CYBERONICS INC, 10-K, 1996-09-19

CYBERONICS INC
10-K, 1996-09-19
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(Mark One)

/X/ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 /Fee Required/ For the fiscal year ended: June 30, 1996

/ / Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 /No Fee Required/ 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 (I.R.S. Employer
incorporation or organization) Identification Number)

17448 Highway 3, Ste. 100, Webster, Texas 77598-4135
(address of principal executive offices) (zip code)

Registrant's telephone number, including area code: (713) 332-1375

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

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

The aggregate market value of voting stock held by non-affiliates
of the registrant as of September 18, 1996, was $37,307,638 based upon the last
sales price reported for such date on the NASDAQ National Market System. 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 September 18, 1996, registrant had outstanding 11,762,542 shares
of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

No documents are incorporated by reference herein.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
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<S> <C>
PART I.................................................................................................1
ITEM 1. BUSINESS.......................................................................1
ITEM 2. PROPERTIES....................................................................16
ITEM 3. LEGAL PROCEEDINGS.............................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................16

PART II...............................................................................................17
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS...............................................17
ITEM 6. SELECTED FINANCIAL DATA.......................................................18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...........................................19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...........................................24

PART III..............................................................................................25
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................25
ITEM 11. EXECUTIVE COMPENSATION........................................................27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS...............................30
AND MANAGEMENT................................................................30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................31

PART IV...............................................................................................32
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K ..................................................................32
</TABLE>

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PART I

ITEM 1. BUSINESS

This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a result of a number
of important factors. For a discussion of important factors that could affect
the Company's results, please refer to the Summary section and financial
statement line item discussions set forth in Management's Discussion and
Analysis of Financial Condition and Results of Operations.

At a Special Meeting on July 23, 1996, the Company's Stockholders
voted on and approved the Agreement and Plan of Merger between the Company and
St. Jude Medical, Inc. entered into on April 8, 1996. The merger agreement
provides St. Jude Medical, Inc. the right to terminate the merger prior to
closing which, in effect, gives St. Jude Medical, Inc. an option, but not the
obligation, to purchase the Company until October 18, 1996. If the merger is
consummated, St. Jude Medical, Inc. will pay approximately $72 million, or
approximately $7.00 per share in cash, for currently outstanding shares of the
Company.

Cyberonics, Inc. ("Cyberonics" or the "Company") was founded in 1987
to design, develop and bring to market medical devices which provide a novel
therapy, vagus nerve stimulation, for the treatment of epilepsy and other
debilitating neurological disorders. Currently, there are limited or no
effective pharmacological or surgical treatments for many patients suffering
from such disorders. The basic premise of Cyberonics' vagus nerve stimulation
therapy is that electrical stimulation of the vagus nerve decreases the brain's
sensitivity to the conditions or stimuli that can trigger epileptic seizures and
other neurological disorders.

Epilepsy is a neurological disorder which is estimated to affect
over 1.6 million individuals in the United States and in excess of three million
individuals in Western Europe and Japan. Epileptic seizures can be categorized
as either "partial" or "generalized." Over 50% of patients with epilepsy suffer
from partial seizures. Of individuals suffering from partial seizures, over 20%
are reported to suffer from "refractory" seizures, i.e., seizures that recur
despite treatment. Epileptic seizures, whether partial or generalized, can be
severely debilitating. Medical consequences may include brain damage from
recurring seizures, injuries and accidents associated with loss or impairment of
consciousness, and death as a result of severe seizures. For reasons that are
not clear, partial seizures are generally more resistant to existing therapies
than generalized seizures. The medical community and epilepsy patients are
seeking therapies which eliminate or reduce seizures, decrease or eliminate the
side effects associated with antiepileptic drugs and avoid the costs and risks
associated with brain surgery.

The Company believes that its proprietary, implantable vagus nerve
stimulation device, the NeuroCybernetic Prosthesis System (the "NCP(R) System"),
offers a safe, efficacious and cost-effective therapy for patients suffering
from partial seizures. The Company believes that the NCP System may also provide
an effective and safe therapy for generalized seizures and for certain other
debilitating neurological disorders. The NCP System, which consists of a cardiac
pacemaker-like signal generator (the "NCP Generator") and a vagus nerve lead,
delivers electrical signals to stimulate the vagus nerve. The NCP Generator is
surgically implanted beneath the skin of the patient's chest and the lead is
attached to the left vagus nerve in the patient's neck in a one-to-two hour
procedure with the patient typically under general anesthesia. To date, the NCP
System has been used in conjunction with patients' existing antiepileptic drug
therapies.
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In 1988, the Company began clinical trials of its NCP System for the
treatment of refractory partial seizures. As of June 30, 1996, NCP Systems had
been implanted in an aggregate of over 700 patients at leading epilepsy
treatment centers in the United States, Canada, Germany, Holland, The United
Kingdom, France, Switzerland, Belgium, Spain, Italy, Japan, Sweden, Norway,
Finland, Australia, Israel, South Africa, Hong Kong and China. The Company
believes that the clinical investigations have demonstrated that its NCP System
is a safe and effective treatment for individuals suffering from partial
seizures.

The Company's strategy is initially to establish vagus nerve
stimulation as a preferred means for treating patients suffering from refractory
partial seizures, and then to assess the application of vagus nerve stimulation
for the treatment of generalized seizures. In addition, based upon theoretical
considerations and limited animal and human study data, the Company believes
that severe neurological disorders outside the field of epilepsy, including
neuropsychiatric disorders such as chronic severe depression, movement disorders
such as Parkinson's Disease, sleep disorders such as narcolepsy, and migraine
headaches, may also be amenable to treatment by vagus nerve stimulation with the
NCP System. The Company plans to establish a program to discover and develop new
applications for the NCP System outside the field of epilepsy. The Company has
retained worldwide commercial rights to its NCP System for all applications.

In December 1991, the Company submitted a Premarket Approval ("PMA")
to the United States Food and Drug Administration (the "FDA"), seeking approval
to sell the NCP System in the United States for the treatment of partial
seizures. In February 1992, the FDA notified the Company that the PMA
application was incomplete and that additional information would be required
before it would be accepted for substantive review. The Company continued its
clinical trials, and on June 2, 1993 submitted its amended PMA application. The
amendment responded to the concerns raised by the FDA, and contained data on 136
patients, 109 of whom had received stimulation for at least one year and 65 of
whom had received stimulation for at least 18 months.

In January 1994, the Company announced that its amended PMA
application was accepted for filing by the FDA. While the amended PMA
application has been accepted for filing, the FDA further informed the Company
that, based on its initial scientific review of the amended PMA application,
there were "significant deficiencies" in the submission and that an amendment
containing certain additional clinical and technical information must be
provided before the regulatory review process could continue. In response to
further discussions with the FDA, the Company announced in July 1994 that it
would initiate an additional confirmatory U.S. clinical trial for the NCP
System. Based on these discussions with the FDA, this study is an additional
requirement of the FDA's regulatory approval process for the NCP System for the
treatment of epilepsy patients experiencing refractory partial seizures.

In January 1995, the Company announced the submission of a major PMA
amendment responding to the FDA's questions regarding the PMA application that
was accepted for filing in January 1994. The Company also announced that it had
received permission to begin enrolling patients into its additional confirmatory
trial, under which an additional 265 patients were targeted for enrollment at
approximately 20 major investigational centers in the United States.
Approximately 190 to 200 patients are expected to complete the trial. All
patients have completed the acute phase of the confirmatory study. Gathering,
analyzing and submission of the data is expected to take place by the end of
calendar 1996, although it may take longer.

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pre-market approval. The Company is currently clinically testing the NCP System
under an Investigational Device Exemption ("IDE") from the FDA and cannot
commence marketing or commercial sales of the NCP System in the United States
until it receives pre-market approval from the FDA. The Company's business,
financial condition and results of operations are critically dependent upon
receiving FDA approval of the Company's PMA application.

In June 1994, the Company was granted regulatory approval to market
the NCP System in the twelve- member countries of the European Union after
having obtained "CE marking," the designation of market approval now universally
accepted by all European Union member countries. Cyberonics has also obtained
approval to sell the NCP System in certain other international markets including
Sweden, Norway, Switzerland, Israel, Australia, South Africa, Hong Kong and
China. The Company has obtained government and third-party reimbursement in
certain of its approved markets and is continuing to pursue full reimbursement
approval for substantially all of those that remain. The Company does not
believe that significant international sales volume can be generated without
full reimbursement approval. There can be no assurances as to when or whether
such reimbursement will be obtained in any of these countries or, if obtained,
whether the levels of reimbursement will be sufficient to enable the Company to
sell the NCP System on a profitable basis. See "Third Party Reimbursement."

VAGUS NERVE STIMULATION MARKET

OVERVIEW

Currently, there are limited or no effective pharmacological or
surgical treatments for many patients suffering from debilitating neurological
disorders such as epilepsy. For a significant number of patients with epilepsy,
currently available drug therapies provide only limited benefit and/or cause
unacceptable side effects. Surgical treatment may be indicated for certain
people with epilepsy, and generally involves removing the portion of the brain
where seizures originate. Even when indicated, surgery is performed on
relatively few patients due to the extensive evaluation and testing required to
establish eligibility for surgery and to localize the source of the disorder,
the risks and high costs associated with surgery, and the uncertainty of
long-term benefit. Patients suffering from debilitating neurological disorders
need improved therapies which provide safe and effective treatment without the
unsatisfactory side effects associated with drugs or the costs and risks
associated with brain surgery.

The basic theoretical premise of the Company's therapy is that
electrical stimulation of the vagus nerve decreases the brain's sensitivity to
the conditions or stimuli that can trigger epileptic seizures and other
neurological disorders. The primary function of the vagus nerve is to monitor
and modulate the function of internal organs. Vagus nerve stimulation has
demonstrated in animals the ability to either synchronize or desynchronize
electrical activity in the brain, depending upon the stimulation parameters. The
Company believes that the NCP System treats epilepsy, which is characterized by
aberrant synchronous electrical activity, by desynchronizing such electrical
activity. In addition, based upon theoretical considerations and limited animal
and human study data, vagus nerve stimulation appears to increase the electrical
threshold for seizures and may modulate the release of certain excitatory and
inhibitory neurotransmitters and neuropeptides associated with the control of
epilepsy and other neurological disorders.

Since its inception, the Company has focused its product
development, clinical investigation and regulatory resources on epilepsy, and in
particular epilepsy patients suffering from refractory partial seizures. Based
on theoretical considerations and limited animal and human data, the Company
believes that vagus nerve stimulation may have applications for the treatment of
other types of epilepsy and for other neurological disorders. The Company
intends to investigate other applications for vagus nerve stimulation in the
future. See "Strategy."

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EPILEPSY

Epilepsy is a recurrent disorder of the brain characterized by
excessive neuronal discharges, manifested by transient episodes of motor,
sensory, and/or psychic dysfunction, with or without unconsciousness or
convulsive movements. Epileptic seizures are categorized as either partial or
generalized. Partial seizures involve only one hemisphere of the brain at the
onset and may or may not result in the loss of consciousness. Generalized
seizures, such as "grand mal" seizures, involve both hemispheres of the brain
from the onset, result in the loss of consciousness and are typically manifested
by convulsions. Partial seizures can also develop into generalized seizures,
known as "secondarily generalized" seizures. For reasons that are not clear,
partial seizures are generally more resistant to existing therapies than
generalized seizures.

The prevalence of epilepsy significantly exceeds other well
recognized neurological disorders such as Parkinson's disease, multiple
sclerosis, muscular dystrophy, myasthenia gravis and amyotrophic lateral
sclerosis (ALS or Lou Gehrig's Disease). Published epidemiological studies of
epilepsy estimate that over 1.6 million individuals are currently being treated
for epilepsy in the United States and that over 112,000 new cases are diagnosed
each year. In addition, it is estimated that there are in excess of three
million individuals being treated for epilepsy in Western Europe and Japan, with
over 210,000 new cases diagnosed each year. Over 50% of patients with epilepsy
suffer from partial seizures. Of patients suffering from partial seizures, over
20% are reported to continue to experience more than one seizure per month
despite treatment.

The impact of epilepsy varies from individual to individual. Some
patients respond well to existing therapies while some patients do not respond
to therapy or respond but experience significant side-effects. The medical,
personal and societal implications of epilepsy can be profound for those
individuals with epilepsy who do not respond well to available therapies or for
whom such therapies have unacceptable side effects. Seizures can be severely
debilitating and may result in major irreversible morbidity (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 the 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. Societal
implications of epilepsy include the loss or underutilization of potentially
productive citizens and the cost of long-term public assistance for those
disabled by epilepsy.

There are currently two courses of treatment available to persons
suffering from epilepsy: drug therapy and surgery. The efficacy of these
treatments depends in part upon the type of seizures from which a patient
suffers. The efficacy of drugs and surgery for patients suffering from partial
seizures is highly variable. Patients suffering from generalized seizures are
more likely to respond well to available drug therapies.

Drug Therapy. Antiepileptic drugs serve as a first-line treatment,
and are prescribed for virtually all individuals being treated for epilepsy.
There are four drugs predominately used for the treatment of epilepsy which are
used either singly (monotherapy) or in combination (polytherapy). Lack of
patient compliance, which is typical of chronic drug therapy, inherently reduces
the efficacy of a drug therapy regimen. In addition, side effects are common
with antiepileptic drugs, particularly where polytherapy is used. Side effects
range from transient drowsiness to life-threatening hematologic reactions or
liver failure. Women taking antiepileptic drugs are two to five times more
likely to bear infants with birth defects than the general population and
children receiving antiepileptic drug therapy often experience learning
difficulties. Three new antiepileptic drugs, felbamate, gabapentin and
lamotrigine, recently received FDA approval. No other major antiepileptic drugs
have been introduced in the United States since 1978. While several of the new
drugs have shown some improvement in seizure reduction, it appears from publicly
available data that the major benefit of these drugs will be reduced side
effects. In August 1994, the manufacturer of felbamate

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announced that, in conjunction with recommendations from the FDA, it was
advising that patients be withdrawn from the drug based on reports of serious
complications. See "Competition."

Surgical Treatment. When drug therapy is not effective, the only
current alternative is 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. It is estimated that 30,000 to
54,000 patients in the United States are potential candidates for surgery.
However, only 1,500 therapeutic epilepsy surgeries are performed per year in the
United States. The Company believes that the low number of surgeries is
attributable to several factors, including: the extensive evaluation and testing
required to screen candidates for surgery and to localize the source of the
seizures; the risks of morbidity and mortality associated with brain surgery;
the uncertainty of long-term benefit; and the cost of evaluation, testing and
surgery, which is reported to range from $25,000 in uncomplicated cases, to
greater than $100,000 for those individuals requiring extensive preoperative
testing.

Vagus Nerve Stimulation. The medical community and epilepsy patients
are seeking therapies which eliminate or reduce seizures, decrease or eliminate
the side effects associated with antiepileptic drugs and avoid the costs and
risks associated with brain surgery. The Company developed the NCP System, which
provides vagus nerve stimulation, to address these needs. The Company began
clinical trials of the NCP System for the treatment of partial seizures in
November 1988. To date, the NCP System has been used in conjunction with
patients' existing antiepileptic drug therapies. As of June 30, 1996, NCP
Systems had been implanted in an aggregate of over 700 patients at leading
epilepsy treatment centers in the United States, Canada, Germany, Holland, The
United Kingdom, France, Switzerland, Belgium, Spain, Italy, Japan, Sweden,
Norway, Finland, Australia, Israel, South Africa, Hong Kong and China. The
Company believes that these clinical investigations have demonstrated that the
NCP System is a safe and effective treatment for individuals suffering from
partial seizures.

STRATEGY

The Company's initial strategy is to establish vagus nerve
stimulation as a preferred means for treating patients who suffer from
refractory partial seizures. The Company's secondary strategy is to expand vagus
nerve stimulation therapy to other types of epileptic seizures and other
debilitating neurological disorders which respond well to vagus nerve
stimulation. The following are key elements of the Company's strategy:

- Continue to demonstrate clinical efficacy and safety of the
NCP System for the treatment of partial seizures. The Company
will continue conducting scientifically rigorous, multi-center
clinical studies intended to meet the requirements for
obtaining U.S. regulatory approval and to strengthen and
broaden the efficacy and safety claims of vagus nerve
stimulation using the NCP System for the treatment of partial
seizures. The Company believes that this approach will enhance
scientific and market acceptance of the NCP System.
Information from these trials will be used for presentation to
physicians who treat patients with epilepsy, for publication
in medical journals and for regulatory filings. See "Clinical
Trials."

- Enter major global medical markets upon obtaining regulatory
and reimbursement approvals. The Company's clinical trials
have been or are being conducted at leading epilepsy treatment
centers in the United States, Germany, Canada, Holland,
Norway, Sweden, Spain and Japan. The Company intends to
conduct clinical studies in other well funded medical markets
with major epilepsy centers as part of its strategy to obtain
regulatory and/or reimbursement approval in such additional
countries. In June 1994, the Company was granted regulatory
approval to market the NCP System in the twelve-member
countries of the European Union, has obtained government and
third-party reimbursement approval in certain of those
countries and is continuing to pursue full reimbursement

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approval for substantially all of the remaining European Union
member countries. The Company has commenced sales and
marketing activities in additional countries and intends to
expand these efforts as regulatory and reimbursement approvals
are obtained for the NCP System. The Company will initially
target the approximately 500,000 patients in North America,
Western Europe and Japan with refractory partial seizures. See
"Marketing and Sales," "Government Regulation" and
"Third-Party Reimbursement."

- Expansion of epilepsy indications. The Company intends to
conduct clinical studies of the NCP System for treatment of
generalized seizures. When and if the Company is able to
demonstrate safety and efficacy in treating generalized
seizures, the Company intends to file supplements to its PMA
and international regulatory filings. See "Government
Regulation."

- Other disorders. The Company believes that severe neurological
disorders outside the field of epilepsy, including
neuropsychiatric disorders such as chronic severe depression,
movement disorders such as Parkinson's Disease, sleep
disorders such as narcolepsy, and migraine headaches, may be
amenable to treatment by vagus nerve stimulation with the NCP
System. The Company has filed patent applications relating to
the use of vagus nerve stimulation for the treatment of
certain neurological disorders, and plans to establish a
program to discover and develop new applications for the NCP
System outside the field of epilepsy. To date, the Company has
been granted method patents with respect to movement
disorders, eating disorders, mobility disorders, endocrine
disorders, migraine headaches, sleep disorders, dementia,
neuropsychiatric disorders and pain. See "Clinical Trials" and
"Patents, Licenses and Proprietary Technology."

CYBERONICS' NCP SYSTEM

The NCP System is a proprietary, integrated system consisting of an
implantable, pacemaker-like device that delivers an electrical signal to an
implantable lead which is attached to the left vagus nerve. The signals are
delivered on a chronic, intermittent basis, and may also be initiated by the
patient with a hand-held magnet. The NCP System is surgically implanted, with
the patient typically under general anesthesia, in a procedure which usually
takes one to two hours. The NCP Generator is surgically implanted in a
subcutaneous pocket in the upper left chest. The electrode of the vagus nerve
lead is attached to the left vagus nerve in the lower left side of the neck, and
the connector end of the lead is tunneled to the generator site in the chest.
The patient is generally admitted to the hospital the day of surgery and
discharged one to two days after surgery.

The total cost of the NCP System to the patient, including the
implant procedure, is projected to be approximately $15,000. This projected cost
is comprised of approximately $9,000 in hospital charges and physician fees and
$6,000 for the NCP System.

NCP Generator. The NCP Generator is an implantable, programmable,
cardiac pacemaker-like signal generator designed to be coupled with the vagus
nerve lead to deliver electrical signals to the vagus nerve. The Company's
current NCP Generator employs a single lithium thionyl chloride battery and has
an expected useful life of two to five years depending on the stimulation
parameter selection. Upon expiration of the battery, the NCP Generator is
removed and a new generator is implanted in a short, out-patient procedure. To
optimize patient treatment, the pulse width, output current, signal frequency
and stimulation duration of the NCP Generator can be noninvasively programmed
and adjusted by the treating physician with a personal computer using the
Company's programming wand and software. The patient can use a small, hand held
magnet which is offered with the NCP Generator to manually activate or
deactivate stimulation.

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Vagus Nerve Lead. Cyberonics has licensed a proprietary nerve lead
design to convey the electrical signal from the NCP Generator to the vagus
nerve. The lead incorporates patented open helical 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 helical
electrodes and helical anchor tether wrap around the vagus nerve and the
connector end is tunneled subcutaneously to the chest where it is attached to
the NCP 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. The Company's proprietary programming
wand and software are used to transmit programming information from a personal
computer to the NCP Generator via electromagnetic signals. Programming
capabilities include revision of the NCP Generator's programmable parameters
(pulse width, output current, signal frequency and stimulation duration), and
storage and retrieval of telemetry data. The NCP programming wand can be
connected to any IBM compatible personal computer via a standard serial
connector.

Tunneling Tool. The tunneling tool is a disposable surgical tool
designed to be used during surgical placement of the vagus nerve lead. The tool
is used for subcutaneous tunneling of the lead assembly between the nerve site
in the neck and the NCP Generator site in the chest.

CLINICAL TRIALS

The Company began trials of the NCP System for the treatment of
refractory partial seizures in November 1988. As of June 30, 1996, approximately
700 patients had been implanted with NCP Systems, of whom approximately 481 were
implanted pursuant to clinical trials conducted at leading epilepsy treatment
centers in North America, Europe and Japan.

The Company conducted two pilot studies of the NCP System between
November 1988 and March 1990. In June 1990, the Company commenced a
triple-blinded, randomized, parallel, controlled study of the NCP System at 17
epilepsy treatment centers, including 12 in the United States, one in Canada,
two in Germany, one in Sweden and one in Holland. This demanding study design,
while customary for drug trials, is significantly more rigorous than would be
typical for assessing medical devices and was utilized to enhance the scientific
validity of the data generated. A total of 115 patients were implanted with NCP
Systems as part of this pivotal study. The Company believes that this study
accomplished its primary objective by demonstrating that vagus nerve stimulation
provides a safe and effective treatment for patients suffering from refractory
partial seizures. As of June 30, 1996, data records had been collected on 81
study patients who had received stimulation for at least 18 months. Such data
records reveal that 34 of the 81 patients who had received stimulation for at
least 18 months realized a 50% or greater reduction in seizure frequency. In
addition, consistent with the pilot studies, data from the pivotal study showed
improved seizure reduction over time. Reported side effects include minor
hoarseness, coughing and throat pain during stimulation.

During the pivotal clinical trials, technical complications occurred
due to lead wire fractures, battery depletion and NCP Generator malfunctions. In
eight of the first 10 patients to receive the NCP System, prototype leads
fractured and were replaced with a redesigned lead or were unipolarized. Several
of the redesigned leads have failed, for either unknown reasons or as a result
of trauma to the patient. In response to these failures, the Company has
improved the lead's durability. None of these events caused patients to withdraw
from the clinical studies. In one patient, an NCP Generator malfunctioned as a
result of an assembly error. The malfunction caused intense electrical
stimulation resulting in permanent left vocal cord paralysis. Changes in design
and manufacturing processes were implemented to preclude the recurrence of such
a malfunction. This malfunction was reported to the FDA as a serious adverse
event. Although a number of patients received devices which were manufactured
and implanted prior to the reported malfunction, to date, no other malfunctions
of this nature have been reported. There can be no assurance that there will not
be similar or other device failures which could result in an unsafe condition in
patients. The

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<PAGE> 10
occurrence of such malfunctioning or other adverse reactions could
result in a recall of the Company's products, possibly requiring removal (and
potentially reimplantation) of the NCP Generator and/or leads. Any product
recall could have a material adverse effect on the Company's business, financial
condition and results of operations. Clinical events are reported to the FDA in
regular reports, whether or not related to the NCP System. The Company has
reported several deaths among patients implanted with the NCP System. Although
treatment was underway at the time, no deaths have been linked to the
implantation of or stimulation by the NCP System.

In July 1994, the Company announced that it intended to initiate an
additional confirmatory U.S. clinical trial for the NCP System. Based on
discussions with the FDA, this study is an additional requirement of the FDA's
regulatory approval process for the NCP System for the treatment of epilepsy
patients experiencing refractory partial seizures. Cyberonics has since received
FDA permission to enroll up to 265 patients into its additional confirmatory
trial. Completion of the trial and submission of the data is expected to take
place by the end of calendar 1996, although it may take longer.

The Company intends to sponsor additional clinical trials for the
NCP System, initially for expanded applications within the field of epilepsy and
secondarily for neurological disorders outside the field of epilepsy.
New trials conducted in the United States will require additional FDA approvals.

Although clinical data for periods of up to 18 months reveal
continuing improved efficacy over time, data regarding the longer term safety
and efficacy of the NCP System are limited. In addition, although the Company
has theories as to why vagus nerve stimulation reduces epileptic seizures,
uncertainty still exists as to the basic mechanism that provides positive
therapeutic effects. There can be no assurance that the efficacy of the
treatment will continue to improve or will not decline over time, or that
long-term operation of the NCP System will not produce adverse side-effects or
cause harm or death to patients. Any such negative long-term effects could
adversely affect the regulatory status and/or market acceptance of the NCP
System and thereby adversely affect the Company's business, financial condition
and results of operations.

MARKETING AND SALES

The Company has developed a sales and marketing plan to reach the
key epilepsy treatment centers in the United States and internationally. In the
United States, there are approximately 50 comprehensive epilepsy treatment
centers. The approximately 200 key epilepsy treatment centers in the United
States are staffed by approximately 800 epileptologists, neurologists who
specialize in epilepsy. The treatment of patients with epilepsy is even more
concentrated in key international markets. For example, there are five major
centers and 30 to 40 secondary clinics in Germany, four major centers in Sweden,
three major centers in Holland, three major centers in Spain and one major
center in Norway. The Company believes that the concentrated nature of the
market for the NCP System will allow highly focused sales and educational
activities conducted by a sales force that is modest in size and resource
requirements.

MARKETING

The adoption of new therapeutic medical technologies is typically
driven by physicians who have participated in the investigation of a new
technology and who then convince other physicians to adopt the technology for
the treatment of their patients. This process is typically referred to as
physician-to-physician selling, and is carried out via presentations and
discussions of scientific and clinical data at major medical symposia, through
scientific and clinical articles published in medical journals, local
educational programs and direct communications among physicians. The Company
intends to continue to sponsor scientifically rigorous trials of the NCP System
conducted by respected clinical investigators in influential medical centers in
key markets, to support investigators in the

-8-
<PAGE> 11
generation and presentation of scientific and clinical data and to develop
internal education capabilities to support the physician-to-physician selling
process on an on-going basis following PMA approval.

In addition, adoption of new medical therapies is fostered by
patient awareness. To enhance patient awareness, the Company intends to, among
other things, support presentation by authoritative physicians of clinical
results and patient case studies to national, regional and local epilepsy
support groups.

The availability of reimbursement from government and third-party
payors is also critical to market acceptance of new therapeutic medical devices.
In the United States, the Company is executing a plan to qualify the NCP System
and implant procedure for reimbursement. Country-specific plans have been
developed and are being executed for key international markets. While the NCP
System has been approved for reimbursement in certain countries outside of the
United States, and there can be no assurance that widespread approval will be
obtained in a timely manner or at all, or that, if obtained, reimbursement will
be at a level sufficient to enable the Company to sell NCP Systems on a
profitable basis. See "Third-Party Reimbursement."

The Company currently has only one product, the NCP System, and does
not expect to have any other source of revenue for the foreseeable future. Even
if the Company's PMA is approved by the FDA, market acceptance of the Company's
NCP System will depend on the Company's ability to convince the medical
community of the clinical efficacy and safety of vagus nerve stimulation and the
NCP System, and on the availability of adequate levels of reimbursement. There
can be no assurance that the NCP System will achieve market acceptance for the
treatment of epilepsy or any other indication. Failure of the NCP System to gain
market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations.

SALES

The Company's marketing plans are being implemented, in part, via a
sales and education strategy, which will be executed on a country-by-country
basis when and if regulatory and reimbursement approvals are obtained. The
Company plans to employ a direct sales force together with educational
specialists for North America and other key markets. The Company plans to enter
into distribution agreements for other territories. The decision whether to use
a direct sales force or independent distributors will be made on a
country-by-country basis, depending upon a number of factors including market
size, anticipated market entry costs, reimbursement potential, and regulatory
considerations. As of June 30, 1996, the Company had signed distribution
agreements or letters of intent for Sweden, Norway, Finland, Spain, Australia,
Denmark, Korea, Ireland and Israel. The distribution agreements generally grant
the distributor exclusive distribution rights for the particular territory. In
return, the distributor assumes responsibility for obtaining regulatory approval
for such territory and agrees to certain minimum purchase levels.

MANUFACTURING AND SOURCES OF SUPPLY

Cyberonics' manufacturing operations are required to comply with
Good Manufacturing Practices ("GMP"). GMP addresses the methods, facilities and
quality assurance controls used in manufacturing, packing, storing and
installing medical devices. As part of the FDA pre-market approval process, the
Company has passed compliance inspection, and will continue to be subject to
periodic follow-up inspections. See "Government Regulation." Certain
international markets have quality assurance and manufacturing requirements that
may be more or less rigorous than those in the United States.

The NCP Generator, which is similar in design and manufacture to a
cardiac pacemaker, is comprised of two printed circuit boards and a battery
which are hermetically sealed in a titanium case. Standard components are
assembled on printed circuit boards by a contract manufacturer using
surface-mount technology. The boards are then

-9-
<PAGE> 12
shipped to the Company for assembly and testing. The assembled electronics are
then placed in a titanium case which is shipped to a third party for laser
welding and returned to the Company for attachment of an epoxy header to which
the lead connects and for final testing. Sterilization of the NCP Generator is
performed by a third party.

The Company relies upon sole source suppliers for certain of the key
components and materials used in its products. The Company routinely experiences
discontinuation or unavailability of components and materials requiring
qualification of alternative sources or, if no such alternative sources are
identified, product design changes. Qualifying alternative sources and
redesigning products can be time consuming. In addition, such changes generally
require regulatory submissions and approvals. Specifically, the Company is aware
of future product design changes that will be required to incorporate a new
battery and microprocessor into the NCP Generators' circuitry. Although the
Company believes that these changes will be made without disruption, any
extended delays in or inability to secure alternate sources for these or other
components and materials could result in product supply and manufacturing
interruptions which could have a material adverse effect on the Company's
ability to manufacture its products and therefore on its business, financial
condition and results of operations.

The Company does not have experience manufacturing its products in
the volumes that will be necessary to achieve significant commercial sales.
Should the Company receive approval of its PMA for the NCP System, the Company
may encounter difficulties in scaling up production or in hiring and training
additional manufacturing personnel. Any production or supply-related
interruption could have a material adverse effect on the Company's ability to
manufacture its products and, therefore, on its business, financial condition
and results of operations.

PRODUCT DEVELOPMENT

Cyberonics' product development strategy is directed toward
improving its current products and developing new products which provide
additional features and functionality. In October 1992, the Company began
shipping an improved version of the NCP Generator which has a two to five year
life and is capable of providing a broader range of stimulation patterns. The
Company will be required to file for the appropriate United States and
international regulatory approvals in connection with the introduction of
improved and new products. See "Government Regulation." Current product
development programs include ongoing improvements to the NCP Generator are under
way, including the addition of end of service predictors. Longer term
development activities may concentrate on methods of detecting physiological
signals which indicate the onset of a seizure and automatically activate the NCP
Generator. These development activities are expected to be technically
challenging and no assurance can be given that they will result in marketable
products.

COMPETITION

The Company believes that existing and future antiepileptic drugs
will be the primary competition for the treatment of partial seizures. Three new
antiepileptic drugs, felbamate, gabapentin and lamotrigine recently received FDA
approval. No other major antiepileptic drugs have been introduced in the United
States since 1978. While several of the new drugs have shown some improvement in
seizure reduction, it appears from publicly available data that the major
benefit of this new generation of drugs will be reduced side effects. In August
1994, the manufacturer of felbamate announced that, in conjunction with
recommendations from the FDA, it was advising that patients be withdrawn from
the drug based on reports of serious complications. The Company may also face
competition from medical device companies for the treatment of partial seizures.
While there is no known commercially available competitive vagus nerve
stimulation device, one company has clinically assessed an implantable signal
generator used with a deep brain probe (thalamic stimulation) for the treatment
of epilepsy. The Company could also face competition from pacemaker companies
which have the technology and expertise to develop devices for vagus nerve
stimulation.

-10-
<PAGE> 13
Many of the Company's current and potential competitors have
substantially greater financial, manufacturing, technical and marketing
resources than the Company. The development by others of new treatment methods
with either novel antiepileptic drugs or medical devices for epilepsy could
render the NCP System non-competitive or obsolete.

Cyberonics believes that the primary competitive factors within the
epilepsy treatment market 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 and product reliability.
There can be no assurance that the NCP System will achieve market acceptance.

PATENTS, LICENSES AND PROPRIETARY RIGHTS

Proprietary protection for the Company's products is important to
the Company's business. The Company maintains a policy of seeking patents on its
inventions, acquiring licenses under selected patents of third parties,
obtaining copyrights on its software and other copyrightable materials and
entering into invention and proprietary information agreements with its
employees and consultants with respect to technology which it considers
important to its business. Cyberonics also relies upon trade secrets, unpatented
know-how and continuing technological innovation to develop and maintain its
competitive position.

The Company entered into an exclusive license agreement with Dr.
Jacob Zabara, a co-founder of and consultant to the Company, pursuant to which
the Company has licensed three United States patents (and such international
counterparts as have been or may be issued) covering the NCP System for vagus
nerve stimulation for the control of epilepsy and other movement disorders. The
License Agreement runs for the term of licensed patents. Pursuant to the license
agreement, the Company is obligated to pay Dr. Zabara a royalty equal to the
greater of $36,000 per year or 6% of net sales of the NCP System on the first
$12 million in cumulative sales, and at the rate of 3% thereafter for the
remaining term of the licensed patents.

The Company entered into a license agreement with Huntington Medical
Research Institute pursuant to which the Company has licensed two United States
patents (and their international counterparts, if and when issued) covering two
lead designs. The license agreement provides an exclusive license to the
licensor's lead designs for the field-of-use of vagus nerve stimulation for
control of epilepsy and other movement disorders. Pursuant to the license
agreement, as amended, the Company paid an initial license fee of $200,000. In
addition, the Company has a renewable option to expand the licensed field-of-use
for additional indications for a license fee of $15,000 per indication. Pursuant
to the license agreement the Company is obligated to pay the licensor a royalty
of 1% of net sales of NCP Systems using the licensor's standard lead (the
Company's vagus nerve lead is a standard lead) and 1.75% of net sales of NCP
Systems which include the licensor's bidirectional lead. In addition, the
Company paid royalties of $10,000 during each of fiscal 1992, 1993 and 1994,
$26,000 for fiscal 1995, $35,000 for fiscal 1996, and has agreed to pay minimum
royalties of $35,000 for fiscal 1997 and each fiscal year thereafter for the
life of the licensed patents. Beginning in fiscal 1997, if total combined annual
royalties paid to the licensor are not equal to at least $200,000 each fiscal
year, and if the Company elects not to make a payment sufficient to meet such
minimum royalty, the licensor may convert the license regarding the
bidirectional lead to a non-exclusive license.

Cyberonics believes that the patent licenses described above provide
broad protection in the United States for the field of vagus nerve stimulation
for the control of epilepsy and movement disorders. The protection offered by
the licensed international patents is not as strong as that offered by the
licensed United States patents due to differences in patent laws. In addition,
there can be no assurance that any of the licensed patents will not be
challenged or circumvented by competitors, or found to be invalid or
non-infringed in judicial or administrative proceedings should a dispute arise.

-11-
<PAGE> 14
In addition to the license agreements, as of June 30, 1996, the
Company had 4 United States patent applications pending covering NCP Generator
circuits, electrode designs and various therapeutic applications of vagus nerve
stimulation and, as of such date, had been issued 21 United States patents. In
addition to movement disorders, recently issued method patents cover the fields
of eating disorders, endocrine disorders, migraine headaches, dementia and
neuropsychiatric disorders. The Company has filed counterparts of certain of its
key United States patent applications in certain key international
jurisdictions.

There can be no assurance that patents will issue from any of the
remaining applications or, if patents are issued, that they will be of
sufficient scope or strength to provide meaningful protection of the Company's
technology. In addition, there can be no assurance that any patents issued to
the Company will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide proprietary protection or commercial
advantage to the Company.

Notwithstanding the scope of the patent protection available to the
Company, a competitor could develop other methods of controlling epilepsy by
stimulation which do not involve the vagus nerve or which use electrodes which
are not covered by the licensed patents.

Cyberonics requires its employees and consultants to sign
confidentiality agreements upon the commencement of employment or consulting
relationships with the Company. These agreements provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with Cyberonics must be kept confidential and must not
be disclosed to third parties except in specific circumstances. In the case of
employees, the agreements provide that all inventions conceived by the
individual shall be the exclusive property of the Company. In the case of
consultants, all inventions and intellectual material developed in accomplishing
the work required in the relationship with the Company or with materials
furnished by the Company are assigned to the Company. There can be no assurance,
however, that these agreements will provide meaningful protection or adequate
remedies for the Company's trade secrets in the event of unauthorized use or
disclosure of such information.

GOVERNMENT REGULATION

Clinical testing, manufacture and sale of the Company's products in
the United States are subject to FDA regulation. Under the Food, Drug, and
Cosmetic Act, all medical devices are classified into three classes, class I, II
or III. New class III devices, such as the NCP System, are subject to the most
stringent FDA review, and require submission and approval of a PMA before
commencement of marketing, sales and distribution in the United States.

In order to obtain pre-market approval, a device must undergo
clinical evaluation under an Investigational Device Exemption ("IDE") which is
granted by the FDA to permit testing of the device in humans in controlled
trials. In addition to obtaining an IDE from the FDA, the sponsor of the
investigational study must also obtain approval for the research from an
institutional review board or committee established for this purpose at each
investigational site. Once an IDE has been granted, the FDA may allow additional
patient implants or additional clinical sites, or both.

The results of the clinical studies are submitted to the FDA in a
PMA. In addition to the results of clinical investigations, the PMA applicant
must submit other information relevant to the safety and effectiveness of the
device including the results of nonclinical tests, a full description of the
device and its components, a full description of the methods, facilities and
controls used for manufacturing, and proposed labeling. The FDA staff then
reviews the submitted application and determines whether to accept the
application for filing. If accepted for filing, the application undergoes
substantive review by the FDA, which can request additional information at any
time. Ultimately, an FDA scientific advisory panel comprised of physicians and
others with expertise in the relevant field

-12-
<PAGE> 15
will review the application. A public meeting is held in which the PMA is
reviewed and discussed by the panel. The scientific advisory panel then issues a
favorable or unfavorable recommendation to the FDA or recommends approval with
conditions. Although the FDA is not bound by the opinion of the advisory panel,
the FDA tends to give considerable deference to panel recommendations. The FDA
will also conduct an inspection to determine whether the Company's manufacturing
facility is in compliance with GMP. If the FDA's evaluation is favorable, the
FDA will subsequently publish an order approving the PMA for the device.
Interested parties can file comments on the order and seek further FDA review.

The Company applied for its first IDE in August 1988 and, as of June
30, 1996, had received FDA authorization for NCP Systems to be implanted in up
to 535 patients at 58 clinical sites in the United States. In December 1991, the
Company submitted a PMA application to the FDA containing data on 81 patients.
In February 1992, the FDA notified the Company that the PMA was incomplete and
that additional information would be required before the PMA would be accepted
for review. The Company continued its clinical trials and, on June 2, 1993,
amended the PMA. The amendment responded to the concerns raised by the FDA, and
contained data on 136 patients, including 65 who had received stimulation for at
least 18 months.

In January 1995, the Company announced the submission of a major PMA
amendment responding to the FDA's questions regarding the PMA application that
was accepted for filing in January 1994. The Company also announced that it had
received permission to begin enrolling patients into its additional confirmatory
trial, under which an additional 190 to 200 patients are expected to be treated
with vagus nerve stimulation therapy at approximately 20 major investigational
centers in the United States. Completion of the confirmatory trial and
submission of the data is expected to take place by the end of calendar 1996,
although it may take longer.

There can be no assurance that the Company will adequately address
the concerns raised by the FDA, or that additional concerns will not be raised
by the FDA in the future. The timing of the PMA approval process is
unpredictable and there can be no assurance as to when or whether the Company
will receive pre-market approval. The Company is currently clinically testing
the NCP System under an IDE from the FDA and cannot commence marketing or
commercial sales of the NCP System in the United States until it receives
pre-market approval from the FDA. The Company's business, financial condition
and results of operations are critically dependent upon receiving FDA approval
of the Company's PMA application.

Even if the Company receives pre-market approval for its device for
the treatment of partial seizures, it will nonetheless be required to file
additional or supplemental IDEs and PMAs for other applications and for future
generations of existing products. Supplements to a PMA generally require
submission of the information needed to support the proposed change potentially
including additional patient data. In addition, international sales are subject
to foreign government regulation, the requirements of which vary substantially
from country to country. The Company has obtained certain foreign governmental
approvals, including the European Union "CE" mark, and has applied for
additional approvals. There can be no assurance that the necessary approvals,
including approval of the Company's PMA for the NCP System, will be granted on a
timely basis or at all, and delays in receipt of or failure

-13-
<PAGE> 16
to receive such approvals, or the withdrawal of previously received approvals,
could have a material adverse effect on the business, financial condition and
results of operations of the Company.

The Company has registered with the FDA as a medical device
manufacturer. The Company's facilities are subject to inspection on a routine
basis by the FDA for compliance with GMP and other regulations. GMP regulations
impose procedural and documentation requirements upon the Company with respect
to product designs, manufacturing, testing, control, process validation and
similar activities. As of June 30, 1996, the Company has been the subject of a
major GMP pre-PMA site inspection, which was completed with no deficiencies
noted. Additionally, the Company must comply with various FDA requirements such
as those governing advertising, labeling and reporting of adverse experiences
with the use of the product. New regulations governing such matters as device
tracking and post-market surveillance also may apply to the NCP System. The FDA
actively enforces regulations prohibiting marketing of products for
non-indicated uses. Failure to comply with applicable regulatory requirements
can result in, among other things, fines, suspensions or withdrawal of
approvals, confiscations or recalls of products, operating restrictions and
criminal prosecutions. Changes in existing requirements or the adoption of new
requirements could adversely affect the Company's ability to comply with
regulatory requirements. Failure to comply with regulatory requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations.

In addition, the Company's products are covered by FDA regulations
for implantable medical devices that require the Company to comply with certain
specific record keeping, reporting, product testing, design, safety and product
labeling requirements. The Company believes that it is in material compliance
with these requirements. There can be no assurance, however, that the Company
will be able to maintain such compliance in the future. Any such failure to
comply could have an adverse effect on the Company's business, financial
condition and results of operations.

Clinical testing, manufacture and sale of the Company's products
outside of the United States are subject to regulatory approval by other
jurisdictions which may be more or less rigorous than in the United States. The
Company has received regulatory approval to market the NCP System in the
thirteen member countries of the European Union and is pursuing other regulatory
approvals outside the United States.

THIRD-PARTY REIMBURSEMENT

The success of the Company is dependent upon approval for
reimbursement of costs associated with the NCP System and the implant procedure
by government and third-party payors in the United States and certain key
international markets. Regulatory approval of the NCP System in the United
States and international markets does not assure favorable reimbursement
decisions.

The Company believes that the NCP System will be purchased by
hospitals, which in turn bill various government and private third-party payors
for the health care services provided to patients. In the United States, the key
third-party payors include the Medicare and Medicaid programs (administered by
the Health Care Financing Administration), Blue Cross and Blue Shield plans,
commercial insurance companies, preferred provider organizations and health
maintenance organizations. These payors generally exclude payment for services
that are deemed to be not "reasonable and necessary," or which are considered to
be experimental or investigational, not safe, effective or medically appropriate
for the patient, or which are not accepted medical practice in the local
community. In determining whether they will cover new medical services, payors
typically rely on government regulatory approvals and studies published in
recognized peer-reviewed medical and scientific journals. Some payors are
beginning to examine the cost-effectiveness of services in determining whether
and how much they will reimburse for the services, although these efforts are
focused principally on services for which there are alternative treatments.

-14-
<PAGE> 17
The Company believes that the NCP System will be viewed favorably by
payors because of its efficacy and because of the lack of alternative therapies
for the patients being treated. There can be no assurance that the NCP System
will be considered cost effective by government or private third-party payors,
that reimbursement will be available in a timely manner or at all, or, if
available, that payors' reimbursement policies will not adversely affect the
Company's ability to sell NCP Systems on a profitable basis. Failure by
hospitals, physicians and other users of the Company's products to obtain
reimbursement from third-party payors and/or changes in government or private
third-party payors' policies toward reimbursement for procedures employing the
Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations. The health-care
industry in the United States is undergoing substantial reform, and there is
substantial uncertainty and turmoil surrounding the issues of funding,
reimbursement and regulatory approval. While the Company believes that the NCP
System will be favorably viewed in the context of the currently pending
health-care reform objectives, there can be no assurances that the pending
health-care reforms will not adversely affect regulatory or reimbursement
approvals for the NCP System.

In the United States, Cyberonics is executing a plan to increase the
likelihood that hospitals and physicians will be reimbursed adequately for the
NCP System and the implant procedure. The plan addresses the third-party payors
concerns noted above and the necessary procedural and administrative actions.
Reimbursement approval processes in markets outside the United States vary
significantly. Specific plans to obtain reimbursement approval in key
international markets are in various stages of development and execution.

The Company does not expect to achieve significant sales unless and
until both regulatory and reimbursement approvals are obtained for the NCP
System and even if such approvals are obtained, there can be no assurance the
Company will achieve significant sales.

PRODUCT LIABILITY AND INSURANCE

The business of the Company entails the risk of financial exposure
to product liability claims. Although the Company has not experienced any
product liability claims to date, such claims could have an adverse impact on
the Company. The Company maintains product liability insurance. There can be no
assurance, however, that product liability claims will not exceed such insurance
coverage limits or that such insurance will be available on commercially
reasonable terms or at all.

EMPLOYEES

As of June 30, 1996, the Company had 33 full-time employees,
including 6 in research and development, 3 in clinical and regulatory affairs,
13 in manufacturing and quality assurance and 11 in marketing and
administration. The Company believes that the success of its business will
depend, in part, on its ability to attract and retain qualified personnel,
including but not limited to its key officers and its Board of Directors. The
Company believes its relationship with its employees is good. There can be no
assurance that the Company will be successful in hiring or retaining qualified
personnel. The loss of key personnel, or inability to hire or retain qualified
personnel, could have a material adverse effect on the Company's business,
financial condition and results of operations.

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<PAGE> 18
ITEM 2. PROPERTIES

The Company leases approximately 19,146 square feet in Webster,
Texas. This facility contains approximately 5,664 square feet of manufacturing
space and approximately 13,482 square feet devoted to research and
administrative offices. The facility is leased through October 1997. The Company
has certain rights of first refusal to acquire additional space at its facility
as such space becomes available. The Company believes that its current facility,
together with space which it can obtain through exercise of its rights of first
refusal, are adequate to meet its current needs.

ITEM 3. LEGAL PROCEEDINGS

The Company is subject to a number of routine pending litigation
matters. While the outcome of these claims cannot be predicted with certainty,
management, after review and consultation with counsel, considers that any
liability arising from the disposition of such matters would not have a material
adverse effect upon the financial condition or results of operations of the
Company.

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

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<PAGE> 19
PART II

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

The Company's Common Stock, $0.01 par value, is quoted on the NASDAQ
National Market System under the symbol CYBX. The high and low per share prices
for the Company's Common Stock during Fiscal 1995 and 1996 are set forth below.
Price data reflect actual transactions, but do not reflect mark-ups, mark-downs
or commissions.

<TABLE>
<CAPTION>
HIGH LOW
---------- ------------
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1995
First Quarter $ 8.25 $ 3.75
Second Quarter $ 5.75 $ 1.88
Third Quarter $ 5.75 $ 3.50
Fourth Quarter $ 5.50 $ 3.25
FISCAL YEAR ENDED JUNE 30, 1996
First Quarter $ 6.00 $ 4.00
Second Quarter $ 8.00 $ 4.50
Third Quarter $ 6.25 $ 4.00
Fourth Quarter $ 7.50 $ 4.25
</TABLE>

The stock market has from time to time experienced significant price
and volume fluctuations that are unrelated to the operating performance of
particular companies. Like the stock price of other early stage medical device
companies, the market price of the Company's Common Stock is subject to
significant volatility. Factors such as reports on the clinical efficacy and
safety of the Company's products, product and component supply issues,
government approval status, fluctuations in the Company's operating results,
announcements of technological innovations or new products by the Company or its
competitors, developments with respect to patents or proprietary rights, public
concern as to the safety of products developed by the Company or others may have
a significant effect on the market price of the Common Stock. In addition, the
price of the Company's stock could be affected by stock price volatility in the
medical device industry or the capital markets in general without regard to the
Company's operating performance.

As of August 30, 1996, there were 112 stockholders of record.

The Company currently intends to retain future earnings to fund the
development and growth of its business and, therefore, does not anticipate
paying cash dividends within the foreseeable future. Any future payment of
dividends will be determined by the Company's Board of Directors and will depend
on the Company's financial condition, results of operations and other factors
deemed relevant by its Board of Directors.

-17-
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA

The following table summarizes certain selected financial data,
which should be read in conjunction with the Company's Consolidated Financial
Statements and with Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere herein. The selected financial data
as of June 30, 1996 and 1995, and for each of the years in the three-year period
ended June 30, 1996 are derived from consolidated financial statements that have
been audited by Arthur Andersen LLP, independent public accountants, which are
included elsewhere herein and are qualified by reference to such consolidated
financial statements. The selected financial data as of June 30, 1994, 1993 and
1992 and for the years ended June 30, 1993 and 1992 are derived from audited
financial statements not included herein.

<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:

Net sales $ 1,416,965 $ 966,989 $ 399,689 $ 149,775 $ 53,890

Cost of goods sold 411,562 347,457 117,835 50,463 42,547
------------ ----------- ----------- ----------- -----------
Gross profit 1,005,403 619,532 281,854 99,312 11,343

Operating expenses:

Research and development 8,024,502 5,678,024 4,323,671 3,390,037 2,305,858

Selling, general and administrative 3,420,111 2,906,589 2,519,037 2,154,070 1,273,428
------------ ----------- ----------- ----------- -----------
Total operating expenses 11,444,613 8,584,613 6,842,708 5,544,107 3,579,286

Interest and other income (net) 325,960 726,271 635,129 323,075 75,240
------------ ----------- ----------- ----------- -----------
Net loss $(10,113,250) $(7,238,810) $(5,925,725) $(5,121,720) $(3,492,703)
============ =========== =========== =========== ===========

Net loss per share $ (1.06) $ (.79) $ (.66) $ (.65) $ (.53)
============ =========== =========== =========== ===========

Shares used in computing net loss per share 9,513,038 9,218,008 8,945,968 7,882,857 6,529,766
</TABLE>

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<PAGE> 21
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities $ 2,201,962 $ 11,852,619 $ 18,468,154 $ 24,385,755 $ 3,372,529
Working capital 1,042,396 8,988,373 9,676,289 20,489,855 2,825,599
Total assets 3,948,043 13,560,593 19,756,148 25,195,514 4,089,522
Capital lease obligations, net of current portion -- -- 72,562 183,818 220,890
Redeemable Convertible Preferred Stock -- -- -- -- 12,548,453
Accumulated deficit (37,922,171) (27,808,921) (20,570,111) (14,644,386) (9,522,666)
Common stockholders' equity $ 1,465,050 $ 11,443,555 $ 18,503,398 $ 24,134,127 $ (9,444,338)
</TABLE>

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

SUMMARY

Cyberonics was founded in 1987 to design, develop and bring to
market medical devices which provide a novel therapy, vagus nerve stimulation,
for the treatment of epilepsy and other debilitating neurological disorders.
Clinical trials of the Company's investigational NeuroCybernetic Prosthesis
("NCP(R) System") began with the first patient implant in November 1988 under an
IDE from the FDA. The Company has been unprofitable to date, has had minimal
revenues and expects to incur operating losses through the next several years
due to continuing requirements for research and development activities
(including product and process development and clinical trials and related
regulatory activities), sales and marketing activities and manufacturing
start-up. For the period from inception through June 30, 1996, the Company had
incurred a cumulative net deficit of approximately $37.9 million.

Cyberonics is continuing the clinical testing of the NCP System
under its IDE from the FDA. In January 1994, the Company announced that its
amended PMA application was accepted for filing by the FDA. While the amended
PMA application has been accepted for filing, the FDA further informed the
Company that, based on its initial scientific review of the amended PMA
application, there were "significant deficiencies" in the submission and that an
amendment containing certain additional clinical and technical information must
be provided before the regulatory review process could continue.

-19-
<PAGE> 22
In response to further discussions with the FDA, the Company
announced in July 1994 that it would initiate an additional confirmatory U.S.
clinical trial for the NCP System. Based on these discussions with the FDA, this
study is an additional requirement of the FDA's regulatory approval process for
the NCP System for the treatment of epilepsy patients experiencing refractory
partial seizures.

In January 1995, the Company announced that it had received
permission to begin enrolling patients into its additional confirmatory trial,
under which an additional 265 patients were targeted for enrollment at 20 major
investigational centers in the United States. Approximately 190 to 200 patients
are expected to complete the confirmatory trial. Completion of the trial and
submission of the data is expected to take place by the end of calendar 1996,
although it may take longer.

Cyberonics is pursuing government and third-party reimbursement
approvals for the NCP System in the United States and in international markets.
The Company believes that such approvals will be critical to market acceptance
of the NCP System when and if regulatory approvals are obtained. There can be no
assurance that third-party reimbursement will be available to enable the Company
to successfully market the NCP System in the United States when and if the
Company's PMA is approved or, if available, that the level of reimbursement will
be sufficient to enable the Company to sell the NCP System on a profitable
basis.

The health care industry in the United States is undergoing
substantial change, and there is substantial uncertainty and turmoil surrounding
the issues of funding, reimbursement and regulatory approval. While the Company
believes that the NCP System will be favorably viewed in the context of the
changing health care industry, there can be no assurances that the pending
health care reforms will not adversely affect regulatory or reimbursement
approvals for the NCP System. The Company does not expect to achieve significant
sales unless and until both regulatory and reimbursement approvals are obtained
for the NCP System and even if such approvals are obtained, there can be no
assurance the Company will achieve significant sales.

In June 1994, the Company was granted regulatory approval to market
the NCP System in the original twelve-member countries of the European Union
after having obtained "CE marking," the designation of market approval now
universally accepted by all European Union member countries. The Company has
obtained government and third-party reimbursement approval in certain of the
European Union member countries and is continuing to pursue full reimbursement
approval for substantially all of the remaining European Union member countries.
The Company does not believe that significant sales volume can be generated
without full reimbursement approval. There can be no assurances as to when or
whether such reimbursement will be obtained in any of these European Union
member countries or, if obtained, whether the levels of reimbursement will be
sufficient to enable the Company to sell the NCP System on a profitable basis.

The Company believes that existing and future antiepileptic drug
compounds will be the primary competition for its NCP System, although the
Company could also face competition from other medical devices. Three new
antiepileptic drugs, felbamate, gabapentin and lamotrigine recently received FDA
approval. No other major antiepileptic drugs have been introduced in the United
States since 1978. In August 1994, the manufacturer of

-20-
<PAGE> 23
felbamate announced that, in conjunction with recommendations from the FDA, it
was advising that patients be withdrawn from the drug based on reports of
serious complications. There can be no assurance that the NCP System will
achieve market acceptance for the treatment of epilepsy or any other indication.

LIQUIDITY AND CAPITAL RESOURCES

From inception through February 1993 the Company financed its
operations primarily through private placements of its securities and had raised
approximately $16.5 million in net proceeds. In February 1993, the Company
completed an initial public offering of 2,000,000 shares of its Common Stock,
generating net proceeds to the Company of approximately $22 million.
Additionally, through June 30, 1996, the Company has funded approximately
$530,000 of its equipment needs with proceeds from an equipment lease agreement.
As further described below, in July 1996 the Company raised an additional $11.3
million net of offering costs in a sale of 2,181,818 shares of its Common Stock
to St. Jude Medical, Inc. The Company has no short- or long-term borrowings
outstanding at June 30, 1996, and has no credit facilities available at this
time.

The Company expects to incur substantial additional costs related to
clinical trials and regulatory activities, expansion of manufacturing
capabilities, sales and marketing activities associated with preparation for
United States and international market entry and product and process
development. In addition, if regulatory and reimbursement approvals are
obtained, the Company will incur substantial marketing and distribution
expenses. The amount and timing of anticipated expenditures will depend upon
numerous factors both within and outside of the Company's control. Factors
within the Company's control include the nature and timing of additional
clinical trials for partial seizures and for other indications, and the nature
and timing of marketing and sales activities. Factors affecting the amount and
timing of expenditures which are largely beyond the Company's control include
the clinical trial and regulatory activities associated with the Company's
effort to obtain FDA approval of its PMA application for partial seizures.
Moreover, even if the Company obtains PMA approval for the NCP System for
partial seizures, the Company's ability to generate income from operations will
be dependent upon obtaining reimbursement approval from government and
third-party payors as well as receiving market acceptance for the NCP System.
Therefore, while the Company believes that its current resources will be
sufficient to fund its operations at least through its current fiscal year
ending June 30, 1997, the Company will require additional funds after that date.

On April 8, 1996, the Company and St. Jude Medical, Inc. ("St.
Jude") entered into an Agreement and Plan of Merger (the "Merger Agreement") and
a Common Stock Purchase Agreement (the "Stock Purchase Agreement"). Pursuant to
the Stock Purchase Agreement, upon approval of the Merger Agreement by holders
of a majority of the Company's outstanding Common Stock, St. Jude agreed to
purchase 2,181,818 shares of the Company's newly-issued Common Stock at $5.50
per share, representing a cash investment in the Company of $12 million before
deducting commissions and other offering costs. On July 23, 1996, Cyberonics
shareholders approved the Merger Agreement and the Stock Purchase Agreement, the
stock purchase was completed, and St. Jude provided the Company with cash

-21-
<PAGE> 24
proceeds totaling $12 million. The Company believes that the proceeds from this
investment will be sufficient to fund its operations as an independent entity
through at least June 30, 1997. The availability of financing at that time will
depend upon a number of important factors, including the state of the United
States capital markets and economy in general and the health care and medical
device segments in particular, the status of the Company's international sales
activities and the status of the Company's clinical and regulatory activities.
There can be no assurance that the Company will be able to raise such capital
when needed or that the terms upon which capital will be available will be
favorable to the Company.

In addition to providing the Company with $12 million of additional
capital, the Merger Agreement further gives St. Jude the right, but not the
obligation, to acquire the Company on or before October 18, 1996 in a merger
pursuant to which the holders of Company Common Stock (other than St. Jude) will
receive cash totaling approximately $72 million.

The Company's liquidity will continue to be reduced as amounts are
expended for continuing clinical trials and related regulatory affairs,
manufacturing start-up, product and process development, and expansion of sales
and marketing activities. While not currently anticipated, the Company's
liquidity could also be substantially reduced if significant amounts were
expended for additional facilities and equipment.

RESULTS OF OPERATIONS

Net Sales. Cyberonics has been granted regulatory approval to market
and sell the NCP System internationally in the original twelve member countries
of the European Union (the United Kingdom, Germany, The Netherlands, France,
Spain, Italy, Belgium, Denmark, Greece, Portugal, Ireland and Luxembourg) and
has permission to sell in certain other international markets including Sweden,
Norway, Finland, Switzerland, Israel, Australia, South Africa, Hong Kong and
China. Cyberonics is engaged in obtaining reimbursement approvals from the
various health care provider systems that exist in these countries and has
received partial or complete reimbursement approvals in a number of these
markets. During the year ending June 30, 1997, the Company expects that the
substantial majority of its net sales will be generated from its international
markets, the extent of which will depend, in part, on the success of future
efforts to obtain broader international reimbursement approval and additional
countries' regulatory approvals.

In the United States, the Company has permission from the FDA to
sell the NCP Systems used in clinical trials for up to $6,000 per system. Given
the experimental nature of the device, the Company believes that widespread
reimbursement from government and third party payors is unlikely in connection
with its clinical studies. Therefore, the Company has not aggressively sought to
sell the NCP Systems used in the clinical studies. The Company does not expect
to achieve significant sales unless and until both regulatory and reimbursement
approvals are obtained for the NCP System.

Net sales for the year ended June 30, 1996 totaled $1,416,965
compared to $966,989 and $399,689 for the years ended June 30, 1995 and 1994,
respectively. Domestic sales depend entirely upon the Company conducting
clinical trial activities under arrangements with certain investigational
centers, some of which receive research funding from the Company. Domestic sales
made in connection with such clinical studies have been limited to date and are
expected to decline in the future as the Company is not presently seeking
reimbursement for implants associated with its current United States clinical
trial. Arrangements with certain investigational centers employ risk-sharing
provisions. Domestic sales made under risk-sharing arrangements are deferred
until Cyberonics receives payment from the centers and the centers in turn
receive third-party reimbursement or satisfy other terms set forth in their
respective arrangements. Sales, net of risk-sharing provisions, for the year
ended June 30, 1996, consisted of $1,307,274 from international markets and
$109,691 from domestic risk-sharing arrangements.

-22-
<PAGE> 25
Gross Profit. In determining gross profit, cost of sales is
calculated primarily to include the acquisition cost of raw materials and
components, direct labor and allocated manufacturing overhead. Direct labor and
overhead constitute a substantial majority of cost of sales. The Company is
obligated to pay royalties ranging from 7% to 7.75% on the first $12 million in
net sales, and from 4% to 4.75% thereafter. Minimum royalty obligations under
the Company's license agreements totaled $46,000 during each of the years ended
June 30, 1996, 1995 and 1994, and will continue at or above this level in future
years. Royalties up to the minimum amount are presently classified as research
and development expenses while amounts exceeding this minimum are included as a
component of the Company's cost of sales.

The Company's gross margin percentage was 71.0% for the year ended
June 30, 1996 compared to 64.1% and 70.5% for fiscal 1995 and 1994,
respectively. The fiscal 1996 increase is attributable primarily to a shift in
international sales mix toward markets where the Company sells its products
directly, resulting in higher average selling prices and consequently, higher
gross margins. Continued fluctuations in gross margin percentages can be
expected prior to the Company achieving commercial levels of production volume,
particularly if the Company continues to experience period-to-period changes in
unit production.

Research and Development Expenses. Research and development expenses
are comprised of both expenses related to the Company's product and process
development efforts and expenses associated with conducting clinical trials and
certain related regulatory activities. Research and development expenses totaled
$8,024,502, $5,678,024, and $4,323,671 during the years ended June 30, 1996,
1995 and 1994, respectively. The increased level of research and development
expenditures is due primarily to the costs associated with the Company's
confirmatory clinical trial which was at its peak level of activity during
fiscal 1996. The Company expects research and development spending to decrease
during fiscal 1997 as the Company's confirmatory clinical trial is completed.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $3,420,111, $2,906,589, and $2,519,037 during
the years ended June 30, 1996, 1995 and 1994, respectively. The continued
increases from year to year were primarily due to expanded international market
development and marketing activities. The Company expects to incur higher
selling, general and administrative expenses in developing its international
market and in anticipation of regulatory and reimbursement approvals for the NCP
System, and expects these expenses to increase significantly when and if such
approvals are obtained.

Interest Income, net. Net interest income totaled $423,044,
$688,909, and $629,993 during the years ended June 30, 1996, 1995 and 1994,
respectively. Due to the July 1996 equity investment totaling net proceeds of
$11.3 million from St. Jude, the Company expects to have interest income that
will partially offset operating losses for several fiscal quarters. Interest
income decreased during fiscal 1996 in comparison with fiscal 1995, due to lower
overall levels of invested funds.

Other Income (Expense), net. Other income (expense) totaled
$(97,084), $37,362, and $5,136 during the three years ended June 30, 1996, 1995
and 1994, respectively. For each of these years, other income (expense)
consisted of net gains and losses resulting from foreign currency transactions.

Income Taxes. At June 30, 1996, the Company had net operating loss
carry forwards for federal income tax purposes of approximately $33.6 million
which expire during the years 2003 through 2011, and tax credit carryforwards of
approximately $1 million for federal income tax purposes which expire during the
years 2006 through 2010. Due to its net operating loss history, to date the
Company has incurred no income tax expense for financial reporting purposes.
Current federal income tax regulations with respect to changes in ownership
could limit the utilization of the Company's net operating loss carryforwards.

-23-
<PAGE> 26
Effect of Inflation. The Company believes that inflation has not had
a material impact on its operating or financial ratios during the year ended
June 30, 1996 as compared to the years ended June 30, 1995 and 1994.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item is incorporated by reference
to the Consolidated Financial Statements set forth on pages F-1 through F-15
hereof.

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

None.

-24-
<PAGE> 27
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company, their ages as of June 30,
1996, and certain additional information about them, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reese S. Terry, Jr............................. 54 Chairman of the Board, Executive Vice President and Secretary

Robert P. Cummins.............................. 43 President and Chief Executive Officer

John K. Bakewell............................... 35 Vice President, Finance and Administration and Chief Financial
Officer

William H. Duffell, Jr.,
Ph.D........................................... 37 Vice President, Clinical and Regulatory Affairs

Stephen D. Ford................................ 46 Vice President, Manufacturing

Shawn P. Lunney................................ 33 Vice President, Marketing

Thomas A. Duerden, Ph.D........................ 66 Director
</TABLE>

Mr. Terry co-founded the Company in December 1987 and served as a
Director and Chief Executive Officer of the Company until February 1990, when he
became Chairman of the Board and Executive Vice President. From May 1995 until
September 1995, Mr. Terry assumed the additional duties of President and Chief
Executive Officer. Mr. Terry has also served as Secretary of the Company from
its inception and served as Chief Financial Officer of the Company from its
inception until July 1992. He has 26 years experience in the implantable medical
device and electronics industry. 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, most recently, as Vice President of Quality. Mr. Terry
holds a B.S. and an M.S. in Electrical Engineering from the University of
Kentucky.

Mr. Cummins became a director of the Company in June 1988. He was
appointed President and Chief Executive Officer of the Company on September 21,
1995. Until September, 1995, he was also a general partner of Vista Partners,
L.P., a venture capital partnership which he joined in 1984, a general partner
of Vista III Partners, L.P., a venture capital firm formed in 1986 and Vice
President of Vista Ventures Inc., a venture capital advisory firm. Mr. Cummins
is a director of Sigma Circuits Inc., a public company. Mr. Cummins holds a B.A.
in government from Dartmouth College, and an M.B.A. from the University of
Illinois.

Mr. Bakewell joined the Company as Vice President, Finance and
Administration and Chief Financial Officer in May 1993. Prior to joining the
Company, Mr. Bakewell held the position of Chief Financial Officer with Zeos
International, Ltd., a manufacturer and direct marketer of personal computers
and related products from October 1990 Group of Ernst & Young, an international
accounting firm. From August 1983 to May 1988, Mr. Bakewell held various
positions with KPMG Peat Marwick, an international accounting firm. Mr. Bakewell
holds a B.A. in Accounting from the University of Northern Iowa and is a
certified public accountant.

Dr. Duffell joined the Company as Vice President, Regulatory and
Clinical Affairs in May 1995. Prior to joining the Company, Dr. Duffell held the
position of Director, Regulatory Affairs and Quality Assurance with
Bristol-Meyers Squibb Companies from March 1989 until April 1995, where his
responsibilities included the areas

-25-
<PAGE> 28
of regulatory affairs, quality assurance and clinical research in both corporate
and divisional capacities. From March 1987 to March 1989, Dr. Duffell served as
Senior Manager, Regulatory Affairs and Clinical Research with Dornier Medical,
Inc., a manufacturer of extracaporial shock-wave lithotriptors and related
gastrointestinal and urological products. Dr. Duffell holds a B.S. in Biology
from Rutgers University and a Ph.D. in Behavioral Sciences from Clayton
University.

Mr. Ford joined the Company as Vice President, Manufacturing in
March 1992. Prior to joining the Company, Mr. Ford held the position of Manager
of Manufacturing with the Biomedical Products Division of McGaw, Inc. from
September 1987 to March 1992. From March 1983 to September 1987, Mr. Ford served
as Director of Manufacturing at Quest Medical. Mr. Ford holds a B.S. in
Engineering Technology from Texas Tech University.

Mr. Lunney joined the Company in April, 1991 and served in various
sales, marketing ad reimbursement planning positions until May 1996, when he
became Vice President, Marketing. Prior to joining the Company, Mr. Lunney held
the position of Sales and Marketing Manager with Perceptive Systems, Inc., a
hospital laboratory medical instrument manufacturer. Mr. Lunney holds a B.A. in
marketing from Texas A&M University and an MBA from the University of
Houston-Clear Lake.

Dr. Duerden is an independent business consultant and has been a
director of the Company since March 1989. From 1979 through 1988, Dr. Duerden
served as Chairman and Chief Executive Officer of Electro Biology, Inc., an
orthopedic device company. From December 1988 through January 1990, Dr. Duerden
served as Chairman of the Board and Chief Executive Officer of Tonometrics,
Inc., a medical diagnostic device company. Dr. Duerden holds a B.S. and a Ph.D.
in physics from Manchester University.

BOARD MEETINGS AND COMMITTEES

The Board of Directors of the Company held a total of 11 meetings,
and acted by written consent one time, during the fiscal year ended June 30,
1996. The Board has an Audit Committee and a Compensation Committee. There is no
nominating committee or other committee performing a similar function.

The Audit Committee, which consisted of Thomas A. Duerden and Dennis
J. Gorman, a former director of the Company, met one time during the fiscal year
ended June 30, 1996. This Committee recommends engagement of the Company's
independent public accountants and is primarily responsible for approving the
services performed by such accountants and for reviewing and evaluating the
Company's accounting principles and its system of internal accounting controls.
The Audit Committee currently consists of Thomas A. Duerden.

The Compensation Committee, which consisted of directors Dennis J.
Gorman and Thomas A. Duerden in fiscal 1995, met or acted by unanimous written
consent 3 times during the last fiscal year. This Committee establishes salary
and incentive compensation of the executive officers of the Company and
administers the Company's employee benefit plans. The Compensation Committee
currently consists of Thomas A. Duerden.

During the fiscal year ended June 30, 1996, no current director
missed more than one meeting of the Board of Directors or Committee on which
such director served.

-26-
<PAGE> 29
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the
Securities and Exchange Commission (the "SEC"). Such officers, directors and
ten-percent stockholders are also required by SEC rules to furnish the Company
with copies of all Section 16(a) forms they file.

Based solely on its review of the copies of such forms received by
it, the Company believes that, for the fiscal year ended June 30, 1996, all
Section 16(a) filing requirements applicable to its officers, directors and
ten-percent stockholders were complied with, except that Messrs. Bakewell and
Ford each reported late their purchases of shares under the Company's Employee
Stock Purchase Plan.

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table. The following table sets forth the
compensation paid by the Company for the year ended June 30, 1996 to the Chief
Executive Officer of the Company for fiscal 1996 and each of the other most
highly compensated executive officers of the Company whose total compensation
exceeded $100,000 (collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------
SECURITIES
FISCAL ANNUAL COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION
- -------------------------------------------------------- ------ --------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Robert P. Cummins(1) ................................... 1996 140,758 32,930 50,000 8,194(2)(5)
President and Chief Executive Officer 1995 -- -- -- --
1994 -- -- -- --

Reese S. Terry, Jr.(1) ................................. 1996 130,880 32,950 -- 5,321(2)
Chairman of the Board and Executive Vice President 1995 127,746 11,158 20,000 5,544(2)
1994 121,763 2,234 -- --

William H. Duffell, Jr.(3) ............................. 1996 150,000 27,886 -- 27,881(6)
Vice President, Clinical and Regulatory Affairs 1995 23,077 5,000 85,000 --
1994 -- -- -- --

John K. Bakewell(4) .................................... 1996 105,502 27,537 -- 225(2)
Vice President Finance and Administration and Chief 1995 101,620 8,630 55,000 226(2)
Financial Officer 1994 96,380 12,234 -- --

Stephen D. Ford ........................................ 1996 103,645 25,487 -- 218(2)
Vice President, Manufacturing 1995 98,762 8,158 45,000 220(2)
1994 95,000 2,234 -- --
</TABLE>
- ------------------------------------

(1) Robert P. Cummins, the Company's current chief executive officer was
appointed chief executive officer on September 21,1995. Mr. Terry
served as president and chief executive officer from May 5, 1995 to
September 21, 1995.

(2) Represents premium paid by the Company for term life insurance.

(3) Mr. Duffell joined the company in 1995. Mr. Duffell's bonus in fiscal
1996 includes a $10,000 bonus related to Mr. Duffell's relocation to
Houston.

(4) Mr. Bakewell joined the Company in May 1993. Mr. Bakewell's bonus in
fiscal 1994 includes a $10,000 bonus related to Mr. Bakewell's
relocation to Houston.

(5) Includes $7,900 paid to Mr. Cummins in fiscal 1996 as a travel/auto
allowance.

(6) Represents $315 paid by Company for term life insurance and $27,566
paid to Mr. Duffell for expenses related to relocation to Houston.

-27-
<PAGE> 30
Option Grants in Last Fiscal Year. The following table sets forth
each grant of stock options made during the year ended June 30, 1996 to each of
the Named Executive Officers:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-----------------------------------------------------------
NUMBER OF PERCENT OF VALUE AT ASSUMED
SECURITIES TOTAL OPTIONS ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE PRICE APPRECIATION
OPTIONS EMPLOYEES IN PRICE EXPIRATION FOR OPTION TERM ($)(1)
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% 10%
- --------------------------------- ------------ -------------- ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Cummins................ 50,000 100% 4.7$ 10/11/05 149,362 378,514
Reese S. Terry, Jr............... -- -- -- -- -- --
John K. Bakewell................. -- -- -- -- -- --
William H. Duffell, Jr........... -- -- -- -- -- --
Stephen D. Ford.................. -- -- -- -- -- --
</TABLE>

- ------------------------------------

(1) Potential realizable value is based on an assumption that the stock
price appreciates at the annual rate shown (compounded annually) from
the date of grant until the end of the ten-year option term. These
numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth.

Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End
Values. The following table sets forth, for each of the Named Executive
Officers, each exercise of stock options during the fiscal year ended June 30,
1996 and the year-end value of unexercised options:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED VALUE OPTIONS AT FISCAL YEAR-END: OPTIONS AT FISCAL YEAR-END:
NAME ON EXERCISE(#) REALIZED ($)(1) EXERCISABLE/UNEXERCISABLE(#)(2) EXERCISABLE/UNEXERCISABLE($)(3)
- -------------------------- --------------- --------------- ------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Robert P. Cummins -- -- 8,000/50,000 $ 10,000/$62,500
Reese S. Terry, Jr. -- -- 10,000/10,000 $ 12,500/$12,500
John K. Bakewell -- -- 45,167/54,833 $ 35,522/$89,478
William H. Duffell, Jr. -- -- 18,417/66,583 $50,647/$183,103
Stephen D. Ford -- -- 49,667/40,333 $ 91,147/$77,603

- --------------------------
</TABLE>

(1) Represents market value of underlying securities at date of exercise
less option exercise price.

(2) Options granted by the Company are generally exercisable by the
Optionee ahead of vesting. Unvested shares purchased on exercise of an
option are subject to a repurchase right of the Company, and may not be
sold by an optionee until vested. Options indicated as "Exercisable"
are those options which were both vested and exercisable as of June 30,
1996. All other options are indicated as "Unexercisable."

(3) Market value of underlying securities at fiscal year-end ($6.00/per
share) minus the exercise price.

BOARD COMPENSATION

Directors do not receive any cash compensation for their services as
members of the Board of Directors. Nonemployee directors are automatically
granted options to purchase 2,000 shares of the Company's Common Stock on a
yearly basis pursuant to the terms of the Company's 1988 Incentive Stock Plan.
Pursuant to the Option Plan, on June 1, 1996 each nonemployee director was
automatically granted an option to purchase 2,000 shares of Common Stock at an
exercise price of $4.00 per share.

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<PAGE> 31
EMPLOYMENT AGREEMENTS

The Company has entered into employment or change of control with the
following Named Executive Officers:

Robert P. Cummins. The Company entered into an Employment Agreement with
Mr. Cummins on September 30, 1995. This Agreement, as amended, provides for an
annualized salary of $151,000 through December 31, 1996, together with
discretionary bonuses as determined by the Board of Directors or Compensation
Committee. The agreement further provides that Mr. Cummins is entitled to
receive $450,000 in severance benefits if he is "involuntarily terminated" (as
defined in such agreement) by Cyberonics on or before December 31, 1996.
Consummation of the previously announced Merger between the Company and a
wholly-owned subsidiary of St. Jude Medical, Inc. (the "Merger") is expected to
result in an involuntary termination of Mr. Cummins' employment and payment of
the severance benefit.

John K. Bakewell. Pursuant to an Employee Retention Agreement dated
September 30, 1995, as amended, between Cyberonics and John K. Bakewell, the
Chief Financial Officer of Cyberonics, Mr. Bakewell is entitled to receive
$200,000 upon a "change of control" of Cyberonics on or before December 31, 1996
if Mr. Bakewell (i) is employed by Cyberonics on the closing date of such change
of control, (ii) is terminated by Cyberonics without "cause" (as defined in such
agreement) by Cyberonics prior to such closing date or (iii) is terminated by
Cyberonics due to death or disability prior to such closing date. In addition,
pursuant to a Change of Control Agreement dated as of May 8, 1995, between
Cyberonics and Mr. Bakewell, as amended on January 10, 1996 and April 8, 1996,
Mr. Bakewell is entitled to receive a lump sum bonus equal to fifty percent
(50%) of his annualized salary upon a "change of control" of Cyberonics
occurring on or before December 31, 1996, provided that he has maintained
continuous employment with Cyberonics on the closing date of such "change of
control." Consummation of the Merger constitutes a "change of control" and will
result in payment of the retention bonus.

William H. Duffell, Jr. Pursuant to a Change of Control Agreement dated
as of May 8, 1995, as amended, between Cyberonics and William H. Duffell, Jr.,
the Vice President, Clinical and Regulatory Affairs of Cyberonics, Mr. Duffell
is entitled to receive a bonus upon a "change of control" of Cyberonics
occurring on or before December 31, 1996, provided that he has maintained
continuous employment with Cyberonics on the closing date of such "change of
control." Consummation of the Merger constitutes a "change of control" and will
result in payment of the retention bonus.

Stephen D. Ford. Pursuant to a Change of Control Agreement dated as of
May 8, 1995, as amended, Stephen D. Ford, the Vice President, Manufacturing of
Cyberonics, is entitled to receive a lump sum payment equal to nine months of
his annual base salary (or seven months of his annual base salary if he is
offered continuous employment with the successor corporation) six months from
the closing date of a "change of control" of Cyberonics occurring on or before
December 31, 1996, provided that he has maintained continuous employment with
the successor corporation on such payment date. If Mr. Ford is terminated
without "cause" prior to such payment date, such lump sum payment shall be
payable within five (5) days of such termination. Consummation of the Merger
constitutes a "change of control" and will result in payment of the retention
bonus.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Mr. Cummins, formerly a member of the Compensation Committee, was
appointed President and Chief Executive Officer in September 1995. In connection
with this appointment, Mr. Cummins ceased to serve on the Compensation
Committee.

-29-
<PAGE> 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth as of August 31, 1996 certain information
with respect to the beneficial ownership of Cyberonics Common Stock (i) by each
person known by Cyberonics to own beneficially more than five percent of the
outstanding shares of Cyberonics Common Stock, (ii) by each director of
Cyberonics, (iii) by each of the Chief Executive Officer and four other most
highly paid executive officers of Cyberonics who earned over $100,000 in fiscal
1996 and (iv) by all directors and executive officers as a group. Except as
otherwise noted below, Cyberonics knows of no agreements among its stockholders
which relate to voting or investment of its shares of Cyberonics Common Stock.

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED(1)
-------------------------------------
DIRECTORS, EXECUTIVE OFFICERS AND PERCENTAGE
FIVE PERCENT STOCKHOLDERS NUMBER OWNERSHIP
- ------------------------------------------------- ------------------ ----------------
<S> <C> <C>
St. Jude Medical, Inc. ........................ 2,181,818 18.5%
One Lillehei Plaza
St. Paul, MN 55117-9983

Vista III, L.P.(2) ............................ 1,573,204 13.4%
36 Grove Street
New Canaan, CT 06840

Pfizer, Inc. .................................. 1,106,849 9.4%
235 East 42nd Street
New York, NY 10017

Reese S. Terry, Jr.(3) ........................ 956,000 8.0%
c/o Cyberonics, Inc.
17448 Highway 3, Suite 100
Webster, TX 77598-4135

John K. Bakewell(6) ........................... 101,130 *

Stephen D. Ford(7) ............................ 92,468 *

William H. Duffell(5) ......................... 85,000 *

Robert P. Cummins(4) .......................... 18,000 *

Thomas A. Duerden, Ph.D.(8) ................... 33,500 *

All executive officers and directors as a group
(7 persons)(9) .............................. 1,351,099 11.5%
</TABLE>

- ---------------

* Less than 1%

(1) Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting or investment power with respect to
securities. Shares of Cyberonics Common Stock subject to options and
warrants currently exercisable, or exercisable within 60 days, are
deemed outstanding for computing the percentage of the person holding
such options but are not deemed outstanding for computing the
percentage of any other person. 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 Cyberonics Common Stock shown as beneficially owned by them.

(2) Mr. Cummins, the Chief Executive Officer, President and a director of
Cyberonics, is a limited partner of the partnership that controls Vista
III, L.P.

-30-
<PAGE> 33
(3) Includes 148,500 shares held in trusts for the benefit of Mr. Terry's
children of which Mr. Terry serves as trustee. Also includes 20,000
shares subject to options exercisable on or before November 30, 1996,
of which 10,000 will be vested as of such date and the remaining 10,000
would be subject to repurchase by the Company until vested.

(4) Includes 8,000 shares subject to options exercisable on or before
November 30, 1996, all of which will be vested as of such date.
Excludes shares held by Vista III, L.P. as to which Mr. Cummins
disclaims beneficial ownership except to the extent of his pecuniary
interest therein.

(5) Includes 85,000 shares subject to options exercisable on or before
November 30, 1996, of which 25,500 will be vested as of such date and
the remaining 59,500 would be subject to repurchase by the Company
until vested.

(6) Includes 100,000 shares subject to options exercisable on or before
November 30, 1996, of which 52,250 will be vested as of such date and
the remaining 47,750 would be subject to repurchase by the Company
until vested.

(7) Includes 90,000 shares subject to options exercisable on or before
November 30, 1996, of which 55,500 will be vested as of such date and
the remaining 34,500 would be subject to repurchase by the Company
until vested.

(8) Includes 10,000 shares subject to options exercisable on or before
November 30, 1996, of which 8,000 will be vested as of such date and
the remaining 2,000 would be subject to repurchase by the Company until
vested.

(9) Includes 419,650 shares subject to options held by executive officers
and directors which are exercisable on or before November 30, 1996,
187,283 of which will be vested as of such date and the remaining
232,367 of which would be subject to repurchase by the Company until
vested. Also includes shares which may be determined to be beneficially
owned by executive officers and directors. See Notes 1 through 8.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain stockholders of the Company, including Messrs. Cummins and Terry
and venture capital firms formerly affiliated with Mr. Cummins, are entitled to
certain registration rights with respect to the Common Stock and certain stock
options held by them.

The Company's Bylaws provide that the Company is required to indemnify
its officers and directors to the fullest extent permitted by Delaware law,
including those circumstances in which indemnification would otherwise be
discretionary, and that the Company is required to advance expenses to its
officers and directors as incurred. Further, the Company has entered into
indemnification agreements with its officers and directors. The Company believes
that its charter and bylaw provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and officers.

The Company believes that all of the transactions set forth above were
made on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties. All future transactions between the Company and
its officers, directors, principal stockholders and affiliates will be approved
by a majority of the Board of Directors, including a majority of the independent
and disinterested outside directors on the Board of Directors, and will be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties.

-31-
<PAGE> 34
PART IV

ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents Filed with Report

1. Financial Statements. The following consolidated financial
statements of Cyberonics, Inc. and subsidiary, and the Report of Independent
Public Accountants are included at pages F-1 through F-15 of this Form 10-K:

<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
- ----------------------------------------------------------------------------------------------- ---------
<S> <C>
Report of Independent Public Accountants....................................................... F-1
Consolidated Balance Sheets as of June 30, 1996 and 1995....................................... F-2
Consolidated Statements of Operations for the Three Years Ended June 30, 1996.................. F-3
Consolidated Statements of Stockholders' Equity for the Three Years Ended June 30, 1996........ F-4
Consolidated Statements of Cash Flows for the Three Years Ended June 30, 1996.................. F-5
Notes to Consolidated Financial Statements..................................................... F-6
</TABLE>

2. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1* Restated Certificate of Incorporation of Registrant.
3.2* Bylaws of Registrant.
10.1*(1) 1988 Incentive Stock Plan, as amended.
10.2*(1) 1991 Employee Stock Purchase Plan.
10.3* License Agreement dated March 15, 1988 between the Registrant and
Dr. Jacob Zabara.
10.4* Patent License Agreement effective as of July 28, 1989 between the Registrant and
Huntington Medical Research Institute.
10.5* Lease Agreement dated as of May 8, 1990, together with amendments thereto dated
February 27, 1991 and August 20, 1991, respectively, between the Registrant and
Collecting Bank, N.A.
10.6* Form of Indemnification Agreement.
10.7* Amended and Restated Stockholders Agreement dated October 16, 1992.
10.8 Employment Agreement dated September 30, 1995 between the Company and
Robert P. Cummins, together with amendments
dated January 10, 1996 and April 10, 1996.
10.9 Employee Retention Agreement dated September
30, 1996 between the Company and John K.
Bakewell, together with amendment dated
April 10, 1996.
10.10 Form of Change of Control Agreement (Messrs. Bakewell and Ford).
10.11 Change of Control Agreement dated May 8,
1995 between the Company and William H.
Duffell, Jr., together with extension dated
April 10, 1996.
10.12 Retention Bonus Agreement dated October 1, 1996 between the Company and
Stephen D. Ford.
</TABLE>

-32-
<PAGE> 35
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
23.1 Consent of Independent Public Accountants.
24 Power of Attorney (see page 35).
99** Agreement and Plan of Merger dated as of April 8, 1996, by and among the
Registrant, St. Jude Medical, Inc. and SJM Acquisition Corp.
</TABLE>

- ------------------------------------

* Incorporated by reference to the Company's Registration Statement on
Form S-1 (Reg. No. 33-45118) declared effective February 10, 1993.

** Incorporated by reference to the Company's Current Report on Form 8-K
filed April 9, 1996.

(1) Document indicated is a compensatory plan.

(b) Reports on Form 8-K.

Not Applicable

See Item 14(a)(2) above

-33-
<PAGE> 36
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.

Registrant

CYBERONICS, INC.

September 19 , 1996 BY: /s/ Robert P. Cummins
-----------------------------
Robert P. Cummins
President and Chief Executive
Officer

-34-
<PAGE> 37
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 K. Bakewell,
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.

<TABLE>
<CAPTION>
Signature Capacity in Which Signed Date
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ Reese S. Terry, Jr. Chairman of the Board and September 19, 1996
- --------------------------------------- Executive Vice President
Reese S. Terry, Jr.

/s/ Robert P. Cummins President, Chief Executive Officer and September 19, 1996
- --------------------------------------- Director
Robert P. Cummins (Principal Executive Officer)

/s/ John K. Bakewell Vice President, Finance and September 19, 1996
- --------------------------------------- Administration and Chief Financial
John K. Bakewell Officer (Principal Financial and
Accounting Officer)

/s/ Thomas A. Duerden Director September 19, 1996
- ---------------------------------------
Thomas A. Duerden, Ph.D.
</TABLE>

-35-
<PAGE> 38
EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Description
- ---------- ----------------------------------------------------------

<S> <C>
3.1* Restated Certificate of Incorporation of Registrant.

3.2* Bylaws of Registrant.

10.1*(1) 1988 Incentive Stock Plan, as amended.

10.2*(1) 1991 Employee Stock Purchase Plan.

10.3* License Agreement dated March 15, 1988 between the Registrant and
Dr. Jacob Zabara.

10.4* Patent License Agreement effective as of July 28, 1989 between the
Registrant and Huntington Medical Research Institute.

10.5* Lease Agreement dated as of May 8, 1990, together with
amendments thereto dated February 27, 1991 and August
20, 1991, respectively, between the Registrant and
Collecting Bank, N.A.

10.6* Form of Indemnification Agreement.

10.7* Amended and Restated Stockholders Agreement dated October 16,
1992.

10.8 Employment Agreement dated September 30, 1995 between the Company
and Robert P. Cummins, together with amendments dated January 10,
1996 and April 10, 1996.

10.9 Employee Retention Agreement dated September 30, 1996 between the
Company and John K. Bakewell, together with amendment dated April
10, 1996.

10.10 Form of Change of Control Agreement (Messrs. Bakewell and Ford).

10.11 Change of Control Agreement dated May 8, 1995 between the Company
and William H. Duffell, Jr., together with extension dated April
10, 1996.

10.12 Retention Bonus Agreement dated October 1, 1996 between the
Company and Stephen D. Ford.

23.1 Consent of Independent Public Accountants.

24 Power of Attorney (see page 35).

99** Agreement and Plan of Merger dated as of April 8, 1996, by and
among the Registrant, St. Jude Medical, Inc. and SJM Acquisition
Corp.
</TABLE>

- ------------------------------------

* Incorporated by reference to the Company's Registrant Statement on Form
S-1 (Reg. No. 33-45118) declared effective February 10, 1993.

** Incorporated by reference to the Company's Current Report on Form 8-K
filed April 9, 1996.

(1) Document indicated is a compensatory plan.

-36-
<PAGE> 39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Cyberonics, Inc.:

We have audited the accompanying consolidated balance sheets of Cyberonics,
Inc., and subsidiary as of June 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cyberonics, Inc.,
and subsidiary as of June 30, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1996, in conformity with generally accepted accounting
principles.

Houston, Texas
July 30, 1996

F-1
<PAGE> 40
CYBERONICS, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS

Current Assets:
Cash and cash equivalents $ 2,121,930 $ 8,862,993
Securities held to maturity -- 1,029,898
Accounts receivable 473,038 339,658
Inventories 671,836 605,556
Prepaid expenses 258,585 267,306
------------ ------------
Total Current Assets 3,525,389 11,105,411

Securities held to maturity 80,032 1,959,728
Property and equipment, net 332,881 481,975
Other assets, net 9,741 13,479
------------ ------------
$ 3,948,043 $ 13,560,593
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable $ 924,059 $ 574,915
Accrued liabilities 1,558,934 1,480,497
Current portion of capital lease obligations -- 61,626
------------ ------------
Total Current Liabilities 2,482,993 2,117,038

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; 25,000,000 shares
authorized; 9,577,115 and 9,499,261 shares issued and
outstanding at June 30, 1996 and 1995, respectively 95,771 94,993
Additional paid-in capital 39,261,602 39,329,006
Deferred compensation (4,460) (131,800)
Accumulated deficit (37,922,171) (27,808,921)
Cumulative translation adjustment 34,308 (39,723)
------------ ------------
Total Stockholders' Equity 1,465,050 11,443,555
------------ ------------
$ 3,948,043 $ 13,560,593
============ ============
</TABLE>

See accompanying notes to financial statements

F-2
<PAGE> 41
CYBERONICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 1,416,965 $ 966,989 $ 399,689

Cost of sales 411,562 347,457 117,835
------------ ------------ ------------
Gross profit 1,005,403 619,532 281,854

Operating expenses:

Research and development 8,024,502 5,678,024 4,323,671

Selling, general and administrative 3,420,111 2,906,589 2,519,037
------------ ------------ ------------
Total operating expenses 11,444,613 8,584,613 6,842,708
------------ ------------ ------------
Loss from operations (10,439,210) (7,965,081) (6,560,854)

Interest income, net 423,044 688,909 629,993

Other income (expense), net (97,084) 37,362 5,136
------------ ------------ ------------
Net loss $(10,113,250) $ (7,238,810) $ (5,925,725)
============ ============ ============

Net loss per share $ (1.06) $ (.79) $ (.66)
============ ============ ============
Shares used in computing net
loss per share 9,513,038 9,218,008 8,945,968
============ ============ ============
</TABLE>

See accompanying notes to financial statements

F-3
<PAGE> 42
CYBERONICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------------------- PAID-IN
SHARES AMOUNT CAPITAL
------------ ------------ ------------
<S> <C> <C> <C>
Balances at June 30, 1993 8,916,131 $ 89,161 $ 39,003,552

Stock options exercised 105,040 1,051 28,635

Issuance of Common Stock under Employee Stock Purchase Plan 25,333 253 165,448

Issuance of Common Stock under Employee Special Recognition Stock
Program 3,050 31 27,795

Issuance of Common Stock, other 1,500 15 (19,432)

Amortization of deferred compensation

Net loss for the year
------------ ------------ ------------
Balances at June 30, 1994 9,051,054 90,511 39,205,998

Stock options exercised 415,616 4,156 27,775

Issuance of Common Stock under Employee Stock Purchase Plan 32,391 324 94,485

Issuance of Common Stock under Employee Special Recognition Stock
Program 200 2 748

Amortization of deferred compensation

Translation adjustment

Net loss for the year
------------ ------------ ------------
Balances at June 30, 1995 9,499,261 94,993 39,329,006

Stock options exercised 63,849 638 44,875

Issuance of Common Stock under Employee Stock Purchase Plan 14,005 140 54,485

Effect of early employee terminations on deferred compensation and
related balances (166,764)

Amortization of deferred compensation

Translation adjustment

Net loss for the year
------------ ------------ ------------
Balances at June 30, 1996 9,577,115 $ 95,771 $ 39,261,602
============ ============ ============
<CAPTION>
CUMULATIVE
DEFERRED ACCUMULATED TRANSLATION
COMPENSATION DEFICIT ADJUSTMENT
------------ ------------ ------------
<S> <C> <C> <C>
Balances at June 30, 1993 $ (314,200) $(14,644,386) $ --

Stock options exercised

Issuance of Common Stock under Employee Stock Purchase Plan

Issuance of Common Stock under Employee Special Recognition Stock
Program

Issuance of Common Stock, other

Amortization of deferred compensation 91,200

Net loss for the year (5,925,725)
------------ ------------ ------------
Balances at June 30, 1994 (223,000) (20,570,111) --

Stock options exercised

Issuance of Common Stock under Employee Stock Purchase Plan

Issuance of Common Stock under Employee Special Recognition Stock
Program

Amortization of deferred compensation 91,200

Translation adjustment (39,723)

Net loss for the year (7,238,810)
------------ ------------ ------------
Balances at June 30, 1995 (131,800) (27,808,921) (39,723)

Stock options exercised

Issuance of Common Stock under Employee Stock Purchase Plan

Effect of early employee terminations on deferred compensation and
related balances 56,264

Amortization of deferred compensation 71,076

Translation adjustment 74,031

Net loss for the year (10,113,250)
------------ ------------ ------------
Balances at June 30, 1996 $ (4,460) $(37,922,171) $ 34,308
============ ============ ============

</TABLE>

See accompanying notes to financial statements

F-4
<PAGE> 43
CYBERONICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net loss $(10,113,250) $ (7,238,810) $ (5,925,725)
Non-cash items included in net loss:
Depreciation and amortization 273,905 329,738 314,266
Compensation (income) expense related to certain stock
options and common stock issuances (39,424) 91,200 91,200
Issuance of Common Stock under Employee Stock Recognition
Program -- 750 27,826
Change in operating assets and liabilities:
Accounts receivable (133,380) (265,627) (58,228)
Inventories (66,280) (180,257) (230,040)
Prepaid expenses 8,721 (47,693) (143,399)
Accounts payable and accrued liabilities 427,581 983,685 332,500
Other 3,738 4,356 (4,228)
------------ ------------ ------------
Net Cash Used In Operating Activities (9,638,389) (6,322,658) (5,595,828)

Cash Flow From Investing Activities:
Purchases of property and equipment (124,811) (260,497) (356,606)
Purchases of marketable securities (3,181,598) (8,050,344) (15,483,500)
Maturities of marketable securities 6,091,192 18,920,809 17,569,870
------------ ------------ ------------
Net Cash Provided By Investing
Activities 2,784,783 10,609,968 1,729,764

Cash Flow From Financing Activities:
Proceeds from issuance of Common Stock 100,138 126,740 175,970
Payments of capital lease obligations (61,626) (119,397) (141,137)
------------ ------------ ------------
Net Cash Provided By Financing
Activities 38,512 7,343 34,833
------------ ------------ ------------
Effect of exchange rate changes on cash and cash equivalents 74,031 (39,723) --
------------ ------------ ------------
Net (Decrease) Increase In Cash and
Cash Equivalents (6,741,063) 4,254,930 (3,831,231)

Cash and cash equivalents at beginning of year 8,862,993 4,608,063 8,439,294
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,121,930 $ 8,862,993 $ 4,608,063
============ ============ ============
</TABLE>

Interest payments totaled $14,953, $13,348 and $29,104 during the years ended
June 30, 1996, 1995 and 1994, respectively.

Investing and financing activities not resulting in cash receipts or payments
consist of reclassifications of $56,264 of deferred compensation to additional
paid-in capital during the year ended June 30, 1996.

See accompanying notes to financial statements

F-5
<PAGE> 44
CYBERONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1996

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED DATA

Nature of Operations. Cyberonics, Inc. ("Cyberonics" or the "Company"), designs,
develops, manufactures and markets medical devices which deliver a novel
therapy, vagus nerve stimulation (VNS(TM)), for the treatment of epilepsy and
other debilitating neurological disorders. Cyberonics' sole product, its
proprietary implantable device, the NCP(R) System, is marketed internationally
(principally in Europe) using a combination of distributors and the Company's
own employee-based sales organization while it continues clinical testing under
an Investigational Device Exemption ("IDE") from the United States Food and Drug
Administration ("FDA"). Cyberonics cannot commence marketing or commercial sales
of the device in the United States unless and until it receives premarket
approval from the FDA. Cyberonics is headquartered in Webster, Texas.

The Company's future success is dependent upon a number of factors which
include, among others, obtaining and maintaining regulatory and reimbursement
approvals for its products, the possibility of competition and technological
changes, achieving market acceptance and generating sufficient sales volume,
developing its sales and marketing infractures, maintaining an uninterrupted
supply of certain sole source components and materials, adding sufficient
manufacturing capacity to meet future product demand, possible product liability
and reliance on key personnel.

Consolidation. The accompanying consolidated financial statements include the
Company and its wholly-owned subsidiary, Cyberonics Europe, S.A. All significant
intercompany accounts and transactions have been eliminated.

Use of Estimates. The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Foreign Currency Translation. The balance sheet accounts of Cyberonics Europe
S.A. are generally translated into U.S. dollars at exchange rates in effect on
reporting dates. Income statement items are translated at average exchange rates
in effect during the accounting period. Gains and losses resulting from foreign
currency transactions denominated in currency other than the functional currency
are included in other income and expense.

Cash and Cash Equivalents. The Company considers all highly liquid investments
with a maturity of three months or less at the time of purchase to be cash
equivalents.

Marketable Securities. Effective July 1, 1994, the Company adopted Financial
Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under Statement No. 115, securities
that the Company has the intent and ability to hold to maturity are classified
as "held to maturity" and reported at amortized cost. Securities that are held
for current resale are classified as "trading securities" and reported at fair
value with unrealized gains and losses included in results of operations.
Securities not classified as either "securities held to maturity" or "trading
securities" are classified as "securities available for sale" and reported at
fair value, with unrealized gains and losses excluded from results of operations
and reported as a separate component of stockholders' equity. Adopting Statement
No. 115 had no effect on the Company's financial position or results of
operations.

F-6
<PAGE> 45
At June 30, 1996 and 1995, the Company's entire investment portfolios consisted
of securities held to maturity. Securities held to maturity are primarily
various types of corporate bonds and asset-backed investments with various
maturity dates of approximately 18 months and have a fair market value of
$79,442 and $3,002,788, respectively. At June 30, 1996 and 1995, the Company's
investment portfolio consists of the following:

<TABLE>
<CAPTION>
1996 1995
------------------------ --------------------------
FAIR MARKET CARRYING FAIR MARKET CARRYING
VALUE VALUE VALUE VALUE
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Securities held to maturity-
Current-
Corporate debt $ -- $ -- $1,001,740 $1,029,898
Noncurrent-
Corporate debt 62,384 62,931 1,352,640 1,382,323
Collateralized mortgage obligations 17,058 17,101 648,408 577,405
------- ------- ---------- ----------
79,442 80,032 2,001,048 1,959,728
------- ------- ---------- ----------
Total $79,442 $80,032 $3,002,788 $2,989,626
======= ======= ========== ==========
</TABLE>

Inventories. Cyberonics states its 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.

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. For financial reporting purposes, the Company computes depreciation
using the double declining balance method over useful lives ranging from three
to seven years.

Stock Options. Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation," requires companies to measure
employee stock compensation plans based on the fair value method of accounting.
However, the statement allows the alternative of continued use of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," with pro forma disclosure of net income and earnings per share
determined as if the fair value method had been applied in measuring
compensation cost. The Company is required to adopt Statement No. 123 in fiscal
1997 and expects to elect the continued use of APB No. 25 with pro forma
disclosures.

Revenue Recognition. Revenue from product sales is generally recognized upon
shipment to the customer. Domestic sales have depended entirely upon the Company
conducting clinical trial activities under arrangements with certain
investigational centers, some of which receive research funding from the
Company. Arrangements with certain investigational centers employ risk-sharing
provisions. Domestic sales made under risk-sharing arrangements are deferred
until Cyberonics receives payment from the centers and the centers in turn
receive third-party reimbursement or satisfy other terms set forth in their
respective arrangements. Sales, net of risk-sharing provisions, for the year
ended June 30, 1996, consisted of $1,307,274 from international markets and
$109,691 from domestic risk-sharing arrangements.

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

Warranty Expense. The Company provides at the time of shipment for the estimated
costs which may be incurred under its product warranties.

License Agreements. The Company has executed licensing agreements under which it
has secured the rights provided under certain patents. License fees and
royalties, payable under the terms of these agreements, are expensed as
incurred.

F-7
<PAGE> 46
Income Taxes. Cyberonics accounts for income taxes in accordance with Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes."
Under Statement No. 109, 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 Company's election to
defer the deduction of certain start-up costs for federal income tax purposes,
the deductibility of certain accruals and reserves and the effect of tax loss
and tax credit carryforwards not yet utilized. Reflecting its tax loss
carryforward position, a reserve is established to fully offset the Company's
net deferred tax assets at June 30, 1996.

Net Loss Per Share. The Company's net loss per share is based on the weighted
average number of common shares outstanding. Common equivalent shares,
consisting of the effect of stock options and warrants, are excluded from the
per share calculations, as the effect of their inclusion is antidilutive.

NOTE 2. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Raw materials and components $307,707 $259,402
Work-in-process 227,821 180,944
Finished goods 136,308 165,210
-------- --------
$671,836 $605,556
======== ========
</TABLE>

NOTE 3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Furniture and fixtures $ 232,704 $ 231,478
Office equipment 59,633 46,256
Computer equipment 612,113 555,455
Research and development equipment 109,959 93,147
Manufacturing equipment 501,309 466,779
Leasehold improvements 243,123 243,124
----------- -----------
1,758,841 1,636,239

Accumulated depreciation (1,425,960) (1,154,264)
----------- -----------
$ 332,881 $ 481,975
=========== ===========
</TABLE>

F-8
<PAGE> 47
NOTE 4. ACCRUED LIABILITIES

Accrued liabilities are as follows:

<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
Clinical costs $ 618,885 $ 804,587
Payroll and other compensation 257,468 297,977
Professional services 209,540 144,000
Customer deposits 48,916 85,279
Warranties 167,778 106,635
Marketing activities 155,526 --
Other 100,821 42,019
---------- ----------
$1,558,934 $1,480,497
========== ==========
</TABLE>

NOTE 5. MERGER AGREEMENT WITH ST. JUDE MEDICAL, INC.

On April 8, 1996, Cyberonics and St. Jude Medical, Inc. ("St. Jude"), entered
into an Agreement and Plan of Merger ("the Merger Agreement") and a related
Common Stock Purchase Agreement ("the Stock Purchase Agreement").

Under the terms of the Merger Agreement, St. Jude has the right, but not the
obligation, to acquire Cyberonics on or before October 18, 1996, whereby each
outstanding share of Cyberonics Common Stock (other than shares held by St.
Jude) will be converted into the right to receive an amount of cash equal to
$72,090,669 divided by the number of shares of Cyberonics Common Stock
outstanding immediately prior to the effective time of the merger. As described
in Note 7, the merger will cause a substantial majority of all stock options
outstanding under the Company's Stock Option Plan to become fully vested and
exercisable at the time of the merger. Assuming the exercise of these stock
options and their addition to the total number of shares outstanding, cash
proceeds from the merger are expected to total approximately $7.00 per
outstanding share of Cyberonics Common Stock. Completion of the merger is
subject to normal regulatory reviews.

Pursuant to the Stock Purchase Agreement, St. Jude agreed to purchase 2,181,818
newly issued shares of Cyberonics Common Stock for $5.50 per share upon approval
of the Merger Agreement and Stock Purchase Agreement by holders of a majority of
the Company's Common Stock, providing proceeds to the Company of $12 million
before deducting commissions and other offering costs. On July 23, 1996,
Cyberonics shareholders approved both agreements, the stock purchase was
completed and the Company received cash proceeds of approximately $11,300,000,
net of offering costs to date of approximately $700,000.

The following table sets forth balance sheet data of the Company as of June 30,
1996, and as adjusted to give effect to the sale by the Company of the 2,181,818
shares of Common Stock to St. Jude in connection with the Merger Agreement as if
the sale of common stock were effective at June 30, 1996:

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and securities held to maturity $2,202 $13,502
Working capital 1,042 12,342
Total stockholders' equity 1,465 12,765
</TABLE>

F-9
<PAGE> 48
NOTE 6. STOCKHOLDERS' EQUITY

Preferred Stock. The Company has 2,500,000 shares of undesignated Preferred
Stock authorized and available for future issuance, of which none have been
issued through June 30, 1996. With respect to the shares authorized, the
Company's 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.

Common Stock. During the year ended June 30, 1994, stock option exercises and
issuances of Common Stock under the Company's Employee Stock Purchase Plan, the
Company's Employee Stock Recognition Program and for other purposes increased
the number of common shares by 105,040, 25,333, 3,050 and 1,500, respectively.
During the year ended June 30, 1995, stock option exercises and issuances of
Common Stock under the Company's Employee Stock Purchase Plan and the Company's
Employee Stock Recognition Program increased the number of common shares by
415,616, 32,391 and 200, respectively. During the year ended June 30, 1996,
stock option exercises and issuances of Common Stock under the Company's
Employee Stock Purchase Plan increased the number of common shares by 63,849 and
14,005, respectively.

Warrants. In connection with the execution of certain lease agreements,
Cyberonics granted warrants to a third-party leasing company to effectively
purchase up to 9,104 shares of the Company's Common Stock. Through June 30,
1996, the warrant holder has exercised its rights to purchase 7,534 shares,
netting 5,185 shares upon the execution of a cashless exercise. A warrant for
the purchase of 1,570 shares remains outstanding at June 30, 1996, carries an
exercise price of $5.33 per common share, is currently exercisable, expires in
February 1998 or earlier in the event of a merger and carries certain
registration rights.

NOTE 7. STOCK INCENTIVE AND PURCHASE PLANS

Stock Options. The Company has reserved 1,500,000 shares of its Common Stock for
future issuance pursuant to its Amended 1988 Incentive Stock Option Plan (the
"Stock Option Plan"). Options granted under the Stock Option Plan consist
primarily of Incentive Stock Options ("ISO's") and, in general, vest ratably
over the five year period following their date of grant. The vesting of certain
options is based upon the achievement of specific Company milestones; options to
purchase 204,000 shares vest ratably over the five-year period following date of
grant, with an additional 50 percent of all unvested shares vesting upon FDA
panel recommendation of the Company's Premarket Approval (PMA) application, and
with all remaining unvested shares vesting upon FDA approval of the PMA
application; 50,000 shares vest upon completion of a stated term of employment;
42,500 vest 10 years from their date of grant; and 6,000 shares vest upon the
achievement of certain third-party reimbursement milestones or 10 years from
their date of grant.

The pending merger with St. Jude Medical, Inc., described in Note 5, if
consummated, will constitute a change of control whereby a substantial majority
of options outstanding at the time of the merger shall become fully vested and
exercisable. Upon completion of the merger, 669,552 shares (of the 719,552
shares outstanding at June 30, 1996) will be fully vested and exercisable if not
otherwise canceled or forfeited.

F-10
<PAGE> 49
Transactions involving options are summarized as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------
SHARES
SHARES ------------------------- PRICE PER
RESERVED TOTAL EXERCISABLE SHARE
-------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Balances at June 30, 1993 486,433 938,449 389,511 $ .07 -$ 8.00
Granted (67,400) 67,400 -- 7.00 - 11.75
Options becoming exercisable -- -- 201,714 .07 - 10.25
Exercised -- (105,040) (105,040) .13 - 3.00
Canceled or forfeited 8,096 (8,096) -- .07 - 10.25
-------- -------- --------
Balances at June 30, 1994 427,129 892,713 486,185 .13 - 11.75
Shares reserved 500,000 -- --
Granted (613,800) 613,800 -- 3.25 - 5.25
Options becoming exercisable -- -- 133,523 .13 - 11.75
Exercised -- (429,666) (429,666) .13 - 3.00
Canceled or forfeited 273,396 (273,396) -- .13 - 11.75
-------- -------- --------
Balances at June 30, 1995 586,725 803,451 190,042 .07 - 7.75
Granted (52,000) 52,000 -- 4.75 - 5.38
Options becoming exercisable -- -- 167,412 .37 - 7.75
Exercised -- (63,849) (63,849) .07 - 4.00
Canceled or forfeited 72,050 (72,050) -- .67 - 8.00
-------- -------- --------
Balances at June 30, 1996 606,775 719,552 293,605 $.37 -$ 8.00
======== ======== ========
</TABLE>

For certain options granted, the Company recognizes as compensation expense the
excess of the deemed value for accounting purposes of the Common Stock on the
date the options were granted over the aggregate exercise price of such options.
This compensation expense is amortized ratably over the vesting period of each
option. The Company recognized compensation expense totaling $91,200 during each
of the fiscal years 1994 and 1995 and $71,076 during fiscal 1996. The Company
also recognized adjustments totaling $56,264 during fiscal 1996 to reduce
deferred compensation balances as a result of early employee terminations.

Stock Purchase Plan. Under the Cyberonics, Inc. Employee Stock Purchase Plan
(the "Stock Purchase Plan"), 100,000 shares of the Company's Common Stock have
been reserved for issuance. Subject to certain limits, the Stock Purchase Plan
allows eligible employees to purchase shares of the Company's Common Stock
through payroll deductions of up to 15 percent of their respective current
compensation at a price equaling the lesser of 85 percent of the fair market
value of the Company's Common Stock on (i) the first business day of the
purchase period or (ii) the last business day 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 June 30, 1996,
28,271 shares remain available for future issuances under the Stock Purchase
Plan.

Stock Recognition Program. In May 1992, the Company's Board of Directors
established the Cyberonics Employee Stock Recognition Program. Since its
inception, a total of 8,600 shares of the Company's Common Stock has been
reserved for issuance as special recognition grants. The shares are granted to
employees for special performances and/or contributions at the discretion of the
Company's President, based on nominations made by fellow employees. At June 30,
1996, 4,030 shares remain available for future issuances under the program.

F-11
<PAGE> 50
NOTE 8. INCOME TAXES

Components of the Company's loss before taxes are as follows:

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Domestic $ (8,772,435) $(6,604,780) $(5,749,017)
Foreign (1,340,815) (634,030) (176,708)
------------ ----------- -----------

$(10,113,250) $(7,238,810) $(5,925,725)
============ =========== ===========
</TABLE>

A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
U.S. statutory rate (34.0)% (34.0)% (34.0)%
Effect of unused tax loss and tax credit carryforwards 30.8 31.4 32.7
Amortization of deferred compensation (.1) .4 .5
Other, net 3.3 2.2 .8
----- ----- -----
0.0% 0.0% 0.0%
===== ===== =====
</TABLE>

Significant components of the Company's deferred tax assets and liabilities are
as follows:

<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1996 1995
------------ -----------
<S> <C> <C>
Deferred tax assets:
Federal net operating loss carryforwards $ 11,436,378 $ 8,406,147
Foreign net operating loss carryforwards 210,852 79,452
Tax credit carryforwards 1,003,964 1,003,964
Start-up costs, net of amortization 37,436 170,676
Depreciation 77,787 77,448
Clinical costs 81,772 60,180
Other, net 188,771 110,527
------------ -----------
Total deferred tax assets 13,036,960 9,908,394

Total deferred tax liabilities, net (23,514) (12,676)
Deferred tax valuation reserve (13,013,446) (9,895,718)
------------ -----------
Net deferred tax assets and liabilities $ -- $ --
============ ===========
</TABLE>

At June 30, 1996, the Company has net operating loss carryforwards of
approximately $33,600,000 for federal income tax purposes, which expire during
the years 2003 through 2011, and tax credit carryforwards of approximately
$1,000,000 for federal income tax purposes, which expire during the years 2006
through 2010. As required under Statement No. 109, for financial reporting
purposes, a valuation allowance totaling $13,013,446 is established as of June
30, 1996, to fully offset the Company's net deferred tax assets, including those
relating to its carryforwards. The valuation allowance increased by $3,117,728
during fiscal 1996 due primarily to the Company's additional net operating
losses. Current federal income tax regulations with respect to changes in
ownership could limit the utilization of the Company's net operating loss
carryforwards.

F-12
<PAGE> 51
NOTE 9. EMPLOYEE RETIREMENT SAVINGS PLAN

In September 1994, Cyberonics implemented an employee retirement savings plan
(the "Plan") which qualifies under Section 401(k) of the Internal Revenue Code.
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. Employer contributions are made solely at the Company's discretion.
No employer contributions were made to the Plan for the years ended June 30,
1996 and 1995.

NOTE 10. COMMITMENTS AND CONTINGENCIES

Clinical Testing. The ability of the Company to successfully develop,
manufacture and market its proprietary products is dependent upon many factors,
including regulatory approval. Cyberonics is currently involved in clinical
trials for the testing of an implantable device and is committed for the costs
to complete those trials currently in process. The Company has recorded an
accrual for estimated costs incurred which had not yet been billed as of the
respective balance sheet dates.

License Agreements. The Company executed a license agreement which provides
Cyberonics with worldwide exclusive rights under three United States patents
(and their international counterparts) covering the method and devices of the
implantable NeuroCybernetic Prosthesis System (the "NCP System") for vagus nerve
stimulation for the control of epilepsy and other movement disorders. The
license agreement provides that the Company will pay a royalty equal to the
greater of $36,000 per year or at the rate of 6 percent on the first $12 million
of sales and at the rate of 3 percent thereafter for the remaining term of the
licensed patents. The license agreement runs for successive three-year terms,
renewable at the Company's election. The license agreement, and its periods of
extension, may not be terminated by the licensor without cause. The Company's
royalty payments pursuant to this agreement are ratably charged to expense.

On July 28, 1989, the Company executed a license agreement for a specific
application of the patented "Implantable Electrode Array" to be used in the
control of epilepsy and other movement disorders. The licensor retains all
rights to this patent for applications outside the above specified use. Pursuant
to the license agreement, as amended in 1991, the Company was obligated to pay a
license fee of $200,000, of which all had been paid as of June 30, 1996. The
Company has a limited-term option to expand the licensed field of use for
additional indications for a license fee of $15,000 per indication and has made
partial payments for certain such indications. Amounts due under this agreement
are being charged to expense as incurred. In addition, the Company is obligated
to pay the licensor an earned royalty of 1 percent of the Company's net sales
price of implantable systems incorporating the licenser's standard electrodes
and 1.75 percent of net sales incorporating the licenser's bi-directional
electrodes. The Company paid royalties of $10,000 during fiscal year 1994,
$26,000 during fiscal year 1995 and $35,000 during fiscal year 1996, and has
agreed to pay minimum royalties of $35,000 in each fiscal year thereafter for
the life of the licensed patents. Beginning in fiscal 1997, if total combined
annual royalties paid to the licensor are not equal to at least $200,000 each
fiscal year and if the Company elects not to make a payment sufficient to meet
such minimum royalty, the licensor may convert the license regarding the
bi-directional lead to a non-exclusive license.

Lease Agreements. The Company leases its domestic office and production facility
under an operating lease agreement which extends through October 1997. Future
minimum lease payments relating to this lease agreement are as follows:

<TABLE>
<CAPTION>
Year ended June 30-
<S> <C>
1997 $229,752
1998 76,584
--------

$306,336
========
</TABLE>

F-13
<PAGE> 52
Legal Matters. The Company is subject to certain claims and proceedings which
arise in the ordinary course of its business. Management does not believe that
the outcome of any of these matters will have a material adverse effect on the
Company's financial condition or results of operations.

Other Arrangements. The Company has entered into arrangements with certain key
employees which provide compensation in the event that more than 50 percent of
the Company's ownership becomes held by a single party. The maximum amount of
potential future payments under these arrangements totals approximately
$1,500,000 at June 30, 1996. Certain amounts under these arrangements are
payable upon completion of the merger with St. Jude, as further described in
Note 5.

NOTE 11. CONCENTRATIONS OF CREDIT RISK

The Company's cash equivalents and securities held to maturity represent
potential concentrations of credit risk. The Company minimizes potential
concentrations of credit risk in cash equivalents and marketable securities by
placing investments in high quality financial instruments and, as required by
its corporate investment policy, limiting the amount of investment in any one
issuing party. At June 30, 1996, management believes that the Company has no
significant concentrations of credit risk and has incurred no material
impairments in the carrying values of its cash equivalents and securities held
to maturity.

NOTE 12. GEOGRAPHIC AREA INFORMATION

The Company's business activities are represented by a single industry segment,
the manufacturing and distribution of medical products. For management purposes,
the Company is segmented into two geographic areas: North America and Europe
(which includes all export sales to unaffiliated customers in Europe, the Middle
East, Africa and Asia/Pacific). Sales between geographic areas are made at
prices which would approximate transfers to unaffiliated distributors. Because
of the interdependence of the Company's geographic areas, the operating loss as
presented below may not be representative of the geographic distribution which
would occur if the areas were not interdependent.

The Company's net sales, losses from operations and assets by geographic area
for the fiscal years that separate geographic business units have operated are
as follows:

<TABLE>
<CAPTION>
NORTH
AMERICA EUROPE ELIMINATIONS CONSOLIDATED
------- ------ ------------ ------------
<S> <C> <C> <C> <C>
1996
Customer sales $ 109,691 $ 1,307,274 $ -- $ 1,416,965
Intercompany sales 1,227,500 -- (1,227,500) --
------------ ----------- ----------- ------------

Total net sales $ 1,337,191 $ 1,307,274 $(1,227,500) $ 1,416,965
============ =========== =========== ============

Loss from operations $(10,492,597) $(1,243,843) $ 1,297,230 $(10,439,210)
============ =========== =========== ============

Identifiable assets $ 3,689,080 $ 420,193 $ (161,230) $ 3,948,043
============ =========== =========== ============

1995
Customer sales $ 204,187 $ 762,802 $ -- $ 966,989
Intercompany sales 778,437 -- (778,437) --
------------ ----------- ----------- ------------

Total net sales $ 982,624 $ 762,802 $ (778,437) $ 966,989
============ =========== =========== ============

Loss from operations $ (7,917,323) $ (671,384) $ 623,626 $ (7,965,081)
============ =========== =========== ============

Identifiable assets $ 13,509,248 $ 282,305 $ (230,960) $ 13,560,593
============ =========== =========== ============
</TABLE>

F-14
<PAGE> 53
<TABLE>
<CAPTION>
NORTH
AMERICA EUROPE ELIMINATIONS CONSOLIDATED
------- ------ ------------ ------------
<S> <C> <C> <C> <C>
1994
Customer sales $ 198,000 $ 201,689 $ -- $ 399,689
Intercompany sales 159,500 -- (159,500) --
----------- --------- --------- -----------

Total net sales $ 357,500 $ 201,689 $(159,500) $ 399,689
=========== ========= ========= ===========

Loss from operations $(6,534,208) $(185,004) $ 158,358 $(6,560,854)
=========== ========= ========= ===========

Identifiable assets $19,699,687 $ 95,371 $ (38,910) $19,756,148
=========== ========= ========= ===========
</TABLE>

NOTE 13. QUARTERLY FINANCIAL INFORMATION - UNAUDITED

The tables below contain summarized unaudited quarterly data for the years ended
June 30, 1996 and 1995. The Company believes this information reflects all
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation of the quarterly information presented. The operating results
for any quarter presented are not necessarily indicative of the results that may
be expected for future periods.

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH ANNUAL
QUARTER QUARTER QUARTER QUARTER TOTALS
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
1996
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $ 192,310 $ 400,236 $ 292,818 $ 531,601 $ 1,416,965
Gross profit 136,250 299,977 221,203 347,973 1,005,403
Operating expenses 2,414,645 2,892,027 2,665,176 3,472,765 11,444,613
Net loss (2,129,564) (2,475,081) (2,340,296) (3,168,309) (10,113,250)
Net loss per share $ (.22) $ (.26) $ (.25) $ (.33) $ (1.06)
Shares used in computing net
loss per share 9,500,209 9,503,971 9,509,345 9,538,626 9,513,038

<CAPTION>
FIRST SECOND THIRD FOURTH ANNUAL
QUARTER QUARTER QUARTER QUARTER TOTALS
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
1995
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $ 144,687 $ 141,920 $ 282,721 $ 397,661 $ 966,989
Gross profit 84,311 105,152 194,014 236,055 619,532
Operating expenses 1,769,209 1,890,731 1,990,212 2,934,461 8,584,613
Net loss (1,550,496) (1,625,489) (1,621,297) (2,441,528) (7,238,810)
Net loss per share $ (.17) $ (.18) $ (.17) $ (.26) $ (.79)
Shares used in computing net
loss per share 9,052,990 9,065,170 9,268,992 9,484,878 9,218,008
</TABLE>

Quarterly and annual loss per share are computed independently based upon the
applicable number of weighted average common shares and share equivalents for
each period.

F-15

<PAGE> 1
EXHIBIT 10.8

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of this 30th day of
September 1995, (the "Effective Date") by and between Robert P. Cummins, an
individual ("Employee"), and CYBERONICS, INC., a Delaware corporation
("Company"), with reference to the following facts:

RECITALS

A. The Board of Directors of the Company (the "Board") has determined
that it is in the best interests of the Company and its stockholders to assure
that the Company will have the continued dedication and objectivity of the
Employee.

B. The Board believes that it is in the best interests of the Company
and its stockholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company.

C. The Board believes that it is imperative to provide the Employee
with certain severance benefits upon the Employee's termination of employment
which provides the Employee with enhanced financial security and provides
efficient incentive and encouragement to the Employee to remain with the
Company.

In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:

1. Employment.

1.1 Employment. Company hereby hires Employee, and Employee
hereby accepts employment, as the Company's Chief Executive Officer and
President, with such duties and responsibilities as are set forth in the
Company's Bylaws and at the direction of the Board.

1.2 Employment Term. The period of Employee's employment
hereunder shall commence on the date hereof and shall continue until and
terminate on the first anniversary hereof unless earlier terminated pursuant to
Section 3 (the "Employment Period"). After the expiration of the Employment
Period and with the mutual agreement of the parties, Employees employment with
the Company may continue on an "at-will" basis, subject to the Company's
customary terms and condition of employment for its at-will employees.

1.3 Place of Employment. During the Employment Period,
Employee shall render his services principally at the offices of the Company in
Webster, Texas.

2. Compensation.

As compensation for his services to be performed hereunder,
Company shall provide Employee with the following compensation and benefits:

2.1 Base Salary. Employee's initial base salary shall be
$18,083.33 per month. Employee's base salary shall continue at such amount
subject to adjustment by the mutual agreement
<PAGE> 2
of the parties. Employee's base salary shall be payable in accordance with this
Company's payroll practices as in effect from time to time, and subject to such
withholding as is required by law.

2.2 Bonus Plan. In addition to the base salary specified in
Section 2.1, Employee shall be eligible to participate in executive officer
bonus plans as determined by the Board from time to time. Employee's bonus under
such plans shall be based on criteria set forth or established pursuant to any
such plan.

2.3 Benefits.

(a) Vacation. Employee shall be entitled to four (4)
weeks paid vacation during each year of his employment by the Company, which
shall be administered according to the Company's standard employment policies as
in effect from time to time; provided, however, that Employee shall not take
more than two (2) weeks of vacation in any six (6) week period.

(b) Auto/Travel Allowances. In addition to the other
compensation provided for herein, during the term of this Agreement, Employee
shall be paid an automobile allowance of $350.00 per month and a personal travel
allowance of $500.00 per month. Such payments shall be payable concurrent with
salary payments made in accordance with this Company's payroll practices as in
effect from time to time, and subject to such withholding as is required by law.

(c) Business Expenses. The Company shall reimburse
Employee for all reasonable business expenses incurred by Employee in the course
of performing services for the Company, in accordance with the Company's expense
reimbursement policy as in effect from time to time.

(d) Other Benefits. The Employee shall be eligible to
participate in the employee benefit plans and executive compensation programs
maintained by the Company of general applicability to other key executives of
the Company, including (without limitation) retirement plans, savings or
profit-sharing plans, deferred compensation plans, supplemental retirement or
excess-benefit plans, stock option, incentive or other bonus plans, life,
disability, health, accident and other insurance programs, paid vacations, and
similar plans or programs, subject in each case to the generally applicable
terms and conditions of the plan or program in question and to the determination
of the Board or any committee administering such plan or program.

2.4 Withholding, Etc. The Company may make such deductions,
withholdings and other payments from all sums payable to Employee pursuant to
this Agreement which are required by law or as Employee requests for taxes and
other charges.

3. Severance Pay. Except as otherwise expressly set forth in this
Section 3, Employee's right to receive base salary or any other payments not
required by law shall cease upon the effective date of any termination of the
Employment Period, and the Company shall have no further liability or obligation
to Employee, his executors, administrators or assigns hereunder except for
unpaid salary, benefits and bonuses (if any) accrued to the date of termination,
and except as set forth below.

-2-
<PAGE> 3
3.1 Involuntary Termination.

(a) Severance Payment. In the event that prior to the
first anniversary date of the Effective Date of this Agreement Employee's
employment with the Company is "involuntarily terminated" (as defined below),
the Company shall pay to Employee as severance pay, a cash payment equal to
$650,000 (the "Severance Payment"). The Cash Bonus shall be subject to
applicable tax withholding and shall be paid in a lump sum within five (5) days
following the effective date of the event giving rise to the Severance Payment.

(b) Involuntarily Terminated Defined. For purposes of
this Agreement, the term "involuntarily terminated" shall mean:

(i) the continued assignment to Employee of
any duties or the continued significant reduction of Employee's duties, either
of which is substantially inconsistent with the level of Employee's position
with the Company as of the date of this Agreement;

(ii) a material reduction in Employee's
salary, other than any such reduction which is part of, and generally consistent
with, a general reduction of officer salaries;

(iii) a material reduction by the Company in
the kind or level of employee benefits (other than salary and bonus) to which
Employee is entitled immediately prior to such reduction with the result that
Employee's overall benefits package (other than salary and bonus) is
substantially reduced (other than any such reduction applicable to officers of
the Company generally);

(iv) the relocation of Employee's principal
place for the rendering of the services to be provided him hereunder to a
location more than fifty (50) miles from the present location of the principal
executive office of the Company; or

(v) any material breach by the Company of
any material provision of this Agreement which continues uncured for 30 days
following notice thereof; provided, however, that none of the foregoing shall
constitute "involuntarily terminated" to the extent Employee has agreed thereto
in writing.

3.2 Voluntary Termination; Termination for Cause.

(a) No Severance Payment. In the event that Employee
voluntarily terminates his employment with the Company or the Company terminates
his employment for "cause" (as defined below), then the Company's sole
obligation to Employee will be (i) to pay Employee any salary, vacation or the
like accrued but not paid as of the date of termination and (ii) to provide
Employee with such right to continue health care benefits (at Employee's
expense) as required by applicable law. Notwithstanding the foregoing, it is
understood that a termination will not be deemed to be voluntary where Employee
terminates his employment as a result of the occurrence of one or more of the
events described in the definition of "involuntarily terminated."

-3-
<PAGE> 4
(b) For purposes of this Agreement, the term "cause"
shall mean:

(i) Conviction of a crime involving moral
turpitude;

(ii) The death or permanent disability of
Employee, with the term "permanent disability" defined as meaning a total or
partial physical or mental disability continuing for a period of not less than
three (3) consecutive months, which prevents Employee from substantially
discharging his duties and responsibilities as set forth herein;

(iii) Employee's malfeasance in connection
with his employment or neglect of his duties hereunder after written
notification thereof by the Company, which notice shall specify the alleged
instances of neglect of his duty, and shall provide Employee with 30 days in
which to remedy such neglect, if it is subject to being remedied;

(iv) Employee's material breach of this
Agreement or the confidential information agreement entered into with the
Company; or

(v) Employee personally engaging in knowing
and intentional illegal conduct which is seriously injurious to the Company or
its affiliates.

4. Confidentiality and Nondisclosure.

4.1 Exclusive Service. Employee agrees that so long as he
remains employed by the Company, he will not, except with the written approval
of the Company, engage in or be employed in any business competitive with that
of the Company either actively or as a passive investor (other than passive
investment in publicly traded securities), and will otherwise do nothing
inconsistent with his duties hereunder including, but not limited to, using any
of the Company's trade secrets, patents, trademarks, trade names, copyrights,
secret processes, plans of business operation, customer lists or other
intangible assets of the Company, whether presently owned or hereafter required,
other than in connection with his employment by the Company. Without limiting
the foregoing, the Company acknowledges that Employee has the outside
commitments described in Exhibit A hereto and hereby consents to such
activities.

4.2 Confidentiality Policies. Employee acknowledges that the
Company is a publicly held corporation and that as such, it is legally obligated
to maintain certain policies concerning the disclosure of nonpublic material
information concerning the Company, its products, operations and business.
Employee agrees to comply with all of such policies as may be adopted by the
Company from time to time hereafter, or as may be presently existing. Employee
further agrees to fully comply with all laws, rules and regulations of the
Securities and Exchange Commission, any state securities authority, any court or
other regulatory authority or agency relating to or affecting transactions in
the Company's securities, and specifically agrees not to purchase or sell
securities of the Company while in possession of material nonpublic information
concerning the Company.

4.3 Trade Secrets and Confidential Information. Employee
agrees to execute, and abide by, the Company's standard employee confidential
information agreement.

-4-
<PAGE> 5
4.4 Survival. Employee's agreements under this Section 4 shall
survive the termination of his employment, and shall continue indefinitely.

5. Miscellaneous.

5.1 Arbitration. If any dispute between the parties arises out
of this agreement, such dispute shall be finally resolved by binding arbitration
conducted in Webster, Texas in accordance with the commercial rules of the
American Arbitration Association then in effect. Any such arbitration shall be
conducted before a single arbitrator. Judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.

5.2 Assignment. This Agreement shall inure to the benefit of
and shall be binding upon the successors and the assigns of the Company. This
Agreement is personal to Employee and may not be assigned by him.

5.3 Severability. If any provision of the Agreement shall be
found invalid by any court of competent jurisdiction, such findings shall not
affect the validity of the other provisions hereof and the invalid provisions
shall be deemed to have been severed herefrom.

5.4 Applicable Law. This Agreement is entered into and
executed in the State of Texas and shall be governed by the laws of such State.

5.5 Entire Agreement. This Agreement expresses the entire
understanding of the parties with respect to the terms of Employee's employment
with the Company, and supersedes any prior agreement, understanding or the like,
whether written or oral.

5.6 Counterparts. This Agreement may be executed
simultaneously in any number of counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the same instrument.

5.7 Attorneys' Fees. In the event any party hereto commences
arbitration or legal action to enforce this Agreement, the prevailing party
shall be entitled to its reasonable attorneys' fees, costs and expenses incurred
in such action.

-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth on the first page hereof.

CYBERONICS, INC.

By: /s/ Reese S. Terry, Jr.
---------------------------------------
Reese S. Terry, Jr.
Chairman of the Board,
Executive Vice President and Secretary

EMPLOYEE

By: /s/ Robert P. Cummins
---------------------------------------
Robert P. Cummins

-6-
<PAGE> 7
EMPLOYMENT AGREEMENT AMENDMENT

THIS EMPLOYMENT AGREEMENT AMENDMENT (the "Amendment") is made as of
this 10th day of January, 1996 (the "Effective Date") by and between Robert P.
Cummins, an individual ("Employee"), and CYBERONICS, INC., a Delaware
corporation ("Company"), with reference to the following facts:

RECITALS

A. The Company and the Employee are parties to an Employment Agreement
dated effective as of September 30, 1995 (the "Employment Agreement");

B. The Board of Directors of the Company (the "Board") and the Employee
have jointly determined that it would be appropriate for Employee's role with
the Company to be revised as set forth in this Amendment, and to adjust
Employees time commitment and compensation in accordance with this revised role.

AGREEMENT

In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:

1. Amendment of Employment Agreement.

1.1 Compensation. Section 2.1 of the Employment Agreement is
hereby revised to read in its entirety as follows:

"2.1 Base Salary. Employee's initial base salary
shall be $18,083.33 per month. Effective as of February 1, 1996,
Employee's base salary shall be reduced to $12,583.33 per month.
Employee's base salary shall continue at such amount subject to
adjustment by the mutual agreement of the parties. Employee's base
salary shall be payable in accordance with this Company's payroll
practices as in effect from time to time, and subject to such
withholding as is required by law."

1.2 Severance Payment. As of the Effective Date of this
Amendment, the Severance Payment amount set forth in Section 3.1(a) of the
Employment Agreement will be reduced to $450,000.

1.3 Exclusive Service. Section 4.1 of the Employment Agreement
is hereby amended to read in its entirety as follows:

"4.2 Exclusive Service. Employee agrees that so long
as he remains employed by the Company, he will not, except with the
written approval of the Company, engage in or be employed in any
business competitive with that of the Company either actively or as a
passive investor (other than passive investment in publicly traded
securities), and will otherwise do nothing inconsistent with his duties
hereunder including, but not limited to, using any of the Company's
trade secrets, patents, trademarks, trade names, copyrights, secret
processes, plans of business operation, customer lists or other
intangible assets of the
<PAGE> 8
Company, whether presently owned or hereafter required, other than in
connection with his employment by the Company. Without limiting the
foregoing, Employee agrees to devote at least 87% of his working time
devoted to Company business through January 31, 1996, and at least 50%
of his working time devoted to Company business from February 1, 1996
through the remaining term of this Agreement."

1.4 Exclusive Service. Section 3.2(b)(iii) of the Employment
Agreement is hereby amended to read in its entirety as follows:

"(iii) Employee's malfeasance in connection with his
employment or neglect or inadequate performance of
his duties as determined at any time in the sole and
absolute discretion of the Board of Directors;"

2. No Other Changes. Except as expressly provided in this Amendment,
the terms of the Employment Agreement shall remain in full force and effect.

3. Miscellaneous. The Miscellaneous provisions set forth in Section 5
of the Employment Agreement shall apply to this Amendment as if set forth
herein.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth on the first page hereof.

CYBERONICS, INC.

By: /s/ Reese S. Terry, Jr.
--------------------------------------
Reese S. Terry, Jr.
Chairman of the Board,
Executive Vice President and Secretary

EMPLOYEE

By: /s/ Robert P. Cummins
--------------------------------------
Robert P. Cummins

-2-
<PAGE> 9
EMPLOYMENT AGREEMENT AMENDMENT

THIS EMPLOYMENT AGREEMENT AMENDMENT (the "Amendment") is made as of
this 10th day of April, 1996 (the "Effective Date") by and between Robert P.
Cummins, an individual ("Employee"), and CYBERONICS, INC., a Delaware
corporation ("Company"), with reference to the following facts:

RECITALS

A. The Company and the Employee are parties to an Employment Agreement
dated effective as of September 30, 1995, as amended on January 10, 1996 (the
"Employment Agreement");

B. The Company has announced the execution of an Agreement and Plan of
Merger pursuant to which the Company may be acquired by another company. The
Board of Directors of the Company (the "Board") recognizes that such
announcement can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility or occurrence of a Change of Control (as defined
below) of the Company.

AGREEMENT

In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:

1. Amendment of Employment Agreement.

1.1 Employment Period. Section 1.2 of the Employment Agreement
is hereby revised to read in its entirety as follows:

"(a) Employment Term. The period of Employee's
employment hereunder shall commence on the date hereof and shall
continue until and terminate on December 31, 1996 unless earlier
terminated pursuant to Section 3 (the "Employment Period"). After the
expiration of the Employment Period and with the mutual agreement of
the parties, Employees employment with the Company may continue on an
"at-will" basis, subject to the Company's customary terms and condition
of employment for its at-will employees."

1.2 Severance Payment. Section 3.1(a) of the Employment
Agreement is hereby revised to read in its entirety as follows:

"(a) Severance Payment. In the event that prior to
December 31, 1996 Employee's employment with the Company is
"involuntarily terminated" (as defined below), the Company shall pay to
Employee as severance pay, a cash payment equal to $450,000 (the
"Severance Payment"). The Cash Bonus shall be subject to applicable tax
withholding and shall be paid in a lump sum within five (5) days
following the effective date of the event giving rise to the Severance
Payment."
<PAGE> 10
2. No Other Changes. Except as expressly provided in this Amendment,
the terms of the Employment Agreement shall remain in full force and effect.

3. Miscellaneous. The Miscellaneous provisions set forth in Section 5
of the Employment Agreement shall apply to this Amendment as if set forth
herein.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth on the first page hereof.

CYBERONICS, INC.

By: /s/ Reese S. Terry, Jr.
--------------------------------------
Reese S. Terry, Jr.
Chairman of the Board,
Executive Vice President and Secretary

EMPLOYEE

By: /s/ Robert P. Cummins
--------------------------------------
Robert P. Cummins

-2-

<PAGE> 1
EXHIBIT 10.9

EMPLOYEE RETENTION AGREEMENT

THIS EMPLOYEE RETENTION AGREEMENT ("Agreement") is made as of this 30th
day of September 1995 (the "Effective Date"), by and between John K. Bakewell,
an individual ("Employee"), and CYBERONICS, INC., a Delaware corporation
("Company"), with reference to the following facts:

RECITALS

A. It is expected that the Company may from time to time consider the
possibility of an acquisition by another company or other change of control. The
Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.

In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:

1. Cash Retention Bonus.

1.1 Retention Bonus Trigger. In the event of a Change of
Control (as defined below) occurring within twelve (12) months of the Effective
Date of this Agreement, provided that the Employee meets the eligibility
requirements set forth in Section 1.2 hereof, Employee shall be entitled to
receive a lump sum cash payment equal to Two Hundred Thousand Dollars ($200,000)
(the "Retention Bonus").

1.2 Retention Bonus Eligibility. Employee shall be eligible to
receive the Retention Bonus if: (i) Employee is employed by the Company as of
the date of closing (the "Closing Date") of an event which constitutes a Change
of Control (regardless of whether the Employee is terminated by the Company or
its successor, or terminates his or her employment with the Company or its
successor, following the Closing Date); (ii) if Employee's employment is
terminated by the Company without Cause (as defined below) prior to the Closing
Date; or (iii) in the event Employees employment is terminated prior to the
Closing Date as a result of the death or permanent disability of Employee.

1.3 Payment of Retention Bonus. The Retention Bonus will be
paid to Employee not later than five (5) business days after the Closing Date.

1.4 "Change of Control" Defined. For purposes of this
Agreement, the term "Change of Control" shall mean (i) a corporate
reorganization of the Company which results in the stockholders of the Company
immediately prior to such reorganization owning less than 50% of the
<PAGE> 2
combined voting power of the capital stock of the surviving company immediately
following such reorganization, or (ii) the sale of all or substantially all of
the assets of the Company.

1.5 Termination for "Cause" Defined. For purposes of this
Agreement, the term "Cause" shall mean:

(a) Conviction of a crime involving moral turpitude;

(b) Employee's neglect or inadequate performance of
his duties as determined at any time in the sole and absolute discretion of the
Board of Directors;

(d) Employee personally engaging in knowing and
intentional illegal conduct which is seriously injurious to the Company or its
affiliates.

2. Miscellaneous.

2.1 Term of Agreement. The terms of this Agreement shall be
effective for one year from the Effective Date; provided, however, that if the
Employee is terminated by the Company for Cause or voluntarily terminates his
employment with the Company at any time prior to the Closing Date, this
Agreement shall expire on the effective date of such termination and the Company
shall have no further obligations under this Agreement, including no obligation
to pay the Retention Bonus pursuant to Section 1.

2.2 Withholding, Etc. The Company shall make such deductions,
withholdings and other payments from all sums payable to Employee pursuant to
this Agreement which are required by law or as Employee requests for taxes and
other charges.

2.3 Arbitration. If any dispute between the parties arises out
of this agreement, such dispute shall be finally resolved by binding arbitration
conducted in Webster, Texas in accordance with the commercial rules of the
American Arbitration Association then in effect. Any such arbitration shall be
conducted before a single arbitrator. Judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.

2.4 Assignment. This Agreement shall inure to the benefit of
and shall be binding upon the successors and the assigns of the Company. This
Agreement is personal to Employee and may not be assigned by him.

2.5 Severability. If any provision of the Agreement shall be
found invalid by any court of competent jurisdiction, such findings shall not
affect the validity of the other provisions hereof and the invalid provisions
shall be deemed to have been severed herefrom.

2.6 Applicable Law. This Agreement is entered into and
executed in the State of Texas and shall be governed by the laws of such State.

-2-
<PAGE> 3
2.7 Counterparts. This Agreement may be executed
simultaneously in any number of counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the same instrument.

2.8 Attorneys' Fees. In the event any party hereto commences
arbitration or legal action to enforce this Agreement, the prevailing party
shall be entitled to its reasonable attorneys' fees, costs and expenses incurred
in such action.

2.9 Non-Integration. This Agreement shall be in addition to
any other agreements between the parties hereto.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth on the first page hereof.

CYBERONICS, INC.

By: /s/ Robert P. Cummins
-------------------------------------
Robert P. Cummins
President and Chief Executive Officer

EMPLOYEE

By: /s/ John K. Bakewell
-------------------------------------
John K. Bakewell

-3-
<PAGE> 4
EXTENSION OF
EMPLOYEE RETENTION AGREEMENT

This Extension of Employee Retention Agreement (the "Extension") is
made and entered into effective as of April 10, 1996 (the "Effective Date"), by
and between John K. Bakewell (the "Employee") and Cyberonics, Inc. (the
"Company").

R E C I T A L S

A. The Company and the Employee are parties to an Employee Retention
dated as of September 30, 1995 (the "Employee Retention Agreement") which
provides Employee with certain benefits in the event of a Change of Control of
the Company as defined therein. The Employee Retention Agreement expires by its
terms one year from the date of execution.

3. The Board believes that it is in the best interests of the Company
and its stockholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its stockholders.

In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree that the Employee Retention Agreement is hereby amended as
follows:

3.1 Section 1.1. Section 1.1 of the Employee Retention Agreement
is hereby amended in its entirety to read as follows:

"Retention Bonus Trigger. In the event of a Change of Control
(as defined below) occurring on or before December 31, 1996 (the
"Expiration Date"), provided that the Employee meets the eligibility
requirements set forth in Section 1.2 hereof, Employee shall be
entitled to receive a lump sum cash payment equal to Two Hundred
Thousand Dollars ($200,000) (the "Retention Bonus")."

3.2 Section 2.1. Section 2.1 of the Employee Retention Agreement
is hereby amended in its entirety to read as follows:

"Term of Agreement. The terms of this Agreement shall
terminate upon the earlier of (i) the date that all obligations of the
parties hereunder have been satisfied or (ii) the Expiration Date;
provided, however, that if the Employee is terminated by the Company
for Cause or voluntarily terminates his employment with the Company at
any time prior to the Closing Date, this Agreement shall expire on the
effective date of such termination and the
<PAGE> 5
Company shall have no further obligations under this Agreement,
including no obligation to pay the Retention Bonus pursuant to Section
1.

3.3 No Other Changes. Except as expressly provided in this Extension,
the terms of the Employee Retention Agreement shall remain in full force and
effect.

3.4 Miscellaneous. The Miscellaneous provisions set forth in Section 2
of the Employee Retention Agreement shall apply to this Extension as if set
forth herein.

IN WITNESS WHEREOF, each of the parties has executed this Extension, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.

COMPANY: CYBERONICS, INC.

By: /s/ Robert P. Cummins
-------------------------------------

Title: President and CEO
---------------------------------

EMPLOYEE: /s/ John K. Bakewell
----------------------------------------
JOHN K. BAKEWELL

-2-

<PAGE> 1
EXHIBIT 10.10

CHANGE OF CONTROL AGREEMENT

This Change of Control Agreement (the "Agreement") is made and entered
into effective as of May 8, 1995 (the "Effective Date"), by and between
_________________ ("the Employee") and Cyberonics, Inc. (the "Company").

R E C I T A L S

1. It is expected that the Company may from time to time consider the
possibility of an acquisition by another company or other change of control. The
Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.

2. The Board believes that it is in the best interests of the Company
and its stockholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its stockholders.

In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:

2.1 Cash Bonus.

(a) In the event of a Change of Control (as defined below)
occurring within twelve (12) months of the Effective Date of this Agreement, as
long as the Employee has maintained continuous employment with the Company from
the Effective Date through the date of closing (the "Closing Date") of an event
which constitutes a Change of Control hereunder, and regardless of whether the
Employee is terminated by the Company or its successor, or terminates his or her
employment with the Company following such Change in Control, such Employee
shall be entitled to receive a lump sum payment equal to fifty percent (50%) of
the Employee's annualized base salary (the "Bonus"). The Company shall pay such
Bonus to the Employee not later than five (5) business days after the Closing
Date.

(b) For purposes of this Agreement, the term "Change of
Control" shall mean (i) a corporate reorganization of the Company which results
in the stockholders of the Company immediately prior to such reorganization
owning less than 50% of the combined voting power of the capital stock of the
surviving company immediately following such reorganization, or (ii) the sale of
all or substantially all of the assets of the Company.

2.2 At-Will Employment. The Company and the Employee acknowledge that
the Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or
<PAGE> 2
as may otherwise be available in accordance with the Company's established
employee plans and practices or other agreements with the Company at the time of
termination.

2.3 Duration. The terms of this Agreement shall terminate upon the
earlier of (i) the date that all obligations of the parties hereunder have been
satisfied or (ii) one year after the Effective Date; provided, however, that
this Agreement may be extended for an additional period or periods by resolution
adopted by the Board at any time during the period that the Agreement is in
effect.

2.4 Miscellaneous Provisions.

(a) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof.

(b) Employment Taxes. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.

(c) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.

IN WITNESS WHEREOF, each of the parties has executed this
Agreement, in the case of the Company by its duly authorized officer, as of the
day and year first above written.

COMPANY: CYBERONICS, INC.

By: /s/ Reese S. Terry, Jr.
-------------------------------------
Title: President
----------------------------------

EMPLOYEE: /s/ John K. Bakewell or /s/ Steve Ford
----------------------------------------

-2-

<PAGE> 1
EXHIBIT 10.11

CHANGE OF CONTROL AGREEMENT

This Change of Control Agreement (the "Agreement") is made and entered
into effective as of May 8, 1995 (the "Effective Date"), by and between William
H. Duffell, Jr. ("Employee") and Cyberonics, Inc. (the "Company").

R E C I T A L S

In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:

1. Cash Bonus.

(a) In the event of a Change of Control (as defined below)
occurring within twelve (12) months of the Effective Date of this Agreement, as
long as the Employee has maintained continuous employment with the Company
during the period from the Effective Date through the date of closing of an
event which constitutes a Change of Control hereunder (the "Closing Date"), and
regardless of whether the Employee is terminated by the Company or its
successor, or terminates his or her employment with the Company following such
Change in Control, such Employee shall be entitled to receive a lump sum payment
(the "Bonus") equal to (i) $325,000 minus (ii) the difference between (a) the
aggregate value of 60,000 shares of the Company's Common Stock (adjusted for any
stock split, stock dividend or the like) on the Closing Date and (b) $195,000.
The Company shall pay such Bonus to the Employee not later than five (5)
business days after the Closing Date.

2. At-Will Employment. The Company and the Employee acknowledge that
the Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or
<PAGE> 2
as may otherwise be available in accordance with the Company's established
employee plans and practices or other agreements with the Company at the time of
termination.

3. Duration. The terms of this Agreement shall terminate upon the
earlier of (i) the date that all obligations of the parties hereunder have been
satisfied or (ii) one year after the Effective Date; provided, however, that
this Agreement may be extended for an additional period or periods by resolution
adopted by the Board at any time during the period that the Agreement is in
effect.

4. Miscellaneous Provisions.

(b) Employment Taxes. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.

(c) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.

IN WITNESS WHEREOF, each of the parties has executed this
Agreement, in the case of the Company by its duly authorized officer, as of the
date set forth above.

COMPANY: CYBERONICS, INC.

By: /s/ Reese S. Terry, Jr.
-------------------------------------
Title: President
---------------------------------

EMPLOYEE: /s/ William H. Duffell, Jr.
----------------------------------------
William H. Duffell, Jr.

-2-
<PAGE> 3
EXTENSION OF
CHANGE OF CONTROL AGREEMENT

This Extension of Change of Control Agreement (the "Extension") is made
and entered into effective as of April 10, 1996 (the "Effective Date"), by and
between William H. Duffell, Jr. (the "Employee") and Cyberonics, Inc. (the
"Company").

R E C I T A L S

A. The Company and the Employee are parties to a Change of Control
Agreement dated as of May 8, 1995, as extended on January 10, 1996 (the "Change
of Control Agreement"), which provides Employee with certain benefits in the
event of a Change of Control of the Company as defined therein. The Change of
Control Agreement expires by its terms on September 30, 1996.

C. The Board believes that it is in the best interests of the Company
and its stockholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its stockholders.

In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree that the Change of Control Agreement is hereby amended as follows:

1. Section 1(a). Section 1(a) of the Change of Control Agreement
is hereby amended in its entirety to read as follows:

"In the event of a Change of Control (as defined below)
occurring within on or before December 31, 1996 (the "Expiration
Date"), as long as the Employee has maintained continuous employment
with the Company from the Effective Date through the date of closing
(the "Closing Date") of an event which constitutes a Change of Control
hereunder, and regardless of whether the Employee is terminated by the
Company or its successor, or terminates his or her employment with the
Company following such Change in Control, such Employee shall be
entitled to receive a lump sum payment (the "Bonus") equal to (i)
$325,000 minus (ii) the difference between (a) the aggregate value of
60,000 shares of the Company's Common Stock (adjusted for any stock
split, stock dividend or the like) on the Closing Date and (b)
$195,000. The Company shall pay such Bonus to the Employee not later
than five (5) business days after the Closing Date."

2. No Other Changes. Except as expressly provided in this Extension,
the terms of the Change of Control Agreement shall remain in full force and
effect.
<PAGE> 4
3. Miscellaneous. The Miscellaneous provisions set forth in Section 4
of the Change of Control Agreement shall apply to this Extension as if set forth
herein.

IN WITNESS WHEREOF, each of the parties has executed this
Extension, in the case of the Company by its duly authorized officer, as of the
day and year first above written.

COMPANY: CYBERONICS, INC.

By: /s/ Robert P. Cummins
-------------------------------------

Title: President & CEO
---------------------------------

EMPLOYEE: /s/ William H. Duffell, Jr.
----------------------------------------
WILLIAM H. DUFFELL, JR.

-2-

<PAGE> 1
EXHIBIT 10.12

RETENTION BONUS AGREEMENT

This Retention Bonus Agreement (the "Agreement") is made and entered
into effective as of October 1, 1996 (the 'Effective Date"), by and between
Steve Ford (the "Employee") and Cyberonics, Inc. (the "Company").

RECITALS

A. The Company has announced the execution of an Agreement and Plan of
Merger pursuant to which the Company may be acquired by another company. The
Board of Directors of the Company (the "Board") recognizes that such
announcement can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility or occurrence of a Change of Control (as defined
below) of the Company.

In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:

1. Definitions. For purposes of this Agreement, the following
definitions shall apply:

(a) "Bonus" shall mean the applicable of the follow: (i) a
lump sum payment equal to nine (9) months of the Employee's annual base salary
as in effect on the Effective Date, if prior to the Payment Date, the Company or
successor corporation has not offered the Employee Continued Employment with the
Company or successor corporation, or (ii) a lump sum payment equal to seven (7)
months of the Employee's annual base salary as in effect on the Effective Date,
if prior to the Payment Date, the Company or successor corporation has offered
the Employee Continued Employment with the Company or successor corporation;

(b) "Cause" shall mean:

(i) Conviction of a crime involving moral turpitude;

(ii) Employee's malfeasance in connection with his
employment or neglect of his duties after written notification thereof by the
Company or its successor, which notice shall specify the alleged instances of
neglect of his duty, and shall provide Employee with 30 days in which to remedy
such neglect, if it is subject to being remedied;

(iii) Employee's material breach of this Agreement or
the confidential information agreement entered into with the Company; or

(iv) Employee's personally engaging in knowing and
intentional illegal conduct which is seriously injurious to the Company or its
affiliates.
<PAGE> 2
(c) "Change of Control" shall mean (i) a corporate
reorganization of the Company which results in the stockholders of the Company
immediately prior to such reorganization owning less than 50% of the combined
voting power of the capital stock of the surviving company immediately following
such reorganization, or (ii) the sale of all or substantially all of the assets
of the Company.

(d) "Closing Date" means that date upon which a Change of
Control is consummated.

(e) An offer of "Continued Employment' shall mean an offer
extended by Company or its successor to Employee of employment with the Company
or its successor beyond the Payment Date which (X) the Employee accepts or (Y)
which meets each of the following conditions:

(i) the assignment to Employee of duties which are
substantially equivalent to the Employee's duties with the Company as of the
Effective Date;

(ii) a salary which is equal to or greater than the
Employee's salary with the Company as of the Effective Date; and

(iii) receipt of employee benefits which are
comparable to employee benefits received by other employees of the Company or
successor corporation who have comparable salaries and duties to the Employee.

It is understood and agreed that an offer of employment which meets the
requirements of the term "Continued Employment" may require the Employee to
relocate, may involve a different job grade level and may carry a different
title.

(f) "Involuntary Termination" means:

(i) the continued assignment to Employee of any
duties or the continued significant reduction of Employee's duties, either of
which is not substantially equivalent to the Employee's duties with the Company
as of the Effective Date, provided that a change in job title shall not
constitute a significant reduction in Employee's duties;

(ii) a reduction in Employee's salary;

(iii) receipt of employee benefits which are not
comparable to employee benefits received by other employees of the Company or
successor corporation who have comparable salaries and duties to the Employee;

(iv) the relocation of Employee's principal place for
rendering the Employee's services to the Company to a location more than fifty
(50) miles from the present location of the principal executive office of the
Company prior to the Payment Date;

(v) any material breach by the Company of any
material provision of this Agreement which continues uncured for 30 days
following notice thereof, provided, however, that

-2-
<PAGE> 3
none of the foregoing shall constitute "involuntarily terminated" to the extent
Employee has agreed thereto in writing; or

(vi) termination of the Employee's employment with
the Company or the successor corporation by the Company or the successor
corporation other than for Cause.

(g) "Payment Date" means that date which is six (6) months
after the Closing Date.

2. Payment of Bonus; Effect of Termination of Employment.

(a) Triggering Event. In the event of a Change of Control
occurring on or before December 31, 1996, as long as the Employee has maintained
continuous employment with the Company or its successor from the Effective Date
hereof through the Payment Date, Employee shall be entitled to receive the
Bonus. The Company or its successor shall pay such Bonus to the Employee not
later than five (5) business days after the Payment Date.

(b) Accrual of Right; Effect of Termination. No right shall
accrue hereunder in the event that Employee's employment with the Company is
terminated for any reason, with, or without Cause and whether initiated by
Employee or by Company, at any time prior to the Closing Date. In the event that
Employee has maintained continuous employment with the Company from the
Effective Date through the Closing Date but Employee's employment with the
Company or its successor is terminated as a result of an Involuntarily
Termination at any time between the Closing Date and the Payment Date, then the
Bonus shall become payable within five (5) business days after the termination
date.

(c) No Bonus. No Bonus shall be payable hereunder to Employee
if Employee's employment is terminated for Cause prior to the Payment Date.

3. At-Will Employment. This Agreement does not guarantee or imply any
right to continued employment for any period whatsoever. The Company and the
Employee acknowledge that the Employee's employment is and shall continue to be
at-will, as defined under applicable law. If the Employee's employment
terminates for any reason, all payments of compensation and benefits shall cease
and thereafter the Employee shall not be entitled to any payments, benefits,
damages, awards or compensation except for the Bonus (subject to Section 2(c)),
and except as may otherwise be available in accordance with the Company's
established employee plans and practices or other agreements with the Company at
the time of termination.

4. Duration. The terms of this Agreement shall terminate upon the date
that all obligations of the parties hereunder have been satisfied; provided,
however, that this Agreement may be extended for an additional period or periods
by resolution adopted by the Board at any time during the period that the
Agreement is in effect.

-3-
<PAGE> 4
5. Miscellaneous Provisions.

(b) Employment Taxes. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.

(c) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.

-4-
<PAGE> 5
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.

COMPANY: CYBERONICS, INC.

By: /s/ Robert P. Cummins
-------------------------------------

Title: President & CEO
----------------------------------

EMPLOYEE: /s/ Steve Ford
----------------------------------------
Steve Ford

-5-

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation
by reference of our report dated July 30, 1996 included in this Form 10-K and
into the Company's previously filed Registration Statements on Form S-8.

ARTHUR ANDERSEN LLP

Houston, Texas
September 19, 1996