (the “Bonus”) as follows:

     (i) the bonus payable with respect to shares that vest prior to January 1, 2008 will be paid on or about January 15, 2008, and

     (ii) the bonus payable with respect to shares that vest on or after January 1, 2008 will be payable only if such shares vest and will be paid quarterly for the shares that vested during the preceding fiscal quarter. Such

payment will be made within 14 days following the close of each fiscal quarter.

          Payment of the Bonus shall be subject to the Company’s collection of all applicable federal, state and local income and employment withholding taxes, and the Optionee shall be paid only the net amount of such bonus remaining after such taxes have been collected.

     3. Entire Agreement. This Agreement, together with the Option Agreements (to the extent not expressly amended in a separate amendment or amended hereby) and the Plan(s), represents the entire agreement of the parties with respect to the Options, the Covered Portions thereof and the Bonus and supersedes any and all previous contracts, arrangements or understandings between the parties with respect to such Options and the Bonus. This Agreement may be amended at any time only by means of a writing signed by the Optionee and an authorized officer of the Company.

     4. Continuation of Option Agreements. Except for the foregoing increases to the exercise prices per share for the Covered Portions of the Options, no other terms or provisions of the Option Agreements for such Options or the applicable Plan(s) have been modified as a result of this Agreement, and those terms and provisions shall continue in full force and effect.

     IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year indicated above.

CYBERONICS, INC.
/s/ John A. Riccardi
By:	John A. Riccardi
TITLE:	Vice President, Finance
OPTIONEE
By:	Michael Cheney

SCHEDULE A

Number of

Unexercised

Option Shares

Applicable

Increased

Aggregate

Potential

Exercise Price

Which Vest After

Measurement

Exercise Price

Increase in

Retention Bonus

Name

Plan

Grant Date

Per Share

12/31/04

Date

Per Share*

Exercise Price

**

Cheney, Michael

SEC16 Chene

07/06/01

$

15.10

45,000

08/14/01

$

1.85

$

83,250.00

$

83,250.00

Cheney, Michael

1997 Plan

01/24/02

$

12.45

10,417

02/12/02

$

2.06

$

21,459.02

$

21,459.02

Total

$

104,709.02

EX-10.32

Exhibit 10.32

INDEMNIFICATION AGREEMENT

     This Indemnification Agreement (this “Agreement”) is executed on and effective as of August 1, 2003 (the “Effective Date”), by and between Cyberonics, Inc., a Delaware corporation (the “Company”), and Robert P. Cummins (“Director”).

     WHEREAS, the Company and Director recognize the difficulty in obtaining directors’ and officers’ liability insurance, the increases in the cost of such insurance, and the general limitations in the coverage of such insurance;

     WHEREAS, the Company and Director further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited;

     WHEREAS, Director does not regard the current protection available as adequate under the present circumstances, and Director and other officers and directors of the Company may not be willing to serve or continue to serve as officers and directors without additional protection; and

     WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Director, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law.

     NOW, THEREFORE, the Company and Director hereby agree as follows:

     1. Indemnification.

          a. Third Party Proceedings. The Company shall indemnify Director and any partnership, corporation, trust, or other entity of which Director is or was a partner, stockholder, trustee, director, officer, employee, or agent (Director and each such partnership, corporation, trust, or other entity being referred to as an “Indemnitee”) if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the Company) by reason of the fact that Director is or was a director, officer, employee, or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Director while an officer or director or by reason of the fact that Director is or was serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit, or proceeding, if Director acted in good faith and in a manner Director reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Director’s conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Director did not act in good faith and in a manner that Director reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that Director’s conduct was unlawful.

          b. Proceedings By or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Director is or was a director, officer, employee, or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Director while an officer or director or by reason of the fact that Director is or was serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys’ fees) and, to the fullest extent permitted by law, amounts paid in settlement, in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit, if Director acted in good faith and in a manner Director reasonably believed to be in or not opposed to the best interests of the Company, except that no indemnification shall be made in respect of any claim, issue, or matter as to which Director shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses that the Court of Chancery of the State of Delaware or such other court shall deem proper.

          c. Mandatory Payment of Expenses. To the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in Sections 1(a) and (b) or the defense of any claim, issue, or matter therein, Indemnitee shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by Indemnitee in connection therewith.

     2. Expenses: Indemnification Procedure.

          a. Advancement of Expenses. The Company shall advance all expenses incurred by Indemnitee, and, to the fullest extent permitted by law, amounts paid in settlement by Indemnitee, in connection with the investigation, defense, settlement, or appeal of any civil or criminal action, suit, or proceeding referenced in Section 1(a) or (b) hereof. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to Indemnitee within 20 days following delivery of a written request therefor by Indemnitee to the Company.

          b. Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his or its right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the President of the Company at the address shown on the signature page of this Agreement, or such other address as the Company shall designate in writing to Indemnitee. Notice shall be deemed received three business days after the date postmarked if sent by domestic certified or registered mail, properly addressed; otherwise notice shall be deemed received when such notice shall actually be received by the Company. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee’s power.

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          c. Procedure. Any indemnification and advances provided for in Section 1 and this Section 2 shall be made no later than 45 days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company’s Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within 45 days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 12 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys’ fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit, or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct that make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Subsection 2(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties’ intention that if the Company contests Indemnitee’s right to indemnification, the question of Indemnitee’s right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct.

          d. Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 2(b) hereof, the Company has directors’ and officers’ liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

          e. Selection of Counsel. In the event the Company shall be obligated under Section 2(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee (whose approval shall not be unreasonably withheld), upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ his counsel in any such proceeding at Indemnitee’s expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee’s counsel shall be at the expense of the Company.

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     3. Additional Indemnification Rights; Nonexclusivity.

          a. Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company’s Certificate of Incorporation, the Company’s Bylaws, or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule that expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes shall be, ipso facto, within the purview of Indemnitee’s rights and Company’s obligations under this Agreement. In the event of any change in any applicable law, statute, or rule that narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute, or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties’ rights and obligations hereunder.

          b. Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Director or any other Indemnitee may be entitled under the Company’s Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in Director’s official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Director and each other Indemnitee for any action taken or not taken while Director is or was serving in an indemnified capacity even though he may have ceased to serve in such capacity at the time of any action, suit, or other covered proceeding.

     4. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines, or penalties actually or reasonably incurred by Indemnitee in the investigation, defense, appeal, or settlement of any civil or criminal action, suit, or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines, or penalties to which Indemnitee is entitled.

     5. Mutual Acknowledgment. Both the Company and Director acknowledge that in certain instances Federal law or applicable public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise, in which event, notwithstanding any other provisions of this Agreement to the contrary, the indemnification provided by this Agreement shall be limited to such extent as is necessary to comply with applicable Federal law or public policy. For example, the Company and Director acknowledge that the Securities and Exchange Commission (the “SEC”) has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain violations of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Director understands and acknowledges that in the event the Company undertakes a public offering of its securities pursuant to a registration with the SEC, the Company may be required to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company’s right under public policy to indemnify Director or any other Indemnitee.

4

     6. Directors and Officers Liability Insurance. The Company has applied for and will use its best efforts to obtain and maintain in force with a financially sound and reputable insurer a directors, officers, and corporate liability insurance policy having a limit which the Company, together with the Board of Directors, approves as providing coverage appropriate and acceptable to the Board of Directors. In all policies of directors and officers liability insurance, Director and each other Indemnitee shall be named as an insured in such a manner as to provide Director the same rights and benefits as are accorded to the most favorably insured of the Company’s directors.

     7. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company’s inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 7. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Director and each other Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms.

     8. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement:

          a. Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate;

          b. Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous;

          c. Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA, excise taxes or penalties, and amounts paid in settlement) that have been paid directly to Indemnitee by an insurance carrier under a policy of officers’ and directors’ liability insurance maintained by the Company; or

          d. Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.

     9. Construction of Certain Phrases.

          a. For purposes of this Agreement, references to the “Company” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger, so that if Indemnitee is or was a director, officer,

5

employee, or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued.

          b. For purposes of this Agreement, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to “serving at the request of the Company” shall include any service as a director, officer, employee, or agent of the Company that imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner “not opposed to the best interests of the Company” as referred to in this Agreement.

     10. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original.

     11. Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of Director and each other Indemnitee and their respective estates, heirs, successors, legal representatives, and assigns.

     12. Attorneys’ Fees. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys’ fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys’ fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee’s counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee’s material defenses to such action was made in bad faith or was frivolous.

     13. Notice. All notices, requests, demands, and other communications under this Agreement shall be in writing and shall be deemed duly given on the third business day after the date postmarked, if delivered by domestic certified or registered mail with postage prepaid, or, if delivered by other means, on the date actual notice is received. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice.

     14. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the non-exclusive jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding that arises out of or relates to this Agreement and agree that any action instituted under this Agreement may be brought in any court of competent jurisdiction in the State of Delaware.

6

     15. CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND ITS PROVISIONS CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, AS APPLIED TO CONTRACTS BETWEEN DELAWARE RESIDENTS ENTERED INTO AND TO BE PERFORMED ENTIRELY WITHIN DELAWARE.

[Signature page follows.]

7

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date.

COMPANY:
Cyberonics, Inc.
By:	/s/ Pamela B. Westbrook Pamela B. Westbrook,
	Secretary

CHAIRMAN & CHIEF EXECUTIVE OFFICER:
	/s/ Robert P. Cummins Robert P. Cummins

8

EX-10.34

Exhibit 10.34

David S. Wise
Vice President
General Counsel
(281) 228-7268 Direct Line
(281) 283-5369 Facsimile

September 28, 2006

Robert P. Cummins
4 Wexford Court
Houston, TX 77024

Re: Advancement of Attorney ’s Fees

Dear Mr. Cummins:

     This Agreement, Affirmation and Undertaking is to confirm the terms under which Cyberonics, Inc., a Delaware corporation, (“Cyberonics” or the “Company”) will agree to your request that it advance your reasonable attorney’s fees and costs (collectively, “Fees”) in connection with any action, suit or proceeding, whether civil, criminal, administrative, or investigative, regarding Cyberonics’ practices and procedures for granting stock options (collectively, “Proceedings”).

     The terms are as follows:

     1. Subject to the terms of this Agreement, the Company’s bylaws and articles of incorporation, and applicable law, Cyberonics agrees to advance Fees incurred by you in connection with the Proceedings.

     2. You agree to undertake to repay all Fees advanced by Cyberonics pursuant to this Agreement if it shall ultimately be determined that you are not entitled to indemnification. The obligations of this paragraph shall survive termination of this Agreement.

     3. You agree that with respect to any amounts advanced to you or on your behalf by Cyberonics in connection with the Proceedings: (i) Cyberonics will be subrogated to any right you have to recover such amounts from any third party including, but not limited to, any right you have to any insurance coverage that may be available to you under any insurance policy procured by or on behalf of Cyberonics; (ii) you will cooperate with Cyberonics and take any action reasonably necessary to assist or enable Cyberonics to exercise the rights to which it is subrogated under the preceding clause including, but not limited to, executing any formal assignment or other legal instrument that may be required in order for Cyberonics to pursue or enforce such rights; and (iii) you will cooperate with Cyberonics and take any action reasonably necessary to assist or enable Cyberonics to obtain reimbursement or direct payment of such amounts under any insurance policy procured by Cyberonics. The obligations of this paragraph shall survive termination of this Agreement.

100 Cyberonics Blvd • Houston, TX 77058 • Tel: (800) 332-1375 • Fax:(281) 218-9332
Belgicastraat 9 • 1930 Zaventem • Belgium • Tel: 32 2 720 95 93 • Fax: 32 2 720 60 53
www.cyberonics.com

Robert P. Cummins
September 28, 2006 Page 2

     4. You shall cause your legal counsel to send to Cyberonics, each month, an invoice for the fees and expenses of counsel for the immediately preceding month. All such invoices shall provide a description of the services performed (subject to the reasonable requirements for you to maintain the attorney-client privilege), shall set forth the hours worked and the hourly rate of the attorney who performed the services, shall conform to any applicable billing guidelines and procedures, and shall otherwise be in form and substance acceptable to Cyberonics.

     5. You shall send all invoices and notices under this Agreement to: Office of General Counsel, Cyberonics, Inc., 100 Cyberonics Boulevard, Houston, TX 77058.

     6. This Agreement covers only the advancement of Fees in connection with a Proceeding. The rights and obligations of you and Cyberonics regarding any possible claim of indemnification by you from or against any damages, fines, penalties or awards, whether in connection with a Proceeding or otherwise, are not governed by this Agreement, but will be determined under the bylaws and articles of incorporation of Cyberonics, applicable law, and any applicable contract.

     7. To the extent there is any inconsistency between this Agreement and the terms of the Company’s bylaws and articles of incorporation or applicable law, the Company’s bylaws and articles of incorporation and applicable law shall govern over the terms herein.

     To indicate your agreement with the terms of this Agreement, please execute a copy in the space provided below and return it to Cyberonics’ General Counsel.

Sincerely, Cyberonics, Inc.
By:	/s/ David S. Wise
	David S. Wise
	Vice President & General Counsel

AGREED AND ACCEPTED:

/s/ Robert P. Cummins

Robert P. Cummins

Date: 10/3/06

EX-10.37

Exhibit 10.37

CYBERONICS, INC.

OFFICER STOCK OPTION PLAN AGREEMENT

I. NOTICE OF STOCK OPTION GRANT

     William Steven Jennings

     You have been granted a Nonstatutory Stock Option to purchase Common Stock of the Company, subject to the terms and conditions of this Agreement, as follows:

Date of Grant	June 2, 2003
Vesting Commencement Date	June 2, 2003
Exercise Price per Share	$18.94
Total Number of Shares Granted	150,000
Total Exercise Price	$2,841,000
Term/Expiration Date:	August 23,2011
Vesting Schedule:

     This Option shall vest and may be exercised, in whole or in part, in accordance with the following schedule:

     1/60^th of the Shares subject to the Option shall vest each month after the Vesting Commencement Date, so that the Option shall be fully vested five (5) years from the Date of Grant, subject to the Optionee continuing to be a Service Provider on such dates.

     Termination Period

     This Option may be exercised for ninety (90) days after Optionee ceases to be a Service Provider in accordance with Section 7 of this Agreement. Upon the death or Disability of the Optionee, this Option may be exercised for twelve (12) months after the Optionee ceases to be a Service Provider in accordance with Sections 8 and 9 of this Agreement. In no event shall this Option be exercised later than the Term/Expiration Date provided.

II. AGREEMENT

     1. Definitions. As used herein, the following definitions shall apply:

          (a) “Agreement” means this stock option agreement between the Company and Optionee evidencing the terms and conditions of this Option.

          (b) “Applicable Laws” means the requirements relating to the administration of stock options under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction that may apply to this Option.

          (c) “Board” means the Board of Directors of the Company or any committee of the Board that has been designated by the Board to administer this Agreement.

          (d) “Code” means the Internal Revenue Code of 1986, as amended.

          (e) “Common Stock” means the common stock of the Company.

          (f) “Company” means Cyberonics, Inc., a Delaware corporation.

          (g) “Consultant” means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity.

          (h) “Director” means a member of the Board.

          (i) “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code.

          (j) “Employee” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

          (k) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          (l) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

                    (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

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                    (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the day of determination; or

                    (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board.

          (m) “Nonstatutory Stock Option” means an Option not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

          (n) “Notice of Grant” means a written notice, in Part I of this Agreement, evidencing certain the terms and conditions of this Option grant. The Notice of Grant is part of the Option Agreement.

          (o) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

          (p) “Option” means this stock option.

          (q) “Optioned Stock” means the Common Stock subject to this Option.

          (r) “Optionee” means the person named in the Notice of Grant or such person’s successor.

          (s) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

          (t) “Service Provider” means an Employee, Director or Consultant.

          (u) “Share” means a share of the Common Stock, as adjusted in accordance with Section 10 of this Agreement.

          (v) “Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.

     2. Grant of Option. The Board hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement the Option to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the “Exercise Price”), subject to the terms and conditions of this Agreement.

     3. Exercise of Option.

          (a) Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of this Agreement.

          (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the “Exercise Notice”), which shall state the election to exercise

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the Option, the number of Shares in respect of which the Option is being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company. The Exercise Notice shall be completed by the Optionee and delivered to Secretary of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price.

          (c) Legal Compliance. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares.

     4. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:

          (a) cash or check;

          (b) promissory note;

          (c) consideration received by the Company under a cashless exercise program implemented by the Company; or

          (d) surrender of other Shares, provided Shares acquired directly from the Company, (i) have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares.

     5. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of this Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

     6. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the terms of this Agreement.

     7. Termination of Relationship as a Service Provider. If the Optionee ceases to be a Service Provider (other than for death or Disability), this Option may be exercised for a period of ninety (90) days after the date of such termination (but in no event later than the expiration date of this Option as set forth in the Notice of Grant) to the extent that the Option is vested on the date of such termination. To the extent that the Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

     8. Disability of Optionee. If the Optionee ceases to be a Service Provider as a result of the Optionee’s Disability, this Option may be exercised for a period of twelve (12) months after the date of such termination (but in no event later than the expiration date of this Option as set forth in the Notice of Grant) to the extent that the Option is vested on the date of such termination. To the extent

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that Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

     9. Death of Optionee. If the Optionee dies while a Service Provider, the Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration date of this Option as set forth in the Notice of Grant), by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the Optionee was entitled to exercise the Option at the date of death. If, after death, the Optionee’s estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate.

     10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale.

          (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by this Option, as well as the price per share of Common Stock covered by this Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration,” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to this Option.

          (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Board shall notify Optionee as soon as practicable prior to the effective date of such proposed transaction, The Board in its discretion may provide for the Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. To the extent it has not been previously exercised, the Option will terminate immediately prior to the consummation of such proposed.

          (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, the Option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If the Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify the Optionee in writing or electronically that the Option shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately

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prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets.

          (d) Change of Control. In the event of a Change of Control (as defined below), the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable, and any Company reacquisition option applicable to any Shares acquired upon exercise of an Option shall lapse as to all such Shares. If an Option becomes fully vested and exercisable as the result of a Change of Control, the Administrator shall notify the Optionee in writing or electronically prior to the Change of Control that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For purposes of this Plan, a “Change of Control” means the happening of any of the following events:

                    (1) When any “person,” as such term is used in Sections 13(d) and 14(d) of the Exchange Act, other than the Company, a subsidiary of the Company or a Company employee benefit plan, including any trustee of such plan acting as trustee, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of directors; or

                    (2) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets; or

                    (3) A change in the composition of the Board of Directors of the Company, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the date the Plan is approved by the shareholders, or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company).

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     11. Notices. Any notice to be given to the Company hereunder shall be in writing and shall be addressed to the Company at its then current principal executive office or to such other address as the Company may hereafter designate to the Optionee by notice as provided in this Section. Any notice to be given to the Optionee hereunder shall be addressed to the Optionee at the address set forth beneath his signature hereto, or at such other address as the Optionee may hereafter designate to the Company by notice as provided herein. A notice shall be deemed to have been duly given when personally delivered or mailed by registered or certified mail to the party entitled to receive it.

     12. Withholding Taxes. Optionee agrees to make appropriate arrangements with the Company (or the Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all federal, state, and local income and employment tax withholding requirements applicable to the Option exercise. Optionee acknowledges and agrees that the Company may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise.

     13. Entire Agreement; Governing Law. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes in its entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of Texas.

     14. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUES ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.

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     By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of this Agreement. Optionee has reviewed this Agreement in its entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of this Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions relating to this Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below.

OPTIONEE	CYBERONICS, INC.
/s/ William Steven Jennings
Signature	Robert P. Cummins
	/s/ Robert P. Cummins
William Steven Jennings	Chairman & Chief Executive Officer
Residence Address

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EXHIBIT A

CYBERONICS, INC.

EXERCISE NOTICE

Cyberonics, Inc.
16511 Space Center Boulevard #600
Houston, Texas 77062

Attention:

     1. Exercise of Option. Effective as of today,                                         , 20        , the undersigned (“Purchaser”) hereby elects to purchase                      shares (the “Shares”) of the Common Stock of Cyberonics, Inc. (the “Company”) under and pursuant to the Stock Option Agreement dated [                                        ] (the “Option Agreement”). The purchase price for the Shares shall be [$                     ], as required by the Option Agreement.

     2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price for the Shares.

     3. Representations of Purchaser. Purchaser acknowledges that Purchaser has received, read and understood the Option Agreement and agrees to abide by and be bound by their terms and conditions.

     4. Rights as Shareholder. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 10 of the Option Agreement.

     5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser’s purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice.

     6. Successors and Assigns. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and this Exercise Notice shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Exercise Notice shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns.

     7. Interpretation. Any dispute regarding the interpretation of this Exercise Notice shall be submitted by Optionee or by the Company forthwith to the Board which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Board shall be final and binding on all parties.

     8.  Entire Agreement; Governing Law. The Option Agreement is incorporated herein by reference. This Agreement, and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser’s interest except by means of a writing signed by the Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, of Texas.

Submitted by:	Accepted by:
OPTIONEE	CYBERONICS, INC.
Signature
Print Name
Address	Address
	Date Received:

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EX-10.38

Exhibit 10.38

EMPLOYMENT AGREEMENT

     This Employment Agreement (the “Agreement”), entered into effective as of June 15, 2006 (the “Effective Date”), by and between Cyberonics, Inc. (the “Company”) and W. Steven Jennings (“Employee”).

W1TNESSETH:

     WHEREAS, the Company desires to secure the experience, abilities and service of Employee by employing Employee upon the terms and conditions specified herein; and

     WHEREAS, Employee is willing to enter into this Agreement upon the terms and conditions specified herein;

     NOW, THEREFORE, in consideration of the premises, terms and provisions set forth herein, the mutual benefits to be gained by the performance thereof and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

     SECTION 1. Employment. The Company hereby employs Employee, and Employee hereby accepts such employment, all upon the terms and conditions set forth herein.

     SECTION 2. Term. Subject to the terms and conditions of this Agreement, unless sooner terminated pursuant to Section 5 of this Agreement, Employee shall be employed by the Company commencing on the Effective Date and terminating on June 1, 2009 (the “Term”). Termination of this Agreement shall not alter or impair any rights of Employee (or his beneficiaries or heirs) with respect to payments, benefits or other rights provided by the terms of this Agreement, arising before or after the end of the Term.

     SECTION 3. Duties. Responsibilities and Location.

     A. Capacity. Employee shall serve as the Vice President, Sales of the Company and shall report to the Chief Executive Officer of the Company.

     B. Full-Time Duties. Employee shall devote his full business time, attention and energies to the business of the Company. Notwithstanding anything herein to the contrary, Employee shall be allowed to (i) manage Employee’s personal investments and affairs and, (ii) with the written consent of the Chief Executive Officer of the Company, serve on boards or committees of civic or charitable organizations or trade associations, provided that such activities do not materially interfere with his performance of the duties and responsibilities of his position specified in Section 3.A.

     C. Offices. Employee’s primary place of work shall be at the principle executive offices of the Company located in the greater Houston, Texas metropolitan area, but Employee shall be required to travel on a basis consistent with his position.

     SECTION 4. Compensation.

     A. Base Salary During the Term, Employee shall receive an annual salary of $260,000 (the “Base Salary”) payable in accordance with the Company’s general payroll practices. Employee’s Base Salary shall be reviewed prior to the beginning of each fiscal year of the Company for increase in the discretion of the Compensation Committee of the Board of Directors (“Compensation Committee”); provided, however, that the Base Salary, as it may be increased at any time, may not thereafter be decreased.,

     B. Annual Incentive Bonus. During the Term, Employee shall be eligible to participate in the Annual CEO Direct Reports Bonus Plan, with a target bonus of 50% of Employee’s annual Base Salary. A bonus, if earned, shall be payable as soon as reasonably practical following the completion of the applicable fiscal year. Bonuses for Employee shall be based on the achievement of such Company, departmental and/or individual performance goals that may be established for the applicable bonus year by the Compensation Committee.

     C. Annual Overachievement Bonus. During the Term, Employee shall be eligible to participate in the Annual CEO Direct Reports Overachievement Bonus Plan as determined by the Compensation Committee, Overachievement Bonuses shall be based on the Company’s overachievement of such Company, departmental and/or individual performance goals that may be established for the applicable bonus year by the Compensation Committee.

     D. Equity Compensation. Employee will be eligible for grants of Company stock options (the “Options”) and other equity awards in the discretion of the Compensation Committee.

     E. General Benefits. Upon satisfying applicable eligibility requirements, if any, Employee will be eligible to participate in the Company’s qualified 401(k) plan, group health, group life insurance, accidental death and dismemberment, travel accident, long-term disability and short-term disability plans and other welfare and similar plans and vacation policies under terms generally applicable to other similarly situated employees of the Company and shall be eligible to receive all perquisites and other benefits provided or made available by the Company to other similarly situated executives of the Company.

     F. Reimbursements. Employee shall be entitled to receive prompt reimbursement by the Company in accordance with its business reimbursement policy in effect from time to time for ail reasonable, out-of-pocket business expenses incurred by him in performing his duties under this Agreement upon the submission by Employee of such accounts and records as may be reasonably required under the Company’s business reimbursement policy.

     SECTION 5. Termination of Employment. Notwithstanding the provisions of Section 2, Employee’s employment hereunder may terminate under any of the following conditions:

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     A. Death. Employee’s employment under this Agreement shall terminate automatically upon his death.

     B. Disability. Employee’s employment under this Agreement may be terminated due to his Disability. “Disability” shall mean Employee’s inability to substantially perform his duties hereunder for any period of at least 180 consecutive days due to a physical or mental incapacity. The date of termination due to Disability shall be the date Employee elects to terminate his employment service due to such Disability or, if earlier, the date the Board determines that Employee has met the definition of Disability and given written notice of such termination to Employee.

     C. Termination by Company Without Cause. The Company may terminate Employee’s employment hereunder without Cause (as hereinafter defined) on 30 days’ prior written notice to Employee.

     D. Termination by Company for Cause. Employee’s employment hereunder may be terminated for Cause by the Company. For purposes of this Agreement, “Cause” shall mean (i) the willful and continued failure by Employee to substantially perform Employee’s duties with the Company (other than any such failure resulting from Employee’s incapacity due to physical or mental illness), (ii) an act or acts of dishonesty taken by Employee and intended to result in personal enrichment of Employee at the expense of the Company, (iii) willful violation by Employee of Employee’s material obligations under this Agreement, (iv) willful violation by Employee of a material policy of the Company, including its policies regarding professional and ethical conduct, (v) Employee’s commission of one or more acts that constitute a felony, (vi) Employee is publicly censured by the Securities Exchange Commission, or (vii) Employee commits one or more acts of fraud as regards the Company. For purposes of clause (i) of this definition, no act, or failure to act, on Employee’s part shall be deemed “willful” unless done, or omitted to be done, by Employee not in good faith and without reasonable belief that Employee’s act, or failure to act, was in the best interest of the Company. The determination of whether Cause exists must be made by a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors of the Company.

     E. Termination by Employee. Employee may terminate his employment hereunder at any time on 30 days’ prior written notice to the Board.

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     SECTION 6. Payments Upon Termination.

     A. Upon termination of Employee’s employment for any reason prior to the expiration of the Term, the Company shall be obligated to pay, and Employee shall be entitled to receive:

     1. all accrued and unpaid Base Salary to the date of termination;

     2. any earned, but unpaid, bonuses for the bonus year ending prior to the date of termination;

     3. all incurred but unreimbursed business expenses for which Employee is entitled to reimbursement; and

     4. any benefits to which he is entitled under the terms of any applicable employee benefit plan or program, or applicable law.

     B. Upon termination of Employee’s employment pursuant to Section 5.C., the Company shall be obligated to pay or provide, and Employee’s estate or beneficiary shall be entitled to receive:

     1. all of the amounts and benefits described in Section 6. A.; and

     2. either (a) a lump sum payment equal to 1.5 times the sum of (i) Employee’s Base Salary, plus (ii) the most recent annual bonus earned by Employee or (b) a lump sum payment equal to 1.5 times Employee’s Base Salary and, solely for purposes of determining Employee’s vesting under any Options, the number of shares that would become vested under such Options during the 12-month period following Employee’s termination date if Employee’s employment had continued during such period shall become vested on his termination of employment date, whichever of (a) or (b) is elected by Employee in writing to the Company within five days of his termination date.

     C. In the event of any termination of employment under Section 5, Employee shall be under no obligation to seek other employment and there shall be no offset against amounts due Employee under this Agreement on account of any remuneration attributable to any subsequent employment or self-employment that he may obtain.

     D. The Company and Employee have previously or contemporaneously with this Agreement entered into a Severance Agreement which provides certain payments and benefits to Employee upon a qualified termination of employment in connection with a change of control of the Company. Notwithstanding anything in this Agreement to the contrary, to the extent Employee is entitled to receive any severance payment or benefits under the Severance Agreement any

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severance payment or benefits to which Employee is otherwise entitled to receive under this Agreement shall be reduced or offset by the severance payment or benefit payable under the Severance Agreement in such manner as is appropriate, as determined in good faith by the Board, to prevent a duplication of such payment and benefits.

     SECTION 7. Indemnification. The Company agrees to indemnify Employee to the fullest extent permitted by applicable law with respect to any acts or non-acts he may have committed during the period which he was an officer, director and/or employee of the Company or any subsidiary or affiliate thereof, or of any other entity of which he served as an officer, director or employee at the request of the Company.

     SECTION 8. Covenants of Employee. Employee covenants as follows:

     A. Confidentiality. During and after his employment with the Company and its affiliates, Employee will hold in confidence all confidential information and will not disclose it to any person other than in connection with the performance of his duties and obligations hereunder, except with the specific prior written consent of the Board of Directors or the Chief Executive Officer; provided, however, that the parties agree that this Agreement does not prohibit the disclosure of confidential information where applicable law requires, including, but not limited to, in response of subpoenas and/or orders of a governmental agency or court of competent jurisdiction. In the event that Employee is requested or becomes legally compelled under the terms of a subpoena or order issued by a court of competent jurisdiction or by a governmental body to make any disclosure of confidential information, Employee agrees that he will (i) immediately provide the Company with written notice of the existence, terms and circumstances, surrounding such request(s) so that the Company may seek an appropriate protective order or other appropriate remedy, (ii) cooperate with the Company in its efforts to decline, resist or narrow such requests and (iii) if disclosure of such confidential information is required in the opinion of counsel, exercise reasonable efforts to obtain an order or other reliable assurance that confidential treatment will be accorded to such disclosed information. “Confidential information” means any and all intellectual property of the Company (or any of its affiliates), including but not limited to: (a) trade secrets concerning the business and affairs of the Company (or any of its affiliates), product specifications, data, know-how, formulae, compositions, processes, designs, sketches, photographs, graphs, drawings, samples, inventions and ideas, past, current, and planned research and development, current and planned manufacturing or distribution methods and processes, customer lists, current and anticipated customer requirements, price lists, market studies, business plans, computer software and programs (including object code and source code), computer software and database technologies, systems, structures, and architectures (and related formulae, compositions, processes, improvements, devices, know-how, inventions, discoveries, concepts, ideas, designs, methods and information), and any other information, however documented, that is a trade secret under federal, state or other applicable law; and (b) information concerning

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the business and affairs of the Company (or any of its affiliates) (which includes historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, the names and backgrounds of key personnel, personnel training and techniques and materials), however documented; and notes, analysis, compilations, studies, summaries, and other material prepared by or for the Company (or any of its affiliates) containing or based, in whole or in part, on any information included in the foregoing.

     B. Trade Secrets. Any trade secrets of the Company will be entitled to all of the protections and benefits under the federal and state trade secret and intellectual property laws and any other applicable law. If any information that the Company deems to be a trade secret is found by a court of competent jurisdiction not to be a trade secret for purposes of this Agreement, such information will, nevertheless, be considered confidential information for purposes of this Agreement, so long as it otherwise meets the definition of confidential information. Employee hereby waives any requirement that the Company submit proof of the economic value of any trade secret or post a bond or other security.

     C. Proprietary Items. Employee will not remove from the Company’s premises (except to the extent such removal is for purposes of the performance of Employee’s duties at home or while traveling, or except as otherwise specifically authorized by the Company) any document, record, notebook, plan, model, component, device, or computer software or code, whether embodied in a disk or in any other form belonging to the Company or used in the Company’s business (collectively, the “Proprietary Items”). All of the Proprietary Items, whether or not developed by Employee, are the exclusive property of the Company. Upon termination of his employment, or upon the request of the Company during the Term, Employee will return to the Company all of the Proprietary Items and confidential information in Employee’s possession or subject to Employee’s control, and Employee shall not retain any copies, abstracts, sketches, or other physical embodiment, including electronic or otherwise, of any of the Proprietary Items or confidential information.

     D. Non-Competition and Non-Interference. During the period of his employment with the Company or its affiliates and for the one-year period after the termination of his employment with the Company and its affiliates, Employee will not, directly or indirectly:

     1. without the express prior written consent of the Board of Directors, own an interest in, manage, operate, join, control, lend money or render financial or other assistance to or participate in or be connected with, as an officer, employee, partner, stockholder, consultant or otherwise, any person that competes with the Company in the field of neurostimulation in a matter covered by a patent assigned to or held by the Company; provided, however, that following Employee’s termination of employment with the Company the foregoing restriction shall apply only

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to those areas where the Company is actually doing business on the date of such termination of employment; provided, further, that Employee may purchase or otherwise acquire for passive investment up to 3% of any class of securities of any such enterprise if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934;

     2. whether for Employee’s own account or for the account of any other person, (except for the account of the Company and its affiliates), solicit Business from any person known by Employee to be a customer of the Company or its affiliates, whether or not Employee had personal contact with such person during Employee’s employment with the Company and its affiliates;

     3. whether for Employee’s own account or the account of any other person, (i) solicit, employ, or otherwise engage as an employee, independent contractor, or otherwise, any person who is an employee of the Company or an affiliate, or in any manner induce, or attempt to induce, any employee of the Company or its affiliate to terminate his employment with the Company or its affiliate; or (ii) interfere with the Company’s or its affiliate’s relationship with any person who at any time during the Term, was an employee, contractor, supplier, or customer of the Company or its affiliate; or

     4. at any time after the termination of his employment, disparage the Company or its affiliates or any shareholders, directors, officers, employees, or agents of the Company or any of its affiliates, so long as the Company does not disparage Employee.

     E. Acknowledgements. The Company acknowledges that it is providing Employee with confidential information in order for Employee to perform his duties under this Agreement. Employee acknowledges that (a) the services to be performed by him under this Agreement are of a special, unique, unusual, extraordinary, and intellectual character, and (b) the provisions of this Section 8 are reasonable and necessary to protect the confidential information, goodwill and other business interests of the Company. If any covenant in this Section 8 is held to be unreasonable, arbitrary, or against public policy, such covenant will be considered to be divisible with respect to scope, time, and geographic area, and such lesser scope, time, or geographic area, or all of them, as a court of competent jurisdiction may determine to be reasonable, not arbitrary, and not against public policy, will be effective, binding, and enforceable against Employee. Employee hereby agrees that this covenant is a material and substantial part of this Agreement and that: (i) the geographic limitations are reasonable; (ii) the term of the covenant is reasonable; and (iii) the covenant is not made for the purpose of limiting competition per se and is reasonably related to a protectable business interest of the Company. The period of time applicable to any covenant in this Section 8 will be extended by the duration of any violation

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by Employee of such covenant. The provisions of this Section 8 shall survive the termination of the Term of this Agreement.

     SECTION 9. Injunctive Relief and Additional Remedy. Employee acknowledges that the injury that would be suffered by the Company as a result of a breach of the provisions of Section 8 of this Agreement would be irreparable and that an award of monetary damages to the Company for such a breach would be an inadequate remedy. Consequently, the Company will have the right, in addition to any other rights it may have, to obtain a temporary restraining order and/or injunctive relief to restrain any breach or threatened breach or otherwise to specifically enforce any provision of this Agreement. Employee waives any requirement for the Company’s securing or posting of any bond in conjunction with any such remedies. Employee further agrees to and hereby does submit to in personam jurisdiction before each and every court for that purpose. Without limiting the Company’s rights under this Section or any other remedies of the Company, if Employee breaches any of the provisions of Section 8 and such breach is proven in a court of competent jurisdiction, the Company will have the right to cease making any payments or providing other benefits otherwise due Employee under this Agreement.

     SECTION 10. Amendment: Waiver. The terms and provisions of this Agreement may be modified or amended only by a written instrument executed by each of the parties hereto, and compliance with the terms and provisions hereof may be waived only by a written instrument executed by each party entitled to the benefits thereof. No failure or delay on the part of any party in exercising any right, power or privilege granted hereunder shall constitute a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege granted hereunder.

     SECTION 11. Entire Agreement. Except as contemplated herein, this Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes any and all prior or contemporaneous written or oral agreements, arrangements or understandings between the Company and Employee.

     SECTION 12. Notices. All notices or communications hereunder shall be in writing, addressed as follows or to any address subsequently provided to the other party:

To the Company:

Cyberonics, Inc.
Attention: Vice President of Human Resources
100 Cyberonics Blvd., Suite 600
Houston, Texas 77058

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To Employee:

W. Steven Jennings
3114 Scenic Elm
Houston, TX 77059

All such notices shall be conclusively deemed to be received and shall be effective, (i) if sent by hand delivery or overnight courier, upon receipt, (ii) if sent by telecopy or facsimile transmission, upon confirmation of receipt by the sender of such transmission or (iii) if sent by registered or certified mail, on the fifth day after the day on which such notice is mailed.

     SECTION 13. Severability. In the event that any term or provision of this Agreement is found to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining terms and provisions hereof shall not be in any way affected or impaired thereby, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained therein.

     SECTION 14. Binding Effect: Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns (it being understood and agreed that, except as expressly provided herein, nothing contained in this Agreement is intended to confer upon any other person or entity any rights, benefits or remedies of any kind or character whatsoever). No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder.

     SECTION 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas (except that no effect shall be given to any conflicts of law principles thereof that would require the application of the laws of another jurisdiction).

     SECTION 16. Submission to Jurisdiction. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS IN HARRIS COUNTY, TEXAS, FOR THE PURPOSES OF ANY PROCEEDING ARISING OUT OF THIS AGREEMENT.

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     SECTION 17. Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.

     SECTION 18. Tax Withholdings. The Company shall withhold from all payments hereunder all applicable taxes that it is required to withhold with respect to payments and benefits provided under this Agreement.

     SECTION 19. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

     IN WITNESS WHEREOF, the undersigned have executed this Agreement effective as of the date set forth above.

CYBERONICS, INC.
By:	/s/  Robert P. Cummins
	Robert P. Cummins Chairman of the Board of Directors and Chief Executive Officer
EMPLOYEE
/s/  W. Steven Jennings    6/16/2006
W. Steven Jennings

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EX-10.39

Exhibit 10.39

CYBERONICS, INC,

NOTICE OF STOCK OPTION GRANT

Shawn Lunney

     You have been granted an option (the “Option”) to purchase Common Stock of Cyberonics, Inc (the “Company”) as follows:

Date of Grant:	November 1, 1996
Exercise Price:	$3,0625 per share
Number of Shares Subject to Option:	104,750
Type of Option:	___ Incentive Stock Option
	___ Nonstatutory Stock Option
Vesting Start Date.	November 1,1996
Expiration Date:	Tenth Anniversary of Date of Grant
Exercise Schedule:	The Option shall be exercisable at any time prior to the Expiration Date or earlier termination as to shares which are vested in accordance with the Vesting Schedule below.

     Vesting Schedule: For so long as the Optionee shall continue to be a Service Provider, this Option shall vest cumulatively as follows:

     A. 6/48ths of the Shares subject to the Option shall vest six months following the Vesting Start Date set forth above, and l/48th of the Shares subject to the Option shall vest on the first day of each month thereafter.

     B. In addition to the foregoing, vesting of this Option will accelerate, and this Option will become exercisable, as follows:

          (i) in the event that the Food and Drug Administration (“FDA”) Panel recommends approval of the Company’s pending Pre-Market Approval (“PMA”) Application for indications and with labeling requirements substantially as requested by the Company, then twenty-five percent (25%) of the Shares subject to this Option shall automatically vest and become exercisable;

          (ii) in the event that the FDA grants final approval for the Company’s pending Pre-Market Approval (“PMA”) Application for indications and with labeling requirements substantially

as requested by the Company, then twenty-five percent (25%) of the Shares subject to this Option shall automatically vest and become exercisable;

          (iii) For each month in calendar 1997 in which total net sales exceed Five Hundred Thousand Dollars ($500,000), two percent (2%) of the Shares subject to this Option shall automatically vest and become exercisable; and

          (iv) For each month in calendar 1998 in which total net sales exceed One Million Dollars ($1,000,000), two percent (2%) of the Shares subject to this Option shall automatically vest and become exercisable.

     With respect to paragraphs (i) and (ii) above, any question as to whether the indications covered in a PMA or labelling requirements imposed by the FDA are “substantially as requested by the Company” shall be determined by the Board of Directors of the Company, whose determination will be final and binding on the Company and the Optionee.

     Termination Period. Option may be exercised for up to 90 days after termination of employment or consulting relationship except as set out in Sections 7 and 8 of the Stock Option Agreement (but in no event later than the Expiration Date).

     OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER) OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY’S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE’S OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S EMPLOYMENT OR CONSULTANCY RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE.

     By your signature and the signature of the Company’s representative below, you and the Company agree that this option is granted under and governed by the terms and conditions of the Company’s 1988 Incentive Stock Plan and the Stock Option Agreement, all of which are attached and made a part of this document.

OPTIONEE:		Cyberonics, Inc.
/s/ Shawn Lunney		By:	/s/ Robert P. Cummins
Shawn Lunney
Date:	1/21/97	Title:	CEO
		Date:	1/21/97

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Cyberonics, Inc.

STOCK OPTION AGREEMENT

     1. Grant of Option. Cyberonics, Inc., a Delaware corporation (the “Company”), hereby grants to the Optionee named in the Notice of Grant (the “Optionee”), an option (the “Option”) to purchase a total number of shares of Common Stock (the “Shares”) set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the “Exercise Price”) subject to the terms, definitions and provisions of the Company’s 1988 Incentive Stock Plan (the “Plan”) which is incorporated herein by reference Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option.

          If designated an Incentive Stock Option, this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code.

     2. Adjustments for Stock Splits,Recapitalization.

          (a) The Exercise Price and number of Shares subject to this Option (as set forth on the Notice of Grant) shall be subject to adjustment as follows: If the Company at any time (i) sub-divides (by any stock split, stock dividend or otherwise) the Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of Shares issuable shall be proportionately increased, and (ii) if the Company at any time combines (by reverse stock split or otherwise) the Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of Shares issuable shall be proportionately decreased.

          (b) If at any time while this Option is outstanding there shall be any reclassification or conversion of the Common Stock into another class of securities (other than a subdivision or combination of shares provided for in the preceding paragraph), the Optionee shall thereafter be entitled to receive, during the term hereof and upon payment of the Exercise Price, the number of shares of stock to which a holder of the Common Stock would have been entitled upon such reclassification or conversion had the Optionee exercised this Option immediately prior to such reclassification or conversion,

     3. Exercise of Option. This Option shall be exercisable during its term in accordance with the Exercise Schedule set out in the Notice of Grant and with the provisions of Section 8(b) of the Plan as follows.

          (a) Right to Exercise

               (i) This Option may not be exercised for a fraction of a share.

               (ii) In the event of Optionee’s death, disability or other termination of employment, the exercisability of the Option is governed by Sections 6, 7 and 8 below

               (iii) In no event may this Option be exercised after the Expiration Date of this Option as set forth in the Notice of Grant.

          (b) Method of Exercise. This Option shall be exercisable by execution and delivery of the Exercise Notice and Stock Purchase Agreement (the “Exercise Notice”) in the form attached as Exhibit A Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price.

     4. Method of Payment. Payment of the Exercise Price shall be by:

          (i) cash; or

          (ii) check, or

          (iii) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and immediate sale of the shares through a broker which provides for delivery to the Company from the sale or loan proceeds of the exercise price; or

          (iv) any combination of the foregoing methods of payment.

     5. Restrictions on Exercise. This Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including the requirements of any stock exchange upon which the Shares may then be listed and including any rule under Part 207 of Title 12 of the Code of Federal Regulations (“Regulation G”) as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation.

     6. Termination of Relationship. In the event of termination of Optionee’s consulting relationship or Continuous Status as an Employee, Optionee may, to the extent otherwise so entitled at the date of such termination (the “Termination Date”), exercise this Option during the Termination Period set out in the Notice of Grant. To the extent that Optionee was not entitled to exercise this Option at the date of such termination, or if Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

     7. Disability of Optionee. Notwithstanding the provisions of Section 6 above, in the event of termination of an Optionee’s consulting relationship or Continuous Status as an Employee as a result of total and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months from the date of termination of employment (but in no event later than the Expiration Date of this Option as set forth in the Notice of Grant), exercise the Option to the extent otherwise so entitled at the date of such termination To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such

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Option (to the extent otherwise so entitled) within the time specified herein, the Option, shall terminate.

     8. Death of Optionee. In the event of the death of Optionee during the term of this Option and while an Employee or Consultant or within ninety (90) days following termination of Optionee’s employment/consultancy relationship with the Company, this Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the Expiration Date), by Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent the Optionee could exercise the Option at the date of death.

     9. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by him. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

     10. Term of Option. This Option may be exercised only prior to the Expiration Date set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option. The limitations set out in Section 7 of the Plan regarding Options designated as Incentive Stock Options and Options granted to more than ten percent (10%) shareholders shall apply to this Option.

     11. Tax Consequences. Set forth below is a brief summary as of the date of this Option of some of the federal tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

          (a) Exercise of ISO. If this Option qualifies as an ISO, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise.

          (b) Exercise of Nonqualified Stock Option. If this Option does not qualify as an ISO, there may be a regular federal income tax liability upon the exercise of the Option. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. If Optionee is an employee, the Company will be required to withhold from Optionee’s compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise.

          (c) Disposition of Shares. In the case of an NSO, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. In the case of an ISO, if Shares transferred pursuant to the Option are held for at least one year after exercise and are disposed of at least two years after the Date of Grant,

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any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal and income tax purposes If Shares purchased under an ISO are disposed of within such one-year period or within two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price.

          (d) Notice of Disqualifying Disposition of ISO Shares. If this Option is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to this Option on or before the later of (1) the date two years after the Date of Grant, or (2) the date one year after exercise of this Option, the Optionee shall immediately notify the Company in writing of such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee from the early disposition by payment in cash or out of the current earnings paid to the Optionee.

     12. Change of Control. In the event of a Change of Control (as defined below), this Option shall be exercisable as in accordance with the following notwithstanding anything to the contrary set forth elsewhere herein:

          (a) In the event that Options under the Plan are not Assumed, as defined below, by the successor corporation (or the parent or subsidiary of such successor), this Option shall be exercisable as to all shares, whether or not vested as provided in the Notice of Grant attached hereto.

          (b) In the event of a Change of Control in which (i) the Option is Assumed (or the parent or a subsidiary of the successor) this option shall be exercisable as to a number of shares equal to 2.5 times the number of shares actually vested as of the date of closing of the Change of Control (but in no event as to a number of shares greater than the number of shares set forth on the Notice of Grant)

          (c) For purposes of this Section 12, “Change of Control” shall mean a corporate reorganization of the Company which results in the then current shareholders of the Company owning less than 50% of the equity securities of the surviving company, or the sale of all or substantially all of the assets of the Company.

          (d) For purposes of this Section 12, an Option granted under the Plan shall be deemed to be Assumed if, following a Change of Control, the Option confers the right to purchase, for each Share subject to the Option immediately prior to the Change of Control, the consideration (whether stock, cash or other securities or property) received in the Change of Control by holders of Common Stock for each Share held on the effective date of the transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the Change of Control was not solely Common Stock of the successor corporation or its parent, the Board may, with the consent of the successor corporation and the participant, provide for the consideration to be received upon exercise of the Option to be solely Common Stock of the successor corporation or its parent equal in Fair Market Value to the per share consideration received by holders of Common Stock in the Change of Control.

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     13. Certain Business Combinations. In the event it is determined by the Board of Directors, upon receipt of a written opinion of the Company’s independent public accountants, that the enforcement of any Section or subsection of this Agreement, including, but not limited to, Section 12 hereof, which allows for the acceleration of vesting of options to purchase shares of the Company’s common stock in connection with a Change of Control, would preclude accounting for any proposed business combination of the corporation involving a Change of Control as a pooling of interests, and the Board otherwise desires to approve such a proposed business transaction which requires as a condition to the closing of such transaction that it be accounted for as a pooling of interests, that any such Section or subsection of this Agreement shall be null and void.

     OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY’S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH HIS OR HER RIGHT OR THE COMPANY’S RIGHT TO TERMINATE HIS OR HER EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.

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EXHIBIT A

EXERCISE NOTICE AND STOCK PURCHASE AGREEMENT

Cyberonics, Inc.
17448 Highway 3, Suite 100
Webster, Texas 77598

Attention: Secretary

     1. Exercise of Option. Effective as of today,                                                     , 19      , the undersigned (“Optionee”) hereby elects to exercise Optionee’s option to purchase                         shares of the Common Stock (the “Shares”) of Cyberonics, Inc. (the “Company”) under and pursuant to the Company’s 1988 Incentive Stock Plan, as amended (the “Plan”) and the [       ] Incentive [      ] Nonqualified Stock Option Agreement dated                       (the “Option Agreement”).

     2. Representations of Optionee.

          (a) Optionee acknowledges that Optionee has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions.

          (b) Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee’s purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice.

     3. Rights as Shareholder. Subject to the terms and conditions of this Agreement, Optionee shall have all of the rights of a shareholder of the Company with respect to the Shares from and after the date that Optionee delivers full payment of the Exercise Price until such time as Optionee disposes of the Shares.

     4. Successors and Assigns. The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns.

     5. Arbitration. Any dispute or claim arising out of or in connection with this Agreement shall be settled by binding arbitration. Any such arbitration shall be conducted in accordance with the Rules of Conciliation and Arbitration of the American Arbitration Association and shall take place in Webster, Texas The arbitration shall be conducted by one arbitrator; provided that if the parties cannot agree on a single arbitrator, then the arbitration shall be conducted by a panel of three arbitrators, one selected by each party and the third selected by the other two arbitrators. The determination of the arbitrator(s) shall be final and binding upon the parties.

     6. Governing Law; Severability. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE EXCLUDING THAT BODY OF LAW PERTAINING TO CONFLICTS OF

LAW. Should any provision of this Agreement be determined by a court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable

     7. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, with postage and Fees prepaid, addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party

     8. Further Instruments. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement.

     9. Delivery of Payment. Optionee herewith delivers to the Company the full Exercise Price for the Shares.

     10. Entire Agreement. The Plan and Notice of Grant/Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Notice of Grant/Option Agreement constitute the entire agreement of the parties and supersede in their entirety ail prior undertakings and agreements of the company and optionee with respect to the subject matter hereof.

Submitted by:	Accepted by:
OPTIONEE:	Cyberonics, Inc
	By:
Shawn Lunney
	Its:
Address:	Address:
	17448 Highway 3, Suite 100
	Webster, Texas 77598

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EX-10.40

Exhibit 10.40

Amendment to Stock Option Agreement and Notice

     This Amendment to Stock Option Agreement (the “Amendment”) is made on the 27th day of December, 2006 by and between Cyberonics, Inc., a Delaware corporation (the “Company”) and Shawn P. Lunney, an individual residing in Texas (“Optionee”).

     Whereas, the Company and Optionee entered into a Stock Option Agreement having a grant date of November 1, 1996, which agreement includes a Notice of Stock Option Grant (the “Agreement”); and

     Whereas, the Company and Optionee previously agreed to amend the Agreement to extend the period for Optionee to exercise the option granted under the Agreement (the “Option”) to December 31, 2006;

     Whereas, the Option is currently unexercisable because an exercise of such right would violate applicable securities laws; and

     Whereas, the Company’s Board of Directors has authorized the Company to extend the period for Optionee’s exercise of the Option to thirty (30) days after the exercise of such Option would no longer violate applicable securities laws, all on the conditions set forth in this Agreement;

     Now, Therefore, for a good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

     1. The paragraph entitled, “Termination Period,” under “Notice of Stock Option Grant” is deleted in its entirety, and the following is substituted therefor:

“The Option may be exercised within thirty (30) days after the date on which the exercise of such Option would no longer violate applicable securities laws.”

     2. This Amendment supersedes all prior agreements, amendments, understandings, negotiations, and discussion, oral or written, related to such subject matter.

     3. Except as expressly amended herein, the terms of the Agreement remain unchanged.

OPTIONEE		CYBERONICS, INC.
/s/ Shawn P. Lunney	By:	/s/ John A. Riccardi
Shawn P. Lunney		John A. Riccardi
		Vice President, Finance

EX-10.42

Exhibit 10.42

EMPLOYMENT AGREEMENT

     This Employment Agreement (the “Agreement”), entered into effective as of June 15, 2006 (the “Effective Date”), by and between Cyberonics, Inc. (the “Company”) and Shawn P. Lunney (“Employee”).

WITNESSETH:

     WHEREAS, the Company desires to secure the experience, abilities and service of Employee by employing Employee upon the terms and conditions specified herein; and

     WHEREAS, Employee is willing to enter into this Agreement upon the terms and conditions specified herein;

     NOW, THEREFORE, in consideration of the premises, terms and provisions set forth herein, the mutual benefits to be gained by the performance thereof and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

     SECTION 1. Employment. The Company hereby employs Employee, and Employee hereby accepts such employment, all upon the terms and conditions set forth herein.

     SECTION 2. Term. Subject to the terms and conditions of this Agreement, unless sooner terminated pursuant to Section 5 of this Agreement, Employee shall be employed by the Company commencing on the Effective Date and terminating on June 1, 2009 (the “Term”). Termination of this Agreement shall not alter or impair any rights of Employee (or his beneficiaries or heirs) with respect to payments, benefits or other rights provided by the terms of this Agreement, arising before or after the end of the Term.

     SECTION 3. Duties. Responsibilities and Location.

     A. Capacity. Employee shall serve as the Vice President, Market Development of the Company and shall report to the Chief Executive Officer of the Company.

     B. Full-Time Duties. Employee shall devote his full business time, attention and energies to the business of the Company. Notwithstanding anything herein to the contrary, Employee shall be allowed to (i) manage Employee’s personal investments and affairs and, (ii) with the written consent of the Chief Executive Officer of the Company, serve on boards or committees of civic or charitable organizations or trade associations, provided that such activities do not materially interfere with his performance of the duties and responsibilities of his position specified in Section 3 A.

     C. Offices. Employee’s primary place of work shall be at the principle executive offices of the Company located in the greater Houston, Texas

metropolitan area, but Employee shall be required to travel on a basis consistent with his position.

     SECTION 4. Compensation.

     A. Base Salary. During the Term, Employee shall receive an annual salary of $260,000 (the “Base Salary”) payable in accordance with the Company’s general payroll practices. Employee’s Base Salary shall be reviewed prior to the beginning of each fiscal year of the Company for increase in the discretion of the Compensation Committee of the Board of Directors (“Compensation Committee”); provided, however, that the Base Salary, as it may be increased at any time, may not thereafter be decreased.

     B. Annual Incentive Bonus. During the Term, Employee shall be eligible to participate in the Annual CEO Direct Reports Bonus Plan, with a target bonus of 50% of Employee’s annual Base Salary. A bonus, if earned, shall be payable as soon as reasonably practical following the completion of the applicable fiscal year. Bonuses for Employee shall be based on the achievement of such Company, departmental and/or individual performance goals that may be established for the applicable bonus year by the Compensation Committee.

     C. Annual Overachievement Bonus. During the Term, Employee shall be eligible to participate in the Annual CEO Direct Reports Overachievement Bonus Plan as determined by the Compensation Committee. Overachievement Bonuses shall be based on the Company’s overachievement of such Company, departmental and/or individual performance goals that may be established for the applicable bonus year by the Compensation Committee.

     D. Equity Compensation. Employee will be eligible for grants of Company stock options (the “Options”) and other equity awards in the discretion of the Compensation Committee.

     E. General Benefits. Upon satisfying applicable eligibility requirements, if any, Employee will be eligible to participate in the Company’s qualified 401(k) plan, group health, group life insurance, accidental death and dismemberment, travel accident, long-term disability and short-term disability plans and other welfare and similar plans and vacation policies under terms generally applicable to other similarly situated employees of the Company and shall be eligible to receive all perquisites and other benefits provided or made available by the Company to other similarly situated executives of the Company.

     F. Reimbursements. Employee shall be entitled to receive prompt reimbursement by the Company in accordance with its business reimbursement policy in effect from time to time for all reasonable, out-of-pocket business expenses incurred by him in performing his duties under this Agreement upon the submission by Employee of such accounts and records as may be reasonably required under the Company’s business reimbursement policy.

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     SECTION 5.Termination of Employment. Notwithstanding the provisions of Section 2, Employee’s employment hereunder may terminate under any of the following conditions:

     A. Death. Employee’s employment under this Agreement shall terminate automatically upon his death.

     B. Disability. Employee’s employment under this Agreement may be terminated due to his Disability. “Disability” shall mean Employee’s inability to substantially perform his duties hereunder for any period of at least 180 consecutive days due to a physical or mental incapacity. The date of termination due to Disability shall be the date Employee elects to terminate his employment service due to such Disability or, if earlier, the date the Board determines that Employee has met the definition of Disability and given written notice of such termination to Employee.

     C. Termination by Company Without Cause. The Company may terminate Employee’s employment hereunder without Cause (as hereinafter defined) on 30 days’ prior written notice to Employee.

     D. Termination by Company for Cause. Employee’s employment hereunder may be terminated for Cause by the Company. For purposes of this Agreement, “Cause” shall mean (i) the willful and continued failure by Employee to substantially perform Employee’s duties with the Company (other than any such failure resulting from Employee’s incapacity due to physical or mental illness), (ii) an act or acts of dishonesty taken by Employee and intended to result in personal enrichment of Employee at the expense of the Company, (iii) willful violation by Employee of Employee’s material obligations under this Agreement, (iv) willful violation by Employee of a material policy of the Company, including its policies regarding professional and ethical conduct, (v) Employee’s commission of one or more acts that constitute a felony, (vi) Employee is publicly censured by the Securities Exchange Commission, or (vii) Employee commits one or more acts of fraud as regards the Company. For purposes of clause (i) of this definition, no act, or failure to act, on Employee’s part shall be deemed “willful” unless done, or omitted to be done, by Employee not in good faith and without reasonable belief that Employee’s act, or failure to act, was in the best interest of the Company. The determination of whether Cause exists must be made by a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors of the Company.

     E. Termination by Employee. Employee may terminate his employment hereunder at any time on 30 days’ prior written notice to the Board.

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     SECTION 6, Payments Upon Termination.

     A. Upon termination of Employee’s employment for any reason prior to the expiration of the Term, the Company shall be obligated to pay, and Employee shall be entitled to receive:

     1. all accrued and unpaid Base Salary to the date of termination;

     2. any earned, but unpaid, bonuses for the bonus year ending prior to the date of termination;

     3. all incurred but unreimbursed business expenses for which Employee is entitled to reimbursement; and

     4. any benefits to which he is entitled under the terms of any applicable employee benefit plan or program, or applicable law,

     B. Upon termination of Employee’s employment pursuant to Section 5.C., the Company shall be obligated to pay or provide, and Employee’s estate or beneficiary shall be entitled to receive:

     1. all of the amounts and benefits described in Section 6.A.; and

     2, either (a) a lump sum payment equal to 1.5 times the sum of (i) Employee’s Base Salary, plus (ii) the most recent annual bonus earned by Employee or (b) a lump sum payment equal to 1.5 times Employee’s Base Salary and, solely for purposes of determining Employee’s vesting under any Options, the number of shares that would become vested under such Options during the 12-month period following Employee’s termination date if Employee’s employment had continued during such period shall become vested on his termination of employment date, whichever of (a) or (b) is elected by Employee in writing to the Company within five days of his termination date.

     C. In the event of any termination of employment under Section 5, Employee shall be under no obligation to seek other employment and there shall be no offset against amounts due Employee under this Agreement on account of any remuneration attributable to any subsequent employment or self-employment that he may obtain.

     D. The Company and Employee have previously or contemporaneously with this Agreement entered into a Severance Agreement which provides certain payments and benefits to Employee upon a qualified termination of employment in connection with a change of control of the Company. Notwithstanding anything in this Agreement to the contrary, to the extent Employee is entitled to receive any severance payment or benefits under the Severance Agreement any

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severance payment or benefits to which Employee is otherwise entitled to receive under this Agreement shall be reduced or offset by the severance payment or benefit payable under the Severance Agreement in such manner as is appropriate, as determined in good faith by the Board, to prevent a duplication of such payment and benefits

     SECTION 7. Indemnification. The Company agrees to indemnify Employee to the fullest extent permitted by applicable law with respect to any acts or non-acts he may have committed during the period which he was an officer, director and/or employee of the Company or any subsidiary or affiliate thereof, or of any other entity of which he served as an officer, director or employee at the request of the Company.

     SECTION 8. Covenants of Employee. Employee covenants as follows:

     A. Confidentiality. During and after his employment with the Company and its affiliates, Employee will hold in confidence all confidential information and will not disclose it to any person other than in connection with the performance of his duties and obligations hereunder, except with the specific prior written consent of the Board of Directors or the Chief Executive Officer; provided, however, that the parties agree that this Agreement does not prohibit the disclosure of confidential information where applicable law requires, including, but not limited to, in response of subpoenas and/or orders of a governmental agency or court of competent jurisdiction. In the event that Employee is requested or becomes legally compelled under the terms of a subpoena or order issued by a court of competent jurisdiction or by a governmental body to make any disclosure of confidential information, Employee agrees that he will (i) immediately provide the Company with written notice of the existence, terms and circumstances, surrounding such request(s) so that the Company may seek an appropriate protective order or other appropriate remedy, (ii) cooperate with the Company in its efforts to decline, resist or narrow such requests and (iii) if disclosure of such confidential information is required in the opinion of counsel, exercise reasonable efforts to obtain an order or other reliable assurance that confidential treatment will be accorded to such disclosed information. “Confidential information” means any and all intellectual property of the Company (or any of its affiliates), including but not limited to: (a) trade secrets concerning the business and affairs of the Company (or any of its affiliates), product specifications, data, know-how, formulae, compositions, processes, designs, sketches, photographs, graphs, drawings, samples, inventions and ideas, past, current, and planned research and development, current and planned manufacturing or distribution methods and processes, customer lists, current and anticipated customer requirements, price lists, market studies, business plans, computer software and programs (including object code and source code), computer software and database technologies, systems, structures, and architectures (and related formulae, compositions, processes, improvements, devices, know-how, inventions, discoveries, concepts, ideas, designs, methods and information), and any other information, however documented, that is a trade secret under federal, state or other applicable law; and (b) information concerning

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the business and affairs of the Company (or any of its affiliates) (which includes historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, the names and backgrounds of key personnel, personnel training and techniques and materials), however documented; and notes, analysis, compilations, studies, summaries, and other material prepared by or for the Company (or any of its affiliates) containing or based, in whole or in part, on any information included in the foregoing.

     B. Trade Secrets. Any trade secrets of the Company will be entitled to all of the protections and benefits under the federal and state trade secret and intellectual property laws and any other applicable law. If any information that the Company deems to be a trade secret is found by a court of competent jurisdiction not to be a trade secret for purposes of this Agreement, such information will, nevertheless, be considered confidential information for purposes of this Agreement, so long as it otherwise meets the definition of confidential information. Employee hereby waives any requirement that the Company submit proof of the economic value of any trade secret or post a bond or other security.

     C. Proprietary Items. Employee will not remove from the Company’s premises (except to the extent such removal is for purposes of the performance of Employee’s duties at home or while traveling, or except as otherwise specifically authorized by the Company) any document, record, notebook, plan, model, component, device, or computer software or code, whether embodied in a disk or in any other form belonging to the Company or used in the Company’s business (collectively, the “Proprietary Items”). All of the Proprietary Items, whether or not developed by Employee, are the exclusive property of the Company. Upon termination of his employment, or upon the request of the Company during the Term, Employee will return to the Company all of the Proprietary Items and confidential information in Employee’s possession or subject to Employee’s control, and Employee shall not retain any copies, abstracts, sketches, or other physical embodiment, including electronic or otherwise, of any of the Proprietary Items or confidential information

     D. Non-Competition and Non-Interference. During the period of his employment with the Company or its affiliates and for the one-year period after the termination of his employment with the Company and its affiliates, Employee will not, directly or indirectly:

     1. without the express prior written consent of the Board of Directors, own an interest in, manage, operate, join, control, lend money or render financial or other assistance to or participate in or be connected with, as an officer, employee, partner, stockholder, consultant or otherwise, any person that competes with the Company in the field of neurostimulation in a matter covered by a patent assigned to or held by the Company; provided, however, that following Employee’s termination of employment with the Company the foregoing restriction shall apply only

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to those areas where the Company is actually doing business on the date of such termination of employment; provided, further, that Employee may purchase or otherwise acquire for passive investment up to 3% of any class of securities of any such enterprise if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934;

     2. whether for Employee’s own account or for the account of any other person, (except for the account of the Company and its affiliates), solicit Business from any person known by Employee to be a customer of the Company or its affiliates, whether or not Employee had personal contact with such person during Employee’s employment with the Company and its affiliates;

     3. whether for Employee’s own account or the account of any other person, (i) solicit, employ, or otherwise engage as an employee, independent contractor, or otherwise, any person who is an employee of the Company or an affiliate, or in any manner induce, or attempt to induce, any employee of the Company or its affiliate to terminate his employment with the Company or its affiliate; or (ii) interfere with the Company’s or its affiliate’s relationship with any person who at any time during the Term, was an employee, contractor, supplier, or customer of the Company or its affiliate; or

     4. at any time after the termination of his employment, disparage the Company or its affiliates or any shareholders, directors, officers, employees, or agents of the Company or any of its affiliates, so long as the Company does not disparage Employee.

     E. Acknowledgements. The Company acknowledges that it is providing Employee with confidential information in order for Employee to perform his duties under this Agreement. Employee acknowledges that (a) the services to be performed by him under this Agreement are of a special, unique, unusual, extraordinary, and intellectual character, and (b) the provisions of this Section 8 are reasonable and necessary to protect the confidential information, goodwill and other business interests of the Company. If any covenant in this Section 8 is held to be unreasonable, arbitrary, or against public policy, such covenant will be considered to be divisible with respect to scope, time, and geographic area, and such lesser scope, time, or geographic area, or all of them, as a court of competent jurisdiction may determine to be reasonable, not arbitrary, and not against public policy, will be effective, binding, and enforceable against Employee. Employee hereby agrees that this covenant is a material and substantial part of this Agreement and that: (i) the geographic limitations are reasonable; (ii) the term of the covenant is reasonable; and (iii) the covenant is not made for the purpose of limiting competition per se and is reasonably related to a protectable business interest of the Company. The period of time applicable to any covenant in this Section 8 will be extended by the duration of any violation

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by Employee of such covenant. The provisions of this Section 8 shall survive the termination of the Term of this Agreement.

     SECTION 9. Injunctive Relief and Additional Remedy. Employee acknowledges that the injury that would be suffered by the Company as a result of a breach of the provisions of Section 8 of this Agreement would be irreparable and that an award of monetary damages to the Company for such a breach would be an inadequate remedy. Consequently, the Company will have the right, in addition to any other rights it may have, to obtain a temporary restraining order and/or injunctive relief to restrain any breach or threatened breach or otherwise to specifically enforce any provision of this Agreement. Employee waives any requirement for the Company’s securing or posting of any bond in conjunction with any such remedies. Employee further agrees to and hereby does submit to in personam jurisdiction before each and every court for that purpose. Without limiting the Company’s rights under this Section or any other remedies of the Company, if Employee breaches any of the provisions of Section 8 and such breach is proven in a court of competent jurisdiction, the Company will have the right to cease making any payments or providing other benefits otherwise due Employee under this Agreement.

     SECTION 10. Amendment: Waiver. The terms and provisions of this Agreement may be modified or amended only by a written instrument executed by each of the parties hereto, and compliance with the terms and provisions hereof may be waived only by a written instrument executed by each party entitled to the benefits thereof. No failure or delay on the part of any party in exercising any right, power or privilege granted hereunder shall constitute a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege granted hereunder.

     SECTION 11. Entire Agreement. Except as contemplated herein, this Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes any and all prior or contemporaneous written or oral agreements, arrangements or understandings between the Company and Employee,

     SECTION 12. Notices. All notices or communications hereunder shall be in writing, addressed as follows or to any address subsequently provided to the other party:

To the Company:
 
Cyberonics, Inc
Attention: Vice President of Human Resources
100 Cyberonics Blvd., Suite 600
Houston, Texas 77058

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To Employee:

Shawn P. Lunney
901 Kipp Avenue
Kemah, TX 77565

All such notices shall be conclusively deemed to be received and shall be effective, (i) if sent by hand delivery or overnight courier, upon receipt, (ii) if sent by telecopy or facsimile transmission, upon confirmation of receipt by the sender of such transmission or (iii) if sent by registered or certified mail, on the fifth day after the day on which such notice is mailed.

     SECTION 13. Severability. In the event that any term or provision of this Agreement is found to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining terms and provisions hereof shall not be in any way affected or impaired thereby, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained therein.

     SECTION 14. Binding Effect: Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns (it being understood and agreed that, except as expressly provided herein, nothing contained in this Agreement is intended to confer upon any other person or entity any rights, benefits or remedies of any kind or character whatsoever). No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder.

     SECTION 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas (except that no effect shall be given to any conflicts of law principles thereof that would require the application of the laws of another jurisdiction).

     SECTION 16. Submission to Jurisdiction. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS IN HARRIS COUNTY, TEXAS, FOR THE PURPOSES OF ANY PROCEEDING ARISING OUT OF THIS AGREEMENT.

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     SECTION 17. Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.

     SECTION 18. Tax Withholdings. The Company shall withhold from all payments hereunder all applicable taxes that it is required to withhold with respect to payments and benefits provided under this Agreement.

     SECTION 19. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

     IN WITNESS WHEREOF, the undersigned have executed this Agreement effective as of the date set forth above.

CYBERONICS, INC.
 

/s/ Robert P. Cummins  

Robert P. Cummins 

Chairman of the Board of Directors
and Chief Executive Officer 

EMPLOYEE
 

/s/ Shawn P. Lunney  

Shawn P. Lunney  

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EX-10.43

Exhibit 10.43

RELEASE AGREEMENT

     This Release Agreement (“Agreement”) is made and entered into this 27th day of December, 2006, by and between Cyberonics, Inc., a Delaware corporation, (“Company”) and Shawn P. Lunney, an individual residing in Texas (“Optionee”).

     Whereas, Optionee was employed by the Company and during such employment entered into agreement(s) dated November 1, 1996 with the Company granting options to Optionee , as amended from time to time (singularly or collectively, the “Option Agreement(s)”); and

     Whereas, under the Option Agreement(s) Optionee had a limited period of time to exercise outstanding, vested options under the Option Agreement(s) (singularly or collectively, the “Options”) which has previously been extended until December 31, 2006; and

     Whereas, the Options are currently unexercisable because an exercise of such options would violate applicable securities laws; and

     Whereas, the Company’s Board of Directors has authorized the Company to further extend the period for Optionee’s exercise of the Options to thirty (30) days after the exercise of such Options would no longer violate applicable securities laws, all on the conditions set forth in this Agreement;

     Now, Therefore, for a good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

     1. The Company agrees to execute amendments to the Option Agreement(s) extending the period for Optionee’s exercise of the Options to thirty (30) days from the date on which the exercise of such Options would no longer violate applicable securities laws, all as set forth in the form of agreement(s) attached hereto as Exhibit(s) A.

     2. For and in consideration of the Company’s agreement in Paragraph 1, but if and only if the Company removes all restrictions to Optionee’s exercise of the Options on or about the date that the exercise of such Options would no longer violate applicable securities laws, Optionee hereby releases, remises, acquits, satisfies, and forever discharges the Company and its directors, officers, employees, shareholders, counsel and agents acting in their capacity as employees or representatives of the Company from all, and all manner of, actions, disputes, causes of action, suits, debts, accounts, bills, interest, costs, agreements, judgments, executions, claims, counter-claims, cross claims, liabilities, losses, obligations and demands whatsoever, in law or in equity, at common law, statutory or otherwise, whether now existing or hereafter arising, known and unknown, that may arise or may have arisen, related in any way to the Option Agreement(s). This release shall be binding on the heirs, successors, and assigns of Optionee.

     3. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Texas, without regard to principles of conflict of law otherwise applicable to such determination.

     4. This Agreement contains the entire agreement relating to the subject matter hereof and supersedes all prior agreements, understandings, negotiations, and discussion, oral or written, related to such subject matter. There are no warranties, representations, assurances, agreements, arrangements, or understandings, oral or written, relating to the subject matter that are not fully expressed and provided for herein, and the parties shall not be bound by or liable for any alleged statement, assurance, warranty, representation, agreement, or understanding not so set forth.

     5. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, fully enforceable counterpart for all purposes hereof, but all of which shall be constitute one and the same instrument.

     IN WITNESS WHEREOF, the undersigned parties have executed this Agreement in one or more counterparts.

OPTIONEE		CYBERONICS, INC.
/s/ Shawn P. Lunney	By:	/s/ John A. Riccardi
Shawn P. Lunney		John A. Riccardi
		Vice President, Finance

Page 2

EXHIBIT A

Amendment to Stock Option Agreement and Notice

     This Amendment to Stock Option Agreement (the “Amendment”) is made on the ______ day of December, 2006 by and between Cyberonics, Inc., a Delaware corporation (the “Company”) and Shawn P. Lunney, an individual residing in Texas (“Optionee”).

     Whereas, the Company and Optionee entered into a Stock Option Agreement having a grant date of November 1, 1996, which agreement includes a Notice of Stock Option Grant (the “Agreement”); and

     Whereas, the Company and Optionee previously agreed to amend the Agreement to extend the period for Optionee to exercise the option granted under the Agreement (the “Option”) to December 31, 2006;

     Whereas, the Option is currently unexercisable because an exercise of such right would violate applicable securities laws; and

     Whereas, the Company’s Board of Directors has authorized the Company to extend the period for Optionee’s exercise of the Option to thirty (30) days after the exercise of such Option would no longer violate applicable securities laws, all on the conditions set forth in this Agreement;

     Now, Therefore, for a good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

     1. The paragraph entitled, “Termination Period,” under “Notice of Stock Option Grant” is deleted in its entirety, and the following is substituted therefor:

“The Option may be exercised within thirty (30) days after the date on which the exercise of such Option would no longer violate applicable securities laws.”

     2. This Amendment supersedes all prior agreements, amendments, understandings, negotiations, and discussion, oral or written, related to such subject matter.

     3. Except as expressly amended herein, the terms of the Agreement remain unchanged.

OPTIONEE		CYBERONICS, INC.
	By:
Shawn P. Lunney		John A. Riccardi
		Vice President, Finance

EX-10.44

Exhibit 10.44

CYBERONICS, INC.

INDEMNIFICATION AGREEMENT

     This Indemnification Agreement (“Agreement”) is made as of this 28th day of June, 1999, by and between Cyberonics, Inc., a Delaware corporation (the “Company”), and Alan J. Olsen (“Indemnitee”).

     WHEREAS, the Company and Indemnitee recognize the increasing difficulty in obtaining directors’ and officers’ liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance;

     WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited;

     WHEREAS, Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other officers and directors of the Company may not be willing to continue to serve as officers and directors without additional protection; and

     WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law.

     NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:

     1. Indemnification.

          (a) Third Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee’s

conduct was unlawful. The termination of any action or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that (i) Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or (ii) with respect to any criminal action or proceeding, Indemnitee had reasonable cause to believe that Indemnitee’s conduct was unlawful.

          (b) Proceedings By or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) and, to the fullest extent permitted by law, amounts paid in settlement, in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and its stockholders, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudicated by court order or judgment to be liable to the Company in the performance of Indemnitee’s duty to the Company and its stockholders unless and only to the extent that the court in which such action or proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine.

     2. Expenses; Indemnification Procedure.

          (a) Advancement of Expenses. The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action or proceeding referenced in Section l(a) or (b) hereof (but not amounts actually paid in settlement of any such action or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to Indemnitee within twenty (20) days following delivery of a written request therefor by Indemnitee to the Company.

          (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will be sought under this Agreement, Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). Notice shall be deemed received three business days after the

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date postmarked if sent by domestic certified or registered mail, properly addressed; otherwise notice shall be deemed received when such notice shall actually be received by the Company. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee’s power.

          (c) Procedure. Any indemnification and advances provided for in Section 1 and this Section 2 shall be made no later than forty-five (45) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company’s Certificate of Incorporation or By-laws providing for indemnification, is not paid in full by the Company within forty-five (45) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 12 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys’ fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Subsection 2(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties’ intention that if the Company contests Indemnitee’s right to indemnification, the question of Indemnitee’s right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct.

          (d) Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 3(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

          (e) Selection of Counsel. In the event the Company shall be obligated under Section 2(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by

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Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ his counsel in any such proceeding at Indemnitee’s expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee’s counsel shall be at the expense of the Company.

     3. Additional Indemnification Rights; Nonexclusivity.

          (a) Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company’s Certificate of Incorporation, the Company’s By-laws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its Board of Directors, an officer or other corporate agent, such changes shall be ipso facto, within the purview of Indemnitee’s rights and Company’s obligations, under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its Board of Directors, an officer or other corporate agent, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties’ rights arid obligations hereunder.

          (b) Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company’s Certificate of Incorporation, its By-laws, any agreement, any vote of stockholders or disinterested Directors, the Delaware Corporation Law or otherwise, both as to action in Indemnitee’s official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in such capacity at the time of any action, suit or other covered proceeding.

     4. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred by him in the investigation, defense, appeal or settlement of any civil or criminal action or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled.

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     5. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company’s right under public policy to indemnify Indemnitee.

     6. Officer and Director Liability Insurance. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company’s performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company’s directors, if Indemnitee is a director; or of the Company’s officers, if Indemnitee is not a director of the Company but is an officer; or of the Company’s key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the Company.

     7. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company’s inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 7. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms.

     8. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement:

          (a) Excluded Acts. To indemnify Indemnitee for any acts or omissions or transactions from which a director may not be relieved of liability under the applicable law.

          (b) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to

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indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors has approved the initiation or bringing of such suit; or

          (c) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or

          (d) Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to Indemnitee by an insurance carrier under a policy of officers’ and directors’ liability insurance maintained by the Company.

          (e) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.

     9. Construction of Certain Phrases.

          (a) For purposes of this Agreement, references to the “Company” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued.

          (b) For purposes of this Agreement, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to “serving at the request of the Company” shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner “not opposed to the best interests of the Company” as referred to in this Agreement.

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     10. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original.

     11. Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of Indemnitee and Indemnitee’s estate, heirs, legal representatives and assigns.

     12. Attorneys’ Fees. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all costs and expenses, including reasonable attorneys’ fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all costs and expenses, including reasonable attorneys’ fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee’s counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee’s material defenses to such action were made in bad faith or were frivolous.

     13. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and acknowledged in writing as received by the addressee, on the date of such receipt, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice.

     14. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of Delaware.

     15. Choice of Law. This Agreement shall be governed by and its provisions construed in accordance with the laws of the State of Delaware, as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware.

     16. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable to corporation effectively to bring suit to enforce such rights.

     17. Continuation of Indemnification. All agreements and obligations of the Company contained herein shall continue during the period that Indemnitee is a director, officer or agent of the

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Company and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, by reason of the fact that Indemnitee was serving in the capacity referred to herein.

     18. Amendment and Termination. Subject to Section 17, no amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

CYBERONICS, INC.
By:	/s/ Robert P. Cummins
Title:	CEO
Address:	16511 Space Center Blvd., Suite 600 Houston, TX 77058

AGREED TO AND ACCEPTED:

INDEMNITEE:

/s/ Alan J. Olsen 7/30/99 Alan J. Olsen

Address:	2500 Aqua Vista Blvd.
	Ft. Lauderdale, FL 33301

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EX-10.46

Exhibit 10.46

CYBERONICS, INC.

OFFICER STOCK OPTION PLAN AGREEMENT

I. NOTICE OF STOCK OPTION GRANT

     George E. Parker III

     You have been granted a Nonstatutory Stock Option to purchase Common Stock of the Company, subject to the terms and conditions of this Agreement, as follows:

Date of Grant	July 14, 2003
Vesting Commencement Date	July 14, 2003
Exercise Price per Share		$23.72
Total Number of Shares Granted		150,000
Total Exercise Price	$	3,558,000
Term/Expiration Date:	July 14, 2013
Vesting Schedule:

     This Option shall vest and may be exercised, in whole or in part, in accordance with the following schedule:

     l/60^th of the Shares subject to the Option shall vest each month after the Vesting Commencement Date, so that the Option shall be fully vested five (5) years from the Date of Grant, subject to the Optionee continuing to be a Service Provider on such dates.

     Termination Period

     This Option may be exercised for ninety (90) days after Optionee ceases to be a Service Provider in accordance with Section 7 of this Agreement. Upon the death or Disability of the Optionee, this Option may be exercised for twelve (12) months after the Optionee ceases to be a Service Provider in accordance with Sections 8 and 9 of this Agreement. In no event shall this Option be exercised later than the Term/Expiration Date provided.

II. AGREEMENT

     1. Definitions. As used herein, the following definitions shall apply:

          (a) “Agreement” means this stock option agreement between the Company and Optionee evidencing the terms and conditions of this Option.

          (b) “Applicable Laws” means the requirements relating to the administration of stock options under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction that may apply to this Option.

          (c) “Board” means the Board of Directors of the Company or any committee of the Board that has been designated by the Board to administer this Agreement.

          (d) “Code” means the Internal Revenue Code of 1986, as amended.

          (e) “Common Stock” means the common stock of the Company.

          (f) “Company” means Cyberonics, Inc., a Delaware corporation.

          (g) “Consultant” means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity.

          (h) “Director” means a member of the Board.

          (i) “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code.

          (j) “Employee” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

          (k) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          (l) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

               (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

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               (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the day of determination; or

               (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board.

          (m) “Nonstatutory Stock Option” means an Option not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

          (n) Notice of Grant” means a written notice, in Part I of this Agreement, evidencing certain the terms and conditions of this Option grant. The Notice of Grant is part of the Option Agreement.

          (o) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

          (p) “Option” means this stock option.

          (q) “Optioned Stock” means the Common Stock subject to this Option.

          (r) “Optionee” means the person named in the Notice of Grant or such person’s successor.

          (s) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

          (t) “Service Provider” means an Employee, Director or Consultant.

          (u) “Share” means a share of the Common Stock, as adjusted in accordance with Section 10 of this Agreement.

          (v) “Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.

     2. Grant of Option. The Board hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement the Option to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the “Exercise Price”), subject to the terms and conditions of this Agreement.

     3. Exercise of Option.

          (a) Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of this Agreement.

          (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the “Exercise Notice”), which shall state the election to exercise

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the Option, the number of Shares in respect of which the Option is being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company. The Exercise Notice shall be completed by the Optionee and delivered to Secretary of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price.

          (c) Legal Compliance. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares.

     4. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:

          (a) cash or check;

          (b) promissory note;

          (c) consideration received by the Company under a cashless exercise program implemented by the Company; or

          (d) surrender of other Shares, provided Shares acquired directly from the Company, (i) have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares.

     5. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of this Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

     6. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the terms of this Agreement.

     7. Termination of Relationship as a Service Provider. If the Optionee ceases to be a Service Provider (other than for death or Disability), this Option may be exercised for a period of ninety (90) days after the date of such termination (but in no event later than the expiration date of this Option as set forth in the Notice of Grant) to the extent that the Option is vested on the date of such termination. To the extent that the Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

     8. Disability of Optionee. If the Optionee ceases to be a Service Provider as a result of the Optionee’s Disability, this Option may be exercised for a period of twelve (12) months after the date of such termination (but in no event later than the expiration date of this Option as set forth in the Notice of Grant) to the extent that the Option is vested on the date of such termination. To the extent

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that Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

     9. Death of Optionee. If the Optionee dies while a Service Provider, the Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration date of this Option as set forth in the Notice of Grant), by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the Optionee was entitled to exercise the Option at the date of death. If, after death, the Optionee’s estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate.

     10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale.

          (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by this Option, as well as the price per share of Common Stock covered by this Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration,” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to this Option.

          (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Board shall notify Optionee as soon as practicable prior to the effective date of such proposed transaction. The Board in its discretion may provide for the Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. To the extent it has not been previously exercised, the Option will terminate immediately prior to the consummation of such proposed.

          (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, the Option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If the Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify the Optionee in writing or electronically that the Option shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately

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prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets.

          (d) Change of Control. In the event of a Change of Control (as defined below), the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable, and any Company reacquisition option applicable to any Shares acquired upon exercise of an Option shall lapse as to all such Shares. If an Option becomes fully vested and exercisable as the result of a Change of Control, the Administrator shall notify the Optionee in writing or electronically prior to the Change of Control that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For purposes of this Plan, a “Change of Control” means the happening of any of the following events:

               (1) When any “person,” as such term is used in Sections I3(d) and 14(d) of the Exchange Act, other than the Company, a subsidiary of the Company or a Company employee benefit plan, including any trustee of such plan acting as trustee, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of directors; or

               (2) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets; or

               (3) A change in the composition of the Board of Directors of the Company, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” shall mean directors who either (A) are director’s of the Company as of the date the Plan is approved by the shareholders, or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company).

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     11. Notices. Any notice to be given to the Company hereunder shall be in writing and shall be addressed to the Company at its then current principal executive office or to such other address as the Company may hereafter designate to the Optionee by notice as provided in this Section. Any notice to be given to the Optionee hereunder shall be addressed to the Optionee at the address set forth beneath his signature hereto, or at such other address as the Optionee may hereafter designate to the Company by notice as provided herein. A notice shall be deemed to have been duly given when personally delivered or mailed by registered or certified mail to the party entitled to receive it.

     12. Withholding Taxes. Optionee agrees to make appropriate arrangements with the Company (or the Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all federal, state, and local income and employment tax withholding requirements applicable to the Option exercise. Optionee acknowledges and agrees that the Company may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise.

     13. Entire Agreement; Governing Law. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes in its entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of Texas.

     14. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUES ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.

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     By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of this Agreement. Optionee has reviewed this Agreement in its entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of this Agreement, Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions relating to this Agreement, Optionee further agrees to notify the Company upon any change in the residence address indicated below.

OPTIONEE	CYBERONICS, INC.
/s/ George E. Parker	/s/ Robert P. Cummins
Signature	Robert P. Cummins
George E. Parker	7.14.03
George E. Parker III	Chairman & Chief Executive Officer
15 INVERNESS CT
Address
Cheshire, CT 06410
City, State, Zip Code
216-58-4911       7/21/03
Social Security Number

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EXHIBIT A

CYBERONICS, INC. EXERCISE NOTICE

Cyberonics, Inc.
100 Cyberonics Blvd.
Houston, Texas 77058

Attention:

     1. Exercise of Option. Effective as of today, ______, 20____________, the undersigned (“Purchaser”) hereby elects to purchase _____ shares (the “Shares”) of the Common Stock of Cyberonics, Inc. (the “Company”) under and pursuant to the Stock Option Agreement dated [_______________] (the “Option Agreement”). The purchase price for the Shares shall be [$_________], as required by the Option Agreement.

     2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price For the Shares.

     3. Representations of Purchaser. Purchaser acknowledges that Purchaser has received, read and understood the Option Agreement and agrees to abide by and be bound by their terms and conditions.

     4. Rights as Shareholder. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 10 of the Option Agreement.

     5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser’s purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice.

     6. Successors and Assigns. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and this Exercise Notice shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Exercise Notice shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns.

     7. Interpretation. Any dispute regarding the interpretation of this Exercise Notice shall be submitted by Optionee or by the Company forthwith to the Board which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Board shall be final and binding on all parties.

     8. Entire Agreement; Governing Law. The Option Agreement is incorporated herein by reference. This Agreement, and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser’s interest except by means of a writing signed by the Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, of Texas.

Submitted by:	Accepted by:
OPTIONEE	CYBERONICS, INC,
Signature
Print Name
Address	Address
	Date Received:

EX-10.48

Exhibit 10.48

FIRST AMENDMENT TO EMPLOYMENT AGREEMENT

     This First Amendment to Employment Agreement is entered into and effective as of June 15, 2006 (the Effective Date”), by and between Cyberonics, Inc. (the “Company”) and George E. Parker (“Employee”).

RECITALS

     WHEREAS, the Company and Employee previously entered into an Employment Agreement dated July 14, 2003 (the “Agreement”), which Agreement remains in full force and effect as of this date. The Company and Employee now desire to amend the Agreement as provided herein.

     NOW, THEREFORE, in consideration of the mutual promises set forth in this Amendment and other good and valuable consideration, the parties agree as follows:

TERMS

1. Section 2 of the Agreement (“Term”) is deleted in its entirety and the following provision is inserted therefor:

“Subject to the terms and conditions of this Agreement, unless sooner terminated pursuant to Section 5 of this Agreement, Employee shall be employed by the Company commencing on the Effective Date and terminating on June 1, 2009 (the “Term”). Termination of this Agreement shall not alter or impair any rights of Employee (or his beneficiaries or heirs) with respect to payments, benefits or other rights provided by the terms of this Agreement, arising before or after the end of the Term.”

2. Except as expressly modified by this Amendment, the provisions of the Agreement remain unchanged and in full force and effect.

     IN WITNESS WHEREOF the parties have caused the Amendment to be executed in one or more counterparts, each of which shall be deemed to be an original.

Cyberonics		Employee:
By:	/s/ Robert P. Cummins	/s/ George E. Parker
	Robert P. Cummins	George E. Parker
	Chairman of the Board of Directors and
	Chief Executive Officer

EX-10.49

Exhibit 10.49

CYBERONICS, INC.

STAND-ALONE STOCK OPTION AGREEMENT

I. NOTICE OF STOCK OPTION GRANT

   Richard Rudolph

     You have been granted a Nonstatutory Stock Option to purchase Common Stock of the Company, subject to the terms and conditions of this Agreement, as follows:

Date of Grant	August 23, 2001
Vesting Commencement Date	August 23, 2001
Exercise Price per Share	$ 15.56
Total Number of Shares Granted	150,000
Total Exercise Price	$2,265,000
Term/Expiration Date:	August 23, 2011
Vesting Schedule:

     This Option shall vest and may be exercised, in whole or in part, in accordance with the following schedule:

     l/60^th of the Shares subject to the Option shall vest each month after the Vesting Commencement Date, so that the Option shall be fully vested five (5) years from the Date of Grant, subject to the Optionee continuing to be a Service Provider on such dates.

     Termination Period

     This Option may be exercised for ninety (90) days after Optionee ceases to be a Service Provider in accordance with Section 7 of this Agreement. Upon the death or Disability of the Optionee, this Option may be exercised for twelve (12) months after the Optionee ceases to be a Service Provider in accordance with Sections 8 and 9 of this Agreement. In no event shall this Option be exercised later than the Term/Expiration Date provided.

II. AGREEMENT

     1 . Definitions. As used herein, the following definitions shall apply:

          (a) “Agreement” means this stock option agreement between the Company and Optionee evidencing the terms and conditions of this Option.

          (b) “Applicable Laws” means the requirements relating to the administration of stock options under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction that may apply to this Option.

          (c) “Board” means the Board of Directors of the Company or any committee of the Board that has been designated by the Board to administer this Agreement.

          (d) “Code” means the Internal Revenue Code of 1986, as amended.

          (e) “Common Stock” means the common stock of the Company.

          (f) “Company” means Cyberonics, Inc., a Delaware corporation.

          (g) “Consultant” means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity.

          (h) “Director” means a member of the Board.

          (i) “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code.

          (j) “Employee” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

          (k) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          (1) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

               (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

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               (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the day of determination; or

               (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board.

          (m) “Nonstatutory Stock Option” means an Option not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder,

          (n) “Notice of Grant” means a written notice, in Part I of this Agreement, evidencing certain the terms and conditions of this Option grant. The Notice of Grant is part of the Option Agreement.

          (o) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

          (p) “Option” means this stock option.

          (q) “Optioned Stock” means the Common Stock subject to this Option.

          (r) “Optionee” means the person named in the Notice of Grant or such person’s successor.

          (s) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

          (t) “Service Provider” means an Employee, Director or Consultant.

          (u) “Share” means a share of the Common Stock, as adjusted in accordance with Section 10 of this Agreement.

          (v) “Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.

     2. Grant of Option. The Board hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement the Option to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the “Exercise Price”), subject to the terms and conditions of this Agreement.

     3. Exercise of Option.

          (a) Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of this Agreement.

          (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the “Exercise Notice”), which shall state the election to exercise

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the Option, the number of Shares in respect of which the Option is being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company. The Exercise Notice shall be completed by the Optionee and delivered to Secretary of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price.

          (c) Legal Compliance. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares.

     4. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:

          (a) cash or check;

          (b) promissory note;

          (c) consideration received by the Company under a cashless exercise program implemented by the Company; or

          (d) surrender of other Shares, provided Shares acquired directly from the Company, (i) have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares.

     5. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of this Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

     6. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the terms of this Agreement.

     7. Termination of Relationship as a Service Provider, If the Optionee ceases to be a Service Provider (other than for death or Disability), this Option may be exercised for a period of ninety (90) days after the date of such termination (but in no event later than the expiration date of this Option as set forth in the Notice of Grant) to the extent that the Option is vested on the date of such termination. To the extent that the Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

     8. Disability of Optionee. If the Optionee ceases to be a Service Provider as a result of the Optionee’s Disability, this Option may be exercised for a period of twelve (12) months after the date of such termination (but in no event later than the expiration date of this Option as set forth in the Notice of Grant) to the extent that the Option is vested on the date of such termination. To the extent

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that Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

     9. Death of Optionee. If the Optionee dies while a Service Provider, the Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration date of this Option as set forth in the Notice of Grant), by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the Optionee was entitled to exercise the Option at the date of death. If, after death, the Optionee’s estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate.

     10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale.

          (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by this Option, as well as the price per share of Common Stock covered by this Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to this Option.

          (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Board shall notify Optionee as soon as practicable prior to the effective date of such proposed transaction. The Board in its discretion may provide for the Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. To the extent it has not been previously exercised, the Option will terminate immediately prior to the consummation of such proposed.

          (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, the Option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If the Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify the Optionee in writing or electronically that the Option shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately

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prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets.

          (d) Change of Control. In the event of a Change of Control (as defined below), the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable, and any Company reacquisition option applicable to any Shares acquired upon exercise of an Option shall lapse as to all such Shares. If an Option becomes fully vested and exercisable as the result of a Change of Control, the Administrator shall notify the Optionee in writing or electronically prior to the Change of Control that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For purposes of this Plan, a “Change of Control” means the happening of any of the following events:

               (1) When any “person,” as such term is used in Sections 13(d) and 14(d) of the Exchange Act, other than the Company, a subsidiary of the Company or a Company employee benefit plan, including any trustee of such plan acting as trustee, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of directors; or

               (2) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets; or

               (3) A change in the composition of the Board of Directors of the Company, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the date the Plan is approved by the shareholders, or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company).

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     11. Notices. Any notice to be given to the Company hereunder shall be in writing and shall be addressed to the Company at its then current principal executive office or to such other address as the Company may hereafter designate to the Optionee by notice as provided in this Section. Any notice to be given to the Optionee hereunder shall be addressed to the Optionee at the address set forth beneath his signature hereto, or at such other address as the Optionee may hereafter designate to the Company by notice as provided herein. A notice shall be deemed to have been duly given when personally delivered or mailed by registered or certified mail to the party entitled to receive it.

     12. Withholding Taxes. Optionee agrees to make appropriate arrangements with the Company (or the Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all federal, state, and local income and employment tax withholding requirements applicable to the Option exercise. Optionee acknowledges and agrees that the Company may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise.

     13. Entire Agreement; Governing Law. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes in its entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of Texas.

     14. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUES ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.

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     By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of this Agreement. Optionee has reviewed this Agreement in its entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of this Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions relating to this Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below.

OPTIONEE	CYBERONICS, INC.
Signature	Robert P. Cummins
/s/ Richard Rudolph	/s/ Robert P. Cummins
Richard Rudolph	Chairman & Chief Executive Officer
Residence Address
15118 Blossom Bay Drive
Houston, TX 77059

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EXHIBIT A

CYBERONICS, INC.

EXERCISE NOTICE

Cyberonics, Inc.
16511 Space Center Boulevard #600
Houston, Texas 77062

Attention:

     1. Exercise of Option. Effective as of today,                     , 20__ , the undersigned (“Purchaser”) hereby elects to purchase _____ shares (the “Shares”) of the Common Stock of Cyberonics, Inc. (the “Company”) under and pursuant to the Stock Option Agreement dated [                    ] (the “Option Agreement”). The purchase price for the Shares shall be [$      ], as required by the Option Agreement.

     2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price for the Shares.

     3. Representations of Purchaser. Purchaser acknowledges that Purchaser has received, read and understood the Option Agreement and agrees to abide by and be bound by their terms and conditions.

     4. Rights as Shareholder. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 10 of the Option Agreement.

     5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser’s purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice.

     6. Successors and Assigns. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and this Exercise Notice shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Exercise Notice shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns.

     7. Interpretation. Any dispute regarding the interpretation of this Exercise Notice shall be submitted by Optionee or by the Company forthwith to the Board which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Board shall be final and binding on all parties.

     8. Entire Agreement; Governing Law. The Option Agreement is incorporated herein by reference. This Agreement, and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser’s interest except by means of a writing signed by the Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, of Texas.

Submitted by:	Accepted by:
OPTIONEE	CYBERONICS, INC.
Signature
Print Name
Address	Address
	Date Received:

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EX-10.51

Exhibit 10.51

EMPLOYEE RESTRICTED STOCK AGREEMENT

     THIS RESTRICTED STOCK AGREEMENT (this “Agreement”) is made effective as of July 22, 2005 (the “Grant Date”), between CYBERONICS, INC., a Delaware corporation (the “Company”), and Richard Rudolph (the “Employee”).

     1. Award. Pursuant to the CYBERONICS, INC. 2005 STOCK PLAN (the “Plan”), as of the Grant Date 11,933 shares (the “Restricted Shares”) of the Company’s common stock shall be issued as hereinafter provided in the Employee’s name subject to certain restrictions thereon. The Employee hereby acknowledges receipt of a copy of the Plan and the Prospectus relating thereto pursuant to the Securities Act of 1933, and agrees that this award of Restricted Shares shall be subject to all of the terms and provisions of the Plan, including future amendments thereto, if any, pursuant to the terms thereof. All dividends and other distributions on a Restricted Share shall be subject to the same Forfeiture Restrictions (as hereinafter defined) as are applicable to such Restricted Share.

     2. Restricted Shares. The Employee hereby accepts the Restricted Shares when issued and agrees with respect thereto as follows:

     (a) Forfeiture Restrictions. The Restricted Shares may not be sold, assigned, pledged, exchanged, hypothecated or otherwise transferred, encumbered or disposed of to the extent then subject to the Forfeiture Restrictions, and in the event of termination of the Employee’s service relationship with the Company (as provided in Section 5) for any reason other than as provided in Section 2(b), the Employee shall, for no consideration, forfeit to the Company all Restricted Shares then subject to the Forfeiture Restrictions. The prohibition against transfer and the Employee’s obligation to forfeit and surrender the Restricted Shares to the Company upon the Employee’s termination of service are herein referred to as the “Forfeiture Restrictions.” The Forfeiture Restrictions shall be binding upon and enforceable against any transferee of Restricted Shares.

     (b) Vesting/Lapse of Forfeiture Restrictions. The Forfeiture Restrictions shall lapse in full as to all of the Restricted Shares on the earlier of (i) the first anniversary of the Grant Date (ii) a Change of Control (as defined in the Plan) or (iii) the termination of the Employee’s service relationship with the Company due to the Employee’s death.

     (c) Certificates. A certificate evidencing the Restricted Shares shall be issued by the Company in the Employee’s name, pursuant to which the Employee shall have all of the rights of a shareholder of the Company with respect to the Restricted Shares, including, without limitation, voting rights and the right to receive dividends (provided, however, that dividends paid in shares of the Company’s stock shall be subject to the Forfeiture Restrictions). The Employee may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the stock until the Forfeiture Restrictions with respect to such shares have expired, and a breach of the terms of this Agreement shall

cause a forfeiture of all then remaining Restricted Shares. The certificate shall contain an appropriate endorsement reflecting the Forfeiture Restrictions. The certificate shall be delivered upon issuance to the Secretary of the Company or to such other depository as may be designated by the Committee as a depository for safekeeping until the forfeiture of such Restricted Shares occurs or the Forfeiture Restrictions lapse pursuant to the terms of the Plan and this award. On the date of this Agreement, the Employee shall, if required by the Committee, deliver to the Company a stock power, endorsed in blank, relating to the Restricted Shares. Upon the lapse of the Forfeiture Restrictions without forfeiture of the Restricted Shares, the Company shall cause a new certificate or certificates to be issued without legend (except for any legend required pursuant to applicable securities laws or any other agreement to which the Employee is a party) in the name of the Employee in exchange for the certificate evidencing the Restricted Shares.

     (d) Corporate Acts. The existence of the Restricted Shares shall not affect in any way the right or power of the Board of Directors of the Company or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding. The prohibitions of Section 2(a) hereof shall not apply to the transfer of Restricted Shares pursuant to a plan of reorganization of the Company, but the stock, securities or other property received in exchange therefor shall also become subject to the Forfeiture Restrictions and provisions governing the lapsing of such Forfeiture Restrictions applicable to the original Restricted Shares for all purposes of this Agreement and the certificates representing such stock, securities or other property shall be legended to show such restrictions.

     3. Withholding of Tax. To the extent that the receipt of the Restricted Shares or the lapse of any Forfeiture Restrictions results in compensation income to the Employee for federal or state income tax purposes, the Employee is responsible for taxes due from Employee on such compensation income. In the event that the Employee fails to reimburse the Company for amounts the Company is required to pay as withholding taxes on behalf of the Employee, the Company has the right to withhold from amounts otherwise due to the Employee, and the Employee hereby authorizes such withholding, an amount equal to the withholding taxes paid by the Company by reason of compensation income to the Employee resulting under this Agreement.

     4. Status of Stock. The Employee agrees that the Restricted Shares issued under this Agreement will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable federal or state securities laws. The Employee also agrees that (i) the certificates representing the Restricted Shares may bear such legend or legends as the Committee deems appropriate in order to reflect the Forfeiture Restrictions and to assure compliance with applicable securities laws, (ii) the Company may refuse to register the transfer of the Restricted Shares on the stock transfer records of the Company if such proposed transfer would constitute a violation of the Forfeiture Restrictions or, in the opinion of counsel satisfactory to the Company,

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of any applicable securities law, and (iii) the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the Restricted Shares.

     5. Service Relationship. For purposes of this Agreement, the Employee shall be considered to be in service to the Company as long as the Employee remains an Employee, a Consultant or a Employee (as those terms are defined in the Plan). Nothing in the adoption of the Plan, nor the award of the Restricted Shares thereunder pursuant to this Agreement, shall confer upon the Employee the right to continued service by or with the Company.

     6. Notices. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of the Employee, such notices or communications shall be effectively delivered if hand delivered to the Employee at his principal place of employment or if sent by registered or certified mail to the Employee at the last address the Employee has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices.

     7. Amendment. This Agreement may not be modified in any respect by any verbal statement, representation or agreement made by the Employee or by any employee, officer, or representative of the Company or by any written agreement unless signed by the Employee and by an officer of the Company who is expressly authorized by the Company to execute such document.

     8. Binding Effect. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under the Employee.

[This space is intentionally left blank.]

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     9. Controlling Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas.

     IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by an officer thereunto duly authorized, and the Employee has executed this Agreement, all effective as of the Grant Date.

CYBERONICS, INC.
By:	/s/ Pamela B. Westbrook
Name:	Pamela B. Westbrook
Title:	Vice President, Finance and Administration, Chief Financial Officer
EMPLOYEE
/s/ Richard Rudolph
Richard Rudolph

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EX-10.52

Exhibit 10.52

EMPLOYMENT AGREEMENT

     This Employment Agreement (the “Agreement”), entered into effective as of June 15, 2006 (the “Effective Date”), by and between Cyberonics, Inc. (the “Company”) and Richard L. Rudolph, M.D. (“Employee”).

WITNESSETH:

     WHEREAS, the Company desires to secure the experience, abilities and service of Employee by employing Employee upon the terms and conditions specified herein; and

     WHEREAS, Employee is willing to enter into this Agreement upon the terms and conditions specified herein;

     NOW, THEREFORE, in consideration of the premises, terms and provisions set forth herein, the mutual benefits to be gained by the performance thereof and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

     SECTION 1. Employment. The Company hereby employs Employee, and Employee hereby accepts such employment, all upon the terms and conditions set forth herein,

     SECTION 2. Term. Subject to the terms and conditions of this Agreement, unless sooner terminated pursuant to Section 5 of this Agreement, Employee shall be employed by the Company commencing on the Effective Date and terminating on June 1, 2009 (the “Term”). Termination of this Agreement shall not alter or impair any rights of Employee (or his beneficiaries or heirs) with respect to payments, benefits or other rights provided by the terms of this Agreement, arising before or after the end of the Term.

     SECTION 3. Duties. Responsibilities and Location.

     A. Capacity. Employee shall serve as the Vice President, Clinical and Medical Affairs and Chief Medical Officer of the Company and shall report to the Chief Executive Officer of the Company.

     B. Full-Time Duties. Employee shall devote his full business time, attention and energies to the business of the Company. Notwithstanding anything herein to the contrary, Employee shall be allowed to (i) manage Employee’s personal investments and affairs and, (ii) with the written consent of the Chief Executive Officer of the Company, serve on boards or committees of civic or charitable organizations or trade associations, provided that such activities do not materially interfere with his performance of the duties and responsibilities of his position specified in Section 3.A.

     C. Offices. Employee’s primary place of work shall be at the principle executive offices of the Company located in the greater Houston, Texas

metropolitan area, but Employee shall be required to travel on a basis consistent with his position.

     SECTION 4. Compensation.

     A. Base Salary. During the Term, Employee shall receive an annual salary of $300,000 (the “Base Salary”) payable in accordance with the Company’s general payroll practices. Employee’s Base Salary shall be reviewed prior to the beginning of each fiscal year of the Company for increase in the discretion of the Compensation Committee of the Board of Directors (“Compensation Committee”); provided, however, that the Base Salary, as it may be increased at any time, may not thereafter be decreased.

     B. Annual Incentive Bonus. During the Term, Employee shall be eligible to participate in the Annual CEO Direct Reports Bonus Plan, with a target bonus of 50% of Employee’s annual Base Salary. A bonus, if earned, shall be payable as soon as reasonably practical following the completion of the applicable fiscal year. Bonuses for Employee shall be based on the achievement of such Company, departmental and/or individual performance goals that may be established for the applicable bonus year by the Compensation Committee.

     C. Annual Overachievement Bonus. During the Term, Employee shall be eligible to participate in the Annual CEO Direct Reports Overachievement Bonus Plan as determined by the Compensation Committee. Overachievement Bonuses shall be based on the Company’s overachievement of such Company, departmental and/or individual performance goals that may be established for the applicable bonus year by the Compensation Committee.

     D. Equity Compensation. Employee will be eligible for grants of Company stock options (the “Options”) and other equity awards in the discretion of the Compensation Committee.

     E. General Benefits. Upon satisfying applicable eligibility requirements, if any, Employee will be eligible to participate in the Company’s qualified 401(k) plan, group health, group life insurance, accidental death and dismemberment, travel accident, long-term disability and short-term disability plans and other welfare and similar plans and vacation policies under terms generally applicable to other similarly situated employees of the Company and shall be eligible to receive all perquisites and other benefits provided or made available by the Company to other similarly situated executives of the Company.

     F. Reimbursements. Employee shall be entitled to receive prompt reimbursement by the Company in accordance with its business reimbursement policy in effect from time to time for all reasonable, out-of-pocket business expenses incurred by him in performing his duties under this Agreement upon the submission by Employee of such accounts and records as may be reasonably required under the Company’s business reimbursement policy.

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     SECTION 5. Termination of Employment. Notwithstanding the provisions of Section 2, Employee’s employment hereunder may terminate under any of the following conditions:

     A. Death. Employee’s employment under this Agreement shall terminate automatically upon his death.

     B. Disability. Employee’s employment under this Agreement may be terminated due to his Disability. “Disability” shall mean Employee’s inability to substantially perform his duties hereunder for any period of at least 180 consecutive days due to a physical or mental incapacity. The date of termination due to Disability shall be the date Employee elects to terminate his employment service due to such Disability or, if earlier, the date the Board determines that Employee has met the definition of Disability and given written notice of such termination to Employee.

     C. Termination by Company Without Cause. The Company may terminate Employee’s employment hereunder without Cause (as hereinafter defined) on 30 days’ prior written notice to Employee.

     D. Termination by Company for Cause. Employee’s employment hereunder may be terminated for Cause by the Company. For purposes of this Agreement, “Cause” shall mean (i) the willful and continued failure by Employee to substantially perform Employee’s duties with the Company (other than any such failure resulting from Employee’s incapacity due to physical or mental illness), (a) an act or acts of dishonesty taken by Employee and intended to result in personal enrichment of Employee at the expense of the Company, (iii) willful violation by Employee of Employee’s material obligations under this Agreement, (iv) willful violation by Employee of a material policy of the Company, including its policies regarding professional and ethical conduct, (v) Employee’s commission of one or more acts that constitute a felony, (vi) Employee is publicly censured by the Securities Exchange Commission, or (vii) Employee commits one or more acts of fraud as regards the Company. For purposes of clause (i) of this definition, no act, or failure to act, on Employee’s part shall be deemed “willful” unless done, or omitted to be done, by Employee not in good faith and without reasonable belief that Employee’s act, or failure to act, was in the best interest of the Company. The determination of whether Cause exists must be made by a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors of the Company.

     E. Termination by Employee. Employee may terminate his employment hereunder at any time on 30 days’ prior written notice to the Board.

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     SECTION 6. Payments Upon Termination.

     A. Upon termination of Employee’s employment for any reason prior to the expiration of the Term, the Company shall be obligated to pay, and Employee shall be entitled to receive:

     1. all accrued and unpaid Base Salary to the date of termination;

     2. any earned, but unpaid, bonuses for the bonus year ending prior to the date of termination;

     3. all incurred but unreimbursed business expenses for which Employee is entitled to reimbursement; and

     4. any benefits to which he is entitled under the terms of any applicable employee benefit plan or program, or applicable law.

     B. Upon termination of Employee’s employment pursuant to Section 5.C., the Company shall be obligated to pay or provide, and Employee’s estate or beneficiary shall be entitled to receive:

     1. all of the amounts and benefits described in Section 6.A.; and

     2. either (a) a lump sum payment equal to 1.5 times the sum of (i) Employee’s Base Salary, plus (ii) the most recent annual bonus earned by Employee or (b) a lump sum payment equal to 1.5 times Employee’s Base Salary and, solely for purposes of determining Employee’s vesting under any Options, the number of shares that would become vested under such Options during the 12-month period following Employee’s termination date if Employee’s employment had continued during such period shall become vested on his termination of employment date, whichever of (a) or (b) is elected by Employee in writing to the Company within five days of his termination date.

     C. In the event of any termination of employment under Section 5, Employee shall be under no obligation to seek other employment and there shall be no offset against amounts due Employee under this Agreement on account of any remuneration attributable to any subsequent employment or self-employment that he may obtain.

     D. The Company and Employee have previously or contemporaneously with this Agreement entered into a Severance Agreement which provides certain payments and benefits to Employee upon a qualified termination of employment in connection with a change of control of the Company. Notwithstanding anything in this Agreement to the contrary, to the extent Employee is entitled to receive any severance payment or benefits under the Severance Agreement any

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severance payment or benefits to which Employee is otherwise entitled to receive under this Agreement shall be reduced or offset by the severance payment or benefit payable under the Severance Agreement in such manner as is appropriate, as determined in good faith by the Board, to prevent a duplication of such payment and benefits.

     SECTION 7. Indemnification. The Company agrees to indemnify Employee to the fullest extent permitted by applicable law with respect to any acts or non-acts he may have committed during the period which he was an officer, director and/or employee of the Company or any subsidiary or affiliate thereof, or of any other entity of which he served as an officer, director or employee at the request of the Company.

     SECTION 8. Covenants of Employee. Employee covenants as follows:

     A. Confidentiality. During and after his employment with the Company and its affiliates, Employee will hold in confidence all confidential information and will not disclose it to any person other than in connection with the performance of his duties and obligations hereunder, except with the specific prior written consent of the Board of Directors or the Chief Executive Officer; provided, however, that the parties agree that this Agreement does not prohibit the disclosure of confidential information where applicable law requires, including, but not limited to, in response of subpoenas and/or orders of a governmental agency or court of competent jurisdiction. In the event that Employee is requested or becomes legally compelled under the terms of a subpoena or order issued by a court of competent jurisdiction or by a governmental body to make any disclosure of confidential information, Employee agrees that he will (i) immediately provide the Company with written notice of the existence, terms and circumstances, surrounding such request(s) so that the Company may seek an appropriate protective order or other appropriate remedy, (ii) cooperate with the Company in its efforts to decline, resist or narrow such requests and (iii) if disclosure of such confidential information is required in the opinion of counsel, exercise reasonable efforts to obtain an order or other reliable assurance that confidential treatment will be accorded to such disclosed information. “Confidential information” means any and all intellectual property of the Company (or any of its affiliates), including but not limited to: (a) trade secrets concerning the business and affairs of the Company (or any of its affiliates), product specifications, data, know-how, formulae, compositions, processes, designs, sketches, photographs, graphs, drawings, samples, inventions and ideas, past, current, and planned research and development, current and planned manufacturing or distribution methods and processes, customer lists, current and anticipated customer requirements, price lists, market studies, business plans, computer software and programs (including object code and source code), computer software and database technologies, systems, structures, and architectures (and related formulae, compositions, processes, improvements, devices, know-how, inventions, discoveries, concepts, ideas, designs, methods and information), and any other information, however documented, that is a trade secret under federal, state or other applicable law; and (b) information concerning

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the business and affairs of the Company (or any of its affiliates) (which includes historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, the names and backgrounds of key personnel, personnel training and techniques and materials), however documented; and notes, analysis, compilations, studies, summaries, and other material prepared by or for the Company (or any of its affiliates) containing or based, in whole or in part, on any information included in the foregoing.

     B. Trade Secrets. Any trade secrets of the Company will be entitled to all of the protections and benefits under the federal and state trade secret and intellectual property laws and any other applicable law. If any information that the Company deems to be a trade secret is found by a court of competent jurisdiction not to be a trade secret for purposes of this Agreement, such information will, nevertheless, be considered confidential information for purposes of this Agreement, so long as it otherwise meets the definition of confidential information. Employee hereby waives any requirement that the Company submit proof of the economic value of any trade secret or post a bond or other security.

     C. Proprietary Items. Employee will not remove from the Company’s premises (except to the extent such removal is for purposes of the performance of Employee’s duties at home or while traveling, or except as otherwise specifically authorized by the Company) any document, record, notebook, plan, model, component, device, or computer software or code, whether embodied in a disk or in any other form belonging to the Company or used in the Company’s business (collectively, the “Proprietary Items”). All of the Proprietary Items, whether or not developed by Employee, are the exclusive property of the Company. Upon termination of his employment, or upon the request of the Company during the Term, Employee will return to the Company all of the Proprietary Items and confidential information in Employee’s possession or subject to Employee’s control, and Employee shall not retain any copies, abstracts, sketches, or other physical embodiment, including electronic or otherwise, of any of the Proprietary Items or confidential information,

     D. Non-Competition and Non-Interference. During the period of his employment with the Company or its affiliates and for the one-year period after the termination of his employment with the Company and its affiliates, Employee will not, directly or indirectly:

     1. without the express prior written consent of the Board of Directors, own an interest in, manage, operate, join, control, lend money or render financial or other assistance to or participate in or be connected with, as an officer, employee, partner, stockholder, consultant or otherwise, any person that competes with the Company in the field of neurostimulation in a matter covered by a patent assigned to or held by the Company; provided, however, that following Employee’s termination of employment with the Company the foregoing restriction shall apply only

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to those areas where the Company is actually doing business on the date of such termination of employment; provided, further, that Employee may purchase or otherwise acquire for passive investment up to 3% of any class of securities of any such enterprise if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934;

     2. whether for Employee’s own account or for the account of any other person, (except for the account of the Company and its affiliates), solicit Business from any person known by Employee to be a customer of the Company or its affiliates, whether or not Employee had personal contact with such person during Employee’s employment with the Company and its affiliates;

     3. whether for Employee’s own account or the account of any other person, (i) solicit, employ, or otherwise engage as an employee, independent contractor, or otherwise, any person who is an employee of the Company or an affiliate, or in any manner induce, or attempt to induce, any employee of the Company or its affiliate to terminate his employment with the Company or its affiliate; or (ii) interfere with the Company’s or its affiliate’s relationship with any person who at any time during the Term, was an employee, contractor, supplier, or customer of the Company or its affiliate; or

     4. at any time after the termination of his employment, disparage the Company or its affiliates or any shareholders, directors, officers, employees, or agents of the Company or any of its affiliates, so long as the Company does not disparage Employee.

     E. Acknowledgements. The Company acknowledges that it is providing Employee with confidential information in order for Employee to perform his duties under this Agreement. Employee acknowledges that (a) the services to be performed by him under this Agreement are of a special, unique, unusual, extraordinary, and intellectual character, and (b) the provisions of this Section 8 are reasonable and necessary to protect the confidential information, goodwill and other business interests of the Company. If any covenant in this Section 8 is held to be unreasonable, arbitrary, or against public policy, such covenant will be considered to be divisible with respect to scope, time, and geographic area, and such lesser scope, time, or geographic area, or all of them, as a court of competent jurisdiction may determine to be reasonable, not arbitrary, and not against public policy, will be effective, binding, and enforceable against Employee. Employee hereby agrees that this covenant is a material and substantial part of this Agreement and that: (i) the geographic limitations are reasonable; (ii) the term of the covenant is reasonable; and (ii) the covenant is not made for the purpose of limiting competition per se and is reasonably related to a protectable business interest of the Company. The period of time applicable to any covenant in this Section 8 will be extended by the duration of any violation

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by Employee of such covenant. The provisions of this Section 8 shall survive the termination of the Term of this Agreement.

     SECTION 9. Injunctive Relief and Additional Remedy. Employee acknowledges that the injury that would be suffered by the Company as a result of a breach of the provisions of Section 8 of this Agreement would be irreparable and that an award of monetary damages to the Company for such a breach would be an inadequate remedy. Consequently, the Company will have the right, in addition to any other rights it may have, to obtain a temporary restraining order and/or injunctive relief to restrain any breach or threatened breach or otherwise to specifically enforce any provision of this Agreement. Employee waives any requirement for the Company’s securing or posting of any bond in conjunction with any such remedies. Employee further agrees to and hereby does submit to in personam jurisdiction before each and every court for that purpose. Without limiting the Company’s rights under this Section or any other remedies of the Company, if Employee breaches any of the provisions of Section 8 and such breach is proven in a court of competent jurisdiction, the Company will have the right to cease making any payments or providing other benefits otherwise due Employee under this Agreement.

     SECTION 10. Amendment: Waiver. The terms and provisions of this Agreement may be modified or amended only by a written instrument executed by each of the parties hereto, and compliance with the terms and provisions hereof may be waived only by a written instrument executed by each party entitled to the benefits thereof. No failure or delay on the part of any party in exercising any right, power or privilege granted hereunder shall constitute a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege granted hereunder.

     SECTION 11. Entire Agreement. Except as contemplated herein, this Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes any and all prior or contemporaneous written or oral agreements, arrangements or understandings between the Company and Employee.

     SECTION 12. Notices. All notices or communications hereunder shall be in writing, addressed as follows or to any address subsequently provided to the other party:

To the Company:

Cyberonics, Inc.
Attention: Vice President of Human Resources
100 Cyberonics Blvd., Suite 600
Houston, Texas 77058

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To Employee:

Richard L. Rudolph, M.D.
15118 Blossom Bay Drive
Houston, TX 77059

All such notices shall be conclusively deemed to be received and shall be effective, (i) if sent by hand delivery or overnight courier, upon receipt, (ii) if sent by telecopy or facsimile transmission, upon confirmation of receipt by the sender of such transmission or (iii) if sent by registered or certified mail, on the fifth day after the day on which such notice is mailed.

     SECTION 13. Severability. In the event that any term or provision of this Agreement is found to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining terms and provisions hereof shall not be in any way affected or impaired thereby, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained therein.

     SECTION 14. Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns (it being understood and agreed that, except as expressly provided herein, nothing contained in this Agreement is intended to confer upon any other person or entity any rights, benefits or remedies of any kind or character whatsoever). No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder.

     SECTION 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas (except that no effect shall be given to any conflicts of law principles thereof that would require the application of the laws of another jurisdiction).

     SECTION 16. Submission to Jurisdiction. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS IN HARRIS COUNTY, TEXAS, FOR THE PURPOSES OF ANY PROCEEDING ARISING OUT OF THIS AGREEMENT.

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     SECTION 17. Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.

     SECTION 18. Tax Withholdings. The Company shall withhold from all payments hereunder all applicable taxes that it is required to withhold with respect to payments and benefits provided under this Agreement.

     SECTION 19. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

     IN WITNESS WHEREOF, the undersigned have executed this Agreement effective as of the date set forth above.

CYBERONICS, INC.
By:	/s/ Robert P. Cummins
	Robert P. Cummins
	Chairman of the Board of Directors and Chief Executive Officer
EMPLOYEE
/s/ Richard L. Rudolph, M.D.
Richard L. Rudolph, M.D.

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EX-10.53

Exhibit 10.53

STOCK OPTION AGREEMENT AMENDMENT
AND
BONUS AGREEMENT

     THIS STOCK OPTION AGREEMENT AMENDMENT AND BONUS AGREEMENT (the “Agreement”) is made this 28th day of December, 2006 between Cyberonics, Inc. (the “Company”) and Richard Rudolph, M.D. (the “Optionee”).

     WHEREAS, the Company previously granted to the Optionee the options identified on attached Schedule A (the “Options”) to purchase shares of the Company’s common stock under the Company’s Stock Incentive Plan(s), as amended and restated, and as identified as such on Schedule A (the “Plan(s)”).

     WHEREAS, the Company and the Optionee entered into a formal Stock Option Agreement (the “Option Agreement”) evidencing each such Option.

     WHEREAS, in order to avoid adverse tax consequences under section 409A of the Internal Revenue Code, the Optionee desires to amend each of the Options to increase the exercise price per share to be in effect for the unexercised portion of that Option which is subject to section 409A and identified as such on Schedule A (the “Covered Portion”) to the higher exercise price per share indicated for that portion of such Option on Schedule A.

     WHEREAS, in order to compensate the Optionee for the increased exercise prices to be in effect for the Covered Portions of the Options, the Company is willing to pay the Optionee a special cash bonus in a dollar amount equal to the aggregate increase to the exercise prices for the Covered Portions of the Options listed on Schedule A, with the actual dollar of that bonus indicated as the Total Bonus on Schedule A and payable as provided herein.

     NOW THEREFORE, the parties hereby agree as follows:

     1. Increased Exercise Price. The exercise price per share set forth in the Option Agreement for each of the Options listed on Schedule A is hereby increased, with respect to the shares subject to the Covered Portion of that Option, to the higher exercise price per share set forth for that Option on Schedule A.

     2. Bonus. The Optionee shall become entitled to receive a cash bonus from the Company in the gross dollar amount indicated as his or her Total Bonus on attached Schedule A (the “Bonus”) effective on the date of vesting, with payment as follows:

     (i) the bonus payable with respect to shares that vest prior to January 1, 2008 will be paid on or about January 15, 2008, and

     (ii) the bonus payable with respect to shares that vest on or after January 1, 2008 will be payable only if such shares vest and will be paid quarterly for the shares that vested during the preceding fiscal quarter. Such

payment will be made within 14 days following the close of each fiscal quarter or, in the event of an acceleration of vesting pursuant to the terms of any other agreement governing the vesting of the options under the Option Agreements, within 14 days following the event.

          Payment of the Bonus shall be subject to the Company’s collection of all applicable federal, state and local income and employment withholding taxes, and the Optionee shall be paid only the net amount of such bonus remaining after such taxes have been collected.

     3. Entire Agreement. This Agreement, together with the Option Agreements (to the extent not expressly amended in a separate amendment or amended hereby) and the Plan(s), represents the entire agreement of the parties with respect to the subject matter hereof and the Bonus and supersedes any and all previous contracts, arrangements or understandings between the parties with respect to such Options and the Bonus. This Agreement may be amended at any time only by means of a writing signed by the Optionee and an authorized officer of the Company.

     4. Continuation of Option Agreements. Except for the foregoing increases to the exercise prices per share for the Covered Portions of the Options, no other terms or provisions of the Option Agreements for such Options or the applicable Plan(s) have been modified as a result of this Agreement, and those terms and provisions shall continue in full force and effect.

     IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year indicated above.

CYBERONICS, INC.

/s/ John A. Riccardi                                        

By: John A. Riccardi                                        

TITLE: Vice President, Finance                                        

OPTIONEE

By: Richard L. Rudolph, M.D.                                        

SCHEDULE A

Number of

Unexercised

Option Shares

Applicable

Increased

Aggregate

Potential

Exercise Price

Which Vest After

Measurement

Exercise Price

Increase in

Retention Bonus

Name

Plan

Grant Date

Per Share

12/31/04

Date

Per Share*

Exercise Price

**

Rudolph, Richard

1997 Plan

06/15/04

$

19.58

9,000

06/17/04

$

15.23

$

137,070.00

$

137,070.00

Rudolph, Richard

1997 Plan

01/24/02

$

12.45

10,417

02/12/02

$

2.06

$

21,459.02

$

21,459.02

Total

$

158,529.02

EX-10.56

Exhibit 10.56

FIRST AMENDMENT TO EMPLOYMENT AGREEMENT

     This First Amendment to Employment Agreement is entered into and effective as of June 15, .2006 (the Effective Date”), by and between Cyberonics, Inc. (the “Company”) and Randal L. Simpson (“Employee”).

RECITALS

     WHEREAS, the Company and Employee previously entered into an Employment Agreement dated October 27, 2003 (the “Agreement”), which Agreement remains in full force and effect as of this date. The Company and Employee now desire to amend the Agreement as provided herein.

     NOW, THEREFORE, in consideration of the mutual promises set forth in this Amendment and other good and valuable consideration, the parties agree as follows:

TERMS

1. Section 2 of the Agreement (“Term”) is deleted in its entirety and the following provision is inserted therefor:

“Subject to the terms and conditions of this Agreement, unless sooner terminated pursuant to Section 5 of this Agreement, Employee shall be employed by the Company commencing on the Effective Date and terminating on June 1, 2009 (the “Term”) Termination of this Agreement shall not alter or impair any rights of Employee (or his beneficiaries or heirs) with respect to payments, benefits or other rights provided by the terms of this Agreement, arising before or after the end of the Term.”

2. Except as expressly modified by this Amendment, the provisions of the Agreement remain unchanged and in full force and effect.

     IN WITNESS WHEREOF the parties have caused the Amendment to be executed in one or more counterparts, each of which shall be deemed to be an original.

Cyberonics, Inc.		Employee:
By:	/s/ Robert P. Cummins	/s/ Randal L. Simpson
	Robert P. Cummins	Randal L. Simpson
	Chairman of the Board of Directors and Chief Executive Officer

EX-10.57

Exhibit 10.57

STOCK OPTION AGREEMENT AMENDMENT
AND
BONUS AGREEMENT

     THIS STOCK OPTION AGREEMENT AMENDMENT AND BONUS AGREEMENT (the “Agreement”) is made this 29th day of December, 2006 between Cyberonics, Inc. (the “Company”) and Randal Simpson (the “Optionee”).

     WHEREAS, the Company previously granted to the Optionee the options identified on attached Schedule A (the “Options”) to purchase shares of the Company’s common stock under the Company’s Stock Incentive Plan(s), as amended and restated, and as identified as such on Schedule A (the “Plan(s)”).

     WHEREAS, the Company and the Optionee entered into a formal Stock Option Agreement (the “Option Agreement”) evidencing each such Option.

     WHEREAS, in order to avoid adverse tax consequences under section 409A of the Internal Revenue Code, the Optionee desires to amend each of the Options to increase the exercise price per share to be in effect for the unexercised portion of that Option which is subject to section 409A and identified as such on Schedule A (the “Covered Portion”) to the higher exercise price per share indicated for that portion of such Option on Schedule A.

     WHEREAS, in order to compensate the Optionee for the increased exercise prices to be in effect for the Covered Portions of the Options, the Company is willing to pay the Optionee a special cash bonus in a dollar amount equal to the aggregate increase to the exercise prices for the Covered Portions of the Options listed on Schedule A, with the actual dollar of that bonus indicated as the Total Bonus on Schedule A and payable as provided herein.

     NOW THEREFORE, the parties hereby agree as follows:

     1. Increased Exercise Price. The exercise price per share set forth in the Option Agreement for each of the Options listed on Schedule A is hereby increased, with respect to the shares subject to the Covered Portion of that Option, to the higher exercise price per share set forth for that Option on Schedule A.

     2. Bonus. The Optionee shall become entitled to receive a cash bonus from the Company in the gross dollar amount indicated as his or her Total Bonus on attached Schedule A (the “Bonus”) effective on the date of vesting, with payment as follows:

     (i) the bonus payable with respect to shares that vest prior to January 1, 2008 will be paid on or about January 15, 2008, and

     (ii) the bonus payable with respect to shares that vest on or after January 1, 2008 will be payable only if such shares vest and will be paid quarterly for the shares that vested during the preceding fiscal quarter. Such

payment will be made within 14 days following the close of each fiscal quarter or, in the event of an acceleration of vesting pursuant to the terms of any other agreement governing the vesting of the options under the Option Agreements, within 14 days following the event.

          Payment of the Bonus shall be subject to the Company’s collection of all applicable federal, state and local income and employment withholding taxes, and the Optionee shall be paid only the net amount of such bonus remaining after such taxes have been collected.

     3. Entire Agreement. This Agreement, together with the Option Agreements (to the extent not expressly amended in a separate amendment or amended hereby) and the Plan(s), represents the entire agreement of the parties with respect to the subject matter hereof and the Bonus and supersedes any and all previous contracts, arrangements or understandings between the parties with respect to such Options and the Bonus. This Agreement may be amended at any time only by means of a writing signed by the Optionee and an authorized officer of the Company.

     4. Continuation of Option Agreements. Except for the foregoing increases to the exercise prices per share for the Covered Portions of the Options, no other terms or provisions of the Option Agreements for such Options or the applicable Plan(s) have been modified as a result of this Agreement, and those terms and provisions shall continue in full force and effect.

     IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year indicated above.

CYBERONICS, INC.

/s/ John A. Riccardi                                        

By: John A. Riccardi                                        

TITLE: Vice President, Finance                                        

OPTIONEE

By: Randal L. Simpson                                        

SCHEDULE A

Number of

Unexercised

Option Shares

Applicable

Increased

Aggregate

Potential

Exercise Price

Which Vest After

Measurement

Exercise Price

Increase in

Retention Bonus

Name

Plan

Grant Date

Per Share

12/31/04

Date

Per Share*

Exercise Price

**

Simpson, Randal

1997 Plan

10/27/03

$

26.49

49,067

11/03/03

$

0.86

$

42,197.62

$

42,197.62

Total

$

42,197.62

EX-10.58

Exhibit 10.58

EMPLOYMENT AGREEMENT

     This Employment Agreement (the “Agreement”), entered into effective as of June 15, 2006 (the “Effective Date”), by and between Cyberonics, Inc. (the “Company”) and Pamela B. Westbrook (“Employee”).

WITNESSETH:

     WHEREAS, the Company desires to secure the experience, abilities and service of Employee by employing Employee upon the terms and conditions specified herein; and

     WHEREAS, Employee is willing to enter into this Agreement upon the terms and conditions specified herein;

     NOW, THEREFORE, in consideration of the premises, terms and provisions set forth herein, the mutual benefits to be gained by the performance thereof and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

     SECTION 1. Employment. The Company hereby employs Employee, and Employee hereby accepts such employment, all upon the terms and conditions set forth herein.

     SECTION 2. Term. Subject to the terms and conditions of this Agreement, unless sooner terminated pursuant to Section 5 of this Agreement, Employee shall be employed by the Company commencing on the Effective Date and terminating on June 1, 2009 (the “Term”). Termination of this Agreement shall not alter or impair any rights of Employee (or his beneficiaries or heirs) with respect to payments, benefits or other rights provided by the terms of this Agreement, arising before or after the end of the Term.

     SECTION 3. Duties, Responsibilities and Location.

     A. Capacity. Employee shall serve as the Vice President, Finance and Administration and Chief Financial Officer of the Company and shall report to the Chief Executive Officer of the Company.

     B. Full-Time Duties. Employee shall devote his full business time, attention and energies to the business of the Company. Notwithstanding anything herein to the contrary, Employee shall be allowed to (i) manage Employee’s personal investments and affairs and, (ii) with the written consent of the Chief Executive Officer of the Company, serve on boards or committees of civic or charitable organizations or trade associations, provided that such activities do not materially interfere with his performance of the duties and responsibilities of his position specified in Section 3.A.

     C. Offices. Employee’s primary place of work shall be at the principle executive offices of the Company located in the greater Houston, Texas

metropolitan area, but Employee shall be required to travel on a basis consistent with his position.

     SECTION 4. Compensation.

     A. Base Salary. During the Term, Employee shall receive an annual salary of $300,000 (the “Base Salary”) payable in accordance with the Company’s general payroll practices. Employee’s Base Salary shall be reviewed prior to the beginning of each fiscal year of the Company for increase in the discretion of the Compensation Committee of the Board of Directors (“Compensation Committee”); provided, however, that the Base Salary, as it may be increased at any time, may not thereafter be decreased.

     B. Annual Incentive Bonus. During the Term, Employee shall be eligible to participate in the Annual CEO Direct Reports Bonus Plan, with a target bonus of 50% of Employee’s annual Base Salary. A bonus, if earned, shall be payable as soon as reasonably practical following the completion of the applicable fiscal year. Bonuses for Employee shall be based on the achievement of such Company, departmental and/or individual performance goals that may be established for the applicable bonus year by the Compensation Committee.

     C. Annual Overachievement Bonus. During the Term, Employee shall be eligible to participate in the Annual CEO Direct Reports Overachievement Bonus Plan as determined by the Compensation Committee. Overachievement Bonuses shall be based on the Company’s overachievement of such Company, departmental and/or individual performance goals that may be established for the applicable bonus year by the Compensation Committee.

     D. Equity Compensation. Employee will be eligible for grants of Company stock options (the “Options”) and other equity awards in the discretion of the Compensation Committee.

     E. General Benefits. Upon satisfying applicable eligibility requirements, if any, Employee will be eligible to participate in the Company’s qualified 401(k) plan, group health, group life insurance, accidental death and dismemberment, travel accident, long-term disability and short-term disability plans and other welfare and similar plans and vacation policies under terms generally applicable to other similarly situated employees of the Company and shall be eligible to receive all perquisites and other benefits provided or made available by the Company to other similarly situated executives of the Company.

     F. Reimbursements. Employee shall be entitled to receive prompt reimbursement by the Company in accordance with its business reimbursement policy in effect from time to time for all reasonable, out-of-pocket business expenses incurred by him in performing his duties under this Agreement upon the submission by Employee of such accounts and records as may be reasonably required under the Company’s business reimbursement policy.

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     SECTION 5. Termination of Employment. Notwithstanding the provisions of Section 2, Employee’s employment hereunder may terminate under any of the following conditions:

     A, Death. Employee’s employment under this Agreement shall terminate automatically upon his death.

     B. Disability. Employee’s employment under this Agreement may be terminated due to his Disability. “Disability” shall mean Employee’s inability to substantially perform his duties hereunder for any period of at least 180 consecutive days due to a physical or mental incapacity. The date of termination due to Disability shall be the date Employee elects to terminate his employment service due to such Disability or, if earlier, the date the Board determines that Employee has met the definition of Disability and given written notice of such termination to Employee.

     C. Termination by Company Without Cause. The Company may terminate Employee’s employment hereunder without Cause (as hereinafter defined) on 30 days’ prior written notice to Employee.

     D. Termination by Company for Cause. Employee’s employment hereunder may be terminated for Cause by the Company. For purposes of this Agreement, “Cause” shall mean (i) the willful and continued failure by Employee to substantially perform Employee’s duties with the Company (other than any such failure resulting from Employee’s incapacity due to physical or mental illness), (ii) an act or acts of dishonesty taken by Employee and intended to result in personal enrichment of Employee at the expense of the Company, (iii) willful violation by Employee of Employee’s material obligations under this Agreement, (iv) willful violation by Employee of a material policy of the Company, including its policies regarding professional and ethical conduct, (v) Employee’s commission of one or more acts that constitute a felony, (vi) Employee is publicly censured by the Securities Exchange Commission, or (vii) Employee commits one or more acts of fraud as regards the Company. For purposes of clause (i) of this definition, no act, or failure to act, on Employee’s part shall be deemed “willful” unless done, or omitted to be done, by Employee not in good faith and without reasonable belief that Employee’s act, or failure to act, was in the best interest of the Company. The determination of whether Cause exists must be made by a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors of the Company.

     E. Termination by Employee. Employee may terminate his employment hereunder at any time on 30 days’ prior written notice to the Board.

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     SECTION 6. Payments Upon Termination.

     A. Upon termination of Employee’s employment for any reason prior to the expiration of the Term, the Company shall be obligated to pay, and Employee shall be entitled to receive:

     1. all accrued and unpaid Base Salary to the date of termination;

     2. any earned, but unpaid, bonuses for the bonus year ending prior to the date of termination;

     3. all incurred but unreimbursed business expenses for which Employee is entitled to reimbursement; and

     4. any benefits to which he is entitled under the terms of any applicable employee benefit plan or program, or applicable law.

     B. Upon termination of Employee’s employment pursuant to Section 5.C., the Company shall be obligated to pay or provide, and Employee’s estate or beneficiary shall be entitled to receive:

     1. all of the amounts and benefits described in Section 6.A.; and

     2. either (a) a lump sum payment equal to 1.5 times the sum of (i) Employee’s Base Salary, plus (ii) the most recent annual bonus earned by Employee or (b) a lump sum payment equal to 1.5 times Employee’s Base Salary and, solely for purposes of determining Employee’s vesting under any Options, the number of shares that would become vested under such Options during the 12-month period following Employee’s termination date if Employee’s employment had continued during such period shall become vested on his termination of employment date, whichever of (a) or (b) is elected by Employee in writing to the Company within five days of his termination date.

     C. In the event of any termination of employment under Section 5, Employee shall be under no obligation to seek other employment, and there shall be no offset against amounts due Employee under this Agreement on account of any remuneration attributable to any subsequent employment or self-employment that he may obtain.

     D. The Company and Employee have previously or contemporaneously with this Agreement entered into a Severance Agreement which provides certain payments and benefits to Employee upon a qualified termination of employment in connection with a change of control of the Company. Notwithstanding anything in this Agreement to the contrary, to the extent Employee is entitled to receive any severance payment or benefits under the Severance Agreement any

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severance payment or benefits to which Employee is otherwise entitled to receive under this Agreement shall be reduced or offset by the severance payment or benefit payable under the Severance Agreement in such manner as is appropriate, as determined in good faith by the Board, to prevent a duplication of such payment and benefits.

     SECTION 7. Indemnification. The Company agrees to indemnify Employee to the fullest extent permitted by applicable law with respect to any acts or non-acts he may have committed during the period which he was an officer, director and/or employee of the Company or any subsidiary or affiliate thereof, or of any other entity of which he served as an officer, director or employee at the request of the Company.

     SECTION 8. Covenants of Employee. Employee covenants as follows:

     A. Confidentiality. During and after his employment with the Company and its affiliates, Employee will hold in confidence all confidential information and will not disclose it to any person other than in connection with the performance of his duties and obligations hereunder, except with the specific prior written consent of the Board of Directors or the Chief Executive Officer; provided, however, that the parties agree that this Agreement does not prohibit the disclosure of confidential information where applicable law requires, including, but not limited to, in response of subpoenas and/or orders of a governmental agency or court of competent jurisdiction. In the event that Employee is requested or becomes legally compelled under the terms of a subpoena or order issued by a court of competent jurisdiction or by a governmental body to make any disclosure of confidential information, Employee agrees that he will (i) immediately provide the Company with written notice of the existence, terms and circumstances, surrounding such request(s) so that the Company may seek an appropriate protective order or other appropriate remedy, (ii) cooperate with the Company in its efforts to decline, resist or narrow such requests and (iii) if disclosure of such confidential information is required in the opinion of counsel, exercise reasonable efforts to obtain an order or other reliable assurance that confidential treatment will be accorded to such disclosed information. “Confidential information.” means any and all intellectual property of the Company (or any of its affiliates), including but not limited to: (a) trade secrets concerning the business and affairs of the Company (or any of its affiliates), product specifications, data, know-how, formulae, compositions, processes, designs, sketches, photographs, graphs, drawings, samples, inventions and ideas, past, current, and planned research and development, current and planned manufacturing or distribution methods and processes, customer lists, current and anticipated customer requirements, price lists, market studies, business plans, computer software and programs (including object code and source code), computer software and database technologies, systems, structures, and architectures (and related formulae, compositions, processes, improvements, devices, know-how, inventions, discoveries, concepts, ideas, designs, methods and information), and any other information, however documented, that is a trade secret under federal, state or other applicable law; and (b) information concerning

-5-

the business and affairs of the Company (or any of its affiliates) (which includes historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, the names and backgrounds of key personnel, personnel training and techniques and materials), however documented; and notes, analysis, compilations, studies, summaries, and other material prepared by or for the Company (or any of its affiliates) containing or based, in whole or in part, on any information included in the foregoing.

     B. Trade Secrets. Any trade secrets of the Company will be entitled to all of the protections and benefits under the federal and state trade secret and intellectual property laws and any other applicable law. If any information that the Company deems to be a trade secret is found by a court of competent jurisdiction not to be a trade secret for purposes of this Agreement, such information will, nevertheless, be considered confidential information for purposes of this Agreement, so long as it otherwise meets the definition of confidential information, Employee hereby waives any requirement that the Company submit proof of the economic value of any trade secret or post a bond or other security.

     C. Proprietary Items. Employee will not remove from the Company’s premises (except to the extent such removal is for purposes of the performance of Employee’s duties at home or while traveling, or except as otherwise specifically authorized by the Company) any document, record, notebook, plan, model, component, device, or computer software or code, whether embodied in a disk or in any other form belonging to the Company or used in the Company’s business (collectively, the “Proprietary Items”). All of the Proprietary Items, whether or not developed by Employee, are the exclusive property of the Company. Upon termination of his employment, or upon the request of the Company during the Term, Employee will return to the Company all of the Proprietary Items and confidential information in Employee’s possession or subject to Employee’s control, and Employee shall not retain any copies, abstracts, sketches, or other physical embodiment, including electronic or otherwise, of any of the Proprietary Items or confidential information.

     D. Non-Competition and Non-interference. During the period of his employment with the Company or its affiliates and for the one-year period after the termination of his employment with the Company and its affiliates, Employee will not, directly or indirectly:

     1. without the express prior written consent of the Board of Directors, own an interest in, manage, operate, join, control, lend money or render financial or other assistance to or participate in or be connected with, as an officer, employee, partner, stockholder, consultant or otherwise, any person that competes with the Company in the field of neurostimulation in a matter covered by a patent assigned to or held by the Company; provided, however, that following Employee’s termination of employment with the Company the foregoing restriction shall apply only

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to those areas where the Company is actually doing business on the date of such termination of employment; provided, further, that Employee may purchase or otherwise acquire for passive investment up to 3% of any class of securities of any such enterprise if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934;

     2. whether for Employee’s own account or for the account of any other person, (except for the account of the Company and its affiliates), solicit Business from any person known by Employee to be a customer of the Company or its affiliates, whether or not Employee had personal contact with such person during Employee’s employment with the Company and its affiliates;

     3. whether for Employee’s own account or the account of any other person, (i) solicit, employ, or otherwise engage as an employee, independent contractor, or otherwise, any person who is an employee of the Company or an affiliate, or in any manner induce, or attempt to induce, any employee of the Company or its affiliate to terminate his employment with the Company or its affiliate; or (ii) interfere with the Company’s or its affiliate’s relationship with any person who at any time during the Term, was an employee, contractor, supplier, or customer of the Company or its affiliate; or

     4. at any time after the termination of his employment, disparage the Company or its affiliates or any shareholders, directors, officers, employees, or agents of the Company or any of its affiliates, so long as the Company does not disparage Employee.

     E. Acknowledgements. The Company acknowledges that it is providing Employee with confidential information in order for Employee to perform his duties under this Agreement Employee acknowledges that (a) the services to be performed by him under this Agreement are of a special, unique, unusual, extraordinary, and intellectual character, and (b) the provisions of this Section 8 are reasonable and necessary to protect the confidential information, goodwill and other business interests of the Company.. If any covenant in this Section 8 is held to be unreasonable, arbitrary, or against public policy, such covenant will be considered to be divisible with respect to scope, time, and geographic area, and such lesser scope, time, or geographic area, or all of them, as a court of competent jurisdiction may determine to be reasonable, not arbitrary, and not against public policy, will be effective, binding, and enforceable against Employee. Employee hereby agrees that this covenant is a material and substantial part of this Agreement and that: (i) the geographic limitations are reasonable; (ii) the term of the covenant is reasonable; and (iii) the covenant is not made for the purpose of limiting competition per se and is reasonably related to a protectable business interest of the Company, The period of time applicable to any covenant in this Section 8 will be extended by the duration of any violation

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by Employee of such covenant. The provisions of this Section 8 shall survive the termination of the Term of this Agreement.

     SECTION 9. Injunctive Relief and Additional Remedy. Employee acknowledges that the injury that would be suffered by the Company as a result of a breach of the provisions of Section 8 of this Agreement would be irreparable and that an award of monetary damages to the Company for such a breach would be an inadequate remedy. Consequently, the Company will have the right, in addition to any other rights it may have, to obtain a temporary restraining order and/or injunctive relief to restrain any breach or threatened breach or otherwise to specifically enforce any provision of this Agreement. Employee waives any requirement for the Company’s securing or posting of any bond in conjunction with any such remedies. Employee further agrees to and hereby does submit to in personam jurisdiction before each and every court for that purpose. Without limiting the Company’s rights under this Section or any other remedies of the Company, if Employee breaches any of the provisions of Section 8 and such breach is proven in a court of competent jurisdiction, the Company will have the right to cease making any payments or providing other benefits otherwise due Employee under this Agreement.

     SECTION 10. Amendment; Waiver. The terms and provisions of this Agreement may be modified or amended only by a written instrument executed by each of the parties hereto, and compliance with the terms and provisions hereof may be waived only by a written instrument executed by each party entitled to the benefits thereof. No failure or delay on the part of any party in exercising any right, power or privilege granted hereunder shall constitute a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege granted hereunder.

     SECTION 11. Entire Agreement. Except as contemplated herein, this Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes any and all prior or contemporaneous written or oral agreements, arrangements or understandings between the Company and Employee.

     SECTION 12. Notices. All notices or communications hereunder shall be in writing, addressed as follows or to any address subsequently provided to the other party:

To the Company:

Cyberonics, Inc.
Attention: Vice President of Human Resources
100 Cyberonics Blvd., Suite 600
Houston, Texas 77058

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To Employee:

Pamela B. Westbrook
26 Schubach Drive
Sugar Land, TX 77479

All such notices shall be conclusively deemed to be received and shall be effective, (i) if sent by hand delivery or overnight courier, upon receipt, (ii) if sent by telecopy or facsimile transmission, upon confirmation of receipt by the sender of such transmission or (iii) if sent by registered or certified mail, on the fifth day after the day on which such notice is mailed.

     SECTION 13. Severability. In the event that any term or provision of this Agreement is found to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining terms and provisions hereof shall not be in any way affected or impaired thereby, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained therein.

     SECTION 14. Binding Effect: Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns (it being understood and agreed that, except as expressly provided herein, nothing contained in this Agreement is intended to confer upon any other person or entity any rights, benefits or remedies of any kind or character whatsoever). No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder.

     SECTION 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas (except that no effect shall be given to any conflicts of law principles thereof that would require the application of the laws of another jurisdiction).

     SECTION 16. Submission to Jurisdiction. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS IN HARRIS COUNTY, TEXAS, FOR THE PURPOSES OF ANY PROCEEDING ARISING OUT OF THIS AGREEMENT.

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     SECTION 17. Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.

     SECTION 18. Tax Withholdings. The Company shall withhold from all payments hereunder all applicable taxes that it is required to withhold with respect to payments and benefits provided under this Agreement.

     SECTION 19. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

     IN WITNESS WHEREOF, the undersigned have executed this Agreement effective as of the date set forth above.

CYBERONICS, INC.
By:	/s/ Robert P. Cummins
	Robert P. Cummins
	Chairman of the Board of Directors
	and Chief Executive Officer
EMPLOYEE
/s/ Pamela B. Westbrook
Pamela B. Westbrook

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EX-10.59

Exhibit 10.59

		David S. Wise
	Power To Renew A Life	Vice President & General Counsel
		281.228.7268 office
		281.283.5369 facsimile
		david .wise@cyberonics.com

October 12, 2006

Pamela B. Westbrook
26 Schubach Drive
Sugar Land, TX 77479

Re: Advancement of Attorney’s Fees

Dear Pam:

     This Agreement, Affirmation and Undertaking is to confirm the terms under which Cyberonics, Inc., a Delaware corporation, (“Cyberonics” or the “Company”) will agree to your request that it advance your reasonable attorney’s fees and costs (collectively, “Fees”) in connection with any action, suit or proceeding, whether civil, criminal, administrative, or investigative, regarding Cyberonics’ practices and procedures for granting stock options (collectively, “Proceedings”).

     The terms are as follows:

     1. Subject to the terms of this Agreement, the Company’s bylaws and articles of incorporation, and applicable law, Cyberonics agrees to advance Fees incurred by you in connection with the Proceedings,

     2. You agree to undertake to repay all Fees advanced by Cyberonics pursuant to this Agreement if it shall ultimately be determined that you are not entitled to indemnification. The obligations of this paragraph shall survive termination of this Agreement.,

     3. You agree that with respect to any amounts advanced to you or on your behalf by Cyberonics in connection with the Proceedings: (i) Cyberonics will be subrogated to any right you have to recover such amounts from any third party including, but not limited to, any right you have to any insurance coverage that may be available to you under any insurance policy procured by or on behalf of Cyberonics; (ii) you will cooperate with Cyberonics and take any action reasonably necessary to assist or enable Cyberonics to exercise the rights to which it is subrogated under the preceding clause including, but not limited to, executing any formal assignment or other legal instrument that may be required in order for Cyberonics to pursue or enforce such rights; and (iii) you will cooperate with Cyberonics and take any action reasonably necessary to assist or enable Cyberonics to obtain reimbursement or direct payment of such

Cyberonics, Inc.       100 Cyberonics Blvd.       Houston, TX 77058       800.332.1375       www.VNSTherapy.com

Pamela B. Westbrook
October 12, 2006
Page 2

amounts under any insurance policy procured by Cyberonics. The obligations of this paragraph shall survive termination of this Agreement.

     4. You shall cause your legal counsel to send to Cyberonics, each month, an invoice for the fees and expenses of counsel for the immediately preceding month. All such invoices shall provide a description of the services performed (subject to the reasonable requirements for you to maintain the attorney-client privilege), shall set forth the hours worked and the hourly rate of the attorney who performed the services, shall conform to any applicable billing guidelines and procedures, and shall otherwise be in form and substance acceptable to Cyberonics.

     5. You shall send all invoices and notices under this Agreement to: Office of General Counsel, Cyberonics, Inc., 100 Cyberonics Boulevard, Houston, TX 77058.

     6. This Agreement covers only the advancement of Fees in connection with a Proceeding. The rights and obligations of you and Cyberonics regarding any possible claim of indemnification by you from or against any damages, fines, penalties or awards, whether in connection with a Proceeding or otherwise, are not governed by this Agreement, but will be determined under the bylaws and articles of incorporation of Cyberonics, applicable law, and any applicable contract.

     7. To the extent there is any inconsistency between this Agreement and the terms of the Company’s bylaws and articles of incorporation or applicable law, the Company’s bylaws and articles of incorporation and applicable law shall govern over the terms herein.

     To indicate your agreement with the terms of this Agreement, please execute a copy in the space provided below and return it to Cyberonics’ General Counsel,

Sincerely,

/s/ David S.Wise

David S.Wise

AGREED AND ACCEPTED:
/s/ Pamela B. Westbrook
Print Name:	Pamela B. Westbrook
Date:	October 12, 2006

Cyberonics, Inc.      100 Cyberonics Blvd.     Houston, TX 77058     800.332.1375       www.VNSTherapy.com

EX-10.61

Exhibit 10.61

INDEMNIFICATION AGREEMENT

     This Indemnification Agreement (this “Agreement”) is executed on and effective as of August 1, 2003 (the “Effective Date”), by and between Cyberonics, Inc., a Delaware corporation (the “Company”), and David S. Wise (“Officer”).

     WHEREAS, the Company and Officer recognize the difficulty in obtaining directors’ and officers’ liability insurance, the increases in the cost of such insurance, and the general limitations in the coverage of such insurance;

     WHEREAS, the Company and Officer further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited;

     WHEREAS, Officer does not regard the current protection available as adequate under the present circumstances, and Officer and other officers and directors of the Company may not be willing to serve or continue to serve as officers and directors without additional protection; and

     WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Officer, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law.

     NOW, THEREFORE, the Company and Officer hereby agree as follows:

     1. Indemnification.

          a. Third Party Proceedings. The Company shall indemnify Officer and any partnership, corporation, trust, or other entity of which Officer is or was a partner, stockholder, trustee, director, officer, employee, or agent (Officer and each such partnership, corporation, trust, or other entity being referred to as an “Indemnitee”) if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the Company) by reason of the fact that Officer is or was a director, officer, employee, or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Officer while an officer or director or by reason of the fact that Officer is or was serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit, or proceeding, if Officer acted in good faith and in a manner Officer reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Officer’s conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Officer did not act in good faith and in a manner that Officer reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that Officer’s conduct was unlawful.

          b. Proceedings By or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Officer is or was a director, officer, employee, or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Officer while an officer or director or by reason of the fact that Officer is or was serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys’ fees) and, to the fullest extent permitted by law, amounts paid in settlement, in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit, if Officer acted in good faith and in a manner Officer reasonably believed to be in or not opposed to the best interests of the Company, except that no indemnification shall be made in respect of any claim, issue, or matter as to which Officer shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses that the Court of Chancery of the State of Delaware or such other court shall deem proper.

          c. Mandatory Payment of Expenses. To the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in Sections 1(a) and (b) or the defense of any claim, issue, or matter therein, Indemnitee shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by Indemnitee in connection therewith.

     2. Expenses; Indemnification Procedure.

          a. Advancement of Expenses. The Company shall advance all expenses incurred by Indemnitee, and, to the fullest extent permitted by law, amounts paid in settlement by Indemnitee, in connection with the investigation, defense, settlement, or appeal of any civil or criminal action, suit, or proceeding referenced in Section 1(a) or (b) hereof. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to Indemnitee within 20 days following delivery of a written request therefor by Indemnitee to the Company.

          b. Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his or its right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the President of the Company at the address shown on the signature page of this Agreement, or such other address as the Company shall designate in writing to Indemnitee. Notice shall be deemed received three business days after the date postmarked if sent by domestic certified or registered mail, properly addressed; otherwise notice shall be deemed received when such notice shall actually be received by the Company. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee’s power.

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          c. Procedure. Any indemnification and advances provided for in Section 1 and this Section 2 shall be made no later than 45 days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company’s Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within 45 days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 12 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys’ fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit, or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct that make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Subsection 2(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties’ intention that if the Company contests Indemnitee’s right to indemnification, the question of Indemnitee’s right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct.

          d. Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 2(b) hereof, the Company has directors’ and officers’ liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

          e. Selection of Counsel. In the event the Company shall be obligated under Section 2(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee (whose approval shall not be unreasonably withheld), upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ his counsel in any such proceeding at Indemnitee’s expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee’s counsel shall be at the expense of the Company.

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     3. Additional Indemnification Rights; Nonexclusivity.

          a. Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company’s Certificate of Incorporation, the Company’s Bylaws, or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule that expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes shall be, ipso facto, within the purview of Indemnitee’s rights and Company’s obligations under this Agreement. In the event of any change in any applicable law, statute, or rule that narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute, or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties’ rights and obligations hereunder.

          b. Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Officer or any other Indemnitee may be entitled under the Company’s Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in Officer’s official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Officer and each other Indemnitee for any action taken or not taken while Officer is or was serving in an indemnified capacity even though he may have ceased to serve in such capacity at the time of any action, suit, or other covered proceeding.

     4. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines, or penalties actually or reasonably incurred by Indemnitee in the investigation, defense, appeal, or settlement of any civil or criminal action, suit, or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines, or penalties to which Indemnitee is entitled.

     5. Mutual Acknowledgment. Both the Company and Officer acknowledge that in certain instances Federal law or applicable public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise, in which event, notwithstanding any other provisions of this Agreement to the contrary, the indemnification provided by this Agreement shall be limited to such extent as is necessary to comply with applicable Federal law or public policy. For example, the Company and Officer acknowledge that the Securities and Exchange Commission (the “SEC”) has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain violations of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Officer understands and acknowledges that in the event the Company undertakes a public offering of its securities pursuant to a registration with the SEC, the Company may be required to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company’s right under public policy to indemnify Officer or any other Indemnitee.

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     6. Directors and Officers Liability Insurance. The Company has applied for and will use its best efforts to obtain and maintain in force with a financially sound and reputable insurer a directors, officers, and corporate liability insurance policy having a limit which the Company, together with the Board of Directors, approves as providing coverage appropriate and acceptable to the Board of Directors. In all policies of directors and officers liability insurance, Officer and each other Indemnitee shall be named as an insured in such a manner as to provide Officer the same rights and benefits as are accorded to the most favorably insured of the Company’s directors.

     7. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company’s inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 7. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Officer and each other Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms.

     8. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement:

          a. Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate;

          b. Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous;

          c. Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA, excise taxes or penalties, and amounts paid in settlement) that have been paid directly to Indemnitee by an insurance carrier under a policy of officers’ and directors’ liability insurance maintained by the Company; or

          d. Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.

     9. Construction of Certain Phrases.

          a. For purposes of this Agreement, references to the “Company” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger, so that if Indemnitee is or was a director, officer,

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employee, or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued.

          b. For purposes of this Agreement, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to “serving at the request of the Company” shall include any service as a director, officer, employee, or agent of the Company that imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner “not opposed to the best interests of the Company” as referred to in this Agreement.

     10. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original.

     11. Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of Officer and each other Indemnitee and their respective estates, heirs, successors, legal representatives, and assigns.

     12. Attorneys’ Fees. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys’ fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys’ fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee’s counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee’s material defenses to such action was made in bad faith or was frivolous.

     13. Notice. All notices, requests, demands, and other communications under this Agreement shall be in writing and shall be deemed duly given on the third business day after the date postmarked, if delivered by domestic certified or registered mail with postage prepaid, or, if delivered by other means, on the date actual notice is received. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice.

     14. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the non-exclusive jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding that arises out of or relates to this Agreement and agree that any action instituted under this Agreement may be brought in any court of competent jurisdiction in the State of Delaware.

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     15. CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND ITS PROVISIONS CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, AS APPLIED TO CONTRACTS BETWEEN DELAWARE RESIDENTS ENTERED INTO AND TO BE PERFORMED ENTIRELY WITHIN DELAWARE.

[Signature page follows.]

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date.

COMPANY:
Cyberonics, Inc.
By:	/s/ Robert P. Cummins
	Robert P. Cummins,
	Chief Executive Officer
OFFICER:
/s/ David S. Wise
David S. Wise

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EX-10.64

Exhibit 10.64

FIRST AMENDMENT TO EMPLOYMENT AGREEMENT

     This First Amendment to Employment Agreement is entered into and effective as of June 15, 2006 (the Effective Date”), by and between Cyberonics, Inc (the “Company”) and David S. Wise (“Employee”).

RECITALS

     WHEREAS, the Company and Employee previously entered into an Employment Agreement dated September 17, 2003 (the “Agreement”), which Agreement remains in full force and effect as of this date. The Company and Employee now desire to amend the Agreement as provided herein.

     NOW, THEREFORE, in consideration of the mutual promises set forth in this Amendment and other good and valuable consideration, the parties agree as follows:

TERMS

     1. Section 2 of the Agreement (“Term”) is deleted in its entirety and the following provision is inserted therefor:

“Subject to the terms and conditions of this Agreement, unless sooner terminated pursuant to Section 5 of this Agreement, Employee shall be employed by the Company commencing on the Effective Date and terminating on June 1, 2009 (the “Term”). Termination of this Agreement shall not alter or impair any rights of Employee (or his beneficiaries or heirs) with respect to payments, benefits or other rights provided by the terms of this Agreement, arising before or after the end of the Term.”

     2. Except as expressly modified by this Amendment, the provisions of the Agreement remain unchanged and in full force and effect.

     IN WITNESS WHEREOF the parties have caused the Amendment to be executed in one or more counterparts, each of which shall be deemed to be an original.

Cyberonics, Inc.		Employee:
By:	/s/ Robert P. Cummins	/s/ David S. Wise
	Robert P. Cummins	David S. Wise
	Chairman of the Board of Directors and
	Chief Executive Officer

EX-10.65

Exhibit 10.65

CYBERONICS, INC.

NEW EMPLOYEE EQUITY INDUCEMENT PLAN AGREEMENT

I. NOTICE OF STOCK OPTION GRANT

     David S. Wise

     You have been granted a Nonstatutory Stock Option to purchase Common Stock of the Company, subject to the terms and conditions of this Agreement, as follows:

Date of Grant	September 17, 2003
Vesting Commencement Date	September 17, 2003
Exercise Price per Share	$28.45
Total Number of Shares Granted	150,000
Total Exercise Price	$4,267,500
Term/Expiration Date;	September 17, 2013
Vesting Schedule:

     This Option shall vest and may be exercised, in whole or in part, in accordance with the following schedule;

     l/60^th of the Shares subject to the Option shall vest each month after the Vesting Commencement Date, so that the Option shall be fully vested five (5) years from the Date of Grant, subject to the Optionee continuing to be a Service Provider on such dates.

     Termination Period

     This Option may be exercised for ninety (90) days after Optionee ceases to be a Service Provider in accordance with Section 7 of this Agreement. Upon the death or Disability of the Optionee, this Option may be exercised for twelve (12) months after the Optionee ceases to be a Service Provider in accordance with Sections 8 and 9 of this Agreement. In no event shall this Option be exercised later than the Term/Expiration Date provided.

II. AGREEMENT

     1. Definitions. As used herein, the following definitions shall apply:

          (a) “Agreement” means this stock option agreement between the Company and Optionee evidencing the terms and conditions of this Option.

          (b) “Applicable Laws” means the requirements relating to the administration of stock options under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction that may apply to this Option.

          (c) “Board” means the Board of Directors of the Company or any committee of the Board that has been designated by the Board to administer this Agreement.

          (d) “Code” means the Internal Revenue Code of 1986, as amended.

          (e) “Common Stock” means the common stock of the Company.

          (f) “Company” means Cyberonics, Inc., a Delaware corporation.

          (g) “Consultant” means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity.

          (h) “Director” means a member of the Board.

          (i) “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code.

          (j) “Employee” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

          (k) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          (l) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

               (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq Small Cap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

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               (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the day of determination; or

               (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board.

          (m) “Nonstatutory Stock Option” means an Option not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

          (n) “Notice of Grant” means a written notice, in Part I of this Agreement, evidencing certain the terms and conditions of this Option grant. The Notice of Grant is part of the Option Agreement.

          (o) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

          (p) “Option” means this stock option.

          (q) “Optioned Stock” means the Common Stock subject to this Option.

          (r) “Optionee” means the person named in the Notice of Grant or such person’s successor.

          (s) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

          (t) “Service Provider” means an Employee, Director or Consultant.

          (u) “Share” means a share of the Common Stock, as adjusted in accordance with Section 10 of this Agreement.

          (v) “Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.

     2. Grant of Option. The Board hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement the Option to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the “Exercise Price”), subject to the terms and conditions of this Agreement.

     3. Exercise of Option.

          (a) Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of this Agreement.

          (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the “Exercise Notice”), which shall state the election to exercise

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the Option, the number of Shares in respect of which the Option is being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company. The Exercise Notice shall be completed by the Optionee and delivered to Secretary of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price.

          (c) Legal Compliance. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares.

     4. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:

          (a) cash or check;

          (b) promissory note;

          (c) consideration received by the Company under a cashless exercise program implemented by the Company; or

          (d) surrender of other Shares, provided Shares acquired directly from the Company, (i) have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares.

     5. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of this Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

     6. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the terms of this Agreement.

     7. Termination of Relationship as a Service Provider. If the Optionee ceases to be a Service Provider (other than for death or Disability), this Option may be exercised for a period of ninety (90) days after the date of such termination (but in no event later than the expiration date of this Option as set forth in the Notice of Grant) to the extent that the Option is vested on the date of such termination. To the extent that the Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

     8. Disability of Optionee. If the Optionee ceases to be a Service Provider as a result of the Optionee’s Disability, this Option may be exercised for a period of twelve (12) months after the date of such termination (but in no event later than the expiration date of this Option as set forth in the Notice of Grant) to the extent that the Option is vested on the date of such termination. To the extent

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that Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

     9. Death of Optionee. If the Optionee dies while a Service Provider, the Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration date of this Option as set forth in the Notice of Grant), by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the Optionee was entitled to exercise the Option at the date of death. If, after death, the Optionee’s estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate.

     10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale.

          (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by this Option, as well as the price per share of Common Stock covered by this Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to this Option.

          (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Board shall notify Optionee as soon as practicable prior to the effective date of such proposed transaction. The Board in its discretion may provide for the Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. To the extent it has not been previously exercised, the Option will terminate immediately prior to the consummation of such proposed.

          (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, the Option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If the Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify the Optionee in writing or electronically that the Option shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately

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prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets.

          (d) Change of Control. In the event of a Change of Control (as defined below), the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable, and any Company reacquisition option applicable to any Shares acquired upon exercise of an Option shall lapse as to all such Shares. If an Option becomes fully vested and exercisable as the result of a Change of Control, the Administrator shall notify the Optionee in writing or electronically prior to the Change of Control that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For purposes of this Plan, a “Change of Control” means the happening of any of the following events:

               (1) When any “person,” as such term is used in Sections 13(d) and 14(d) of the Exchange Act, other than the Company, a subsidiary of the Company or a Company employee benefit plan, including any trustee of such plan acting as trustee, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of directors; or

               (2) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets; or

               (3) A change in the composition of the Board of Directors of the Company, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the date the Plan is approved by the shareholders, or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company).

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     11. Notices. Any notice to be given to the Company hereunder shall be in writing and shall be addressed to the Company at its then current principal executive office or to such other address as the Company may hereafter designate to the Optionee by notice as provided in this Section. Any notice to be given to the Optionee hereunder shall be addressed to the Optionee at the address set forth beneath his signature hereto, or at such other address as the Optionee may hereafter designate to the Company by notice as provided herein. A notice shall be deemed to have been duly given when personally delivered or mailed by registered or certified mail to the party entitled to receive it.

     12. Withholding Taxes. Optionee agrees to make appropriate arrangements with the Company (or the Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all federal, state, and local income and employment tax withholding requirements applicable to the Option exercise. Optionee acknowledges and agrees that the Company may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise.

     13. Entire Agreement; Governing Law. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes in its entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of Texas.

     14. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUES ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.

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     By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of this Agreement. Optionee has reviewed this Agreement in its entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of this Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions relating to this Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below.

OPTIONEE	CYBERONICS, INC.
/s/ David S. Wise Signature	Robert P. Cummins
David S. Wise	/s/ Robert P. Cummins Chairman & Chief Executive Officer
11922 Homewood Lane, Houston. TX 77024
Residence Address

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EXHIBIT A

CYBERONICS, INC.

EXERCISE NOTICE

Cyberonics, Inc.
16511 Space Center Boulevard #600
Houston, Texas 77062

Attention:

     1. Exercise of Option, Effective as of today,                                           , 20             , the undersigned (“Purchaser”) hereby elects to purchase              shares (the “Shares”) of the Common Stock of Cyberonics, Inc. (the “Company”) under and pursuant to the New Employee Equity Inducement Plan Agreement dated [                     ] (the “Equity Inducement Agreement”). The purchase price for the Shares shall be [$                     ], as required by the Option Agreement.

     2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price for the Shares.

     3. Representations of Purchaser. Purchaser acknowledges that Purchaser has received, read and understood the Equity Inducement Agreement and agrees to abide by and be bound by their terms and conditions.

     4. Rights as Shareholder. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 10 of the Option Agreement.

     5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser’s purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice.

     6. Successors and Assigns. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and this Exercise Notice shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Exercise Notice shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns.

     7. Interpretation. Any dispute regarding the interpretation of this Exercise Notice shall be submitted by Optionee or by the Company forthwith to the Board which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Board shall be final and binding on all parties.

     8. Entire Agreement; Governing Law. The Agreement is incorporated herein by reference. This Agreement, and the Equity Inducement Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser’s interest except by means of a writing signed by the Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, of Texas.

Submitted by:	Accepted by:
OPTIONEE	CYBERONICS, INC.
Signature
Print Name
Address	Address

Date Received:

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EX-10.66

Exhibit 10.66

INDEMNIFICATION AGREEMENT

     This Indemnification Agreement (this “Agreement”) is executed on and effective as of November 13, 2001 (the “Effective Date”), by and between Cyberonics, Inc., a Delaware corporation (the “Company”), and                      (“Director”).

     WHEREAS, the Company and Director recognize the difficulty in obtaining directors’ and officers’ liability insurance, the increases in the cost of such insurance, and the general limitations in the coverage of such insurance;

     WHEREAS, the Company and Director further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited;

     WHEREAS, Director does not regard the current protection available as adequate under the present circumstances, and Director and other officers and directors of the Company may not be willing to serve or continue to serve as officers and directors without additional protection; and

     WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Director, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law.

     NOW, THEREFORE, the Company and Director hereby agree as follows:

     1. Indemnification.

     (a) Third Party Proceedings. The Company shall indemnify Director and any partnership, corporation, trust, or other entity of which Director is or was a partner, stockholder, trustee, director, officer, employee, or agent (Director and each such partnership, corporation, trust, or other entity being referred to as an “Indemnitee”) if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the Company) by reason of the fact that Director is or was a director, officer, employee, or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Director while an officer or director or by reason of the fact that Director is or was serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit, or proceeding, if Director acted in good faith and in a manner Director reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Director’s conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Director did not act in good faith and in a manner that

Director reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that Director’s conduct was unlawful.

     (b) Proceedings By or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Director is or was a director, officer, employee, or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Director while an officer or director or by reason of the fact that Director is or was serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys’ fees) and, to the fullest extent permitted by law, amounts paid in settlement, in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit, if Director acted in good faith and in a manner Director reasonably believed to be in or not opposed to the best interests of the Company, except that no indemnification shall be made in respect of any claim, issue, or matter as to which Director shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses that the Court of Chancery of the State of Delaware or such other court shall deem proper.

     (c) Mandatory Payment of Expenses. To the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in Sections 1(a) and (b) or the defense of any claim, issue, or matter therein, Indemnitee shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by Indemnitee in connection therewith.

     2. Expenses: Indemnification Procedure.

     (a) Advancement of Expenses. The Company shall advance all expenses incurred by Indemnitee, and, to the fullest extent permitted by law, amounts paid in settlement by Indemnitee, in connection with the investigation, defense, settlement, or appeal of any civil or criminal action, suit, or proceeding referenced in Section 1(a) or (b) hereof. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to Indemnitee within 20 days following delivery of a written request therefor by Indemnitee to the Company.

     (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his or its right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company

shall be directed to the President of the Company at the address shown on the signature page of this Agreement, or such other address as the Company shall designate in writing to Indemnitee. Notice shall be deemed received three business days after the date postmarked if sent by domestic certified or registered mail, properly addressed; otherwise notice shall be deemed received when such notice shall actually be received by the Company. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee’s power.

     (c) Procedure. Any indemnification and advances provided for in Section 1 and this Section 2 shall be made no later than 45 days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company’s Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within 45 days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 12 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys’ fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit, or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct that make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Subsection 2(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties’ intention that if the Company contests Indemnitee’s right to indemnification, the question of Indemnitee’s right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct.

     (d) Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 2(b) hereof, the Company has directors’ and officers’ liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

     (e) Selection of Counsel. In the event the Company shall be obligated under Section 2(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with

counsel approved by Indemnitee (whose approval shall not be unreasonably withheld), upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ his counsel in any such proceeding at Indemnitee’s expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee’s counsel shall be at the expense of the Company.

     3. Additional Indemnification Rights; Nonexclusivity.

     (a) Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company’s Certificate of Incorporation, the Company’s Bylaws, or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule that expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes shall be, ipso facto, within the purview of Indemnitee’s rights and Company’s obligations under this Agreement. In the event of any change in any applicable law, statute, or rule that narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute, or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties’ rights and obligations hereunder.

     (b) Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Director or any other Indemnitee may be entitled under the Company’s Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in Director’s official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Director and each other Indemnitee for any action taken or not taken while Director is or was serving in an indemnified capacity even though he may have ceased to serve in such capacity at the time of any action, suit, or other covered proceeding.

     4. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines, or penalties actually or reasonably incurred by Indemnitee in the investigation, defense, appeal, or settlement of any civil or criminal action, suit, or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines, or penalties to which Indemnitee is entitled.

     5. Mutual Acknowledgment. Both the Company and Director acknowledge that in certain instances Federal law or applicable public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise, in which event, notwithstanding any other provisions of this Agreement to the contrary, the indemnification provided by this Agreement shall be limited to such extent as is necessary to comply with applicable Federal law or public policy. For example, the Company and Director acknowledge that the Securities and Exchange Commission (the “SEC”) has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain violations of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Director understands and acknowledges that in the event the Company undertakes a public offering of its securities pursuant to a registration with the SEC, the Company may be required to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company’s right under public policy to indemnify Director or any other Indemnitee.

     6. Directors and Officers Liability Insurance. The Company has applied for and will use its best efforts to obtain and maintain in force with a financially sound and reputable insurer a directors, officers, and corporate liability insurance policy having a limit which the Company, together with the Board of Directors, approves as providing coverage appropriate and acceptable to the Board of Directors. In all policies of directors and officers liability insurance, Director and each other Indemnitee shall be named as an insured in such a manner as to provide Director the same rights and benefits as are accorded to the most favorably insured of the Company’s directors.

     7. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company’s inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 7. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Director and each other Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms.

     8. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement:

     (a) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate;

     (b) Lack of Good Faith. To indemnify Indemnitee for any expensesincurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or

interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous;

     (c) Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA, excise taxes or penalties, and amounts paid in settlement) that have been paid directly to Indemnitee by an insurance carrier under a policy of officers’ and directors’ liability insurance maintained by the Company; or

     (d) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.

     9. Construction of Certain Phrases.

     (a) For purposes of this Agreement, references to the “Company” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger, so that if Indemnitee is or was a director, officer, employee, or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued.

     (b) For purposes of this Agreement, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to “serving at the request of the Company” shall include any service as a director, officer, employee, or agent of the Company that imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner “not opposed to the best interests of the Company” as referred to in this Agreement.

     10. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original.

     11. Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of Director and each other Indemnitee and their respective estates, heirs, successors, legal representatives, and assigns.

     12. Attorneys’ Fees. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid

all court costs and expenses, including reasonable attorneys’ fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys’ fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee’s counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee’s material defenses to such action was made in bad faith or was frivolous.

     13. Notice. All notices, requests, demands, and other communications under this Agreement shall be in writing and shall be deemed duly given on the third business day after the date postmarked, if delivered by domestic certified or registered mail with postage prepaid, or, if delivered by other means, on the date actual notice is received. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice.

     14. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the non-exclusive jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding that arises out of or relates to this Agreement and agree that any action instituted under this Agreement may be brought in any court of competent jurisdiction in the State of Delaware.

     15. CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND ITS PROVISIONS CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, AS APPLIED TO CONTRACTS BETWEEN DELAWARE RESIDENTS ENTERED INTO AND TO BE PERFORMED ENTIRELY WITHIN DELAWARE.

[Signature page follows.]

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date.

COMPANY:  

Cyberonics, Inc.

By:

Name:

Title:

DIRECTOR:

EX-10.68

Exhibit 10.68

Amendment to Stock Option Agreement

     This Amendment to Stock Option Agreement (the “Amendment”) is made on the ___ day of December, 2006 by and between Cyberonics, Inc., a Delaware corporation (the “Company”) and                                                              (“Optionee”).

     Whereas, the Company and Optionee entered into a Stock Option Agreement having a grant date of May 2, 2001 (the “Agreement”); and

     Whereas, the Company has undergone an extensive investigation of its option grant practices and procedures; and

     Whereas, that investigation has revealed that the options granted under the Agreement were misdated; and

     Whereas, the Company and Optionee have mutually agreed to amend the Agreement to modify the Date of Grant and Exercise Price per Share;

     Now, Therefore, for a good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

     1. Section I, Notice of Stock Option Grant of the Agreement is amended to delete the stated Date of Grant and Exercise Price per Share and substitute the following:

“Date of Grant	April 30, 2001
Exercise Price per Share	$11.47”

     2. This Amendment supersedes all prior agreements, amendments, understandings, negotiations, and discussion, oral or written, related to such subject matter.

     3. Except as expressly amended herein, the terms of the Agreement remain unchanged.

     4. This Amendment may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Signatures by facsimile shall bind the parties hereto.

OPTIONEE		CYBERONICS, INC.
	By:
		John A. Riccardi
		Chief Financial Officer

Schedule of Optionees

Name

Appel, Stanley

Coelho, Tony

Olsen, Alan

Reese, Terry

Strauss, Michael

EX-10.69

Exhibit 10.69

CYBERONICS, INC.
1996 STOCK OPTION PLAN
NOTICE OF STOCK OPTION GRANT
(Standard Vesting)

GRANTEE NAME

     You have been granted an option (the “Option”) to purchase Common Stock of Cyberonics, Inc. (the “Company”) as follows:

Date of Grant:
Exercise Price:	$
Number of Shares Subject to Option:
Type of Option:	Nonstatutory Stock Option
Vesting Start Date:
Expiration Date:	Tenth Anniversary of Date of Grant
Exercise Schedule:	The Option shall be exercisable at any time prior to the Expiration Date or earlier termination as to shares which are vested in accordance with the Vesting Schedule below.
Termination Period:	Option may be exercised for up to 90 days after termination of employment or consulting relationship except as set out in Sections 7 and 8 of the Stock Option Agreement (but in no event later than the Expiration Date).
Vesting Schedule:	l/60th of the Shares subject to the Option shall vest each month after the Vesting Commencement Date until the Option is fully vested, subject to the Optionee continuing to be a Service Provider on such dates.

     OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WELL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY’S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE’S OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S EMPLOYMENT OR CONSULTANCY RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE.

     By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Company’s 1996 Stock Option Plan and the Stock Option Agreement, all of which are attached and made a part of this document.

OPTIONEE:	CYBERONICS, INC.
	By:
Grantee Name		Pamela B. Westbrook
	Title:	Vice President and Chief Financial Officer
Address:	Date:

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Cyberonics, Inc.

STOCK OPTION AGREEMENT

     1. Grant of Option. Cyberonics, Inc., a Delaware corporation (the “Company”), hereby grants to the Optionee named in the Notice of Grant (the “Optionee”), an option (the “Option”) to purchase a total number of shares of Common Stock (the “Shares”) set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the “Exercise Price”) subject to the terms, definitions and provisions of the Company’s 1996 Stock Option Plan (the “Plan”) which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option.

          This Option is a Nonstatutory Stock Option, and is not intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code.

     2. Adjustments for Stock Splits, Recapitalization.

          (a) The Exercise Price and number of Shares subject to this Option (as set forth on the Notice of Grant) shall be subject to adjustment as follows: If the Company at any time (i) subdivides (by any stock split, stock dividend or otherwise) the Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of Shares issuable shall be proportionately increased, and (ii) if the Company at any time combines (by reverse stock split or otherwise) the Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of Shares issuable shall be proportionately decreased.

          (b) If at any time while this Option is outstanding there shall be any reclassification or conversion of the Common Stock into another class of securities (other than a subdivision or combination or shares provided for in the preceding paragraph), the Optionee shall thereafter be entitled to receive, during the term hereof and upon payment of the Exercise Price, the number of shares of stock to which a holder of the Common Stock would have been entitled upon such reclassification or conversion had the Optionee exercised this Option immediately prior to such reclassification or conversion.

     3. Exercise of Option. This Option shall be exercisable during its term in accordance with the Exercise Schedule set out in the Notice of Grant and with the provisions of Section 10 of the Plan as follows:

          (a) Right to Exercise.

               (i) This Option may not be exercised for a fraction of a share.

               (ii) In the event of Optionee’s death, disability or other termination of employment, the exercisability of the Option is governed by Sections 6, 7 and 8 below.

               (iii) In no event may this Option be exercised after the Expiration Date of this Option as set forth in the Notice of Grant.

          (b) Method of Exercise. This Option shall be exercisable by execution and delivery of the Exercise Notice and Stock Purchase Agreement (the “Exercise Notice”) in the form

attached as Exhibit A. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price.

     4. Method of Payment. Payment of the Exercise Price shall be by:

          (i) cash; or

          (ii) check; or

          (iii) delivery of a properly executed Exercise Notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and immediate sale of the Shares through a broker which provides for delivery to the Company from the sale or loan proceeds of the Exercise Price; or

          (iv) any combination of the foregoing methods of payment.

     5. Restrictions on Exercise. This Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including the requirements of any stock exchange upon which the Shares may then be listed and including any rule under Part 207 of Title 12 of the Code of Federal Regulations (“Regulation G”) as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation.

     6. Termination of Relationship. In the event of termination of Optionee’s consulting relationship or Continuous Status as an Employee, Optionee may, to the extent otherwise so entitled at the date of such termination (the “Termination Date”), exercise this Option during the Termination Period set out in the Notice of Grant. To the extent that Optionee was not entitled to exercise this Option at the date of such termination, or if Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

     7. Disability of Optionee. Notwithstanding the provisions of Section 6 above, in the event of termination of an Optionee’s consulting relationship or Continuous Status as an Employee as a result of total and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months from the date of termination of employment (but in no event later than the Expiration Date of this Option as set forth in the Notice of Grant), exercise the Option to the extent otherwise so entitled at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate.

     8. Death of Optionee. In the event of the death of Optionee during the term of this Option and while an Employee or Consultant or within ninety (90) days following termination of Optionee’s employment/consultancy relationship with the Company, this Option may be exercised at

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any time within twelve (12) months following the date of death (but in no event later than the Expiration Date), by Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent the Optionee could exercise the Option at the date of death.

     9. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by him. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

     10. Term of Option. This Option may be exercised only prior to the Expiration Date set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option.

     11. Tax Consequences. Set forth below is a brief summary as of the date of this Option of some of the federal tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

          (a) Exercise of Option. Upon exercise of this Option, the Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. If Optionee is an employee, the Company will be required to withhold from Optionee’s compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise.

          (b) Disposition of Shares. If Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes.

     12. Change of Control. In the event of a Change of Control (as defined in the Plan), this Option shall be governed by the terms of Section 12 of the Plan.

     OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY’S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH HIS OR HER RIGHT OR THE COMPANY’S RIGHT TO TERMINATE HIS OR HER EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.

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EXHIBIT A

EXERCISE NOTICE AND STOCK PURCHASE AGREEMENT

Cyberonics, Inc.
100 Cyberonics Blvd., Suite 600
Houston, Texas 77058

Attention: Secretary

     1. Exercise of Option. Effective as of today,                     , 19 ___, the undersigned (“Optionee”) hereby elects to exercise Optionee’s option to purchase                      shares of the Common Stock (the “Shares”) of Cyberonics, Inc. (the “Company”) under and pursuant to the Company’s 1996 Stock Option Plan, as amended (the “Plan”) and the Nonqualified Stock Option Agreement dated                      (the “Option Agreement”).

     2. Representations of Optionee.

          (a) Optionee acknowledges that Optionee has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions.

          (b) Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee’s purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice.

     3. Rights as Stockholder. Subject to the terms and conditions of this Agreement, Optionee shall have all of the rights of a stockholder of the Company with respect to the Shares from and after the date that Optionee delivers full payment of the Exercise Price until such time as Optionee disposes of the Shares.

     4. Successors and Assigns. The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns.

     5. Arbitration. Any dispute or claim arising out of or in connection with this Agreement shall be settled by binding arbitration. Any such arbitration shall be conducted in accordance with the Rules of Conciliation and Arbitration of the American Arbitration Association and shall take place in Webster, Texas. The arbitration shall be conducted by one arbitrator; provided that if the parties cannot agree on a single arbitrator, then the arbitration shall be conducted by a panel of three arbitrators, one selected by each party and the third selected by the other two arbitrators. The determination of the arbitrator(s) shall be final and binding upon the parties.

     6. Governing Law; Severability. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE EXCLUDING THAT BODY OF LAW PERTAINING TO CONFLICTS OF LAW. Should any provision of this Agreement be determined by a court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable.

     7. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, with postage and fees prepaid, addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party.

     8. Further Instruments. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement.

     9. Delivery of Payment. Optionee herewith delivers to the Company the full Exercise Price for the Shares.

     10. Entire Agreement. The Plan and Notice of Grant/Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Notice of Grant/Option Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof.

Submitted by:	Accepted by:
OPTIONEE:	CYBERONICS, INC.
	By:
Grantee Name
	Its:
Address:	Address:
	100 Cyberonics Blvd.
	Houston, TX 77058

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SCHEDULE

1996 Stock Option Plan Form

Name	Grant Date	Grant Amount		Exercise Price
Michael Allen Cheney	May 14, 2002		10,000	$	14.740000
Shawn P. Lunney	March 6, 1999		25,000	$	8.000000
	May 14, 2002		10,000	$	14.740000
Randal L. Simpson	February 1, 2000		10,000	$	23.000000
	October 10, 2001		10,000	$	15.700000
	January 24, 2002		1,000	$	12.450000
	July 24, 2002		20,000	$	9.960000
	June 2, 2003		25,000	$	18.940000
Pamela B. Westbrook	October 12, 1998		175,000	$	5.125000
	May 14, 2002		10,000	$	14.740000

EX-10.70

EXHIBIT 10.70

CYBERONICS, INC.

2005 STOCK PLAN

STOCK OPTION AGREEMENT

     Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement.

I. NOTICE OF GRANT

     You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows:

Date of Grant:
Exercise Price per Share:	$
Total Number of Shares Granted:
Type of Option:	Nonstatutory Stock Option
Expiration Date:	10th Anniversary of Date of Grant
Vesting Schedule:	1/60th of the Shares subject to the Option shall vest each month after the Date of Grant, subject to the Optionee continuing to be a Service Provider on such dates, until the Option is fully vested.
Termination Period:	To the extent vested, this Option may be exercised for 90 days after Optionee ceases to be a Service Provider and shall then terminate. Upon the death or Disability of the Optionee while a Service Provider, this Option may be exercised one year after Optionee ceases to be a Service Provider and shall then terminate. However, in no event may this Option be exercised after the Expiration Date as provided above.

II. AGREEMENT

     1. Grant of Option. The Plan’s Administrator hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the “Optionee”) an option (the “Option”) to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the “Exercise Price”), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 15(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail.

     If designated in the Notice of Grant as an Incentive Stock Option (“ISO”), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option (“NSO”).

     2. Exercise of Option.

          (a) Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement.

          (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the “Exercise Notice”), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to the Director of Corporate Compliance or to the Secretary of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price.

     No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares.

     3. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:

          (a) cash; or

          (b) check; or

          (c) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; or

          (d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of

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surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares; or

     4. Nontransferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

     5. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement.

     6. Tax Consequences. Some of the federal tax consequences relating to this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

          (a) Exercising the Option.

               (i) Nonstatutory Stock Option. The Optionee may incur federal and other tax liabilities upon exercise of a NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise.

               (ii) Incentive Stock Option. If this Option qualifies as an ISO at the time of exercise, the Optionee will have no federal tax liabilities upon its exercise, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to alternative minimum taxable income for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee ceases to be an Employee but remains a Service Provider, any Incentive Stock Option of the Optionee that remains unexercised shall cease to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the date three months and one day following such change of status.

          (b) Disposition of Shares.

               (i) NSO. If the Optionee holds NSO Shares for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes.

               (ii) ISO. If the Optionee holds ISO Shares for at least one year after exercise and two years after the grant date, any gain realized on disposition of the Shares will be

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treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the lesser of (A) the difference between the Fair Market Value of the Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the sale price of such Shares and the aggregate Exercise Price. Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held.

          (c) Notice of Disqualifying Disposition of ISO Shares. If the Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year-after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee.

     7. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and Optionee. This Agreement is governed by the internal substantive laws, but not the choice of law rules, of Texas.

     8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.

     By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below.

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OPTIONEE:	CYBERONICS, INC.
	By:
	Pamela B. Westbrook
Social Security Number
	Title:	Vice President, Finance & Administration and Chief Financial Officer
Residence Address	Date:

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EXHIBIT A

2005 STOCK PLAN

EXERCISE NOTICE

Cyberonics, Inc.
1651 1 Space Center Blvd. #600
Houston, TX 77062

Attention: Chief Financial Officer

     1. Exercise of Option. Effective as of today,                                         ,___the undersigned (“Purchaser”) hereby elects to purchase                     shares (the “Shares”) of the Common Stock of Cyberonics, Inc. (the “Company”) under and pursuant to the 2005 Stock Plan (the “Plan”) and the Stock Option Agreement dated (the “Option Agreement”). The purchase price for the Shares shall be $                    , as required by the Option Agreement.

     2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price for the Shares.

     3. Representations of Purchaser. Purchaser acknowledges that Purchaser has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions.

     4. Rights as Shareholder. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 13 of the Plan.

     5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser’s purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice.

     6. Entire Agreement: Governing Law. The Plan and Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser’s interest except by means of a writing

A-1

signed by the Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, of Texas.

Submitted by:	Accepted by:
PURCHASER:	CYBERONICS, INC.
	By:
	Its:
Social Security Number

Address:	Address:
	Cyberonics, Inc.
	100 Cyberonics Blvd.
	Houston, TX 77058
	Date Received:

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SCHEDULE

2005 Stock Option Plan Form (Restricted Grants; 5 Year Vesting)

Name	Grant Date	Grant Amount		Exercise Price
Michael Allen Cheney	June 1, 2005		5,000	$	0.000000
W. Steven Jennings	June 1, 2005		5,000	$	0.000000
Shawn P. Lunney	June 1, 2005		10,000	$	0.000000
George E. Parker	June 1, 2005		5,000	$	0.000000
Richard L. Rudolph	June 1, 2005		12,500	$	0.000000
Randal L. Simpson	June 1, 2005		10,000	$	0.000000
Reese S. Terry	June 1, 2005		5,000	$	0.000000
David S. Wise	June 1, 2005		10,000	$	0.000000

EX-10.72

Exhibit 10.72

EMPLOYEE RESTRICTED STOCK AGREEMENT

     THIS RESTRICTED STOCK AGREEMENT (this “Agreement”) is made effective as of XXXX 1, 200X (the “Grant Date”), between CYBERONICS, INC., a Delaware corporation (the “Company”), and                                          (the “Employee”).

     1. Award. Pursuant to the CYBERONICS, INC. 2005 STOCK PLAN (the “Plan”), as of the Grant Date [                    ] shares (the “Restricted Shares”) of the Company’s common stock shall be issued as hereinafter provided in the Employee’s name subject to certain restrictions thereon. The Employee hereby acknowledges receipt of a copy of the Plan and the Prospectus relating thereto pursuant to the Securities Act of 1933, and agrees that this award of Restricted Shares shall be subject to all of the terms and provisions of the Plan, including future amendments thereto, if any, pursuant to the terms thereof. All dividends and other distributions on a Restricted Share shall be subject to the same Forfeiture Restrictions (as hereinafter defined) as are applicable to such Restricted Share.

     2. Restricted Shares. The Employee hereby accepts the Restricted Shares when issued and agrees with respect thereto as follows:

     (a) Forfeiture Restrictions. The Restricted Shares may not be sold, assigned, pledged, exchanged, hypothecated or otherwise transferred, encumbered or disposed of to the extent then subject to the Forfeiture Restrictions, and in the event of termination of the Employee’s service relationship with the Company (as provided in Section 5) for any reason other than as provided in Section 2(b), the Employee shall, for no consideration, forfeit to the Company all Restricted Shares then subject to the Forfeiture Restrictions. The prohibition against transfer and the Employee’s obligation to forfeit and surrender the Restricted Shares to the Company upon the Employee’s termination of service are herein referred to as the “Forfeiture Restrictions.” The Forfeiture Restrictions shall be binding upon and enforceable against any transferee of Restricted Shares.

     (b) Vesting/Lapse of Forfeiture Restrictions. Until the Restricted Shares are fully vested or forfeited, on each anniversary of the Grant Date, so long as the Employee continues in a service relationship with the Company (as provided in Section 5) on such anniversary date, 20% of the Restricted Shares shall vest and the Forfeiture Restrictions shall lapse on such vested shares. The number of shares that vest as of each anniversary date will be rounded down to the nearest whole share, with any remaining shares vesting on the final installment. Notwithstanding the foregoing vesting schedule, the Forfeiture Restrictions shall lapse in full as to all of the Restricted Shares on the earlier of (i) a Change of Control (as defined in the Plan) or (ii) the termination of the Employee’s service relationship with the Company due to the Employee’s death.

     (c) Certificates. A certificate evidencing the Restricted Shares shall be issued by the Company in the Employee’s name, pursuant to which the Employee shall have all of the rights of a shareholder of the Company with respect to the Restricted Shares, including, without limitation, voting rights and the right to receive dividends (provided, however, that dividends paid in shares of the Company’s stock shall be subject

to the Forfeiture Restrictions). The Employee may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the stock until the Forfeiture Restrictions with respect to such shares have expired, and a breach of the terms of this Agreement shall cause a forfeiture of all then remaining Restricted Shares. The certificate shall contain an appropriate endorsement reflecting the Forfeiture Restrictions. The certificate shall be delivered upon issuance to the Secretary of the Company or to such other depository as may be designated by the Committee as a depository for safekeeping until the forfeiture of such Restricted Shares occurs or the Forfeiture Restrictions lapse pursuant to the terms of the Plan and this award. On the date of this Agreement, the Employee shall, if required by the Committee, deliver to the Company a stock power, endorsed in blank, relating to the Restricted Shares. Upon the lapse of the Forfeiture Restrictions without forfeiture of the Restricted Shares, the Company shall cause a new certificate or certificates to be issued without legend (except for any legend required pursuant to applicable securities laws or any other agreement to which the Employee is a party) in the name of the Employee in exchange for the certificate evidencing the Restricted Shares.

     (d) Corporate Acts. The existence of the Restricted Shares shall not affect in any way the right or power of the Board of Directors of the Company or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding. The prohibitions of Section 2(a) hereof shall not apply to the transfer of Restricted Shares pursuant to a plan of reorganization of the Company, but the stock, securities or other property received in exchange therefor shall also become subject to the Forfeiture Restrictions and provisions governing the lapsing of such Forfeiture Restrictions applicable to the original Restricted Shares for all purposes of this Agreement and the certificates representing such stock, securities or other property shall be legended to show such restrictions.

     3. Withholding of Tax. To the extent that the receipt of the Restricted Shares or the lapse of any Forfeiture Restrictions results in compensation income to the Employee for federal or state income tax purposes, the Employee is responsible for taxes due from Employee on such compensation income. In the event that the Employee fails to reimburse the Company for amounts the Company is required to pay as withholding taxes on behalf of the Employee, the Company has the right to withhold from amounts otherwise due to the Employee, and the Employee hereby authorizes such withholding, an amount equal to the withholding taxes paid by the Company by reason of compensation income to the Employee resulting under this Agreement.

     4. Status of Stock. The Employee agrees that the Restricted Shares issued under this Agreement will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable federal or state securities laws. The Employee also agrees that (i) the certificates representing the Restricted Shares may bear such legend or legends as the Committee deems appropriate in order to reflect the Forfeiture Restrictions and to assure compliance with applicable securities laws, (ii) the Company may refuse to register the transfer of the Restricted Shares on the stock transfer records of the Company if such proposed transfer would constitute a

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violation of the Forfeiture Restrictions or, in the opinion of counsel satisfactory to the Company, of any applicable securities law, and (iii) the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the Restricted Shares.

     5. Service Relationship . For purposes of this Agreement, the Employee shall be considered to be in service to the Company as long as the Employee remains an Employee, a Consultant or a Employee (as those terms are defined in the Plan). Nothing in the adoption of the Plan, nor the award of the Restricted Shares thereunder pursuant to this Agreement, shall confer upon the Employee the right to continued service by or with the Company.

     6. Notices . Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of the Employee, such notices or communications shall be effectively delivered if hand delivered to the Employee at his principal place of employment or if sent by registered or certified mail to the Employee at the last address the Employee has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices.

     7. Amendment. This Agreement may not be modified in any respect by any verbal statement, representation or agreement made by the Employee or by any employee, officer, or representative of the Company or by any written agreement unless signed by the Employee and by an officer of the Company who is expressly authorized by the Company to execute such document.

     8. Binding Effect .This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under the Employee.

     1. Controlling Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas.

     IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by an officer thereunto duly authorized, and the Employee has executed this Agreement, all effective as of the Grant Date.

CYBERONICS, INC.

By:

Name:

Title:

EMPLOYEE

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SCHEDULE

2005 Stock Option Plan Form (Restricted Grants; 5 Year Vesting)

Name	Grant Date	Grant Amount		Exercise Price
Michael Allen Cheney	June 1, 2005		5,000	$	0.000000
W. Steven Jennings	June 1, 2005		5,000	$	0.000000
Shawn P. Lunney	June 1, 2005		10,000	$	0.000000
George E. Parker	June 1, 2005		5,000	$	0.000000
Richard L. Rudolph	June 1, 2005		12,500	$	0.000000
Randal L. Simpson	June 1, 2005		10,000	$	0.000000
Reese S. Terry	June 1, 2005		5,000	$	0.000000
David S. Wise	June 1, 2005		10,000	$	0.000000

EX-21.1

EXHIBIT 21.1

LIST OF SUBSIDIARIES OF CYBERONICS, INC.

Name of Subsidiary	Jurisdiction of Incorporation
CYBERONICS EUROPE NV	BELGIUM

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Cyberonics, Inc.:

We consent to the incorporation by reference in the registration statement (No. 333-56022) on Form S-3 and (Nos. 333-102521, 333-97095, 333-81158, 333-76368, 333-74948, 333-66014, 333-56694, 333-40570, 333-91303, 333-77361, 333-66691, 333-66689, 333-66687, 333-49905, 333-33725, 333-19785, 333-125401 and 333-108281) on Forms S-8 of Cyberonics, Inc. of our reports dated January 5, 2007, with respect to the consolidated balance sheets of Cyberonics, Inc. and subsidiary as of April 28, 2006 and April 29, 2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the 52 weeks ended April 28, 2006 and April 29, 2005 and the 53 weeks ended April 30, 2004, and management’s assessment of the effectiveness of internal control over financial reporting as of April 28, 2006 and the effectiveness of internal control over financial reporting as of April 28, 2006, which reports appear in the April 28, 2006 annual report on Form 10-K of Cyberonics, Inc.

Our report dated January 5, 2007, on management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting as of April 28, 2006, expresses our opinion that the Company did not maintain effective internal control over financial reporting as of April 28, 2006 because of the effect of a material weakness on the achievement of the objectives of the control criteria and contains an explanatory paragraph that states Cyberonics, Inc. had inadequate controls over the accounting for and disclosure of its stock-based compensation expense. Specifically, management has identified a material weakness comprised of the following internal control deficiencies:

• Failure to recognize stock option granting practices as a significant risk and to ensure that all individuals involved in the process understood their appropriate roles and responsibilities and the consequences of their actions;

• Lack of communication between individuals involved in the compensation approval process and personnel responsible for the accounting treatment of equity-based awards;

• Lack of accounting expertise and knowledge related to accounting for certain equity-based awards;

• Inadequate policies and procedures regarding maintenance of records supporting the granting activities, grant date, and authorization of equity-based transactions;

• Inadequate policies and procedures regarding preparation and retention of documentation of stock option granting procedures and practices; and

• Inadequate supervision and training for personnel involved in the stock option granting process;

Our audit report on the consolidated financial statements contains an explanatory paragraph that states that the Company has suffered recurring losses from operations, received a Notice of Default and demand letter and Notice of Acceleration for the $125 million senior subordinated convertible notes and incurred a potential default of the $40 million Line of Credit. These matters raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

In addition, our audit report on the consolidated financial statements has an explanatory paragraph that refers to the Company’s restatement of its consolidated financial statements as of April 29, 2005 and for the 52 weeks ended April 29, 2005 and for the 53 weeks ended April 30, 2004.

/s/ KPMG LLP  

Houston, Texas
January 5, 2007

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Reese S. Terry, Jr., Interim Chief Executive Officer, certify that:

     1. I have reviewed this Annual Report Form 10-K for April 28, 2006 of Cyberonics, Inc. (the registrant);

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial position, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/  REESE S. TERRY, JR.  

Reese S. Terry, Jr. 

Interim Chief Executive Officer
(Principal Executive Officer) 

Date: January 5, 2007

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, John A. Riccardi, Interim Chief Financial Officer, certify that:

     1. I have reviewed this Annual Report Form 10-K for April 28, 2006 of Cyberonics, Inc. (the registrant);

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial position, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors or (persons performing the equivalent functions);

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/  JOHN A. RICCARDI  

John A. Riccardi 

Interim Chief Financial Officer
(Principal Financial Officer) 

Date: January 5, 2007

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER OF CYBERONICS, INC.
PURSUANT TO 18 U.S.C. SECTION 1350

     Reese S. Terry, Jr., the Interim Chief Executive Officer of Cyberonics, Inc. (the Company), and John A. Riccardi, the Interim Chief Financial Officer of the Company each hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (a) the Company’s Annual Report on Form 10-K for the fiscal year ended April 28, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

     (b) the information contained in the Report fairly presents, in all material respects, the financial position and results of operations of the Company.

Date: January 5, 2007

/s/  REESE S. TERRY, JR.  

Reese S. Terry, Jr. 

Interim Chief Executive Officer
(Principal Executive Officer) 

/s/  JOHN A. RICCARDI  

John A. Riccardi 

Interim Chief Financial Officer
(Principal Financial Officer)