CYBERONICS INC, DEFM14A, 1996-06-21

CYBERONICS INC
DEFM14A, 1996-06-21
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES

EXCHANGE ACT OF 1934

Filed by the Registrant /x/

Filed by a Party other than the Registrant / /

Check the appropriate box:

<TABLE>
<S> <C>
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>

CYBERONICS, INC.
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(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.

/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).

/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

/x/ Fee paid previously with preliminary materials.

/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:
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CYBERONICS, INC.

June 21, 1996

Dear Fellow Stockholder:

A Special Meeting of Stockholders of Cyberonics, Inc., a Delaware
corporation, will be held at South Shore Harbor Hotel and Conference Center,
2500 South Shore Blvd., League City, Texas, on Tuesday, July 23, 1996,
commencing at 10:00 a.m., local time.

At this Special Meeting, you will be asked to consider and vote on (i)
the approval and adoption of an Agreement and Plan of Merger dated as of April
8, 1996 by and among Cyberonics, St. Jude Medical, Inc., a Minnesota
corporation, and SJM Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of St. Jude, and the merger of Sub with and into Cyberonics. In the
proposed Merger, each outstanding share of Cyberonics common stock (other than
shares held by St. Jude, Cyberonics or any of their subsidiaries and other than
dissenters' shares) will be converted into the right to receive an amount in
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
(approximately $7.00 per share of Cyberonics Common Stock) and (ii) the sale of
2,181,818 shares of Cyberonics Common Stock to St. Jude at a price of $5.50 per
share.

YOUR BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT, THE MERGER
AND THE STOCK PURCHASE DESCRIBED IN THE ATTACHED MATERIAL AND HAS DETERMINED
THAT THE MERGER AND THE STOCK PURCHASE ARE FAIR TO AND IN THE BEST INTERESTS OF
CYBERONICS AND ITS STOCKHOLDERS. AFTER CAREFUL CONSIDERATION, YOUR BOARD OF
DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSED MERGER AGREEMENT, THE MERGER AND
THE STOCK PURCHASE.

Accompanying this letter, you will find a Notice of Special Meeting of
Stockholders, a Proxy Statement relating to the actions to be taken by
Cyberonics stockholders at the Special Meeting and a proxy card. The Proxy
Statement more fully describes the proposed Merger and the Stock Purchase.

All stockholders are cordially invited to attend the Special Meeting in
person. However, whether or not you plan to attend the Special Meeting, please
complete, sign, date and return your proxy card in the enclosed envelope. If you
attend the Special Meeting, you may vote in person if you wish, even though you
have previously returned your proxy card. It is important that your shares be
represented and voted at the Special Meeting.

Sincerely,

Reese S. Terry
Chairman of the Board, Executive
Vice President and Secretary

YOUR VOTE IS IMPORTANT.
EVEN IF YOU HAVE SOLD SHARES SINCE THE JUNE 6, 1996 RECORD DATE,
ONLY YOU ARE ENTITLED TO VOTE SUCH SHARES.
IF YOUR CYBERONICS SHARES WERE HELD BY YOUR BROKER ON THE RECORD
DATE, YOU MUST INSTRUCT YOUR BROKER HOW TO VOTE THE SHARES.
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD
AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
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CYBERONICS, INC.
17448 HIGHWAY 3, SUITE 100
WEBSTER, TEXAS 77598-4135

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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 23, 1996

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

NOTICE IS HEREBY GIVEN of a Special Meeting of Stockholders of
Cyberonics, Inc., a Delaware corporation, to be held on Tuesday, July 23, 1996,
at South Shore Harbor Hotel and Conference Center, 2500 South Shore Blvd.,
League City, Texas, commencing at 10:00 a.m., local time (the "Special
Meeting"), to consider and vote upon the following matters:

(1) The approval and adoption of an Agreement and Plan of
Merger dated as of April 8, 1996 by and among St. Jude Medical, Inc., a
Minnesota corporation, Cyberonics and SJM Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of St. Jude, pursuant to
which Sub will merge with and into Cyberonics (the "Merger") and each
share of Cyberonics common stock then outstanding (other than shares
held by St. Jude, Cyberonics or any of their subsidiaries and other
than dissenters' shares) will be converted without any action on the
part of the holder thereof into the right to receive an amount in 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. A copy of the Merger Agreement is attached as Annex I to the
accompanying Proxy Statement;

(2) The approval of the sale of 2,181,818 shares of Cyberonics
Common Stock to St. Jude at a cash purchase price of $5.50 per share;
and

(3) The transaction of such other business incidental to the
conduct of the Special Meeting as may properly come before the Special
Meeting or any adjournments or postponements thereof.

The Board of Directors of Cyberonics has approved the Merger Agreement,
the Merger and the Stock Purchase and recommends that the stockholders vote
"FOR" approval and adoption of the Merger Agreement, the Merger and the Stock
Purchase.

Only holders of record of shares of Cyberonics common stock at the
close of business on June 6, 1996 are entitled to notice of and to vote at the
Special Meeting and any and all adjournments or postponements thereof. Under
Delaware law, the affirmative vote of the holders of a majority of the
outstanding shares of Cyberonics common stock is necessary to approve and adopt
the Merger Agreement.

Stockholders of Cyberonics who do not vote in favor of the Merger
Agreement and who comply with the requirements of Section 262 of the Delaware
General Corporation Law have the right to seek appraisal of the fair value of
their shares of Cyberonics common stock. (See "Appraisal Rights" in the
accompanying Proxy Statement.)

Please complete, sign, date and return the enclosed proxy card promptly
whether or not you expect to attend the Special Meeting. Your proxy will be
revocable, either in writing or by voting in person at the Special Meeting, at
any time prior to its exercise at the meeting. A return envelope is enclosed for
your convenience and requires no postage for mailing in the United States.
Stockholders should not send stock certificates with the enclosed proxy card.

Reese S. Terry
Chairman of the Board, Executive
Vice President and Secretary

Webster, Texas
June 21, 1996

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CYBERONICS, INC.

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PROXY STATEMENT

For Special Meeting of Stockholders
to be Held Tuesday, July 23, 1996

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This Proxy Statement is furnished by Cyberonics, Inc., a Delaware
corporation ("Cyberonics"), to solicit proxies from holders of common stock, par
value $.01 per share, of Cyberonics ("Cyberonics Common Stock") in connection
with a special meeting of the stockholders of Cyberonics (the "Special
Meeting") to be held at South Shore Harbor Hotel and Conference Center, 2500
South Shore Blvd., League City, Texas, on Tuesday, July 23, 1996, commencing at
10:00 a.m., local time.

At the Special Meeting, Cyberonics stockholders will be asked to
consider and vote on: (i) the approval and adoption of an Agreement and Plan of
Merger dated as of April 8, 1996 (the "Merger Agreement") by and among
Cyberonics, St. Jude Medical, Inc., a Minnesota corporation ("St. Jude"), and
SJM Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of
St. Jude ("Sub"), and the merger of Sub with and into Cyberonics (the "Merger")
pursuant to which each outstanding share of Cyberonics Common Stock (other than
shares held by St. Jude, Cyberonics or any of their subsidiaries and other than
dissenters' shares) will be converted into the right to receive an amount in
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
(approximately $7.00 per share of Cyberonics Common Stock); and (ii) the sale
of 2,181,818 shares of Cyberonics Common Stock to St. Jude at a price of $5.50
per share.

No person is authorized to give any information or to make any
representation not contained in this Proxy Statement, and, if given or made,
such information or representation should not be relied upon as having been
authorized by Cyberonics. This Proxy Statement does not constitute the
solicitation of a proxy in any jurisdiction in which, or from any person from
whom in any jurisdiction, it is unlawful to make such proxy solicitation. The
delivery of this Proxy Statement shall not, under any circumstances, create any
implication that there has been no change in the information set forth herein or
in the affairs of Cyberonics or any of its subsidiaries since the date of this
Proxy Statement.

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

This Proxy Statement is dated, and the date the proxy materials were first
mailed to Cyberonics stockholders was, June 21, 1996.

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<TABLE>
TABLE OF CONTENTS
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PAGE
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AVAILABLE INFORMATION....................................................................................... 1

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................. 1

SUMMARY ................................................................................................... 2

SELECTED FINANCIAL INFORMATION.............................................................................. 12

THE CYBERONICS SPECIAL MEETING.............................................................................. 13

Record Date; Quorum; Proxies....................................................................... 13
Stock Ownership of Management and Certain Beneficial Owners........................................ 14
Solicitation....................................................................................... 15

PROPOSAL I: APPROVAL OF THE MERGER.......................................................................... 16

Background......................................................................................... 16
Reasons for the Merger............................................................................. 17
Recommendation of the Cyberonics Board of Directors................................................ 18
Vote Required to Approve the Merger................................................................ 18
Description of the Merger; Merger Consideration.................................................... 18
Opinion of Cyberonics' Financial Advisor........................................................... 19
Interests of Certain Persons in the Merger......................................................... 22
Certain Cyberonics Employee Benefit Plans.......................................................... 24
Operations of Cyberonics After the Merger.......................................................... 24
Exchange of Certificates Representing Cyberonics Common Stock...................................... 25
Legends on Certificates............................................................................ 25
Conditions of the Merger; Amendments............................................................... 25
Representations and Warranties..................................................................... 26
Conduct of Business of Cyberonics Prior to the Effective Time; Certain Covenants................... 26
No Solicitation.................................................................................... 28
Termination; Termination Fee....................................................................... 28
Other Agreements................................................................................... 29
Deregistration of Cyberonics Common Stock After the Merger......................................... 30
Antitrust Matters.................................................................................. 30
Certain Federal Income Tax Consequences............................................................ 31
Appraisal Rights................................................................................... 31

PROPOSAL II: APPROVAL OF THE STOCK PURCHASE................................................................. 34

General .......................................................................................... 34
Vote Required...................................................................................... 34
Recommendation of Cyberonics Board of Directors.................................................... 35

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<TABLE>
TABLE OF CONTENTS
(CONTINUED)
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ACCOUNTANTS................................................................................................. 35

ANNEXES

Annex I - Agreement and Plan of Merger dated as of April 8, 1996, by and
among St. Jude Medical, Inc., SJM Acquisition Corp. and Cyberonics, Inc.
(without exhibits)........................................................................ I-1

Annex II - Opinion of Vector Securities International, Inc........................................... II-1

Annex III - Section 262 of the General Corporation Law of the State of Delaware....................... III-1

Annex IV - Annual Report on Form 10-K for the fiscal year ended June 30, 1995........................ IV-1

Annex V - Amendment No. 1 to Annual Report on Form 10-K/A for the fiscal year ended
June 30, 1995............................................................................. V-1

Annex VI - Quarterly Report on Form 10-Q for the quarter ended March 31, 1996........................ VI-1
</TABLE>

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AVAILABLE INFORMATION

Cyberonics is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "SEC") relating to
its business, financial statements and other matters.

The reports, proxy and information statements and other information
filed with the SEC by Cyberonics pursuant to the Exchange Act may be inspected
and copied at the public reference facilities maintained by the SEC at Room
1024, Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549, and at the
regional offices of the SEC located at the Northwestern Atrium Center, 500
Madison Street, Suite 1400, Chicago, Illinois 60661, and at Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material can also
be obtained at prescribed rates by addressing written requests for such copies
to the Public Reference Section of the SEC at Room 1024, 450 Fifth Street, NW,
Washington, D.C. 20549. Cyberonics' Common Stock is quoted for trading on The
Nasdaq National Market and reports, proxy or information statements and other
information concerning Cyberonics may be inspected at the offices of the
National Association of Securities Dealers, Inc., 9513 Key West Avenue,
Rockville, Maryland 20850.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed by Cyberonics with the SEC are
incorporated herein by reference, certain of which are delivered with this
Proxy Statement:

1. Annual Report on Form 10-K for the year ended June 30, 1995
(as amended on Form 10-K/A dated October 26, 1995);

2. Quarterly Reports on Form 10-Q for the quarters ended
September 30, 1995, December 31, 1995 and March 31, 1996; and

3. Current Report on Form 8-K dated April 8, 1996.

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All reports and definitive proxy or information statements filed by
Cyberonics pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this Proxy Statement and prior to the date of the Special
Meeting of Cyberonics stockholders shall be deemed to be incorporated by
reference into this Proxy Statement and to be part hereof from the date of
filing of such documents. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement to the extent that a statement
contained herein or in any other subsequently filed document which is also
incorporated or deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Proxy Statement.

The documents incorporated into this Proxy Statement by reference
(without exhibits, unless such exhibits are specifically incorporated by
reference into the information that this Proxy Statement incorporates by
reference herein) are available without charge to each person, including each
beneficial owner, to whom a copy of this Proxy Statement is delivered, upon
written or oral request addressed to Cyberonics, Inc., 17448 Highway 3, Suite
100, Webster, Texas 77598-4135, Attention: Investor Relations. Cyberonics'
telephone number is (713) 332-1375.

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SUMMARY

The following is, in part, a summary of certain information contained
elsewhere in this Proxy Statement. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained elsewhere
in this Proxy Statement, in the Annexes attached hereto and the documents
referred to and incorporated by reference herein. Stockholders are urged to read
this Proxy Statement and the Annexes hereto in their entirety.

PARTIES TO THE MERGER

CYBERONICS, INC.

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. Currently,
there are limited or no effective pharmacological or surgical treatments for
many patients suffering from such disorders. The mailing address and telephone
number of the principal executive offices of Cyberonics are 17448 Highway 3,
Suite 100, Webster, Texas 77598-4135, (713) 332-1375. For more information
relating to the business and operations of Cyberonics, reference is made to the
documents of Cyberonics which are incorporated by reference in this Proxy
Statement. See "Incorporation of Certain Documents by Reference."

ST. JUDE MEDICAL, INC.

St. Jude is a global medical device company and is the leading
manufacturer of mechanical heart valves. St. Jude also manufactures cardiac
rhythm management products through its Pacesetter subsidiary. The mailing
address and telephone number of the principal executive offices of St. Jude are
One Lillehei Plaza, St. Paul, Minnesota 55117, (612) 483-2000.

SJM ACQUISITION CORP.

SJM Acquisition Corp. is a corporation recently organized by St. Jude
for the purpose of effecting the acquisition of Cyberonics. It has no material
assets and has not engaged in any material activities except in connection with
such proposed acquisition. The mailing address and telephone number of the
principal executive offices of Sub are One Lillehei Plaza, St. Paul, Minnesota
55117, (612) 483-2000.

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CYBERONICS SPECIAL MEETING

DATE, TIME AND PLACE OF THE MEETING

The Special Meeting will be held on July 23, 1996, commencing at 10:00
a.m., local time, at South Shore Harbor Hotel and Conference Center, 2500 South
Shore Blvd., League City, Texas.

PURPOSES OF THE MEETING

The purposes of the Special Meeting are (i) to consider and vote upon a
proposal (the "Merger Proposal") to approve and adopt the Merger Agreement and
the Merger pursuant to which Sub will merge with and into Cyberonics and each
share of Cyberonics Common Stock then outstanding (other than shares held by St.
Jude, Cyberonics or any of their subsidiaries and other than dissenters' shares)
will be converted without any action on the part of the holder thereof into the
right to receive an amount in cash equal to $72,090,669 divided by the number of
shares of Cyberonics Common Stock outstanding immediately prior to the Effective
Time (as defined below) (the "Merger Consideration") (approximately $7.00 per
share of Cyberonics Common Stock), (ii) to consider and vote upon the sale of
2,181,818 shares of Cyberonics Common Stock to St. Jude at a purchase price of
$5.50 per share (the "Stock Purchase") and (iii) to transact any other business
that may properly come before the Special Meeting. As of the date of this Proxy
Statement, the Board of Directors of Cyberonics does not know of any business to
be presented at the Special Meeting other than as set forth in the notice
accompanying this Proxy Statement. If any other matters should properly come
before the Special Meeting, it is intended that the shares represented by
proxies will be voted with respect to such matters in accordance with the
judgment of the persons voting such proxies. A copy of the Merger Agreement is
attached to this Proxy Statement as Annex I and incorporated herein by
reference. See "The Cyberonics Special Meeting--Record Date; Quorum; Proxies."

Note that the investment by St. Jude in Cyberonics is contingent on
approval by the Cyberonics stockholders of the Merger Proposal. In the event
that Cyberonics stockholders approve the Stock Purchase but fail to approve the
Merger Proposal, St. Jude has no obligation to complete the Stock Purchase, and
has indicated its intention not to make the investment under such circumstances.
In the event that Cyberonics stockholders approve the Merger Proposal but fail
to approve the Stock Purchase, the parties intend to proceed with the Stock
Purchase notwithstanding such lack of approval to the extent legally
permissible. See "Vote Required."

RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM

Only holders of record of shares of Cyberonics Common Stock at the
close of business on June 6, 1996 (the "Record Date") will be entitled to notice
of and to vote at the Special Meeting. At the close of business on the Record
Date, there were 9,577,115 shares of Cyberonics Common Stock issued and
outstanding, held by approximately 119 holders of record.

VOTE REQUIRED

Merger Proposal. The affirmative vote of the holders of a majority of
the shares of Cyberonics Common Stock outstanding on the Record Date is required
to approve the Merger Proposal.

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Stock Purchase. Cyberonics is seeking the approval of holders of a
majority of the shares represented at the Special Meeting and eligible to vote
with respect to the Stock Purchase.

As of the Record Date, Cyberonics executive officers and directors
owned an aggregate of 973,099 shares of Cyberonics Common Stock (excluding
426,125 shares that executive officers and directors have the right to acquire
upon exercise of outstanding options granted under the Cyberonics 1988 Incentive
Stock Plan (the "Stock Plan")).

MARKET PRICE OF CYBERONICS COMMON STOCK PRIOR TO ANNOUNCEMENT OF MERGER

On April 4, 1996, the last full trading day prior to the joint public
announcement by Cyberonics and St. Jude of the proposed Merger, the highest
reported sales price for shares of Cyberonics Common Stock was $6.25 per share,
the lowest reported sales price for shares of Cyberonics Common Stock was $4.25
per share and the last reported sales price for shares of Cyberonics Common
Stock was $5.50 per share. For the month ended March 1996, the highest reported
sales price for shares of Cyberonics Common Stock was $5.25 per share and the
lowest reported sales price was $4.00 per share. For the month ended May 31,
1996, the highest reported sales price for shares of Cyberonics Common Stock was
$6.125 per share and the lowest reported sales price was $5.25 per share.

APPRAISAL RIGHTS

Holders of shares of Cyberonics Common Stock who comply with the
requirements of Section 262 of the General Corporation Law of the State of
Delaware (the "Delaware Law") with respect to the Merger are entitled to rights
of appraisal with respect to such shares. Stockholders electing to exercise
their appraisal rights under Section 262 must not vote for the Merger Proposal.
If a stockholder returns a signed proxy but does not specify a vote against the
Merger Proposal or a direction to abstain, the proxy will be voted "FOR" the
Merger Proposal, which will have the effect of waiving that stockholder's
appraisal rights. See "Proposal I: Approval of the Merger--Appraisal Rights" and
Annex III.

THE MERGER

DESCRIPTION OF THE MERGER; MERGER CONSIDERATION

The Merger Agreement provides that, if the Merger Proposal is approved
by the stockholders of Cyberonics and all other conditions to the consummation
of the Merger have been satisfied or waived, (i) Sub will be merged with and
into Cyberonics and (ii) each share of Cyberonics Common Stock then outstanding
(other than shares of Cyberonics Common Stock held by St. Jude, Cyberonics or
any direct or indirect subsidiary of either of them, all of which will be
canceled without the payment of any consideration therefor, and other than
dissenters' shares) will be converted without any action on the part of the
holder thereof into the right to receive an amount in cash equal to $72,090,669
divided by the number of shares of Cyberonics Common Stock outstanding
immediately prior to the Effective Time, excluding any shares held by St. Jude,
Sub or their subsidiaries, but including any shares acquired by the treasury of
Cyberonics after April 1, 1996 pursuant to the exercise of Cyberonics stock
options. Based upon the number of shares of Common Stock and options outstanding
as of May 31, 1996, the Merger Consideration per share is expected to be
approximately $7.00. If the Merger Proposal and Stock Purchase are approved by
stockholders, the Company does not anticipate a material change in the
outstanding number of shares of Common Stock or options at the consummation of
the Merger (other than the shares issuable to St. Jude in the Stock Purchase
which do not share in the Merger Consideration). In the event that subsequent
events would cause a material change in the per share Merger Consideration or
other material terms of the Merger Proposal, the Company would resolicit
stockholder approval

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of the Merger Proposal. See "Proposal I: Approval of the Merger--Description of
the Merger; Merger Consideration."

The Merger will be effective upon the filing of a Certificate of Merger
with the Secretary of State of the State of Delaware in accordance with the
Delaware Law (the time of such filing is hereinafter referred to as the
"Effective Time"), which filing will be made on a date mutually acceptable to
St. Jude and Cyberonics after the Merger Proposal has been approved by the
stockholders of Cyberonics and after all other conditions to the consummation of
the Merger have been satisfied or waived. The consummation of the Merger is not
currently anticipated to occur until October 1996. See "Proposal I: Approval of
the Merger--Conditions of the Merger; Amendments."

Notwithstanding the foregoing, St. Jude has the right to terminate the
Merger Agreement at any time, with or without cause. The effect of this
provision is that St. Jude has the option, but not the obligation, to consummate
the Merger. St. Jude's option to acquire Cyberonics would be exercised by St.
Jude electing to consummate the Merger, and effectively expires on October 19,
1996 at which time Cyberonics becomes free to terminate this Merger Agreement
without liability. See "Proposal I: Approval of the Merger--Termination;
Termination Fee."

REASONS FOR THE MERGER

Cyberonics. The Cyberonics Board of Directors considered many factors
in reaching its decision to approve the Merger Agreement and the transactions
contemplated thereby. The principal reason for its decision was the opportunity
to secure a premium for stockholders over the price of Cyberonics Common Stock
which had been prevailing in the market before the announcement of the Merger
Agreement. In comparing such premium to the return on stockholder investment
believed to be achievable through future appreciation in the stock of Cyberonics
operating as an independent company, the Board considered various factors
affecting Cyberonics' future financial performance and prospects, including its
ability to significantly improve revenues and operating results. A primary
consideration was the potential risks and rewards to Cyberonics' stockholders
from continuing to operate as an independent company, including the need for and
probable dilutive impact of additional financing, compared to the opportunity
presented by the Merger. After a careful analysis and with one director voting
against and one director abstaining, the Board concluded that the Merger
Agreement was the best alternative for Cyberonics' stockholders. The Cyberonics
Board also considered the benefits to existing customers and employees which
could result from a combination with St. Jude.

St. Jude. St. Jude believes that, as a result of the Merger, the
operating performance of Cyberonics can be significantly enhanced through the
use of St. Jude's substantial international sales and marketing infrastructure
and its significant core technology competencies in the design and manufacture
of electrical stimulation devices. In addition, the Merger allows St. Jude to
apply its core technology in a new market area, epilepsy therapy, providing
additional opportunities for future growth. See "Proposal I: Approval of the
Merger--Reasons for the Merger."

RECOMMENDATION OF THE CYBERONICS BOARD OF DIRECTORS; OPINION OF CYBERONICS'
FINANCIAL ADVISOR

The Board of Directors of Cyberonics believes that the terms of the
Merger and Stock Purchase are fair to and in the best interests of Cyberonics
and its stockholders and recommends to stockholders of Cyberonics that they vote
FOR the Merger Proposal and Stock Purchase. Please note that one director
abstained from voting with respect to the Merger Agreement (and from making a
recommendation to stockholders) due to a potential conflict of interests arising
from a contingent compensation arrangement and one director voted against the
Merger Agreement. See "Proposal I: Approval of the Merger--Recommendation of the
Cyberonics Board of Directors."

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Cyberonics has retained Vector Securities International, Inc. ("Vector
Securities") to act as its financial advisor in connection with the Merger.
Vector Securities has delivered to the Cyberonics Board of Directors its written
opinion dated April 2, 1996, to the effect that, as of such date and based upon
the matters described therein, the Merger Consideration to be received by the
holders of such shares (other than St. Jude) is fair to such stockholders from a
financial point of view. The opinion of Vector Securities is directed to the
fairness of the Merger Consideration and does not constitute a recommendation to
any stockholder as to how to vote at the Special Meeting. Reference is made to
the full text of the Vector Securities opinion dated as of the date of this
Proxy Statement, a copy of which is attached hereto as Annex II, for the
specific assumptions made and matters considered by Vector Securities. This
opinion should be read in its entirety by Cyberonics stockholders. See "Proposal
I: Approval of the Merger--Background" and "--Opinion of Cyberonics' Financial
Advisor."

CONFLICTS OF INTEREST OF CERTAIN PERSONS IN THE MERGER

Stock Ownership of Directors and Executive Officers. As of the Record
Date, the executive officers and directors of Cyberonics as a group beneficially
owned an aggregate of 973,099 shares of Cyberonics Common Stock (excluding
426,125 shares that executive officers and directors have the right to acquire
upon exercise of outstanding options granted under the Stock Plan), representing
approximately 10.2% of the total voting power of Cyberonics. All such shares
will be treated in the Merger in the same manner as the shares of Cyberonics
Common Stock held by the other stockholders of Cyberonics.

Conflicts of Interest of Cyberonics Negotiating Team. The terms of the
Merger Agreement and the Stock Purchase were primarily negotiated on behalf of
Cyberonics by a team comprised of Robert P. Cummins, Reese S. Terry, Jr. and
John K. Bakewell as well as representatives of Vector Securities and of
Cyberonics' outside legal counsel. As described below, Messrs. Cummins and
Bakewell may be deemed to have conflicts of interests with respect to the
Merger Proposal given the bonus payments to which they will become entitled if
the Merger is consummated. The Cyberonics Board of Directors was fully aware
of, and carefully considered, these potential conflicts of interests at the
time the Merger Agreement and the Stock Purchase were being negotiated and at
the time such transactions were considered and approved by the Board. Based
upon the potential conflict of interests, Mr. Cummins abstained from the Board
vote with respect to the Merger Proposal.

Employment Agreement and Change of Control Provisions.

Pursuant to the Employment Agreement dated September 30, 1995, as
amended, between Cyberonics and Robert P. Cummins, the President and Chief
Executive Officer of Cyberonics and a member of the Board of Directors of
Cyberonics, 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 Merger is expected to result in
an involuntary termination of Mr. Cummins' employment and payment of the
severance benefit.

Pursuant to the Employee Retention Agreement dated September 30, 1995,
as amended, between Cyberonics and John K. Bakewell, the Chief Financial Officer
of the Company, Mr. Bakewell is entitled to receive $200,000 upon a "change of
control" of Cyberonics on or before December 31, 1996 under certain
circumstances. Consummation of the Merger constitutes a "change of control" and
will result in payment of the retention bonus.

Pursuant to Change of Control Agreements, between Cyberonics and each
of: John K. Bakewell, the Chief Financial Officer of Cyberonics; William H.
Duffell, Jr., the Vice President, Clinical and Regulatory Affairs of Cyberonics;
Stephen D. Ford, the Vice President of Manufacturing of Cyberonics; and Shawn
Lunney, the Vice President of Manufacturing of Cyberonics; is entitled to
receive a lump sum bonus in the event of a "change of control" of Cyberonics
occurring on or before December 31, 1996 if certain conditions are satisfied.
For purposes of all of the above described agreements, the Merger will
constitute a "change of control" of Cyberonics. See "Proposal I: Approval of the
Merger--Interests of Certain Persons in the Merger."

Indemnification and Insurance. Pursuant to the Merger Agreement, St.
Jude has agreed that, for six years after the Effective Time, it will cause the
surviving corporation to indemnify and hold harmless the present and former
officers and directors of Cyberonics in respect of acts or omissions occurring
prior to the Effective Time to the extent provided under Cyberonics' Certificate
of Incorporation, Bylaws and indemnification agreements in effect on the date of
the Merger Agreement. For such six-year period, St. Jude will also cause the
surviving corporation, at the surviving corporation's expense, to provide
officers' and directors' liability insurance in respect of acts or omissions
occurring prior to the Effective Time covering each such person currently
covered

-7-
<PAGE> 14
by each respective Cyberonics' officers' and directors' liability insurance
policy on terms with respect to coverage and amount no less favorable than those
of such policy in effect on the date of the Merger Agreement. If the annual
premiums of such insurance would exceed the premiums in effect as of the date of
the Merger Agreement, St. Jude shall use its commercially reasonable efforts to
procure such level of insurance having the same coverage as in effect as of the
date of the Merger Agreement for an annual premium equal to such current premium
amount. See "Proposal I: Approval of the Merger--Interests of Certain Persons in
the Merger."

CERTAIN CYBERONICS EMPLOYEE BENEFIT PLANS

Pursuant to the Cyberonics 1988 Incentive Stock Plan (the "Stock Plan")
and the option agreements entered into between Cyberonics and its employees, all
of the outstanding options of Cyberonics granted under the Stock Plan will be
accelerated as a result of the Merger such that the options will be exercisable
as to all shares, whether vested or not vested. Any outstanding options of
Cyberonics granted under the Stock Plan that have not been exercised will be
canceled at the Effective Time. Under the Cyberonics Employee Stock Purchase
Plan (the "Purchase Plan"), the then pending offering period will terminate and
accumulated payroll deductions will either be returned to participants or
applied to the purchase of shares of Cyberonics Common Stock which shares, if
issued, would be treated like all other shares of Cyberonics Common stock in the
Merger. Both the Stock Plan and the Purchase Plan will terminate upon
consummation of the Merger.

Under the Merger Agreement, St. Jude has agreed to provide to those
employees of Cyberonics which St. Jude elects to retain comparable compensation
and benefits as those provided to employees of St. Jude with similar status and
tenure. In addition, St. Jude shall give each Cyberonics employee full credit
for all service with Cyberonics for purposes of all employee benefit plans and
arrangements. For more information regarding the above and other Cyberonics
employee benefit plans, see "Proposal I: Approval of the Merger--Certain
Cyberonics Employee Benefit Plans."

EXCHANGE OF CYBERONICS STOCK CERTIFICATES

Promptly after consummation of the Merger, American Stock Transfer &
Trust Company as exchange agent (the "Exchange Agent") will mail a letter of
transmittal with instructions to all holders of record of Cyberonics Common
Stock as of the Effective Time for use in exchanging their Cyberonics stock
certificates for the Merger Consideration. STOCK CERTIFICATES SHOULD NOT BE
SURRENDERED UNTIL THE LETTER OF TRANSMITTAL IS RECEIVED. See "Proposal I:
Approval of the Merger--Exchange of Certificates Representing Cyberonics Common
Stock."

CONDITIONS TO THE MERGER; AMENDMENTS OF THE MERGER AGREEMENT

In addition to approval by the stockholders of Cyberonics, consummation
of the Merger is subject to the fulfillment of a number of conditions customary
in transactions similar to the Merger. To the fullest extent permitted by law,
the Merger Agreement may be amended, modified or supplemented with respect to
any of the terms contained therein, and any of the obligations or conditions of
the parties may be waived, except that the obtaining of the approval of the
stockholders of Cyberonics may not be waived. See "Proposal I: Approval of the
Merger -- Conditions of the Merger; Amendments."

Notwithstanding the foregoing, St. Jude has the right to terminate the
Merger Agreement at any time, with or without cause and regardless of whether
the conditions to the Merger have been satisfied. As a result, while Cyberonics
may be obligated to consummate the Merger, St. Jude has an option and not an
obligation to do so. See "Proposal I: Approval of the Merger--Termination;
Termination Fee."

-8-
<PAGE> 15
REPRESENTATIONS AND WARRANTIES

The Merger Agreement contains standard representations and warranties
of Cyberonics, St. Jude and Sub regarding their corporate existence, the
authorization, execution and enforceability of the Merger Agreement, the
accuracy of information contained in documents filed with the SEC and other
matters. See "Proposal I: Approval of the Merger--Representations and
Warranties."

CONDUCT OF BUSINESS OF CYBERONICS PRIOR TO THE EFFECTIVE TIME; CERTAIN COVENANTS

Pursuant to the Merger Agreement, Cyberonics has agreed that, among
other things, until the Effective Time or the date on which the Merger Agreement
is terminated, it will operate its business only in the ordinary course
consistent with past practice, use its best efforts to, among other things,
preserve intact its business organization and relationships with third parties,
keep available the services of its present officers and employees and provide
St. Jude reasonable access to its financial, operating and other information.
Both Cyberonics and St. Jude further agreed to use their commercially reasonable
efforts to take certain actions to obtain requisite approvals for the Merger.
See "Proposal I: Approval of the Merger--Conduct of Business of Cyberonics Prior
to the Effective Time; Certain Covenants."

NO SOLICITATION

Cyberonics agreed that it will not, for so long as the Merger Agreement
remains in effect, directly or indirectly, (a) take any further action to
solicit, initiate or encourage any offer or indication of interest from any
person with respect to any Acquisition Proposal (as defined below), including
without limitation, any such further action through any investment banker,
broker, finder or other intermediary previously engaged or which may be engaged
for the purpose of soliciting, initiating or encouraging such offer or
indication of interest; or (b) engage in negotiations with, or disclose any
non-public information relating to its businesses, assets or operations or of
St. Jude or afford access to the properties, books or records of Cyberonics to,
any person that has made, or that Cyberonics has good reason to believe may be
considering making, an Acquisition Proposal. Cyberonics agreed to promptly
notify St. Jude after receipt of any Acquisition Proposal or indication that any
person is considering making an Acquisition Proposal or any request for
non-public information relating to the business, assets or operations or for
access to the properties, books or records of Cyberonics by any person that has
made, or that Cyberonics has good reason to believe may be considering making an
Acquisition Proposal, and will keep St. Jude informed of any such Acquisition
Proposal for a period of seven days following receipt by St. Jude of such
notification by Cyberonics.

As used in the Merger Agreement, the term "Acquisition Proposal" means
any proposal to (i) effect a merger or consolidation or similar transaction
involving Cyberonics or any of its subsidiaries, (ii) purchase, lease, or
otherwise acquire ten percent or more of the assets of Cyberonics or any of its
subsidiaries, (iii) purchase or otherwise acquire (including by way of merger,
consolidation, share exchange or similar transaction) beneficial ownership (as
defined in Rule 13d-3 of the Exchange Act) of securities representing ten
percent or more of the voting power of Cyberonics or any of its subsidiaries, or
(iv) the assignment, transfer, licensing or the disposition of, in whole or in
part, the patents, patent rights, trade secrets or the technology of Cyberonics
or any of its subsidiaries, other than in the ordinary course of business. See
"Proposal I: Approval of the Merger -- No Solicitation."

TERMINATION; TERMINATION FEE

-9-
<PAGE> 16
and Cyberonics, (b) by St. Jude at any time, with or without cause, or (c) by
Cyberonics if (i) the closing of the sale of shares of Cyberonics Common Stock
to St. Jude pursuant to the Common Stock Purchase Agreement (as described below)
does not occur; provided, however, that Cyberonics may not terminate the Merger
Agreement where such failure to close resulted from a breach by Cyberonics of
any of its obligations or covenants set forth in the Merger Agreement or the
Common Stock Purchase Agreement, (ii) the Merger has not been consummated by
October 18, 1996, (iii) the consummation of the Merger has been prohibited by a
final non-appealable court order, decree or ruling, (iv) the requisite vote of
the stockholders of Cyberonics is not obtained, (v) prior to the Special
Meeting, the Board of Directors of Cyberonics has recommended, approved,
accepted or entered into a definitive agreement regarding an Acquisition
Proposal or an Acquisition Proposal has been made and the Board of Directors of
Cyberonics has withdrawn or modified in a manner adverse to St. Jude its
recommendation of the Merger, (vi) Cyberonics is not in breach of its
obligations under the Merger Agreement and there has been a material breach by
St. Jude of any of its representations and warranties under the Merger Agreement
or a material failure by St. Jude to perform any of its obligations under the
Merger Agreement, which breach or failure cannot, in the reasonable judgment of
Cyberonics, be cured by October 18, 1996 following receipt by St. Jude of notice
of the breach or such breach or failure is not in fact cured by such date, or
(vii) St. Jude materially breaches any of St. Jude's obligations under the
Merger Agreement and such breach is not cured by St. Jude within 30 calendar
days following receipt by St. Jude of notice of the breach. Under certain
circumstances in which the Merger Agreement is terminated as a result of an
Acquisition Proposal, Cyberonics is required to pay to St. Jude a termination
fee of $3,500,000 (the "Termination Fee"). See "Proposal I: Approval of the
Merger--Termination; Termination Fee."

The Merger Agreement further provides that St. Jude may terminate the
Merger Agreement at any time, with or without cause, and without liability to
Cyberonics. The effect of this provision is that St. Jude has the option, but
not the obligation, to consummate the Merger. The only obligations of St. Jude
are (i) if the Merger Proposal is approved by the Cyberonics stockholders, St.
Jude is obligated to consummate the Stock Purchase and (ii) if the Merger
Proposal is not approved by the Cyberonics stockholders, St. Jude is obligated
to provide loans to Cyberonics under the Loan Agreement described below. St.
Jude's option to acquire Cyberonics would be exercised by St. Jude electing to
consummate the Merger, and effectively expires on October 19, 1996 at which time
Cyberonics becomes free to terminate the Merger Agreement without liability. See
"Proposal I: Approval of the Merger--Termination; Termination Fee."

OTHER AGREEMENTS

In connection with the Merger Agreement, Cyberonics and St. Jude
entered into certain other agreements, each dated as of the date of the Merger
Agreement.

Common Stock Purchase Agreement. Pursuant to the Common Stock Purchase
Agreement dated April 8, 1996 between Cyberonics and St. Jude (the "Common Stock
Purchase Agreement"), Cyberonics has agreed to issue and sell, and St. Jude
agreed to purchase, 2,181,818 shares of Cyberonics Common Stock at a purchase
price of $5.50 per share (subject to adjustment for stock splits or the like),
for a total purchase price of approximately $12,000,000. The parties' respective
obligations under the Common Stock Purchase Agreement are subject to the
fulfillment of certain conditions (any of which may be waived by either party),
including without limitation the approval of the Merger Proposal by the
stockholders of Cyberonics. The Stock Purchase is intended to provide Cyberonics
with capital needed to fund its operations.

Stockholders' Agreement. Pursuant to the Stockholders' Agreement dated
April 8, 1996 between Cyberonics and St. Jude (the "Stockholders' Agreement"),
Cyberonics granted to St. Jude certain demand and piggy-back registration rights
with respect to any shares of Cyberonics Common Stock purchased under the Common
Stock Purchase Agreement and Board observer rights. The Stockholders' Agreement
also provides for

-10-
<PAGE> 17

a right of first refusal in favor of Cyberonics with respect to certain proposed
transfers of Cyberonics Common Stock by St. Jude, restricts the holdings of
Cyberonics Common Stock by St. Jude to 19% of the total outstanding shares of
Cyberonics Common Stock, and provides for St. Jude (or its transferees) to vote
its shares of Cyberonics Common Stock (i) for nominees to the Board of Directors
of Cyberonics in accordance with the recommendation of the Cyberonics Board of
Directors through July 1, 1998 and (ii) on other matters, as recommended by the
Cyberonics Board of Directors or in the same proportions as other stockholders
vote on a matter. The 19% ownership ceiling was arrived at through negotiation
between the parties, and is intended to permit St. Jude to effect the Stock
Purchase, but not to acquire a controlling interest in Cyberonics except
through the Merger Agreement (or otherwise through negotiations with the
Cyberonics Board of Directors). The limitation does not impact the specific
transactions under consideration and for which stockholder approval is being
solicited.

Loan Agreement. The Loan Agreement dated April 8, 1996 between
Cyberonics and St. Jude (the "Loan Agreement") provides for the loan by St. Jude
to Cyberonics of up to $2,000,000 at an interest rate equal to the prime rate
plus one percent upon the occurrence of certain events, including without
limitation the absence of approval of the Merger Proposal by the stockholders of
Cyberonics. The Loan Agreement is intended to provide Cyberonics with interim
funding in a circumstance where the Cyberonics stockholders have failed to
approve the Merger and the Merger Agreement is as a result being terminated.

Sales and Marketing Support Agreement. Pursuant to a Letter Agreement
dated April 8, 1996 between Cyberonics and St. Jude (the "Support Agreement"),
St. Jude agreed to provide to Cyberonics the services of two senior executives,
one to support international sales and marketing activities and the other to
support Cyberonics' activities directed toward preparation for United States
market launch of the NCP System once FDA approval is obtained. St. Jude has
agreed to bear the compensation and expenses of its executives providing the
support to Cyberonics. St. Jude's obligation to provide such support terminates
upon the closing of the Merger or termination of the Merger Agreement. See
"Proposal I: Approval of the Merger--Other Agreements."

GOVERNMENTAL AND REGULATORY APPROVALS

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act"), and the rules promulgated thereunder, the Merger may not be
consummated until notifications have been given and certain information has been
furnished to the Federal Trade Commission (the "FTC") and the Antitrust Division
of the United States Justice Department (the "Antitrust Division"), and
specified waiting period requirements have been satisfied. If the Cyberonics
stockholders approve the Merger, Cyberonics and St. Jude plan to each file with
the FTC and the Antitrust Division a Notification and Report Form with respect
to the Merger shortly after the Special Meeting. See "Proposal I: Approval of
the Merger--Regulatory Matters."

ACCOUNTING TREATMENT

The Merger will be accounted for by St. Jude as a "purchase" for
financial accounting purposes in accordance with generally accepted accounting
principles.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The exchange of shares of Cyberonics Common Stock in the Merger for the
Merger Consideration will be a taxable transaction to Cyberonics stockholders
and gain or loss will be recognized by such stockholders measured by the
difference between the amount of cash received in the Merger and the tax basis
of the shares of Cyberonics Common Stock surrendered in exchange therefor. See
""Proposal I: Approval of the Merger--Certain Federal Income Tax Consequences."

-11-
<PAGE> 18
SELECTED FINANCIAL INFORMATION

The following table summarizes certain selected financial data, which
should be read in conjunction with Cyberonics' Consolidated Financial Statements
and notes thereto and the unaudited consolidated interim financial statements
and notes thereto, both of which are incorporated by reference herein. The
selected financial data as of June 30, 1995 and 1994, and for each of the years
in the three-year period ended June 30, 1995 are derived from consolidated
financial statements that have been audited by Arthur Andersen LLP, independent
public accountants, which are incorporated by reference herein and are qualified
by reference to such consolidated financial statements. The selected financial
data as of June 30, 1993, 1992 and 1991 and for the years ended June 30, 1992
and 1991 are derived from audited financial statements not incorporated by
reference herein. The selected financial data for the nine months ended March
31, 1996 and 1995 are derived from unaudited financial statements incorporated
by reference herein.

<TABLE>
<CAPTION>
Nine Months Ended
March 31, Year Ended June 30,
-------------------------- --------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .................... $ 885,364 $ 569,328 $ 966,989 $ 399,689 $ 149,775 $ 53,890 $ --

Cost of goods sold ........... 227,934 185,851 347,457 117,835 50,463 42,547 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit ................. 657,430 383,477 619,532 281,854 99,312 11,343 --
Operating expenses:
Research and development ... 6,035,392 3,674,720 5,678,024 4,323,671 3,390,037 2,305,858 2,866,123
Selling, general and
administrative ........... 1,936,456 1,975,432 2,906,589 2,519,037 2,154,070 1,273,428 613,302
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses . 7,971,848 5,650,152 8,584,613 6,842,708 5,544,107 3,579,286 3,479,425
Interest and other income
(net) ...................... 369,477 469,393 726,271 635,129 323,075 75,240 116,237
Net loss ..................... $(6,944,941) $(4,797,282) $(7,238,810) $(5,925,725) $(5,121,720) $(3,492,703) $(3,363,188)
=========== =========== =========== =========== =========== =========== ===========
Net loss per share ........... $ (.73) $ (.53) $ (.79) $ (.66) $ (.65) $ (.53) $ (.59)
=========== =========== =========== =========== =========== =========== ===========
Shares used in computing
net loss per share ......... 9,504,508 9,129,051 9,218,008 8,945,968 7,882,857 6,529,766 5,725,102
</TABLE>

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<PAGE> 19
THE CYBERONICS SPECIAL MEETING

This Proxy Statement and the accompanying letter, notice and proxy card
are being furnished to the stockholders of Cyberonics in connection with the
solicitation of proxies by the Board of Directors of Cyberonics from holders of
outstanding shares of Cyberonics Common Stock to be voted at the Special Meeting
to be held on Tuesday, July 23, 1996, commencing at 10:00 a.m., local time, and
at any and all adjournments or postponements thereof.

At the Special Meeting, the holders of outstanding shares of Cyberonics
Common Stock will be asked to consider and vote upon the Merger Proposal and a
proposal to approve the Stock Purchase. The Board of Directors of Cyberonics
does not know of any other matters to be presented for consideration at the
Special Meeting.

This Proxy Statement summarizes the material terms of the Merger
Agreement attached hereto as Annex I. The Merger Agreement is by necessity more
complete than the summary set forth herein, and contains additional information
not described herein. Therefore, the summary of the Merger Agreement set forth
herein is qualified by reference to such agreement. The Merger Agreement is
incorporated herein by reference and should be read carefully by each Cyberonics
stockholder in formulating his or her voting decision with respect to the Merger
Proposal.

The Board of Directors of Cyberonics has approved the Merger Agreement,
the Merger and the Stock Purchase and has determined that the Merger Agreement,
the Merger and the Stock Purchase are fair to and in the best interests of
Cyberonics and its stockholders. THE BOARD OF DIRECTORS OF CYBERONICS RECOMMENDS
THAT STOCKHOLDERS OF CYBERONICS VOTE FOR THE MERGER PROPOSAL AND THE STOCK
PURCHASE.

RECORD DATE; QUORUM; PROXIES

Only holders of record of shares of Cyberonics Common Stock at the
close of business on the Record Date will be entitled to notice of and to vote
at the Special Meeting. At the close of business on the Record Date, there were
9,577,115 shares of Cyberonics Common Stock issued and outstanding, held by
approximately 119 holders of record.

The required quorum for the transaction of business at the Special
Meeting is a majority of the shares of Cyberonics Common Stock issued and
outstanding on the Record Date. Abstentions will be included in determining the
number of shares present for purposes of determining the presence of a quorum.
Holders of record of shares of Cyberonics Common Stock on the Record Date are
entitled to one vote per share on the Merger Proposal, the Stock Purchase and
any other matters that properly come before the Special Meeting.

Shares of Cyberonics Common Stock represented by properly executed
proxies will, unless such proxies have been revoked, be voted in accordance with
the instructions indicated on such proxies. If no contrary instructions are
indicated, such shares will be voted FOR the Merger Proposal and FOR the Stock
Purchase. Such shares will also be voted in the discretion of the persons named
as proxies as to any other matter which properly comes before the Special
Meeting. Cyberonics is not aware of any other business to be transacted at the
Special Meeting. A stockholder who has given a proxy may revoke it at any time
prior to its exercise at the

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<PAGE> 20
Special Meeting by delivering a written notice of revocation or a duly executed
proxy bearing a later date to: John K. Bakewell, Chief Financial Officer,
Cyberonics, Inc., 17448 Highway 3, Suite 100, Webster, Texas 77598-4135, or by
voting in person at the Special Meeting.

STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

The following table sets forth as of the Record Date 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 1995 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>
Vista III, L.P.(2) ............................ 1,573,204 16.4%
36 Grove Street
New Canaan, CT 06840

Pfizer, Inc. .................................. 1,106,849 11.6%
235 East 42nd Street
New York, NY 10017

Reese S. Terry, Jr.(3) ........................ 956,000 10.0%
c/o Cyberonics, Inc.
17448 Highway 3, Suite 100
Webster, TX 77598-4135

Chemical Venture Capital Associates ........... 517,198 5.4%
270 Park Avenue, 5th Floor
New York, NY 10012

Robert P. Cummins(4) .......................... 68,000 *

Allen W. Hill(5) .............................. 264,239 2.8%

Remi E. Martin(6) ............................. 62,295 *

John K. Bakewell(7) ........................... 101,130 1.0%

Stephen D. Ford(8) ............................ 92,468 *

Thomas A. Duerden, Ph.D.(9) ................... 33,500 *

All executive officers and directors as a group
(7 persons)(10) ............................. 1,399,224 14.0%
</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.

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<PAGE> 21
(2) Mr. Cummins, the Chief Executive Officer, President and a director of
Cyberonics, was formerly a limited partner of the partnership that
controls Vista III, L.P.

(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 within 60 days of the Record Date.

(4) Includes 58,000 shares subject to options exercisable within 60 days of
the Record 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) Mr. Hill resigned from Cyberonics effective May 5, 1995.

(6) Mr. Martin resigned from Cyberonics effective March 29, 1996.

(7) Includes 100,000 shares subject to options exercisable within 60 days of
the Record Date.

(8) Includes 90,000 shares subject to options exercisable within 60 days of
the Record Date.

(9) Includes 10,000 shares subject to options exercisable within 60 days of
the Record Date.

(10) Includes 426,125 shares subject to options held by executive officers and
directors which are exercisable within 60 days of the Record Date. Also
includes shares which may be determined to be beneficially owned by
executive officers and directors. Excludes shares held by Allen Hill and
Remi Martin, both of whom have resigned from Cyberonics.

SOLICITATION

Cyberonics will bear the costs of the solicitation of proxies from its
stockholders. In addition to soliciting proxies by mail, directors, officers and
employees of Cyberonics, without receiving additional compensation therefor, may
solicit proxies by telephone, by written correspondence or in person.
Arrangements will also be made with brokerage firms and other custodians,
nominees and fiduciaries to forward solicitation material to the beneficial
owners of shares of Cyberonics Common Stock held of record by such persons, and
Cyberonics will reimburse such brokerage firms, custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred by them in connection
therewith. Cyberonics has retained D.F. King & Co., Inc. to aid in the
solicitation of proxies. The fees of such firm are expected to be approximately
$5,500, plus reimbursement for out-of-pocket expenses.

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<PAGE> 22
PROPOSAL I:
APPROVAL OF THE MERGER

BACKGROUND

The terms of the Merger Agreement and Merger were arrived at and
approved by the Cyberonics Board of Directors after a lengthy process. The
following is a summary of certain key events in the process leading up to
approval of the Merger Agreement by the Cyberonics Board of Directors.

In September 1994, in recognition that Cyberonics did not have
sufficient resources to see it through the FDA approval process for its NCP
System, Cyberonics' Board of Directors began a comprehensive review of the
strategic alternatives available to Cyberonics. In November 1994, Cyberonics
engaged Vector Securities as financial advisor. Vector Securities' role was to
assist Cyberonics in exploring strategic alternatives, including corporate or
strategic alliance opportunities, opportunities to secure the additional
financing necessary to continue to operate as an independent company and
opportunities for Cyberonics to be acquired by a company with the financial,
technical, marketing and regulatory resources necessary to bring vagus nerve
stimulation therapies to the market while providing return and liquidity to
Cyberonics' stockholders.

From November 1994 through June 1995, Vector Securities contacted over
70 different companies on behalf of Cyberonics to explore their interest in a
strategic alliance with, or acquisition of, Cyberonics. Certain of the companies
contacted, including St. Jude, expressed interest. Such parties were asked to
sign confidentiality agreements and were given additional information regarding
Cyberonics. In addition to St. Jude, one other company contacted by Vector
Securities verbally expressed interest in acquiring the Company at a price
substantially below the level of the Merger Proposal. A formal offer was not
received from such party and, given the price disparity, the Company did not
pursue discussions with such other party.

In June 1995, representatives of Cyberonics and St. Jude first met and
discussed opportunities that may be of interest to the two companies.

From July through October 1995, St. Jude conducted its review and
analysis of Cyberonics, Cyberonics' clinical and regulatory status and the
market opportunity for vagus nerve stimulation and the NCP system. Preliminary
discussions were also held regarding the potential structure of a transaction
between the parties.

On November 3, 1995 and November 19, 1995, the Cyberonics Board of
Directors met, with counsel and representatives of Vector Securities present, to
review the status of discussions with St. Jude, including the probable price at
which St. Jude would be willing to acquire Cyberonics. The Board, with the
assistance of its advisors, also reviewed the alternatives available to
Cyberonics.

From November 20 through November 22, 1995, representatives of St. Jude
and Cyberonics, together with their respective counsel, and representatives of
Vector Securities met to negotiate the terms of an acquisition of Cyberonics by
St. Jude. The parties came to a general understanding at the meeting regarding
an acquisition of Cyberonics by St. Jude at a price higher than the price
represented by the Merger Proposal. The acquisition was to be effected through a
stock-for-stock merger which was to be accounted for as a pooling of interests.
The understanding , which was within transaction parameters previously approved
by the St. Jude Board of Directors, was submitted for approval to the Board of
Directors of Cyberonics on November 27, 1995.

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On November 27, 1995, the Cyberonics Board of Directors again met to
review the status of discussions with St. Jude and the principal terms of an
acquisition of Cyberonics by St. Jude as described in the preceding paragraph.
Representatives of Vector Securities made a presentation to the Board regarding
Vector Securities' evaluation of the proposed transaction. At the conclusion of
the meeting, management of Cyberonics was directed to proceed to finalize the
relevant agreements with St. Jude.

On December 4, 1995, St. Jude notified Cyberonics that, based on its
continuing review of Cyberonics and the opportunity presented by a potential
acquisition, it was unwilling to proceed with the acquisition on the terms and
at the price previously discussed.

In January 1996, St. Jude made a new proposal to Cyberonics and in
early February representatives of the parties, together with their respective
counsel, met to negotiate the relevant agreements. While the parties were able
to agree in principle as to the price for Cyberonics, the parties were unable to
agree upon the timing of the transaction, the conditions to the parties
obligations and several other issues.

During the remainder of February and through March 1996, the parties
held discussions on several occasions regarding transaction structures that
would address the needs of both parties.

On March 27 and 28, 1996, representatives of Cyberonics (Robert P.
Cummins, President and Chief Executive Officer; Reese S. Terry, Jr., Chairman of
the Board, Executive Vice President and Secretary; and John K. Bakewell, Vice
President, Finance and Administration and Chief Financial Officer) and of St.
Jude (Michael Coyle, Director of Business Development; and Kevin D. O'Malley,
Vice President and General Counsel), together with their respective counsel, met
for a final time to negotiate the remaining issues between the parties and to
prepare definitive agreements.

On April 2, 1996, the Cyberonics Board of Directors met to review and
consider the Merger Agreement and the transactions contemplated thereby. After a
lengthy discussion, and with Mr. Cummins abstaining due to a potential conflict
of interests arising from his compensation arrangements with respect to a change
in control of Cyberonics and Mr. Gorman voting against, the Cyberonics Board of
Directors approved the Merger Agreement and the transactions contemplated
thereby with certain minor changes. See "Recommendation of the Cyberonics Board
of Directors" and "Interests of Certain Persons in the Merger."

Between April 2 and April 7, 1996, the parties finalized the relevant
agreements. On the morning of April 8, 1996, such agreements were signed and the
transaction was publicly announced.

REASONS FOR THE MERGER

Cyberonics. The Cyberonics Board of Directors considered many factors
in reaching its decision to approve the Merger Agreement and the transactions
contemplated thereby. The principal reason for its decision was the opportunity
to secure a premium for stockholders over the market price of Cyberonics Common
Stock before the announcement of the Merger Agreement. In comparing such premium
to the return on stockholder investment believed to be achievable through future
appreciation in the stock of Cyberonics operating as an independent company, the
Board considered various factors affecting Cyberonics' future financial
performance and prospects, including its ability to significantly improve
revenues and operating results. A primary consideration was the potential risks
and rewards to Cyberonics' stockholders from continuing to operate as an
independent company, including the need for, and probable dilutive impact of,
additional financing, compared

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to the opportunity presented by the Merger. After a careful analysis, the Board
concluded that the Merger Agreement was the best alternative for Cyberonics'
stockholders. The Cyberonics Board also considered the benefits to existing
customers and employees which could result from a combination with St. Jude.

St. Jude. St. Jude believes that, pursuant to the Merger, the operating
performance of Cyberonics can be significantly enhanced through the use of St.
Jude's substantial international sales and marketing infrastructure and its
significant core technology competencies in the design and manufacture of
electrical stimulation devices. In addition, the Merger allows St. Jude to apply
its core technology in a new market area, epilepsy therapy, providing additional
opportunities for future growth.

RECOMMENDATION OF THE CYBERONICS BOARD OF DIRECTORS

The Cyberonics Board of Directors carefully considered the Merger
Agreement and the Merger, including a review of financial, legal and market
considerations with the assistance of outside financial and legal advisors, and
determined that the terms of the acquisition of Cyberonics by St. Jude pursuant
to the Merger Agreement are fair to and in the best interests of Cyberonics and
its stockholders. The Cyberonics Board of Directors approved the Merger
Agreement and the Merger. Mr. Robert P. Cummins, President and Chief Executive
Officer as well as a director of Cyberonics, abstained from the vote because of
a potential conflict of interest arising from the bonus he will receive under
his employment agreement if the Merger is consummated (see "--Interests of
Certain Persons in the Merger") and Dennis Gorman, an independent director voted
against the Merger Agreement and Merger primarily on the basis of his belief
that the Merger Consideration did not adequately compensate Company stockholders
for the long term potential of the Company. The Cyberonics Board of Directors
believes that, in the exercise of its fiduciary obligations to the Cyberonics
stockholders and considering all relevant facts and circumstances, the Merger
Consideration is the most favorable price it could obtain from St. Jude or any
other third party. The Cyberonics Board recommends that the Cyberonics
stockholders vote "FOR" the Merger Proposal.

The Cyberonics Board of Directors also carefully considered the terms
of the Stock Purchase and concluded that the terms thereof were as favorable or
more favorable to Cyberonics and its stockholders than would be available from
other sources. The Cyberonics Board recommends that the Cyberonics stockholders
vote "FOR" the Stock Purchase.

VOTE REQUIRED TO APPROVE THE MERGER

The affirmative vote of the holders of a majority of the shares of
Cyberonics Common Stock outstanding on the Record Date is required to approve
the Merger Proposal. Abstentions and broker nonvotes will be counted for
purposes of establishing a quorum but are treated as a vote "AGAINST" approval
and adoption of the Merger Agreement and approval of the Merger since they
cannot be counted toward achieving the requisite majority vote.

DESCRIPTION OF THE MERGER; MERGER CONSIDERATION

If the Merger Proposal is approved by the stockholders of Cyberonics
and all other conditions to the consummation of the Merger have been satisfied
or waived, (i) Sub will be merged with and into Cyberonics, with Cyberonics as
the surviving corporation and (ii) each then outstanding share of Cyberonics
Common Stock will be converted without any action on the part of the holder
thereof into the right to receive an amount in cash equal to $72,090,669 divided
by the number of shares of Cyberonics Common Stock outstanding immediately prior
to the Effective Time, except that shares of Cyberonics Common Stock held by St.
Jude (including the 2,181,818 shares to be purchased by St. Jude in the Stock
Purchase), Cyberonics or any direct or indirect subsidiary of either

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of them will be canceled without the payment of any consideration therefor, and
shares as to which appraisal rights are perfected in accordance with the
Delaware Law will be entitled only to the rights granted to dissenters by the
Delaware Law. See "--Appraisal Rights."

The Merger will be effected by filing a Certificate of Merger with the
Secretary of State of the State of Delaware in accordance with the Delaware Law,
which filing will be made on a date mutually acceptable to St. Jude and
Cyberonics after the Merger Proposal has been approved by the stockholders of
Cyberonics and after all other conditions to the consummation of the Merger have
been satisfied or waived. It is currently contemplated that the Merger will be
consummated in October 1996, if at all.

OPINION OF CYBERONICS' FINANCIAL ADVISOR

Cyberonics retained Vector Securities to act as its exclusive financial
advisor to assist in exploring the feasibility of certain strategic alternatives
for Cyberonics, including the formation of strategic alliances and/or a sale of
the Company, to render an opinion as to the fairness, if requested by the
Company, of the consideration received in any such transaction and to assist in
the negotiation of the terms of any such transaction, including the Merger.
Vector Securities was selected by the Cyberonics Board, after discussions
between representatives of Vector Securities and the management of Cyberonics
regarding the services to be rendered and the fees to be paid for providing
those services, in light of Vector Securities' overall qualifications and its
familiarity with Cyberonics and Cyberonics' business. No limitations were
imposed by Cyberonics with respect to the opinion to be rendered by Vector
Securities. The amount of the Merger Consideration to be paid to the Cyberonics
stockholders was determined by the Cyberonics Board in the course of
negotiations with St. Jude, based on the Cyberonics Board's review of
considerations pertinent to the Merger.

Vector Securities has delivered to the Cyberonics Board of Directors
its written opinion, dated as of April 2, 1996, to the effect that, as of such
date and based upon the matters described therein, the Merger Consideration to
be received by the stockholders of Cyberonics in the Merger, other than St. Jude
or any of its affiliates, is fair to such stockholders from a financial point of
view. The opinion of Vector Securities is directed to the Board of Directors of
Cyberonics and does not address the underlying business decision to effect the
Merger or constitute a recommendation to any stockholder of Cyberonics with
respect to the approval of the Merger. Although Vector Securities evaluated the
fairness from a financial point of view of the aggregate cash consideration to
be received by the stockholders of Cyberonics in the Merger, Vector Securities
was not asked to recommend, and did not recommend, the specific consideration
payable in connection therewith. The complete text of the opinion dated as of
the date of the Merger Agreement is attached to this Proxy Statement as Annex II
and is incorporated by reference herein. While the material terms of Vector
Securities' opinion have been summarized in this Proxy Statement, the summary is
qualified by reference to the full text of such opinion. Cyberonics stockholders
are urged to read such opinion carefully in its entirety for a description of
the assumptions made and matters considered by Vector Securities.

In connection with its opinion, Vector Securities (a) reviewed a March
29, 1996 draft of the Merger Agreement, certain publicly available annual,
quarterly and interim reports of Cyberonics and

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certain internal financial analyses and forecasts of Cyberonics prepared by
Cyberonics' management (the "Management Forecasts"); (b) held discussions with
members of the senior management of Cyberonics regarding the past and current
business operations, financial condition and future prospects of Cyberonics; (c)
reviewed the reported price and trading activity for the Cyberonics Common
Stock; (d) reviewed the financial terms of certain recent business combinations
which were deemed comparable; and (e) reviewed such other generally available
information concerning the medical device and health care industries, and
general business, economic, market and financial matters as Vector Securities
deemed appropriate for its opinion. Vector Securities did not assume any
responsibility for independent verification of any information supplied or
otherwise made available to it regarding Cyberonics and assumed and relied on
such information being accurate and complete in all respects. Vector Securities
did not undertake an independent evaluation or appraisal of the assets of
Cyberonics, nor was it furnished with any such evaluations or appraisals. With
respect to the financial projections of Cyberonics referred to above, Vector
Securities assumed, with the Company's consent, that they had been reasonably
prepared on bases reflecting the best available estimates and judgments of the
management of Cyberonics as to the future financial performance of Cyberonics.
Vector Securities assumes no responsibility for and expresses no view as to such
forecasts or the assumptions under which they were prepared. Vector Securities'
opinion was based solely on information available on or before the date of the
opinion, and reflects economic, market and other conditions as of such date. In
connection with the preparation of its opinion, Vector Securities did not give
effect to St. Jude's purchase of $12 million of Cyberonics' Common Stock and the
transactions related thereto occurring in connection with the Merger Agreement
(the "St. Jude Investment"). In rendering its opinion, Vector Securities assumed
that the transactions contemplated by the Merger will be consummated on the
terms described in the March 29, 1996 draft of the Merger Agreement, without any
material waiver of or modification of Cyberonics or St. Jude, and that obtaining
any necessary regulatory approvals for the transaction will not have an adverse
effect on Cyberonics.

In preparing its opinion to the Cyberonics' Board, Vector Securities
performed certain financial and comparative analyses, including those described
below. The summary of Vector Securities's analyses set forth below does not
purport to be a complete description of the analyses underlying Vector
Securities' opinion or the presentation to the Cyberonics Board. The preparation
of the fairness opinion is a complex process involving subjective judgements,
including as to the most appropriate and relevant methods of financial analysis
and the application of those methods to a particular circumstance and,
therefore, such opinion is not necessarily susceptible to partial analysis or
summary description. In arriving at its opinion, Vector Securities did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, Vector Securities believes that its analysis
must be considered as a whole and that selecting portions of its analysis and
the factors considered by it, without considering all analyses and factors could
create a misleading and incomplete view of the processes underlying such
analyses and the opinion. In its analysis, Vector Securities made numerous
assumptions with respect to Cyberonics and industry performance as well as
general business, economic, market and financial conditions, many of which are
beyond the control of Cyberonics. In addition, none of the precedent
transactions reviewed for comparative purposes is identical to the Merger. Any
estimates contained in such analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than those suggested by such analyses. Analyses relating
to the value of businesses or securities do not purport to be appraisals of or
to reflect the prices at which businesses or securities may actually be sold.
Accordingly, because such estimates are inherently subject to uncertainty, none
of Cyberonics or Vector Securities or any other person assumes responsibility
for their accuracy.

The following is a summary of the material analyses performed by Vector
Securities in connection with its fairness opinion dated as of April 2, 1996.

Discounted Cash Flow Analysis. Vector Securities performed a discounted
cash flow analysis pursuant to which a range of equity values for Cyberonics was
estimated by adding (i) the estimated net present value of Cyberonics' projected
operating cash flow for the fiscal years 1996 through 2000, based on the
financial

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assumptions, forecasts and other information included in the Management
Forecasts, and (ii) the estimated projected terminal value of Cyberonics in
2000. For purposes of the analysis, Vector Securities utilized (i) discount
rates of between 25% and 30% per annum (which discount rates reflect the
inherent business risks faced by Cyberonics given its stage of development and
the cost of capital) and (ii) terminal values based on multiples of operating
income of Cyberonics for fiscal year 2000 of between 18x and 22x. Based on the
Management Forecasts, this analysis resulted in an implied equity value
reference range of $5.92 per share to $9.36 per share.

The Management Forecasts (and Vector Securities' discounted cash flow
analysis of Cyberonics) were predicted on a number of management assumptions,
including: (i) the assumption that Cyberonics remains an independent company and
raises the needed additional capital in the public equity market; (ii) the
assumption that Cyberonics' NCP System receives FDA approval in the second half
of fiscal 1998; and (iii) assumptions regarding the rate of market acceptance of
Cyberonics NCP System following FDA approval and the impact of such market
acceptance on the business and results of operations of Cyberonics. There can be
no assurance that additional capital would be available to Cyberonics on
acceptable terms, if at all, that FDA approval will be granted in such time
frame, if at all, or that, even if FDA approval is granted in that time frame,
Cyberonics will experience the assumed market acceptance rates and related
operating results.

Comparable Transactions Analysis. Using publicly available information,
Vector Securities analyzed the acquisition premiums paid in the following twelve
selected transactions in the medical device industry (the "Comparable
Transactions"): Electormedics, Inc./Medtronic, Inc.; Diasonics Ultrasound,
Inc./Elron Electronic Industries Ltd.; Cardiovascular Imaging Services,
Inc./Boston Scientific Corporation; Orthomet, Inc./Wright Medical Technology,
Inc.; Mitek Surgical Products, Inc./Johnson & Johnson; Cabot Medical
Corporation/Circon Corporation; American Medical Electronics, Inc./Orthofix
International N.V.; Bird Medical Technologies, Inc./Thermo Electron Corporation;
E.P. Technologies, Inc./Boston Scientific Corporation; PSICOR, Inc./Baxter
International, Inc.; Orthopedic Technology, Inc./DePuy, Inc.; InStent
Inc./Medtronic, Inc. In performing its comparable transaction analysis, Vector
Securities compared acquisition premiums paid in the Comparable Transactions
based on the closing price one month and one day prior to announcement of the
transaction. Vector Securities then applied the resulting multiples to
comparable stock price data for Cyberonics. This analysis resulted in an implied
equity value reference range of $5.54 per share to $6.58 per share.

Based on the foregoing analyses, Vector Securities indicated a
composite implied equity value reference range of $5.73 per share to $7.97 per
share.

Based on the valuation methodologies described above and upon numerous
assumptions with respect to industry performance, general business and economic
conditions, and other matters including Vector Securities' subjective judgment,
Vector Securities determined that, as of the date of the opinion, the Merger
Consideration to be received by the stockholders of Cyberonics in the Merger,
other than St. Jude or any of its affiliates, is fair to such stockholders from
a financial point of view.

For Vector Securities' services as financial advisor to Cyberonics in
connection with the St. Jude Investment and the Merger, Cyberonics agreed to pay
Vector Securities a fee, substantially all of which is contingent on the closing
of the transactions contemplated by the Merger Agreement, equal to (a) five
percent (5%) of the aggregate consideration to be received by the Company, its
stockholders or employees in connection with the St. Jude Investment and (b)
three percent (3%) of the consideration to be received by the Company, its
stockholders or employees in connection with the Merger. Cyberonics has also
agreed to reimburse Vector Securities for its reasonable out-of-pocket expenses,
including legal fees, and to indemnify Vector Securities against certain
liabilities, including liabilities under the federal securities laws, relating
to or arising out of services performed by Vector Securities as financial
advisor to Cyberonics. Vector Securities' fee, and the

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resulting potential interest of Vector Securities in approval of the Merger
Agreement were discussed and considered by the Cyberonics Board of Directors in
connection with the Board's evaluation of the fairness opinion. In addition,
Vector Securities is a full service securities firm and in the course of its
normal trading activities may from time to time effect transactions and hold
positions in securities of Cyberonics and/or St. Jude.

Vector Securities is a nationally recognized investment banking firm.
As part of its investment banking business, Vector Securities is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes.

CONFLICTS OF INTEREST OF CERTAIN PERSONS IN THE MERGER

In considering the recommendation of the Board of Directors with
respect to the Merger, stockholders should be aware that certain of Cyberonics'
directors and executive officers have certain interests in the transaction,
which may present them with conflicts of interest in connection with the Merger.
The Board of Directors was aware of these conflicts and considered them among
the other matters described under "Recommendation of the Board of Directors,"
above.

Stock Ownership of Executive Officers and Directors. As of the Record
Date, the executive officers and directors of Cyberonics as a group beneficially
owned an aggregate of 973,099 shares Cyberonics Common Stock (excluding 426,125
shares that executive officers and directors have the right to acquire upon
exercise of outstanding options granted under the Stock Plan), representing
approximately 10.2% of the total voting power of Cyberonics. All such shares
will be treated in the Merger in the same manner as the shares of Cyberonics
Common Stock held by the other stockholders of Cyberonics.

Conflicts of Interest of Cyberonics Negotiating Team. The terms of the
Merger Agreement and the Stock Purchase were primarily negotiated on behalf of
Cyberonics by a team comprised of Robert P. Cummins, Reese S. Terry, Jr. and
John K. Bakewell as well as representatives of Vector Securities and of
Cyberonics' outside legal counsel. As described below, Messrs. Cummins and
Bakewell may be deemed to have conflicts of interests with respect to the Merger
Proposal given the bonus payments to which they will become entitled if the
Merger is consummated. The Cyberonics Board of Directors was fully aware of,
and carefully considered, these potential conflicts of interests at the time the
Merger Agreement and Stock Purchase were being negotiated and at the time such
transactions were considered and approved by the Board. Mr. Cummins abstained
from the Board vote with respect to the Merger Proposal.

Employment Agreements and Change of Control Provisions.

Pursuant to the 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 John
K. 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.

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

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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.

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.

Pursuant to a Change of Control Agreement dated as of May 8, 1995, as
amended, Shawn Lunney, the Vice President of Marketing 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. Lunney 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.

Indemnification and Insurance. The Merger Agreement provides that for
six years after the Effective Time, St. Jude will cause the surviving
corporation to indemnify and hold harmless the present and former officers and
directors of Cyberonics in respect of acts or omissions occurring prior to the
Effective Time to the extent provided under Cyberonics' Certificate of
Incorporation, Bylaws and indemnification agreements in effect on the date of
the Merger Agreement. In addition, for six years after the Effective Time, St.
Jude will cause the surviving corporation, at the surviving corporation's
expense, to provide officers' and directors' liability insurance in respect of
acts or omissions occurring prior to the Effective Time covering each such
person currently covered by each respective Cyberonics officers' and directors'
liability insurance policy on terms with respect to coverage and amount no less
favorable than those of such policy in effect on the date of execution of the
Merger Agreement. If the annual premiums of such insurance would exceed the
premiums in effect as of the date of the Merger Agreement, St. Jude shall use
its commercially reasonable efforts to procure such level of insurance having
the same coverage as in effect as of the date of the Merger Agreement for an
annual premium equal to such current premium amount.

Financial Advisor. For information regarding the retention of Vector
Securities and the fees payable by Cyberonics in connection therewith, see "--
Opinion of Cyberonics' Financial Advisor."

CERTAIN CYBERONICS EMPLOYEE BENEFIT PLANS

Cyberonics 1988 Incentive Stock Plan. Pursuant to the Cyberonics 1988
Incentive Stock Plan (the "Stock Plan") and each of the option agreements
entered into between Cyberonics and its employees thereunder, all of the
outstanding options of Cyberonics under the Stock Plan will be accelerated as a
result of the Merger such that the options will be exercisable as to all shares,
whether vested or not vested. Any outstanding options

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under the Stock Plan that have not been exercised will be canceled at the
Effective Time of the Merger. The Stock Plan will terminate upon consummation of
the Merger.

Cyberonics Employee Stock Purchase Plan. Pursuant to the terms of the
Purchase Plan, the Board of Directors of Cyberonics may, at its discretion (i)
shorten the offering period then in progress by setting a new exercise date (the
"New Exercise Date") or (ii) cancel each outstanding right to purchase shares of
Cyberonics Common Stock and refund all sums collected from participants during
the offering period then in progress. If the Board shortens the offering period
then in progress pursuant to (i) above, then the Board is required to notify
each participant under the Purchase Plan in writing at least ten (10) business
days prior to the New Exercise Date that the exercise date has been changed to
the New Exercise Date and that such participant's option will be exercised
automatically on the New Exercise Date, unless prior to such date the
participant has withdrawn from the offering period. During a purchase period, a
participant in such plan may decrease, but not increase, the percentage of his
or her eligible salary which is contributed under the Purchase Plan. The amounts
in a participant's account during the current purchase period will be applied to
the purchase of shares of Cyberonics Common Stock on the last date of the
shortened purchase period. Any amount of cash remaining in a participant's
account under the Purchase Plan after the purchase of shares will be distributed
to such participant promptly after the termination of the Purchase Plan. The
Purchase Plan will terminate upon consummation of the Merger.

Other Benefit Plans. Pursuant to the Merger Agreement, St. Jude has
agreed to provide to those employees of Cyberonics that it elects to retain
comparable compensation and benefits as those provided to employees of St. Jude
with similar status and tenure. St. Jude is not, however, obligated to extend
employment offers to any person. In addition, St. Jude shall give each
Cyberonics' employee full credit for all service with Cyberonics for purposes of
all employee benefit plans and arrangements.

OPERATIONS OF CYBERONICS AFTER THE MERGER

It is presently contemplated that, after the Effective Time, the
business currently operated by Cyberonics will be operated as a subsidiary of
St. Jude. The officers of Sub will initially be the officers of the surviving
corporation and the directors of Sub will initially be the directors of the
surviving corporation. St. Jude will continue to review the business, operations
and management of the surviving corporation and will make such changes as it
deems appropriate.

EXCHANGE OF CERTIFICATES REPRESENTING CYBERONICS COMMON STOCK

As soon as practicable after the Effective Time, Exchange Agent will
mail to each holder of record of outstanding shares of Cyberonics Common Stock
immediately prior to the Effective Time a letter of transmittal for return to
the Exchange Agent (which will specify that delivery will be effected, and risk
of loss and title to the certificates that immediately prior to the Effective
Time represented shares of Cyberonics Common Stock (the "Certificates") will
pass, only upon receipt of the Certificates by the Exchange Agent) and
instructions for the use thereof in effecting the surrender of the Certificates
in exchange for the Merger Consideration. STOCKHOLDERS OF CYBERONICS SHOULD NOT
SEND THEIR STOCK CERTIFICATES IN FOR EXCHANGE UNTIL THEY HAVE BEEN NOTIFIED THAT
THE MERGER HAS BEEN CONSUMMATED AND HAVE RECEIVED A LETTER OF TRANSMITTAL FROM
THE EXCHANGE AGENT. Upon surrender of a Certificate for exchange to the Exchange
Agent or to such other agent as may be appointed by St. Jude, together with such
letter of transmittal duly executed and properly completed, the holder of such
Certificate will be entitled to receive in exchange therefor, a check
representing the cash such holder is entitled to receive pursuant to the Merger
Agreement.

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After the Effective Time, there will be no further registration of
transfers on the stock transfer books of Cyberonics (the stock transfer books of
which will be closed) of the shares of Cyberonics Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Exchange Agent or the surviving
corporation, they will be canceled and exchanged for the Merger Consideration.

LEGENDS ON CERTIFICATES

In the event that the Merger Proposal is approved by the requisite vote
of Cyberonics' stockholders, Cyberonics' transfer agent will be instructed to
imprint any certificates issued by it with the following legend:

THE STOCKHOLDERS OF CYBERONICS, INC. HAVE APPROVED AN AGREEMENT
AND PLAN OF MERGER DATED APRIL 8, 1996 BY AND AMONG CYBERONICS, INC.,
ST. JUDE MEDICAL, INC. AND SJM ACQUISITION CORP. ("SUB") AND THE MERGER
OF SUB WITH AND INTO CYBERONICS, INC. (THE "MERGER"). UPON
CONSUMMATION OF THE MERGER, WHICH MAY OCCUR AT ANY TIME, THE
SHARES REPRESENTED BY THIS CERTIFICATE WILL BE CONVERTED INTO THE
RIGHT TO RECEIVE MERGER CONSIDERATION, AND WILL NO LONGER
REPRESENT AN INTEREST IN CYBERONICS, INC. COPIES OF THE MERGER
AGREEMENT MAY BE OBTAINED AT NO CHARGE BY THE RECORD HOLDER
HEREOF BY A REQUEST DIRECTED TO CYBERONICS, INC., 17748 HIGHWAY 3,
WEBSTER, TEXAS 77598-4135, ATTN: INVESTOR RELATIONS.

In the event that the Merger Agreement is terminated and the Merger
abandoned, the foregoing legend will no longer be placed on certificates.

CONDITIONS OF THE MERGER; AMENDMENTS

Consummation of the Merger is subject to the fulfillment of a number of
conditions, including, among others, the following: (i) the absence of a final
non-appealable order, decree or ruling, or the taking of any other action,
having the effect of permanently restraining, enjoining or otherwise prohibiting
the Merger and (ii) the receipt of approval of the Merger by the stockholders of
Cyberonics and approvals of applications to public authorities, Federal, state
or local, the granting of which are necessary for the consummation of the
Merger.

Notwithstanding the foregoing, St. Jude has the right to terminate the
Merger Agreement at any time, with or without cause and regardless of whether
the foregoing conditions have been satisfied. As a result, while Cyberonics may
be obligated to consummate the Merger, St. Jude has an option and not an
obligation to do so.

To the fullest extent permitted by law, the Merger Agreement may be
amended, modified or supplemented with respect to any of the terms contained
therein, and any of the obligations or conditions of the parties may be waived,
except that the obtaining of the approval of the stockholders of Cyberonics may
not be waived.

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REPRESENTATIONS AND WARRANTIES

The Merger Agreement contains standard representations and warranties
of Cyberonics, including (i) its corporate existence and capital structure, (ii)
authorization, execution and enforceability of the Merger Agreement, (iii) the
absence of conflicts under the Certificate of Incorporation and Bylaws of
Cyberonics or any material agreement or judgments or other instruments binding
upon Cyberonics, (iv) documents filed with the SEC and the accuracy of the
information contained therein, (v) absence of certain specified material adverse
changes or material litigation, (vi) title to properties and certain
intellectual property matters, (vii) certain tax, labor and employee benefit
matters, (viii) compliance with laws and (ix) full disclosure of documents
provided to St. Jude in connection with the Merger and the Merger Agreement. The
Merger Agreement also contains certain representations and warranties of St.
Jude and Sub, including (i) their corporate existence, (ii) authorization,
execution and enforceability of the Merger Agreement, (iii) the absence of
conflicts under the Articles of Incorporation and Bylaws of St. Jude and the
Certificate of Incorporation and Bylaws of Sub or any material agreements or
judgments or other instruments binding upon either St. Jude or Sub, (iv)
documents filed with the SEC and the accuracy of the information contained
therein, and (v) full disclosure of documents provided to Cyberonics in
connection with the Merger and the Merger Agreement.

CONDUCT OF BUSINESS OF CYBERONICS PRIOR TO THE EFFECTIVE TIME; CERTAIN COVENANTS

Pursuant to the Merger Agreement, Cyberonics has agreed that it will
operate its business only in the ordinary course consistent with past practice
until the Effective Time or the date, if any, on which the Merger Agreement is
terminated. Cyberonics has also agreed during such period: (i) that it will use
its best efforts to, among other things, preserve intact its business
organization and relationships with third parties, keep available the services
of its present officers and employees and (ii) that it will not, without the
prior written consent of St. Jude, (1) declare, set aside or pay any dividend or
other distribution with respect to any shares of its capital stock, (2) amend or
alter any term of any outstanding Cyberonics securities, (3) incur, assume, or
guarantee any debt other than in the ordinary course of business consistent with
historic practices, issue or sell any securities convertible into or
exchangeable for its debt securities or issue or sell any options or other
rights to acquire from it, directly or indirectly, any of its debt securities or
any securities convertible into or exchangeable for any such debt securities,
(4) create, assume or incur any lien on any of its material assets, (5)
relinquish any of its material contract or other material right, make any
payment (direct or indirect) of any of its liabilities before the same becomes
due in accordance with its terms or make any change in its operations that is in
any such case material to it, (6) adopt any change in any method of accounting
or accounting practice used by it other than by reason of a concurrent change in
generally accepted accounting principles and upon the recommendation of its
independent public accountants, (7) grant or make any severance or termination
payments to any of its officers, directors or employees, except pursuant to
written agreements in effect on the date of the Merger Agreement, enter into any
employment, deferred compensation or other similar agreement (or any amendment
thereof) with any officer, director or employee, increase benefits payable under
any existing severance or termination pay policies or employment agreements, or
pay or provide for any increase in compensation, bonus, or other benefits
payable to officers, directors or employees of Cyberonics except for normal
increases to non-managerial employees consistent with past practice or as
required under existing employment and labor agreements, (8) amend its
Certificate of Incorporation or Bylaws, (9) except for Acquisition Proposals,
take any action, the taking of which, or omit to take any action, the omission
of which, would reasonably be expected to cause any of the representations and
warranties in the Merger Agreement to be inaccurate in any respect, (10) except
for the sale of inventory and the disposition of obsolete or defective
equipment, sell, transfer, mortgage, or otherwise dispose of, or encumber, or
agree to sell, transfer, mortgage or otherwise dispose of or encumber, any
assets or properties, real, personal or mixed, (11) (a) enter into any other
agreements, commitments or contracts which, individually or in the aggregate,
are material to Cyberonics, except agreements, commitments or contracts for the
purchase,

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sale or lease of goods or services, consistent with past practice or set forth
in the Merger Agreement, or (b) otherwise make any material change in any
existing material agreement, commitment or arrangement, (12) make any investment
of a capital nature with a maturity in excess of 90 days either by purchase of
stock or securities, contributions to capital, property transfers or otherwise,
or by the purchase of any property or assets of any other individual, firm or
corporation, (13) purchase any capital items which singly have an individual
purchase price greater than $5,000 or in the aggregate $50,000, (14) except with
respect to the issuance of shares pursuant to the exercise of stock options
outstanding, redeem, repurchase or otherwise acquire any of its securities, or
(15) agree or commit to do any of the foregoing.

Cyberonics has also agreed to give St. Jude, its counsel, financial
advisors, auditors and other authorized representatives full access to the
offices, properties, books and records of Cyberonics, to promptly furnish to
such parties such financial and operating data and other information as such
persons may reasonably request and to instruct its employees, counsel and
financial advisors to fully cooperate with St. Jude in its investigation of
Cyberonics.

Cyberonics also agreed to promptly notify St. Jude of, among other
things, any notice from any person or governmental or regulatory agency or
authority in connection with the Merger, any actions, suits, claims,
investigations or proceedings commenced or threatened relating to or otherwise
affecting the Merger Agreement and the transactions contemplated thereby, or any
other event or change of fact or circumstance causing any representation
contained in the Merger Agreement to be incorrect or misleading. St. Jude agreed
to promptly advise Cyberonics of any event occurring which would render any
representation or warranty of St. Jude in the Merger Agreement untrue,
inaccurate or incomplete in any material respect or of any material adverse
change in the working capital, financial condition, assets, liabilities,
operating profits, business or prospects of St. Jude.

Both parties agreed to use their commercially reasonable efforts (i) to
cause all their respective conditions to the Merger to be fulfilled and
satisfied, to perform their respective matters required for consummation of the
Merger and to achieve full compliance with applicable law and (ii) to make all
representations contained in the Merger Agreement true and correct in all
material respects as of the Effective Time. In addition, both parties have
agreed to use commercially reasonable efforts to obtain all necessary approvals,
authorization, consents, licenses, clearances or orders of governmental and
regulatory authorities, and in the case of Cyberonics, to obtain all third
parties consents or approvals, required in order to consummate the Merger.
Provided, however, that the foregoing obligations of St. Jude shall in no way
limit St. Jude's right to terminate the Merger with or without cause.

NO SOLICITATION

Cyberonics agreed that it will not, for so long as the Merger Agreement
remains in effect, directly or indirectly, (a) take any further action to
solicit, initiate or encourage any offer or indication of interest from any
person with respect to any Acquisition Proposal (as defined below), including
without limitation, any such further action through any investment banker,
broker, finder or other intermediary previously engaged or which may be engaged
for the purpose of soliciting, initiating or encouraging such offer or
indication of interest; or (b) engage in negotiations with, or disclose any
non-public information relating to its business, assets or operations or of St.
Jude or afford access to the properties, books or records of Cyberonics to, any
person that has made, or that Cyberonics has good reason to believe may be
considering making, an Acquisition Proposal. Cyberonics agreed to promptly
notify St. Jude after receipt of any Acquisition Proposal or indication that any
person is considering making an Acquisition Proposal or any request for
non-public information relating to the business, assets or operations or for
access to the properties, books or records of Cyberonics by any person that has
made, or that Cyberonics has good reason to believe may be considering making an
Acquisition Proposal, and will keep St.

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Jude informed of any such Acquisition Proposal for a period of seven days
following receipt by St. Jude of such notification by Cyberonics.

TERMINATION; TERMINATION FEE

The Merger Agreement provides that it may be terminated and the Merger
abandoned, either before or after approval by the stockholders of Cyberonics,
(a) by the mutual consent of the Boards of Directors of St. Jude and Cyberonics,
(b) by St. Jude at any time, with or without cause, or (c) by Cyberonics if (i)
the closing of the sale of shares of Cyberonics Common Stock to St. Jude
pursuant to the Common Stock Purchase Agreement does not occur; provided,
however, that Cyberonics may not terminate the Merger Agreement where such
failure to close resulted from a breach by Cyberonics of its obligations or
covenants set forth in the Merger Agreement or the Common Stock Purchase
Agreement, (ii) the Merger has not been consummated by October 18, 1996, (iii)
the consummation of the Merger has been prohibited by a final non-appealable
court order, decree or ruling, (iv) the requisite vote of the stockholders of
Cyberonics is not obtained, (v) prior to the Special Meeting, the Board of
Directors of Cyberonics has recommended, approved, accepted or entered into a
definitive agreement regarding an Acquisition Proposal or an Acquisition
Proposal has been made and the Board of Directors of Cyberonics has withdrawn or
modified in any manner adverse to St. Jude its recommendation of the Merger,
(vi) Cyberonics is not in breach of its obligations under the Merger Agreement
and there has been a material breach by St. Jude of any of its representations
and warranties under the Merger Agreement or a material failure by St. Jude to
perform any of its obligations under the Merger Agreement, which breach or
failure cannot, in the reasonable judgment of Cyberonics, be cured by October
18, 1996 following receipt by St. Jude of notice of the breach or such breach or
failure is not in fact cured by such date, or (vii) St. Jude materially breaches
any of St. Jude's obligations under the Merger Agreement and such breach is not
cured by St. Jude within 30 calendar days following receipt by St. Jude of
notice of the breach.

If the Merger Agreement is terminated (a) due an event described in (v)
above or (b) (i) if any third party makes an Acquisition Proposal or acquires
50% or more of the outstanding Cyberonics Common Stock prior to the Special
Meeting, (ii) the requisite vote of the stockholders of Cyberonics is not
obtained, (iii) the Merger Agreement is terminated and (iv) within six months
after the date of the Merger Agreement Cyberonics enters into an agreement
relating to an Acquisition Proposal (except for any sale by Cyberonics of debt
or equity securities effected for the sole purpose of raising equity capital) or
such Acquisition Proposal is consummated, then Cyberonics is required to pay to
St. Jude a termination fee of $3,500,000.

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be exercised by St. Jude electing to consummate the Merger, and effectively
expires on October 19, 1996 at which time Cyberonics becomes free to terminate
this Merger Agreement without liability.

OTHER AGREEMENTS

In connection with the Merger Agreement, Cyberonics and St. Jude
entered into certain other agreements.

Common Stock Purchase Agreement. Cyberonics and St. Jude have entered
into the Common Stock Purchase Agreement described under Proposal II below.

Stockholders' Agreement. Pursuant to the Stockholders' Agreement,
Cyberonics granted to St. Jude certain demand and piggy-back registration rights
with respect to any shares of Cyberonics Common Stock purchased under the Common
Stock Purchase Agreement as well as Board observer rights. A demand for
registration may be made with respect to at least 15% of the outstanding shares
of Cyberonics Common Stock as of the date of such demand or 80% of the number of
shares purchased by St. Jude under the Common Stock Purchase Agreement. Expenses
of any such first demand registration shall be split between the selling
stockholders and Cyberonics, and thereafter the expenses of any such demand
registrations shall be paid by the selling stockholders. The Stockholders'
Agreement also provides for a right of first refusal in favor of Cyberonics with
respect to certain proposed transfers of Cyberonics Common Stock by St. Jude and
restricts the holdings of Cyberonics Common Stock by St. Jude to 19% of the
total outstanding shares of Cyberonics Common Stock. The 19% ownership ceiling
was arrived at through negotiation between the parties, and is intended to
permit St. Jude to effect the Stock Purchase, but not to acquire a controlling
interest in Cyberonics except through the Merger Agreement (or otherwise through
negotiations with the Cyberonics Board of Directors). The limitation does not
impact the specific transactions under consideration and for which stockholder
approval is being solicited. In addition, the Stockholders' Agreement provides
for St. Jude (or its transferees) to vote its shares of Cyberonics Common Stock
(i) for nominees to the Board of Directors of Cyberonics in accordance with the
recommendation of the Board of Directors until July 1, 1998 and (ii) on other
matters, as recommended by the Cyberonics Board of Directors or in the same
proportions as other stockholders vote on a matter. The Stockholders' Agreement
automatically terminates upon the later of (i) the termination of the Merger
Agreement, (ii) the termination of the Common Stock Purchase Agreement, and
(iii) the date on which any holder of Cyberonics Common Stock subject to the
Stockholder's Agreement may sell all shares of its shares of Cyberonics Common
Stock within a three month period.

Loan Agreement. The Loan Agreement provides for the loan by St. Jude to
Cyberonics of up to $2,000,000 at an interest rate equal to the prime rate plus
one percent. The Loan Agreement is intended to provide Cyberonics with interim
funding in a circumstance where the Cyberonics stockholders have failed to
approve the Merger and the Merger Agreement is as a result being terminated.
Cyberonics may borrow funds under the Loan Agreement only if (i) Cyberonics
shall have complied with all its covenants under the Merger Agreement up to the
date of the Special Meeting, (ii) Cyberonics' Board of Directors shall have
recommended approval of the Merger and the Merger Agreement, and shall have not
changed its recommendation with respect thereto and (iii) the stockholders of
Cyberonics shall have failed to approve the Merger and the Merger Agreement by
the requisite vote. Any borrowings under the Loan Agreement shall be due on the
earlier of (i) the date six months from the borrowing date, (ii) two days after
the closing by Cyberonics of a financing which raises net proceeds payable to
Cyberonics of at least $5,000,000, and (iii) the closing of a sale of
Cyberonics, whether by merger, consolidation, sale of all or substantially all
of the assets of Cyberonics, or change of control of Cyberonics, or the license,
sale or transfer of the patents, patent rights, trade secrets or other
technology of Cyberonics or any of its subsidiaries (other than in the ordinary
course of business). The Loan Agreement automatically terminates upon (i) the
occurrence of the closing of the purchase and sale of Cyberonics Common Stock
under the Common Stock Purchase Agreement, (ii) the termination by Cyberonics of
the Merger Agreement if Cyberonics has recommended, approved, accepted or
entered into a definitive agreement regarding an Acquisition Proposal or such an
Acquisition Proposal has been made and the Board of Directors of Cyberonics has
withdrawn or modified in a manner adverse to St. Jude its recommendation of the
Merger Proposal, and

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(iii) the termination by St. Jude of the Merger Agreement if, and only if,
Cyberonics has recommended, approved, accepted or entered into an definitive
agreement regarding an Acquisition Proposal or such an Acquisition Proposal has
been made and the Board of Directors of Cyberonics has withdrawn or modified in
a manner adverse to St. Jude its recommendation of the Merger.

Sales and Marketing Support Agreement. Pursuant to the Support
Agreement, St. Jude agreed to provide to Cyberonics the services of two senior
executives, one to support international sales and marketing activities and the
other to support Cyberonics' activities directed toward preparation for United
States market launch of the NCP System once FDA approval is obtained. St. Jude
has agreed to bear the compensation and expenses of its executives providing the
support to Cyberonics. St. Jude's obligation to provide such support terminates
upon the closing of the Merger or termination of the Merger Agreement.

DEREGISTRATION OF CYBERONICS COMMON STOCK AFTER THE MERGER

If the Merger is consummated, Cyberonics Common Stock will cease to be
quoted on The Nasdaq National Market. Upon consummation of the Merger,
Cyberonics intends to make an appropriate filing with the SEC, so that it will
no longer be subject to the periodic reporting requirements of the Exchange Act,
and the registration of the Cyberonics Common Stock under the Exchange Act will
terminate.

ANTITRUST MATTERS

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act"), and the rules promulgated thereunder, the Merger may not be
consummated until notifications have been given and certain information has been
furnished to the Federal Trade Commission (the "FTC") and the Antitrust Division
of the United States Justice Department (the "Antitrust Division"), and
specified waiting period requirements have been satisfied. If the Cyberonics
stockholders approve the Merger, Cyberonics and St. Jude plan to each file with
the FTC and the Antitrust Division (collectively, the "Agencies") a Notification
and Report Form with respect to the Merger shortly after the Special Meeting.

The Agencies frequently scrutinize the legality under the antitrust
laws of transactions such as the Merger. At any time before or after the
Effective Time, either or both of the Agencies could take such action under the
antitrust laws as it deems or they deem necessary or desirable in the public
interest or certain other persons could take action under the antitrust laws,
including seeking to enjoin the Merger. See "--Conditions of the Merger,
Amendments."

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following summary describes certain federal income tax consequences
under the Internal Revenue Code of 1986, as amended (the "Code"), of the Merger
to Cyberonics, St. Jude, Sub and holders of Cyberonics Common Stock who are
citizens or residents of the United States. It does not discuss all the tax
consequences that may be relevant to Cyberonics stockholders entitled to Special
treatment under the Code (such as insurance companies, dealers in securities,
tax exempt organizations or foreign persons) or to Cyberonics stockholders who
acquired their shares of Cyberonics Common Stock pursuant to the exercise of
employee stock options or otherwise as compensation.

For federal income tax purposes: (a) no gain or loss will be recognized
by St. Jude, Sub or Cyberonics as a result of the Merger; (b) the exchange of
Cyberonics Common Stock by the Cyberonics stockholders for cash will be a
taxable transaction; (c) gain or loss will be recognized by a Cyberonics
stockholder measured by the

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difference between the Merger Consideration received by such stockholder and the
tax basis of the shares of Cyberonics Common Stock exchanged therefor (however,
a Cyberonics stockholder may be required to compute gain or loss separately with
respect to each block of shares); and (d) such gain or loss will be capital gain
or loss if such shares of Cyberonics Common Stock are held as capital assets at
the Effective Time.

THE DISCUSSION SET FORTH ABOVE PROVIDES GENERAL INFORMATION AS TO THE
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER BUT DOES NOT DISCUSS THE TAX
CONSEQUENCES, IF ANY, OF THE MERGER UNDER APPLICABLE FOREIGN, STATE AND LOCAL
LAWS OR WITH RESPECT TO TAXPAYERS WHO QUALIFY FOR SPECIAL TREATMENT UNDER THE
CODE. CYBERONICS STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER.

APPRAISAL RIGHTS

Holders of shares of Cyberonics Common Stock are entitled to appraisal
rights under Section 262 of the Delaware Law ("Section 262") with respect to the
Merger. Section 262 is reprinted in its entirety as Annex III to this Proxy
Statement. All references in Section 262 and in this summary of appraisal rights
to a "stockholder" are to the record holder of the shares of Cyberonics Common
Stock as to which appraisal rights are asserted. A person having a beneficial
interest in shares of Cyberonics Common Stock that are held of record in the
name of another person, such as a broker or nominee, must act promptly to cause
the record holder to follow the steps summarized below properly and in a timely
manner to perfect whatever appraisal rights the beneficial owner may have.

While the following discussion describes the material provisions of
Section 262, the following discussion is not a complete statement of the law
relating to appraisal rights and is qualified by reference to Annex III.
THIS DISCUSSION AND ANNEX III SHOULD BE REVIEWED CAREFULLY BY ANY STOCKHOLDER
WHO WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE THE
RIGHT TO DO SO, SINCE FAILURE TO COMPLY WITH THE PROCEDURES SET FORTH THEREIN
WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS.

Stockholders who desire to exercise their appraisal rights must satisfy
all of the following conditions. A written demand for appraisal of shares of
Cyberonics Common Stock must be delivered to the Secretary of Cyberonics before
the taking of the vote on the Merger Proposal at the Special Meeting. This
written demand for appraisal of shares must be in addition to and separate from
any proxy or vote abstaining from or voting against the Merger. Voting against,
abstaining from voting or failing to vote on the Merger Proposal will not
constitute a demand for appraisal within the meaning of Section 262.

Stockholders electing to exercise their appraisal rights under Section
262 must not vote for the Merger Proposal. If a stockholder returns a signed
proxy but does not specify a vote against the Merger Proposal or a direction to
abstain, the proxy will be voted for the Merger Proposal, which will have the
effect of waiving that stockholder's appraisal rights.

A demand for appraisal must be executed by or for the stockholder of
record, fully and correctly, as such stockholder's name appears on the
certificate or certificates representing shares of Cyberonics Common Stock. If
the shares of Cyberonics Common Stock are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, such demand must be
executed by the fiduciary. If the shares of Cyberonics Common Stock are owned of
record by more than one person, as in a joint tenancy or tenancy in common, such
demand must be executed by all record owners. An authorized agent, including an
agent for two or more record owners,

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may execute the demand for appraisal for a stockholder of record; however, the
agent must identify the record owner and expressly disclose the fact that, in
executing the demand, such person is acting as agent for the record owner.

A record owner, such as a broker, who holds shares of Cyberonics Common
Stock as a nominee for others, may exercise appraisal rights with respect to the
shares held for all or less than all beneficial owners of shares as to which
such person is the record owner. In such case the written demand must set forth
the number of shares covered by such demand. Where the number of shares is not
expressly stated, the demand will be presumed to cover all shares of Cyberonics
Common Stock outstanding in the name of such record owner. Beneficial owners who
are not record owners and who intend to exercise appraisal rights should
instruct their record owners to comply strictly with the statutory requirements
with respect to the exercise of appraisal rights before the date of the Special
Meeting.

A stockholder who elects to exercise appraisal rights must mail or
deliver his or her written demand to: John K. Bakewell, Cyberonics, Inc., 17448
Highway 3, Suite 100, Webster, Texas 77598-4135. The written demand for
appraisal must specify the stockholder's name and mailing address, the number of
shares of Cyberonics Common Stock owned, and that the stockholder is thereby
demanding appraisal of his or her shares. Within 10 days after the Effective
Time, the surviving corporation must provide notice of the Effective Time to all
stockholders who have complied with Section 262 and have not voted for approval
and adoption of the Merger Agreement. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of the notice, demand in
writing the appraisal of his or her shares from the Surviving Corporation.

Within 120 days after the Effective Time, either the surviving
corporation or any stockholder who has complied with the required conditions of
Section 262 may file a petition in the Delaware Chancery Court demanding a
determination of the fair value of the shares of the dissenting stockholders. If
a petition for an appraisal is timely filed, after a hearing on such petition,
the Delaware Chancery Court will determine which stockholders are entitled to
appraisal rights and will appraise the shares of Cyberonics Common Stock owned
by such stockholders, determining the fair value of such shares, exclusive of
any element of value arising from the accomplishment or expectation of the
Merger, together with a fair rate of interest to be paid, if any, upon the
amount determined to be the fair value. In determining fair value, the Delaware
Chancery Court is to take into account all relevant factors. In Weinberger v.
UOP Inc., et al, decided February 1, 1983, the Delaware Supreme Court discussed
the considerations that could be considered in determining fair value in an
appraisal proceeding, stating that "proof of value by any techniques or methods
which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered and that "fair price
obviously requires consideration of all relevant factors involving the value of
a Company." The Delaware Supreme Court stated that in making this determination
of fair value the court must consider market value, asset value, dividends,
earnings prospects, the nature of the enterprise and any other facts which could
be ascertained as of the date of the merger which throw any light on future
prospects of the merged corporation. Section 262 provides that fair value is to
be "exclusive of any element of value arising from the accomplishment or
expectation of the merger." In Weinberger, the Delaware Supreme Court construed
Section 262 to mean that "elements of future value, including the nature of the
enterprise, which are known or susceptible of proof as of the date of the merger
and not the product of speculation, may be considered." The Chancery Court shall
direct the payment of the fair value of the shares, together with interest, if
any, by the Surviving Corporation to the stockholders entitled thereto.

Stockholders considering seeking appraisal should have in mind that the
fair value of their shares determined under Section 262 could be more than, the
same as or less than the consideration they are to receive pursuant to the
Merger Agreement if they do not seek appraisal of their shares, and that
opinions of investment banking firms as to fairness, from a financial point of
view, are not opinions as to fair value under Section 262.

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The cost of the appraisal proceeding may be determined by the Delaware Chancery
Court and assessed against the parties as the Delaware Chancery Court deems
equitable in the circumstances. Upon application of a dissenting stockholder,
the Delaware Chancery Court may order that all or a portion of the expenses
incurred by any dissenting stockholder in connection with the appraisal
proceeding, including without limitation reasonable attorneys' fees and the fees
and expenses of experts, be charged pro rata against the value of all shares of
Cyberonics Common Stock entitled to appraisal.

Any stockholder who has duly demanded appraisal in compliance with
Section 262 will not, after the Effective Time, be entitled to vote for any
purpose the shares of Cyberonics Common Stock subject to such demand, or to
receive payment of dividends or other distributions on such shares, except for
dividends or distributions payable to stockholders of Cyberonics of record as of
a date prior to the Effective Time.

At any time within 60 days after the Effective Time, any stockholder
has the right to withdraw his or her demand for appraisal and to accept the
terms offered in the Merger Proposal; after this period, the stockholder may
withdraw his or her demand for appraisal only with the consent of the Surviving
Corporation. If no petition for appraisal is filed with the Delaware Chancery
Court within 120 days after the Effective Time, then such stockholder's right to
appraisal ceases, and such stockholder shall become entitled to receive the
Merger Consideration as provided for in the Merger Agreement. Inasmuch as the
Surviving Corporation will have no obligation to file such a petition, and
neither Cyberonics nor St. Jude has any present intention that it will do so,
any stockholder who desires such a petition to be filed is advised to file it on
a timely basis. No petition timely filed in the Delaware Chancery Court
demanding appraisal may be dismissed as to any stockholder without the approval
of the Delaware Chancery Court, and such approval may be conditioned upon such
terms as the Delaware Chancery Court deems just.

PROPOSAL II:
APPROVAL OF THE STOCK PURCHASE

GENERAL

Pursuant to the Common Stock Purchase Agreement, Cyberonics and St.
Jude (the "Common Stock Purchase Agreement"), Cyberonics agreed to issue and
sell, and St. Jude agreed to purchase, 2,181,818 shares of Cyberonics Common
Stock at a purchase price of $5.50 per share (subject to adjustment for stock
splits or the like), for a total purchase price of approximately $12,000,000.
The parties' respective obligations under the Common Stock Purchase Agreement
are subject to the fulfillment of the following conditions (any of which may be
waived by either party): (i) there shall be no order enjoining or restraining
the Merger or the transactions contemplated by the Common Stock Purchase
Agreement, (ii) there shall not be in effect any law, rule or regulation
prohibiting or restricting the Merger or the transactions contemplated by the
Common Stock Purchase Agreement, and (iii) the Merger shall have been approved
by the stockholders of Cyberonics. In addition, St. Jude's obligation to
purchase Cyberonics Common Stock is further conditioned upon (either of which
may be waived by St. Jude) certain representations and warranties in the Common
Stock Purchase Agreement and Merger Agreement being true and correct, and
Cyberonics not being in material breach of any of its covenants set forth in the
Merger Agreement. The Common Stock Purchase Agreement may be terminated by the
mutual consent of St. Jude and Cyberonics, by St. Jude upon notice given to
Cyberonics in the event that the conditions to closing the purchase and sale are
not satisfied by September 30, 1996 (unless such failure is the result of acts
of St. Jude which constitute a breach of St. Jude's obligations or covenants
contained in the Merger Agreement or the Common Stock Purchase Agreement) or by
Cyberonics upon a breach by St. Jude of the Common Stock Purchase Agreement. The
Stock Purchase is intended to provide Cyberonics with needed capital to fund its
operations.

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<PAGE> 40
Note that the investment by St. Jude in Cyberonics is contingent on
approval by the Cyberonics stockholders of the Merger Proposal. In the event
that Cyberonics stockholders approve the Stock Purchase but fail to approve the
Merger Proposal, St. Jude has no obligation to complete the Stock Purchase, and
has indicated its intention not to make the investment under such circumstances.
In the event that Cyberonics stockholders approve the Merger Proposal but fail
to approve the Stock Purchase, the parties intend to proceed with the Stock
Purchase notwithstanding such lack of approval to the extent legally
permissible. See "Vote Required."

VOTE REQUIRED

Under applicable corporate law, stockholder approval is not required
for the Stock Purchase. Cyberonics' Common Stock is traded on the NASDAQ
National Market System and, pursuant to Cyberonics' listing agreement with
NASDAQ, Cyberonics has agreed to be bound to certain additional stockholder vote
requirements of the National Association of Securities Dealers, Inc. ("NASD").
The NASD rules require prior stockholder approval of a transaction where a
Company is issuing stock at a price below the greater of book value or fair
market value and the number of shares to be issued equals or exceeds 20% of the
voting stock outstanding immediately prior to the issuance. The 2,181,818 shares
of Cyberonics Common Stock to be sold to St. Jude in the Stock Purchase
represents approximately 22.8% of the outstanding Cyberonics Common Stock as of
the Record Date (and represents approximately 18.6% of the outstanding
Cyberonics Common Stock after giving effect to the Stock Purchase). While the
purchase price of $5.50 per share represented a premium over the prevailing
market price at the time the Stock Purchase was negotiated, there can be no
assurance that such price will equal or exceed the fair market value of the
Cyberonics Common Stock at the time of issuance. Accordingly, while stockholder
approval may not be required, Cyberonics has nonetheless elected to seek such
approval. The approval sought for the Stock Purchase is the affirmative vote of
a majority of the shares represented at the Special Meeting and eligible to vote
on the Stock Purchase. Abstentions and broker nonvotes will be counted for
purposes of establishing a quorum but are treated as a vote "AGAINST" approval
of the Stock Purchase since they cannot be counted toward achieving the
requisite majority vote.

RECOMMENDATION OF CYBERONICS BOARD OF DIRECTORS

The Board of Directors of Cyberonics believes that the Stock Purchase
will provide needed funding to Cyberonics on terms equal to or better than such
financing could be obtained from third parties. The Board of Directors of
Cyberonics has approved the Stock Purchase and recommends that stockholders vote
"FOR" the Stock Purchase.

ACCOUNTANTS

A representative of Arthur Andersen LLP, independent accountants who
have audited Cyberonics' financial statements since Cyberonics' inception, will
be present at the Special Meeting, will be given the opportunity to make a
statement if he so desires and will be available to respond to appropriate
questions.

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<PAGE> 41
ANNEX I

AGREEMENT AND PLAN OF MERGER

DATED

APRIL 8, 1996

AMONG

ST. JUDE MEDICAL, INC.,

SJM ACQUISITION CORP.

AND

CYBERONICS, INC.
<PAGE> 42
<TABLE>
<CAPTION>
TABLE OF CONTENTS

PAGE
----
<S> <C>
ARTICLE 1 - THE MERGER...................................................................................... 1

1.1 The Merger............................................................................. 1
1.2 Conversion of Merger Subsidiary Shares................................................. 2
1.3 Conversion of CYBX Shares.............................................................. 2
1.4 Cancellation of CYBX Options........................................................... 2
1.5 Exchange of Shares..................................................................... 3
1.6 Dissenting Shares...................................................................... 3

ARTICLE 2 - CLOSING; CLOSING DATE........................................................................... 4

2.1 Closing Date and Location.............................................................. 4
2.2 Closing Date and Location.............................................................. 4
2.3 Closing Deliverables of CYBX........................................................... 4

ARTICLE 3 - REPRESENTATIONS AND WARRANTIES OF CYBX.......................................................... 5

3.1 Corporate Existence and Power.......................................................... 5
3.2 Corporate Authorization................................................................ 5
3.3 Governmental Authorization; Consents................................................... 6
3.4 Non-Contravention...................................................................... 6
3.5 Binding Effect......................................................................... 6
3.6 Capitalization......................................................................... 6
3.7 Financial Statements and SEC Filings................................................... 7
3.8 Material Events........................................................................ 8
3.9 Properties; Liens...................................................................... 10
3.10 Litigation............................................................................. 10
3.11 Taxes.................................................................................. 10
3.12 ERISA.................................................................................. 11
3.13 Compliance With Laws; Permits.......................................................... 13
3.14 Finders' Fees.......................................................................... 14
3.15 Patents, Trademarks, Trade Names, Service Marks and Copyrights......................... 14
3.16 Environmental Matters; OSHA............................................................ 15
3.17 Contracts.............................................................................. 17
3.18 Material Obligations................................................................... 18
3.19 CYBX Products; Regulation.............................................................. 18
3.20 Inventory.............................................................................. 19
3.21 Accounts and Notes Receivable.......................................................... 19
3.22 Employee Relations..................................................................... 19
</TABLE>

-i-
<PAGE> 43
<TABLE>
<CAPTION>
TABLE OF CONTENTS
(CONTINUED)

PAGE
----
<S> <C>
3.23 Insurance.............................................................................. 19
3.24 Potential Conflicts of Interest........................................................ 20
3.25 Bank Accounts.......................................................................... 20
3.26 Acquisition Proposal................................................................... 20
3.27 Full Disclosure........................................................................ 20

ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF ST. JUDE AND MERGER

SUBSIDIARY....................................................................................... 21

4.1 Corporate Existence and Power.......................................................... 21
4.2 Corporate Authorization................................................................ 21
4.3 Governmental Authorization; Consents................................................... 21
4.4 Non-Contravention...................................................................... 22
4.5 Binding Effect......................................................................... 22
4.6 Financial Statements and SEC Filings................................................... 22
4.7 Full Disclosure........................................................................ 22

ARTICLE 5 - COVENANTS OF CYBX............................................................................... 23

5.1 Conduct of CYBX........................................................................ 23
5.2 CYBX's Shareholders' Meeting; Proxy Material........................................... 25
5.3 Access to Information.................................................................. 25
5.4 Notices of Certain Events.............................................................. 26
5.5 Consents, Approvals and Filings........................................................ 26
5.6 Commercially Reasonable Efforts........................................................ 26
5.7 Exclusivity............................................................................ 26
5.8 Return of Confidential Information..................................................... 27
5.9 Further Assurances..................................................................... 27

ARTICLE 6 - COVENANTS OF ST. JUDE........................................................................... 28

6.1 Commercially Reasonable Efforts........................................................ 28
6.2 Consents, Approvals and Filings........................................................ 28
6.3 Advice of Changes...................................................................... 28
6.4 Director and Officer Liability......................................................... 28
6.5 Employee Benefit Matters............................................................... 29
</TABLE>

-ii-
<PAGE> 44
<TABLE>
<S> <C>
ARTICLE 7 - CONDITIONS TO THE MERGER........................................................................ 29

7.1 Conditions to the Obligations of CYBX.................................................. 29

ARTICLE 8 - TERMINATION..................................................................................... 30

8.1 Termination by Mutual Consent.......................................................... 30
8.2 Termination by St. Jude................................................................ 30
8.3 Termination by CYBX.................................................................... 31
8.4 Effects of Termination................................................................. 32

ARTICLE 9 - MISCELLANEOUS................................................................................... 33

9.1 Notices................................................................................ 33
9.2 Amendment and Modification............................................................. 34
9.3 Waiver of Compliance................................................................... 34
9.4 No Survival of Representations and Warranties.......................................... 34
9.5 No Third Party Rights.................................................................. 34
9.6 Confidentiality........................................................................ 35
9.7 Expenses............................................................................... 35
9.8 Assignment............................................................................. 35
9.9 Governing Laws......................................................................... 35
9.10 Counterparts........................................................................... 35
9.11 Headings and References................................................................ 35
9.12 Entire Agreement....................................................................... 35
9.13 Exchange of Documents.................................................................. 36
9.14 Publicity.............................................................................. 36
9.15 Interpretation......................................................................... 36
9.16 Further Assurance...................................................................... 36
9.17 Severability........................................................................... 36
</TABLE>

-iii-
<PAGE> 45
AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT dated April 8, 1996, among Cyberonics, Inc., a
Delaware corporation ("CYBX"), St. Jude Medical, Inc., a Minnesota corporation
("St. Jude"), and SJM Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of St. Jude ("Merger Subsidiary").

WHEREAS, the Board of Directors of CYBX has determined that it is in
the best interests of its stockholders for CYBX to be acquired by St. Jude upon
the terms and subject to the conditions set forth herein;

WHEREAS, in furtherance of such acquisition, the Boards of Directors
of St. Jude, Merger Subsidiary and CYBX have each approved the merger of Merger
Subsidiary with and into CYBX in accordance with the Delaware Business
Corporation Act ("Delaware Law") and upon the terms and subject to the
conditions set forth herein;

WHEREAS, as a result of the Merger, each outstanding share of common
stock, $.01 par value, of CYBX ("CYBX Common Stock") will be converted into the
right to receive cash in the amount determined as set forth herein; and

WHEREAS, the parties hereto intend that St. Jude shall have the
absolute right, exercisable in its sole discretion, to terminate this Agreement
without liability at any time, including after CYBX has obtained stockholder
approval hereof, for any reason (or for no reason);

The parties hereto agree as follows:

ARTICLE 1

THE MERGER

1.1 The Merger.

1.1.1 Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.1.2), Merger
Subsidiary shall be merged with and into CYBX (the "Merger") in accordance with
Delaware Law, whereupon the separate existence of Merger Subsidiary shall cease,
and CYBX shall continue as the surviving corporation (the "Surviving
Corporation") under the name of CYBX.

1.1.2 Subject to the St. Jude's right to terminate this
Agreement at any time pursuant to Section 8.2 hereof, as soon as practicable
after satisfaction of, or to the extent permitted hereunder, waiver of, all
conditions to the Merger, the parties hereto shall cause the Merger to be
consummated by filing Articles of Merger with the Secretary of State of
Delaware, in such form as required by, and executed in accordance with the
relevant provisions of, Delaware Law and the

1
<PAGE> 46
parties hereto shall make all other filings or recordings required by Delaware
Law in connection with the Merger. The Merger shall become effective at such
time as the Articles of Merger are duly filed with the Secretary of State of the
State of Delaware or such later date set forth in the Articles of Merger (the
"Effective Time").

1.1.3 At the Effective Time, (i) the separate existence
of Merger Subsidiary shall cease and Merger Subsidiary shall be merged with and
into CYBX, which shall be the Surviving Corporation; (ii) the officers of the
Surviving Corporation shall initially be the officers of Merger Subsidiary
immediately prior to the Merger; (iii) the directors of the Surviving
Corporation shall initially be the same as the directors of Merger Subsidiary
immediately prior to the Merger; (iv) the Certificate of Incorporation and
Bylaws of the Surviving Corporation shall initially be the same as the
Certificate of Incorporation and Bylaws, respectively, of Merger Subsidiary
immediately prior to the Merger; and (v) the Merger shall, from and after the
Effective Time, have all of the effects provided by applicable law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time all the property, rights, privileges, powers and franchises of the Merger
Subsidiary and CYBX shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Merger Subsidiary and CYBX shall become the debts,
liabilities and duties of the Surviving Corporation.

1.2 Conversion of Merger Subsidiary Shares. At the Effective
Time by virtue of the Merger, each share of capital stock of Merger Subsidiary
outstanding immediately prior to the Effective Time shall remain outstanding as
shares of the Surviving Corporation, which shares shall be owned by St. Jude.

1.3 Conversion of CYBX Shares.

1.3.1 Any shares of CYBX's Common Stock held in the
treasury of the CYBX, and any shares of CYBX Common Stock issued and outstanding
immediately prior to the Effective Time of the Merger which are owned by St.
Jude, Merger Subsidiary or any other entity owned by St. Jude or Merger
Subsidiary, shall be canceled and retired. No cash, securities or other
consideration shall be paid or delivered in exchange for such CYBX Common Stock
under this Agreement.

1.3.2 Except as provided herein with respect to
Dissenting Shares (as defined below in Section 1.6.1) and shares canceled
pursuant to Section 1.3.1 hereof, at the Effective Time of the Merger each share
of CYBX Common Stock outstanding shall be canceled and converted into the right
to receive cash in the amount determined by dividing $72,090,669 by the number
of shares of CYBX Common Stock outstanding immediately prior to the Effective
Time, excluding shares of CYBX Common Stock to be canceled pursuant to Section
1.3.1 hereof, but including those shares of CYBX Common Stock acquired by the
treasury of CYBX after April 1, 1996 pursuant to the exercise of CYBX stock
options (the "Merger Consideration").

1.4 Cancellation of CYBX Options. Any option, warrant or other
right to acquire any CYBX securities which are outstanding as of immediately
prior to the Effective Time will, without any action on the part of any party,
be cancelled and of no further force or effect.

2
<PAGE> 47
1.5 Exchange of Shares.

1.5.1 After the Effective Time of the Merger, each
holder of an outstanding certificate or certificates theretofore representing
shares of CYBX Common Stock ("CYBX Stock Certificates"), upon surrender thereof
to American Stock Transfer & Trust Company, or such other banking institution as
shall be designated by St. Jude, as exchange agent (the "Exchange Agent"), shall
be entitled to receive the Merger Consideration. Until so surrendered, each
outstanding CYBX Stock Certificate shall be deemed for all purposes to represent
a right to receive the Merger Consideration. Whether or not a CYBX Stock
Certificate is surrendered, from and after the Effective Time such certificate
shall under no circumstances evidence, represent or otherwise constitute any
stock or other interest whatsoever in the St. Jude, the Surviving Corporation or
any other person, firm or corporation.

1.5.2 Any funds deposited with the Exchange Agent that
remain unclaimed by the holders of shares of CYBX Common Stock twelve months
after the Effective Time shall be returned to St. Jude upon demand, and any such
holder who has not exchanged his shares of CYBX Common Stock for the Merger
Consideration prior to that time shall thereafter look only to St. Jude for his
claim for Merger Consideration. Notwithstanding the foregoing, St. Jude shall
not be liable to any holder of shares of St. Jude Common Stock for any amount
paid to a public official pursuant to applicable abandoned property laws.

1.6 Dissenting Shares.

1.6.1 Notwithstanding any provision of this Agreement
to the contrary, any shares of capital stock of CYBX held by a holder which has
demanded and perfected its right for appraisal of such shares in accordance with
Delaware Law (the "Dissenters' Rights") and who, as of the Effective Time, has
not effectively withdrawn or lost such right to appraisal ("Dissenting Shares"),
shall not be converted into or represent a right to receive the Merger
Consideration pursuant to Section 1.3, but the holder thereof shall only be
entitled to such rights as are granted by the Dissenters' Rights.

1.6.2 Notwithstanding the provisions of Section 1.6.1,
if any holder of shares of capital stock of CYBX who demands appraisal of such
shares under the Dissenters' Rights shall effectively withdraw or lose (through
failure to perfect or otherwise) its right to appraisal, then, as of the later
of the Effective Time or the occurrence of such event, such holder's shares
shall automatically be converted into and represent only the right to receive
the Merger Consideration as provided in Section 1.3.2, without interest thereon,
upon surrender of the certificate or certificates representing such shares.

1.6.3 CYBX shall give St. Jude (i) prompt written
notice of any notice of intent to demand fair value for any shares of capital
stock of CYBX, withdrawals of such notices, and any other instruments served
pursuant to the Dissenters' Rights or any other provisions of Delaware Law and
received by CYBX and (ii) the opportunity to direct and carry on all
negotiations and

3
<PAGE> 48
proceedings with respect to demands for fair value for shares of capital stock
of CYBX under the Dissenters' Rights. CYBX shall not, except with the prior
written consent of St. Jude, voluntarily make any payment with respect to any
demands for fair value for Shares of capital stock of CYBX or offer to settle or
settle any such demands other than by operation of law or pursuant to a final
order of a court of competent jurisdiction.

ARTICLE 2

CLOSING; CLOSING DATE

2.1 Closing Date and Location. Unless this Agreement shall
have been terminated and the Merger herein contemplated shall have been
abandoned pursuant to a provision of Section 8 below, a closing (the "Closing")
will be held on a date mutually acceptable to St. Jude and CYBX, but in no event
later than October 18, 1996, at the offices of CYBX's legal counsel, commencing
at 10:00 A.M. St. Jude agrees that it will give notice at least ten days prior
to the date on which it desires to close the Merger.

2.2 Closing Date and Location. At Closing, the documents
referred to in Sections 2.3 and 7 hereof will be exchanged by the parties and,
immediately thereafter, the Articles of Merger will be filed by Merger
Subsidiary and CYBX with the Secretary of State of the State of Delaware. The
date on which the Closing occurs is hereinafter referred to as the Closing Date.

2.3 Closing Deliverables of CYBX. At the Closing, CYBX will
deliver the following to St. Jude:

2.3.1 A certificate, signed by the President of CYBX,
to the effect that (i) CYBX has performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the
Effective Time; and (ii) the representations and warranties of CYBX contained in
this Agreement and in any certificate or other writing delivered by CYBX
pursuant hereto are true in all respects at and as of the Effective Time as if
made at and as of such time, except for such changes between the date of signing
and date of closing which (A) are contemplated by this Agreement or (B) have not
had, and are not reasonably expected to have, in the aggregate, a Material
Adverse Effect.

2.3.2 A Certificate of Good Standing relating to CYBX
from the Secretary of State of Delaware, a Certificate of Qualification of CYBX
to do business in the State of Texas as a foreign corporation, and copies of
resolutions of CYBX's Board of Directors authorizing this Agreement, as
certified by the Secretary of CYBX.

2.3.3 Executed originals of any and all consents,
approvals, waivers and/or acknowledgments required under any agreement
identified in Section 3.17.2 of the Disclosure Schedule, in order to permit the
consummation of the transactions provided for herein without

4
<PAGE> 49
causing or resulting in a default, event of default, acceleration event or
termination event under any of such documents and without entitling any party to
any of such documents to exercise any other right or remedy adverse to the
interests of St. Jude thereunder. Each such consent, approval and/or waiver
shall be in form satisfactory to counsel for St. Jude.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES OF CYBX

CYBX represents and warrants to St. Jude that, except as set forth in
the schedule of exceptions to representations and warranties attached hereto as
Schedule 3 (the "Disclosure Schedule"):

3.1 Corporate Existence and Power.

3.1.1 Each of CYBX and its subsidiary, referenced in
Section 3.1 of the Disclosure Schedule, is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, and has all corporate powers required to carry on its business as
now conducted. Each of CYBX and its subsidiary is duly qualified to do business
as a foreign corporation and is in good standing in each jurisdiction where the
character of the property owned or leased by it or the nature of its activities
makes such qualification necessary, except for those jurisdictions where the
failure to be so qualified would not, individually or in the aggregate, have a
Material Adverse Effect. CYBX has heretofore delivered to St. Jude true and
complete copies of CYBX's and its subsidiary's Certificate of Incorporation and
Bylaws, as currently in effect. CYBX has one subsidiary and, except with respect
to such subsidiary, does not, directly or indirectly, own or have the power to
vote, or to exercise a controlling influence with respect to, any securities of
any class of any person, the holders of which class are entitled to vote for the
election of directors (or persons serving similar functions) of such person.

3.1.2 For purposes of this Agreement, a "Material
Adverse Effect," when used with respect to CYBX shall mean a material adverse
change in the financial condition, business, assets, liabilities,
capitalization, financial position compared to the financial statements as of
December 31, 1995, operations or results of operations of CYBX and its
subsidiary taken as a whole in excess of $100,000 or any event which could, so
far as can reasonably be foreseen, have such an effect; provided, however, that
CYBX's continuing losses from operations (and resulting impact on CYBX's balance
sheet) consistent with CYBX's results of operations for the fiscal quarter ended
December 31, 1995, shall not constitute a Material Adverse Effect.

3.2 Corporate Authorization. CYBX has full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by CYBX's Board of Directors and no other corporate
proceedings

5
<PAGE> 50
on the part of CYBX are necessary to authorize the execution and delivery of
this Agreement or to consummate the transactions so contemplated (subject to the
approval and adoption of this Agreement and the transactions contemplated hereby
by the Shareholders of CYBX required in accordance with Delaware Law and the
Certificate of Incorporation and Bylaws of CYBX).

3.3 Governmental Authorization; Consents. The execution,
delivery and performance by CYBX of this Agreement and the consummation of the
Merger by CYBX require no action by or in respect of, or filing with, any
governmental body, agency, official or authority other than (i) the filing of
Articles of Merger in accordance with Delaware Law; (ii) compliance with any
applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (the "HSR Act"); (iii) compliance with any applicable requirements of the
Securities Act of 1933 (the "1933 Act") and the Securities Exchange Act of 1934
(the "1934 Act"); (iv) compliance with the rules and regulations of the NASDAQ
National Market System; (v) compliance with any applicable state securities
laws; and (vi) any action or filing, the failure to obtain or make would not,
individually or in the aggregate, have a Material Adverse Effect.

3.4 Non-Contravention. The execution, delivery and performance
by CYBX of this Agreement and the consummation by CYBX of the transactions
contemplated hereby do not and will not (i) contravene or constitute a default
under or give rise to a right of termination, cancellation or acceleration of
any right or obligation of CYBX or to a loss of any benefit to which CYBX is
entitled under (A) any provision of applicable law or regulation (assuming
compliance with the matters referred to in Section 3.3.1); (B) the Certificate
of Incorporation or Bylaws of CYBX; (C) any material agreement, contract, plan,
lease, arrangement or commitment; or (D) any judgment, injunction, order,
decree, administrative interpretation, award or other instrument binding upon
CYBX, or (ii) result in the creation or imposition of any Lien on any asset of
CYBX. For purposes of this Agreement, "Lien" means, with respect to any asset,
any mortgage, lien, pledge, charge, security interest, restriction on transfer
or encumbrance of any kind in respect of such asset, provided, however, "Lien"
does not include (i) statutory liens not delinquent or the validity of which is
being contested in good faith by appropriate proceedings; and(ii) liens for
taxes not yet delinquent or the validity of which is being contested in good
faith by appropriate proceedings.

3.5 Binding Effect. This Agreement constitutes a legal, valid
and binding agreement of CYBX enforceable against CYBX in accordance with its
terms, except to the extent that the enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization or other similar laws
affecting the enforcement of creditors' rights generally and by principles of
equity regarding the availability of remedies.

3.6 Capitalization. The authorized capital stock of CYBX
consists of 25,000,000 shares of CYBX Common Stock and 2,500,000 shares of CYBX
preferred stock, $.01 par value, ("CYBX Preferred Stock"). As of March 31, 1996
(i) 9,509,345 shares of CYBX Common Stock were outstanding, (ii) -0- shares of
CYBX Preferred Stock were outstanding, (iii) stock options and warrants to
purchase an aggregate of 831,322 Shares were outstanding, and (iv) no shares of
CYBX Common Stock or CYBX Preferred Stock were held in treasury. All outstanding
shares of capital

6
<PAGE> 51
stock of CYBX have been duly authorized and validly issued and are fully paid
and nonassessable. Except for the 1988 Incentive Stock Plan and the 1991
Employee Stock Purchase Plan (collectively the "Stock Option Plans"), there are
no plans, agreements or other arrangements pursuant to which any options,
warrants or other rights to acquire Shares from CYBX are outstanding. True and
complete copies of the Stock Option Plans have been delivered to St. Jude. All
outstanding options and warrants will expire at the Effective Time if not
previously exercised. Except as set forth in this Section and except for stock
options issued or issuable subsequent to January 31, 1995, pursuant to the Stock
Option Plans, there are outstanding (i) no shares of capital stock or other
voting securities of CYBX, (ii) no securities of CYBX convertible into or
exchangeable for shares of capital stock or voting securities of CYBX, and (iii)
no options or other rights to acquire from CYBX, and no obligation of CYBX to
issue, any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of CYBX (collectively "CYBX
Securities"). There are no outstanding obligations of CYBX to repurchase, redeem
or otherwise acquire any CYBX Securities.

3.7 Financial Statements and SEC Filings. CYBX has delivered
to St. Jude true and complete copies of (i) its annual reports on Form 10-K for
its fiscal years ended June 30, 1993, 1994 and 1995, (ii) its quarterly reports
on Form 10-Q for its fiscal quarters commencing March 31, 1993, (iii) its proxy
or information statements relating to all meetings of, or actions taken without
a meeting by, the shareholders of CYBX held since March 1, 1993, and (iv) its
registration statement filed with the Securities and Exchange Commission (the
"SEC") on Form S-1 which became effective in 1993. The reports and statements so
delivered are referred to collectively in this Agreement as the "SEC Filings."
As of their respective dates, the SEC Filings (including all exhibits and
schedules thereto and documents incorporated by reference therein) did not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading. CYBX has delivered to St. Jude's
counsel copies of all statements on Schedule 13D and Schedule 13G known to CYBX
which had been filed with the SEC with respect to capital stock of CYBX pursuant
to the Securities Exchange Act of 1934. Without limiting the generality of the
foregoing, St. Jude has delivered to CYBX its audited financial statements
included within the SEC Filings for fiscal years ended June 30, 1993, 1994 and
1995, its most recently completed fiscal years (the "Audited Financial
Statements") and all interim quarterly financial statements for fiscal year to
date 1996 (the "Interim Financial Statements") (collectively, the "Financial
Statements"). The audited financial statements and unaudited interim financial
statements of CYBX included or incorporated by reference in the SEC Filings (i)
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto); (ii) complied as of their respective dates in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto; and (iii) fairly present
the financial position of CYBX as of the dates thereof and the income and cash
flows for the periods then ended (subject, in the case of any unaudited interim
financial statements, to normal year-end adjustments).

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3.8 Material Events. Except as set forth in the Financial
Statements, after June 30, 1995, there has not been:

3.8.1 Any discharge or satisfaction of any Lien,
charge or encumbrance other than those then required to be discharged or
satisfied, or paid any obligation or liability, absolute, accrued, contingent or
otherwise, whether due or to become due, other than current liabilities shown on
the Financial Statements and current liabilities incurred since June 30, 1995,
in the ordinary course of business and consistent with its prior practice.

3.8.2 Any declaration, setting aside or payment of any
dividend or other distribution with respect to any shares of capital stock of
CYBX, or any repurchase, redemption or other acquisition by CYBX of any
outstanding shares of capital stock or other ownership interests in or other
securities of CYBX.

3.8.3 Any alteration in any material term of any
outstanding security of CYBX.

3.8.4 Any damage, destruction or other casualty loss
(whether or not covered by insurance) affecting the business or assets of CYBX
which, in the aggregate, has resulted in or might reasonably be expected to
result in a Material Adverse Effect.

3.8.5 Any change in any method of accounting or
accounting practice by CYBX, except for any such change required by reason of a
concurrent change in generally accepted accounting principles.

3.8.6 Any labor dispute, other than routine individual
grievances, or, to CYBX's knowledge, any activity or proceeding by a labor union
or representative thereof to organize any employees of CYBX or any lockouts,
strikes, slowdowns, work stoppages or, to CYBX's knowledge, threats thereof by
or with respect to such employees. For purposes of this Agreement, "knowledge"
of a party means, unless otherwise specifically qualified in the Agreement, the
actual knowledge of the officers and directors of that party, as such knowledge
has been obtained in the normal conduct of the business, and also includes such
knowledge as a reasonably prudent officer would have obtained upon the exercise
of reasonable diligence under the same or similar circumstances; "known" or
"aware" shall have a correlative meaning.

3.8.7 Any transaction or commitment made by CYBX
relating to its assets or business (including the acquisition or disposition of
any assets), or any relinquishment of any contract or other right material to
CYBX taken as a whole, other than transactions and commitments in the ordinary
course of business, those contemplated by this Agreement or those constituting
an Acquisition Proposal (as defined in Section 5.7).

3.8.8 Any (i) incurrence, assumption or guarantee by
CYBX of any indebtedness other than in the ordinary course of business in
amounts and on terms consistent with past practices, (ii) issuance or sale of
any securities convertible into or exchangeable for debt securities of CYBX,

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or (iii) issuance or sale of options or other rights to acquire from CYBX,
directly or indirectly, debt securities of CYBX or any securities convertible
into or exchangeable for any such debt securities.

3.8.9 Any creation or assumption of any Lien by CYBX
on any asset of CYBX.

3.8.10 Any grant of any severance or termination pay
to, any entering into of any employment, deferred compensation or other similar
agreement with, or any increase in benefits payable under any existing severance
or termination pay policies or employment agreements, or any increase in
compensation, bonus or other benefits payable to any current or former
shareholder, officer, director, salesperson, distributor, agent or employee of
CYBX, other than any grants or increases in the ordinary course of business
consistent with past practice.

3.8.11 Any acceleration of vesting provisions of
outstanding options and shares granted under CYBX's Stock Option Plans, except
pursuant to the terms of such outstanding options and plans.

3.8.12 Any mortgage, pledge or grant of a Lien, charge,
security interest or any other encumbrance or restriction any of its property,
business or assets, tangible or intangible otherwise than in the ordinary course
of business.

3.8.13 Any sale, transfer, lease to others or other
disposition of any assets of CYBX, except for inventory sold in the ordinary
course of business, or canceled or compromised any debt or claim, or waived or
released any right.

3.8.14 Any notice or threat of termination of any
material contract (including without limitation, any distributorship agreement),
lease or other agreement.

3.8.15 Any transfer or grant of any rights under, or
entered into any settlement regarding the breach or infringement of, any United
States or foreign license, patent, copyright, trademark, trade name, invention
or similar rights, or modified any existing rights with respect thereto.

3.8.16 Any material increase or decrease in the quantity
of items of inventory not consistent with its prior practice and prudent
business practices prevailing in the industry, or any purchase commitment in
excess of the normal, ordinary and usual requirements of CYBX's business, or any
change in CYBX's selling, pricing or advertising practices inconsistent with its
prior practice.

3.8.17 Any agreement or any commitment to take any of
the types of action described in subparagraphs 3.8.1 through 3.8.17 above.

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3.9 Properties; Liens. Except for those assets addressed in
Section 3.15, CYBX has good title to all of its assets material to the business,
results of operation, financial condition or prospects of CYBX, subject, in each
case, only to (i) statutory liens not delinquent or the validity of which is
being contested in good faith by appropriate proceedings; (ii) liens disclosed
or reflected in the Financial Statements; (iii) liens for taxes not yet
delinquent or the validity of which is being contested in good faith by
appropriate proceedings; and (iv) liens and imperfections of title and
encumbrances, if any, which, individually or in the aggregate, do not have a
Material Adverse Effect. Section 3.9 of the Disclosure Schedule sets forth a
summary description of all real property (including warehouses) leased by CYBX
together with any encumbrances on CYBX's interest. Such leases, subleases and
other agreements are in full force and effect and CYBX is not in default
thereunder and has received no notice of default thereunder. To the knowledge of
CYBX, no other party thereto is in default thereunder. CYBX does not own any
real property or buildings or structures located on real property. The real
estate interests of CYBX are not subject to any Lien or other encumbrance, and
CYBX enjoys a right of quiet possession as against any Lien or other encumbrance
on the property. To CYBX's knowledge, all buildings and other structures leased
by CYBX are (i) in good operating condition and repair, normal wear and tear
excepted and (ii) adequate for the uses to which they are being put. CYBX has
not received any notice nor has any knowledge of any pending, threatened or
contemplated condemnation proceeding affecting the real property leased by CYBX
or any part thereof or of any sale or other disposition of such real property or
any part thereof in lieu of condemnation.

3.10 Litigation. There is no action, suit, proceeding or, to the
knowledge of CYBX any investigation pending against, or, to the knowledge of
CYBX, threatened against or affecting, CYBX or any of its respective properties
before any court or arbitrator or any governmental body, agency or official.
None of the actions, suits, claims, proceedings or investigations set forth in
Section 3.10 of the Disclosure Schedule (except as specifically stated thereon),
individually or together with any other, will have a Material Adverse Effect or
will result in any order, judgment, injunction, award or decree of any court,
governmental or regulatory body or arbitration tribunal that is not adequately
reserved against on the Financial Statements. The matters set forth in Section
3.10 of the Disclosure Schedule include all trademark infringement or other
intellectual property claims, and all product liability claims or claims related
to products made, sold or purportedly sold by CYBX, against or involving CYBX
and any products or product lines CYBX sells. CYBX does not act as a distributor
or manufacturer's representative. All such product liability claims currently
pending or, to CYBX's knowledge, threatened against CYBX are fully covered by
insurance.

3.11 Taxes. Except as set forth in paragraph (a) of Schedule
3.11, the statute of limitations for the assessment of federal income taxes has
expired for all federal income tax returns of CYBX or its predecessor through
the fiscal year ended June 30, 1991. Through the date hereof, CYBX has never
been audited by any tax authority. (a) CYBX has filed all returns for Taxes, as
defined below, that it is required to file through the date hereof, and shall,
on or before the Effective Time, prepare and file, in a manner consistent with
prior years, all returns for Taxes that it is required to file on or before the
Effective Time. (b) Each of the federal, state, and local income tax returns
heretofore filed by CYBX is true and correct in all material respects. (c) CYBX
has timely paid or made provision

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for all Taxes that have been shown as due and payable on the returns that have
been filed. (d) The charges, accruals and reserves for taxes reflected on the
books of CYBX are adequate to cover the Tax liabilities accruing or payable by
CYBX in respect of periods covered by such books. (e) CYBX is not delinquent in
the payment of any Taxes, nor has CYBX requested any extension of time within
which to file or send any return, which return has not since been filed or sent.
(f) No deficiency for any Taxes has been proposed, asserted or assessed in
writing against CYBX and CYBX does not know of any other unassessed Tax
deficiency threatened or proposed against CYBX. (g) CYBX has not been granted
any extension of the limitation period applicable to any Tax claims. (h) CYBX is
not, nor has CYBX been, a party to any tax sharing agreement with any
corporation. (i) Section 3.11 of the Disclosure Schedule sets forth all federal
tax elections under the Internal Revenue Code of 1986, as amended (the "Code")
that are or will be in effect with respect to any tax year of CYBX, including
without limitation the tax year ended June 30, 1994, and ending at the Effective
Time. "Tax" means with respect to any person (i) any net income, gross income,
gross receipts, sales, use, ad valorem, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property or windfall profit tax, custom duty or other tax, governmental fee, or
other like assessment or charge of any kind whatsoever, together with any
interest and any penalty, addition to tax or additional amount imposed by any
taxing authority (domestic or foreign) on such person and (ii) any liability of
CYBX for the payment of any amount of the type described in the immediately
preceding clause (i) as a result of being a member of an affiliated or combined
group, or as a result of any spin off, distribution or other reorganization
related to the disposition of any assets or business of CYBX. CYBX has not, for
the 5-year period preceding the Effective Time, been a United States real
property holding corporation within the meaning of Section 897(c)(2) of the
Code. CYBX will deliver to St. Jude at the time of Closing a properly executed
FIRPTA exemption certificate which meets the requirements of Section 1.1445-2 of
the Treasury Regulations.

3.12 ERISA.

3.12.1 Section 3.12 of the Disclosure Schedule sets
forth a list identifying each "employee benefit plan", as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), which is
or was subject to any provision of ERISA and with respect to which CYBX or any
affiliate (as defined below) has any direct or indirect, fixed or contingent
liability as of the Effective Time. Copies of such plans (and, if applicable,
related trust agreements or insurance contracts) and all written amendments
thereto, summary plan descriptions thereof and any material written employee
communications with respect to them have been furnished to St. Jude, together
with the three most recent annual reports (Form 5500 including, if applicable,
Schedule B thereto) and any annual accounting of plan assets prepared in
connection with any such plan. Such plans are hereinafter referred to
collectively as the "Employee Plans". For purposes of this Section, "affiliate"
of any person means any other person which, together with CYBX, is treated as a
single employer under Section 414 of the Code. The only Employee Plans which,
individually or collectively, would constitute an "employee pension benefit
plan" as defined in Section 3(2) of ERISA (the "Pension Plans") are identified
as such in Section 3.12 of the Disclosure Schedule. Neither CYBX nor any
affiliate has terminated or caused to be terminated in whole or in part or
merged any Employee Plan during the period since September 30, 1990. CYBX has
provided St. Jude with complete age, salary,

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service and related data as of November 9, 1995, for employees and former
employees of CYBX and any affiliate covered as of the Effective Time under the
Pension Plans.

3.12.2 No Employee Plan constitutes a "multi-employer
plan," as defined in Section 3(37) of ERISA (a "Multi-employer Plan"); with
respect to insurance arrangements, there are no reserves, assets, surpluses or
prepaid premiums; and no Employee Plan is subject to Title IV of ERISA. Neither
CYBX nor, to the knowledge of CYBX, any disqualified person, as defined in
Section 4975 of the Code, has engaged in any "prohibited transaction", as
defined in Section 406 of ERISA or Section 4975 of the Code, with respect to any
Employee Plan which is covered by Title I of ERISA, excluding transactions
effected pursuant to a statutory or administrative exemption.

3.12.3 Each Employee Plan which is intended to be
qualified under Section 401(a) of the Code is or was the subject of a favorable
Internal Revenue Service determination with respect to such qualification, and
CYBX has furnished to St. Jude copies of the most recent such determination
letters, and nothing has occurred since the date thereof that would have an
adverse effect on such qualification. There are no accrued liabilities under any
Employee Plan which have not been fully provided for by contributions to such
Employee Plans or which are not provided for on the Financial Statements. Each
Employee Plan has been maintained in substantial compliance with its terms and
with the requirements prescribed by any and all statutes, orders, rules and
regulations, including but not limited to ERISA and the Code, which are
applicable to such Employee Plans, including without limitation those
requirements necessary to maintain its qualification and the continuation of
coverage requirements of Code Section 4980B. Other than for claims in the
ordinary course for benefits under the Employee Plans, there are no suits,
actions, claims or proceedings pending or, to the knowledge of CYBX, threatened
which would result in any liability with respect to any such Employee Plan.

3.12.4 There is no contract, agreement, plan or
arrangement covering any employee or former employee of CYBX or any affiliate
that, individually or collectively, could give rise to the payment of any amount
that would not be deductible pursuant to the terms of Section 280G or Section
162(m) of the Code.

3.12.5 Section 3.12 of the Disclosure Schedule sets
forth a list of each material employment, severance or other similar contract,
arrangement or policy and each plan or arrangement (written or oral) providing
for insurance coverage (including any self-insured arrangements), workers'
compensation, disability benefits, supplemental unemployment benefits, vacation
benefits, retirement benefits or for deferred compensation, profit-sharing,
bonuses, stock options, stock appreciation or other forms of incentive
compensation or post-retirement insurance, compensation or benefits in effect at
the Effective Time which (i) is not an Employee Plan (as defined in Section
3.12.1), (ii) is entered into, maintained or contributed to, as the case may be,
by CYBX or any of its subsidiaries and (iii) covers any employee or former
employee of CYBX or any of its affiliates (as defined in Section 3.12.1). Such
contracts, plans and arrangements as are described above, copies or descriptions
of all of which have been furnished previously to St. Jude are hereinafter
referred to collectively as the "Benefit Arrangements." Each Benefit Arrangement
has been maintained in substantial compliance

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with its terms and with the requirements prescribed by any and all statutes,
orders, rules and regulations which are applicable to such Benefit Arrangement.
CYBX has no liability with respect to post-retirement medical or death benefits
for retired employees other than coverage mandated by law or death benefits
under any Pension Plan.

3.12.6 There has been no amendment to, written
interpretation or announcement (whether or not written) by CYBX or any of its
affiliates relating to, or change in employee participation or coverage under,
any Employee Plan or Benefit Arrangement which would increase the expense
(whether or not such expense is recognized under generally accepted accounting
principles) of maintaining such Employee Plan or Benefit Arrangement above the
level of the expense incurred in respect thereof for the fiscal year ended on
June 30, 1995.

3.12.7 With respect to any Employee Plan or Benefit
Arrangement, no event has occurred, and there exists no condition or set of
circumstances in connection with which CYBX or any such plan, directly or
indirectly, could reasonably be expected to be subject to any liability under
ERISA, the Code or any other law, regulation or governmental order. With respect
to each Employee Plan and Benefit Arrangement: (i) CYBX has made all payments
due from it to date or has established a reasonable reserve therefore and all
amounts properly accrued to date as liabilities of CYBX which have not been paid
have been properly recorded on the books of CYBX (including without limitation
the Financial Statements); (ii) no Pension Plan which is subject to ERISA
section 302 or Code section 412 has incurred any "accumulated funding
deficiency" (as defined in either such section), whether or not waived; and
(iii) to the St. Jude's knowledge, there are no unfunded benefit obligations
that are not subject to United States law which are not accounted for by
reserves shown on the Financial Statements and established under generally
accepted accounting principles or otherwise noted on such Financial Statements.

3.12.8 The consummation of the transactions contemplated
by this Agreement will not (i) entitle any current or former employee of CYBX or
any affiliate to severance pay, supplementary unemployment compensation or any
similar payment, (ii) accelerate the time of payment or vesting, or increase the
amount, of any compensation due to any such employee or former employee, or
(iii) constitute or involve a prohibited transaction (as defined in ERISA
section 406 or Code section 4975) that is not otherwise covered by a statutory
or administrative exemption.

3.13 Compliance With Laws; Permits. Except for violations which
do not and will not have individually or in the aggregate a Material Adverse
Effect, CYBX (i) is not in violation of any applicable provision of any law,
statute, ordinance or regulation and (ii) would not, to the knowledge of CYBX,
be in violation of any provision of any law, statute, ordinance or regulation
that has been enacted or adopted but is not yet effective if it were effective
at the date hereof. CYBX has not made any illegal payment to any officer or
employee of any governmental or regulatory body, or made any payment to any
customer for the illegal sharing of fees or to any customer or supplier for
illegal rebating of charges, or engaged in any other illegal reciprocal
practices, or made any illegal payment or given any other illegal consideration
to any purchasing agent or other representative of customers in respect of sales
made or to be made by CYBX. CYBX has all licenses, permits, orders and

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approvals of any federal, state, local or foreign governmental or regulatory
body (collectively, "Permits") that are material to or necessary for the conduct
of the business of CYBX, except where the failure to hold any such Permit would
not result in or be reasonably expected to result in a Material Adverse Effect;
such Permits are in full force and effect; no violations are or have been
recorded in respect of any Permit; and no proceeding is pending or, to the
knowledge of CYBX, threatened to revoke or limit any Permit. Section 3.13 of the
Disclosure Schedule lists all of CYBX's Permits.

3.14 Finders' Fees. There is no investment banker, broker,
finder or other intermediary which has been retained by or is authorized to act
on behalf of, CYBX who might be entitled to any fee or commission from CYBX or
St. Jude or any of its affiliates upon consummation of the transactions
contemplated by this Agreement.

3.15 Patents, Trademarks, Trade Names, Service Marks and
Copyrights.

3.15.1 Section 3.15 of the Disclosure Schedule lists all
trademarks, patents, copyrights, service marks, applications therefor, logos,
trade names and CYBX developed computer software and firmware (collectively the
"Proprietary Rights") owned by CYBX, specifying as to each, as applicable (i)
the nature of such Proprietary Right; (ii) the owner of such Proprietary Right;
(iii) the jurisdiction by or in which such Proprietary Right has been issued or
registered or in which an application for such issuance or registration has been
filed, including the respective registration or application number; and (iv)
licenses, sublicenses or other agreements as to which CYBX is a party pursuant
to which any person is authorized to use such Proprietary Right, including the
identity of all parties thereto. CYBX has previously furnished or made available
to St. Jude, copies of all such licenses, sublicenses or other agreements.
Section 3.15 of the Disclosure Schedule sets forth all material licenses held by
CYBX other than off-the-shelf software licenses. Subject to the rights of third
parties under contracts listed on Section 3.17 of the Disclosure Schedule, or
Section 3.15 of the Disclosure Schedule, all trade secrets (if any) of CYBX
("Proprietary Information") have been developed independently by CYBX, or on
behalf of CYBX by independent contractors, under circumstances and arrangements
which vest in CYBX the exclusive and unencumbered rights to such proprietary
information (subject only to such rights as a third party may have due to its
independent development of such information or obtaining such information in a
manner which does not constitute or involve an act of misappropriation). To the
knowledge of CYBX, the research, development and manufacture of products of CYBX
do not constitute or involve the misappropriation of trade secrets of any third
party. CYBX's rights, title and interest in and to the Proprietary Rights and
Proprietary Information are free and clear of all encumbrance, Liens and rights
of third parties. To CYBX's knowledge, there are no other parties infringing the
Proprietary Rights. CYBX has not granted, conveyed, licensed or assigned any
rights in the Proprietary Rights or Proprietary Information to any third party.

3.15.2 All trademarks, copyrights and U.S. patents
included in the Proprietary Rights are believed to be valid and enforceable, to
CYBX's knowledge. CYBX is not aware of any material fact which would result in
any of the Proprietary Rights being declared invalid or unenforceable.

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3.15.3 None of the features, components, configurations,
uses or operations (whether developed or under development) of CYBX's products
or processes are, to the knowledge of CYBX, believed to infringe, nor has any
claim been made that they may infringe, the intellectual property rights of any
other party. CYBX has not been sued or charged in writing with, or been a
defendant in any claim, suit, action or proceeding relating to CYBX's assets or
business which has not been finally determined prior to the date hereof and
which involves a claim of infringement of any patents, trademarks, service marks
or copyrights, or claim of unfair competition.

3.15.4 None of the Proprietary Rights or Proprietary
Information are subject to any outstanding order, judgment, decree, stipulation
or agreement restricting the use thereof by CYBX or restricting the licensing
thereof by CYBX to any person.

3.15.5 CYBX has not entered into any agreement to
indemnify any person against any charge of infringement of any patent,
trademark, service mark or copyright.

3.15.6 CYBX has established reasonable safeguards to
maintain the secrecy of all the Proprietary Information. To the knowledge of
CYBX, CYBX has executed agreements respecting the non-disclosure of Proprietary
Information, and the assignment of inventions with each of its employees,
excluding clerical, janitorial and similar employees. To the knowledge of CYBX,
the information which CYBX believes is Proprietary Information has not been
disclosed by CYBX or any of its employees or affiliates to any person, entity or
governmental agencies other than to employees, representatives or agencies of
CYBX and certain governmental agencies except pursuant to confidentiality
agreements, protective orders or non-disclosure rules or policies adopted by
governmental agencies (as appropriate).

3.16 Environmental Matters; OSHA.

3.16.1 The following terms used in this section are
defined as follows:

(a) "Environmental Laws" is defined as any and
all federal, state and local laws, regulations, ordinances, codes,
orders or decrees of any government agency, entity, organization or
authority, or of any jurisdiction where CYBX is located or conducts
business pertaining to the pollution of or protection of the
environment, including but not limited to those related to the air,
water, noise, odor, pesticide, land, soil, hazardous or toxic
substances and wastes and specifically including the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as
amended by Superfund Amendments and Re-authorization Act of 1986
("SARA"), 42 U.S.C. Section9601 et seq., the Resource Conservation
and Recovery Act as amended ("RCRA"), 42 U.S.C. Section6901 et seq.,
the Federal Water Pollution Control Act, 33 U.S.C. Section1251 et
seq., the Toxic Substances Control Act ("TSCA"), 15 U.S.C.
Section2601 et seq, and the Emergency Planning and Community Right to
Know Act, 42 U.S.C. Section11001 et seq.

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(b) "Regulated Substances" is defined as toxic,
radioactive or hazardous substances or wastes, pollutants or
contaminants, including but not limited to asbestos, urea
formaldehyde; the group of organic compounds known as polychlorinated
biphenyls; petroleum products including gasoline, fuel oil, crude oil
and the various constituents of such products; and any substance or
material the generation, storage, handling, release or disposal of
which is regulated by any Environmental Law.

(c) "Property" is defined as all real estate and
property now owned, leased or used by CYBX and any real estate and
property that has been previously owned, leased or used by CYBX.

3.16.2 CYBX is and at all times has been in material
compliance with any and all applicable Environmental Laws.

3.16.3 CYBX has all governmental licenses, permits and
other authorizations required by any and all Environmental Laws necessary to
conduct and operate the business of CYBX as currently conducted or operated,
except where the failure to hold such licenses, permits or authorizations would
not, individually or in the aggregate, have a Material Adverse Effect.

3.16.4 The Property is not presently utilized by CYBX,
and has not in the past been utilized by CYBX, for the generation, storage,
handling, transportation or disposal of any Regulated Substance and, to CYBX's
knowledge, the Property has not been used by prior owners, lessees or operators
or others for the generation, storage, handling, transportation or disposal of
any Regulated Substance.

3.16.5 CYBX has not caused any release or threatened
release of any Regulated Substance on the Property and, to CYBX's knowledge, the
Property has not been subject to any release or threatened release of any
Regulated Substance and it does not otherwise contain any condition which may
result in a claim, right of action or recovery by any person or entity under any
Environmental Laws.

3.16.6 CYBX has not transported for disposal or
treatment, arranged for transportation for disposal or treatment or disposed of
any Regulated Substances at any site where, to CYBX's knowledge, there has been
a release or threatened release of Regulated Substances or in a manner which
could, to CYBX's knowledge, create liability to any party under any
Environmental Law. CYBX has not received nor does it have knowledge of any
notice, request for response action, administrative or other order, judgment,
complaint, claim, investigation, request for information or any other request
for relief whatsoever relating to any site where a Regulated Substance, came to
be disposed of, placed or located, which was generated, transported for disposal
or treatment or arranged for transportation by CYBX.

3.16.7 CYBX has not installed and, to CYBX's knowledge,
there are, and have been, no above-ground or underground storage tanks located
on the Property.

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3.16.8 CYBX is not operating its business in material
violation of the Occupational Safety and Health Act of 1970, or the regulations
promulgated thereunder or any similar laws or regulations of any other country.
CYBX is not, nor will it become, liable for any retroactive workers'
compensation insurance premiums relating to the period of time prior to the date
of this Agreement in excess of the reserves shown on its Financial Statements.

3.17 Contracts.

3.17.1 Section 3.17.1 of the Disclosure Schedule sets
forth all of the following contracts and other agreements to which CYBX is a
party or by which CYBX or its assets or properties are bound or subject: (i)
customer contracts and agreements for the sale by CYBX of materials or products
which by their terms exceed one year or under which the executory portion
involves dollar amounts in excess of $25,000; (ii) supply contracts,
distributorship agreements and manufacturer's representative agreements which
are material to CYBX and its subsidiary taken as a whole; (iii) research and
development agreements; (iv) employment, consulting, independent contractor,
severance and indemnification agreements, arrangements or understandings, and
any other agreements, arrangements or understandings, between CYBX and any
current or former stockholder, officer, director, employee, consultant, agent or
other representative; (v) contracts and other agreements with any labor union or
association representing any employee of CYBX; (vi) joint venture agreements;
(vii) contracts or other agreements under which CYBX agrees to indemnify any
party or to share tax liability of any party; (viii) contracts and other
agreements relating to the borrowing of money; (ix) any equipment leases
requiring payment by CYBX of at least $25,000 within a given year which are not
cancelable without penalty upon 90 days notice; or (x) any other material
contract not required to be disclosed by any other section of this Agreement,
whether or not made in the ordinary course of business. There have been
delivered or made available to St. Jude true and complete copies of all such
contracts and other agreements set forth in Section 3.17 of the Disclosure
Schedule. All of such contracts and other agreements are in full force and
effect and CYBX is not in default under any of them, nor, to the knowledge of
CYBX, is any other party to any such contract or other agreement in default
thereunder, nor does any condition exist that with notice or lapse of time or
both would constitute a default thereunder, except for any such defaults that
would not, individually or in the aggregate, have a Material Adverse Effect.
Other than products provided in connection with clinical trials, CYBX is not a
party to any material contract to sell products or to provide services to third
parties which is to be performed at a price which is less than CYBX's full cost.
The relationships of CYBX with its suppliers, distributors, customers,
licensors, licensees and researchers are good commercial working relationships.
No customer or supplier has canceled or otherwise terminated its relationship
with CYBX during the last twelve months, except for such cancellations or
terminations which would not, individually or in the aggregate, have a Material
Adverse Effect.

3.17.2 Section 3.17.2 of the Disclosure Schedule
identifies those contracts and agreements to which CYBX (or its subsidiary) is a
party which (i) require the consent of the other party in order that such
contracts or agreements continue in full force and effect following the

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consummation of the transactions contemplated by this Agreement and (ii) the
termination or discontinuation of which would have a Material Adverse Effect.

3.18 Material Obligations. CYBX does not have any material
liabilities or obligations, absolute or contingent (individually or in the
aggregate) except (i) the liabilities and obligations set forth in the Financial
Statements; (ii) liabilities and obligations which have been incurred subsequent
to June 30, 1995, in the ordinary course of business which are usual and normal
in amount, both individually and in the aggregate; and (iii) liabilities and
obligations under a lease for its principal offices and leases for equipment,
and liabilities and obligations under sales, procurement and other contracts and
arrangements entered into in the ordinary course of business.

3.19 CYBX Products; Regulation.

3.19.1 There are no statements, citations, warning
letters, FDA Forms 483, or decisions by any governmental or regulatory body that
any product produced, manufactured, marketed or distributed at any time by CYBX
("CYBX Product") is defective or fails to meet any applicable standards
promulgated by any such governmental or regulatory body. There have been no
recalls ordered by any such governmental or regulatory body with respect to any
CYBX Product. To the knowledge of CYBX, there is (i) no fact relating to any
CYBX Product that may give rise to a recall of any CYBX Product or a duty to
warn of a defect in any CYBX Product; and (ii) no latent or overt design,
manufacturing or other defect in any CYBX Product.

3.19.2 All CYBX Products used, marketed or distributed
by CYBX in clinical investigations are subject to all applicable licenses,
registrations, approvals, clearances, and authorizations required by local,
state, and federal agencies, foreign or domestic, regulating the safety,
effectiveness, and market clearance of medical devices, which licenses,
registrations, approval, clearances and authorizations are held by CYBX and were
obtained by CYBX on or before the date when same were required. Those licenses,
registrations, approvals, clearances, and authorizations will not be affected or
impaired by the Merger. Section 3.19.2 to the Disclosure Schedule lists all such
licenses, registrations, approvals, clearances and authorizations obtained or
held by CYBX in its own name.

3.19.3 CYBX is in possession of all supportive materials
and data substantiating representations made to the FDA in its material filings
therewith, including any and all testing data in the possession or under the
control of CYBX, whether or not submitted to the FDA. CYBX further represents
and warrants that CYBX Products perform in compliance with the representations
and performance specifications as contained in said filings.

3.19.4 There is no proceeding by the FDA or any other
governmental agency, including but not limited to a grand jury investigation, a
405 hearing, a civil penalty proceeding pending, or to CYBX's knowledge
threatened, against CYBX, and no such proceedings have been brought at any time
in the past relating to the safety or efficacy of CYBX's products and, to CYBX's
knowledge, there is no basis for such a proceeding.

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3.20 Inventory. The inventory (including, without limitation,
finished goods, parts and supplies) of CYBX (including that reflected on the
latest Financial Statements and that acquired after the date of the latest
Financial Statements) is or was, prior to the sale thereof, (i) in good and
merchantable condition, and suitable and usable or salable in the ordinary
course of business for the purposes for which intended, (ii) is not obsolete,
damaged or defective, and (iii) has been reflected on the Financial Statements
and carried on the books of account of CYBX in accordance with generally
accepted accounting principles consistently applied.

3.21 Accounts and Notes Receivable. All accounts and notes
receivable reflected on the Financial Statements, and all accounts and notes
receivable arising subsequent to June 30, 1995, (i) have arisen in the ordinary
course of business of CYBX; (ii) represent valid obligations due to CYBX; and
(iii) subject only to a reserve for bad debts computed in a manner consistent
with past practice, have been collected or are collectible in the ordinary
course of business of CYBX in the aggregate recorded amounts thereof in
accordance with their terms. All items that are required by generally accepted
accounting principles to be reflected as accounts and notes receivable on the
Financial Statements and on the books of account of CYBX are so reflected.

3.22 Employee Relations. CYBX has heretofore provided St. Jude
with a complete list of all employees of CYBX stating position, salary and dates
of service. None of CYBX's employees are union members. No union organizing
efforts have been conducted within the last five years or to the knowledge of
CYBX are now being conducted with respect to the employees of CYBX. CYBX is not
aware of any pending or threatened union activity, strike, work stoppage or
other labor trouble with respect to the employees of any of the suppliers or
customers of CYBX. CYBX is in substantial compliance with all applicable laws
respecting employment and employment practices, terms and conditions of
employment, wages and hours, equal opportunity, civil rights and payroll taxes,
including without limitation, the Immigration and Reform Control Act, Title VII
of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans
with Disabilities Act, the Federal Age Discrimination in Employment Act, the
Family and Medical Leave Act, the Workers Adjustment and Retraining Notification
Act and any state human rights act. CYBX is not in receipt of a complaint,
demand letter or charge issued by a federal, state or local agency which alleges
a violation by CYBX of any federal, state or local law or regulation respecting
employment and employment practices, terms and conditions of employment or wages
and hours. CYBX has no knowledge of any pending or threatened claims by
employees or former employees for any contract claims, intentional infliction of
emotional distress, defamation or any other tort, or any claims arising from any
federal, state or local law or ordinance.

3.23 Insurance. Section 3.23 of the Disclosure Schedule sets
forth a list and brief description of all policies or binders of fire,
liability, product liability, worker's compensation, vehicular, directors' and
officers' and other insurance held by or on behalf of CYBX. Such policies and
binders are valid and enforceable in accordance with their terms, are in full
force and effect, and insure against risks and liabilities to the extent and in
the manner indicated. CYBX is not in default with respect to any provision
contained in any such policy or binder and has not failed to give any notice or
present any claim under any such policy or binder in due and timely fashion.
CYBX has

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received no notice of cancellation or non-renewal of any such policy or binder.
CYBX has no knowledge of any inaccuracy in any application for such policies or
binders, any failure to pay premiums when due or any similar state of facts that
might form the basis for termination of any such insurance. The consummation of
the Merger will not constitute a default under any of such policy or binder or
grounds for the termination thereof.

3.24 Potential Conflicts of Interest. No officer or director
of CYBX, no entity controlled by any such officer or director and no relative or
spouse (or relative of such spouse) of any such officer or director:

3.24.1 owns, directly or indirectly, any interest in
(excepting not more than 1% stock holdings for investment purposes in securities
of publicly held and traded companies), or is an officer, director, employee or
consultant of, any person which is, or is engaged in business as, a competitor,
lessor, lessee, customer or supplier of CYBX;

3.24.2 owns, directly or indirectly, in whole or in
part, any tangible or intangible property that CYBX uses or the use of which is
necessary or desirable for the conduct of business of CYBX;

3.24.3 has any cause of action or other claim whatsoever
against, or owes any amount to, CYBX, except for claims in the ordinary course
of business, such as for accrued vacation pay, accrued benefits under employee
benefit plans, stock options, and similar matters and agreements existing on the
date hereof; or

3.24.4 has made any payment of or commitment to pay any
commission, fee or other amount to, or purchase or obtain or otherwise contract
to purchase or obtain any goods or services from, any corporation or other
person of which any officer or director of CYBX, or a relative of any of the
foregoing, is a CYBX or stockholder (excepting stock holdings solely for
investment purposes in securities of publicly held and traded companies).

3.25 Bank Accounts. Section 3.25 of the Disclosure Schedule sets
forth a complete list of all the bank accounts or safe deposit boxes of CYBX,
together with the names of the persons authorized to draw thereon or to have
access thereto.

3.26 Acquisition Proposal. During the period from September 30,
1993 through the date of this Agreement, neither CYBX nor any agent of CYBX has
received any written proposal or offer which, if received after the execution of
this Agreement would be required to be disclosed to St. Jude pursuant to Section
5.7 hereof.

3.27 Full Disclosure. To the knowledge of CYBX, all documents,
contracts, instruments, certificates, notices, consents, affidavits, letters,
telegrams, telexes, statements, schedules (including Schedules to this
Agreement), exhibits (including Exhibits to this Agreement) and any other papers
whatsoever (collectively, "Documents") delivered by or on behalf of CYBX in
connection with this

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Agreement and the transactions contemplated thereby are true, complete and
authentic. The representations and warranties of CYBX contained in this
Agreement, as modified by the Disclosure Schedule, contain no untrue statements
of any material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not false or misleading.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES OF ST. JUDE AND MERGER SUBSIDIARY

St. Jude and Merger Subsidiary each represents, warrants and
covenants to CYBX that:

4.1 Corporate Existence and Power. Each of St. Jude and Merger
Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation, and has all
corporate powers required to carry on its business as now conducted. Each of St.
Jude and Merger Subsidiary is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the character of
the property owned or leased by it or the nature of its activities makes such
qualification necessary, except for those jurisdictions where the failure to be
so qualified would not, individually or in the aggregate, have an effect on the
condition, financial or otherwise, business, assets, liability, capitalization,
financial position, operations or results of operations of St. Jude and its
subsidiaries taken as a whole.

4.2 Corporate Authorization. Each of St. Jude and Merger
Subsidiary has full corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by St. Jude's Board of
Directors and Merger Subsidiary's Board of Directors and no other corporate
proceedings on the part of either St. Jude or Merger Subsidiary are necessary to
authorize the execution and delivery of this Agreement or to consummate the
transactions so contemplated.

4.3 Governmental Authorization; Consents.

4.3.1 The execution, delivery and performance by St.
Jude and Merger Subsidiary of this Agreement and the consummation of the Merger
by St. Jude and Merger Subsidiary require no action by or in respect of, or
filing with, any governmental body, agency, official or authority other than (i)
the filing of Articles of Merger in accordance with Delaware Law; (ii)
compliance with any applicable requirements of the HSR Act; and (iii) any action
or filing, the failure to obtain or make would not, individually or in the
aggregate, have a material adverse effect.

4.3.2 No consent, approval, waiver or other action by
any person under any contract, agreement, indenture, lease, instrument or other
document to which St. Jude or Merger Subsidiary is a party or by which it is
bound is required or necessary for the execution, delivery and

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performance of this Agreement by St. Jude or Merger Subsidiary or the
consummation of the transactions contemplated hereby.

4.4 Non-Contravention. The execution, delivery and performance
by St. Jude and Merger Subsidiary of this Agreement and the consummation by St.
Jude of the transactions contemplated hereby do not and will not (i) contravene
or constitute a default under or give rise to a right of termination,
cancellation or acceleration of any right or obligation of St. Jude and Merger
Subsidiary or to a loss of any benefit to which St. Jude and Merger Subsidiary
is entitled under (A) any provision of applicable law or regulation (assuming
compliance with the matters referred to in Section 4.2.1); (B) the Articles of
Incorporation or Bylaws of St. Jude or the Certificate of Incorporation or
Bylaws of Merger Subsidiary; (C) any agreement, contract, plan, lease,
arrangement or commitment; or (D) any judgment, injunction, order, decree,
administrative interpretation, award or other instrument binding upon St. Jude
or Merger Subsidiary, or (ii) result in the creation or imposition of any Lien
on any asset of St. Jude or Merger Subsidiary.

4.5 Binding Effect. This Agreement constitutes a legal, valid
and binding agreement of St. Jude and Merger Subsidiary enforceable against St.
Jude and Merger Subsidiary in accordance with its terms, except to the extent
that the enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization or other similar laws affecting the enforcement of
creditors' rights generally and by principles of equity regarding the
availability of remedies.

4.6 Financial Statements and SEC Filings. St. Jude has
delivered to CYBX true and complete copies of (i) its annual reports on Form
10-K for its fiscal years ended December 31, 1993 and 1994; (ii) its quarterly
reports on Form 10-Q for its fiscal quarters ended March 31, June 30 and
September 30, 1995; (iii) its proxy or information statements relating to all
meetings of, or actions taken without a meeting by, the shareholders of St. Jude
held since December 31, 1994; and (iv) all of its other 8-K reports filed with
the SEC since December 31, 1994. The reports and statements so delivered are
referred to collectively in this Agreement as the "St. Jude SEC Filings." As of
their respective dates, the St. Jude SEC Filings (including all exhibits and
schedules thereto and documents incorporated by reference therein) did not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading. The audited financial statements and
unaudited interim financial statements of St. Jude included or incorporated by
reference in the St. Jude SEC Filings (i) have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except as may be indicated in the notes thereto); (ii)
complied as of their respective dates in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto; and (iii) fairly present the financial position of St. Jude as
of the dates thereof and the income and cash flows for the periods then ended
(subject, in the case of any unaudited interim financial statements, to normal
year-end adjustments).

4.7 Full Disclosure. To the knowledge of St. Jude, all
documents, contracts, instruments, certificates, notices, consents, affidavits,
letters, telegrams, telexes, statements, schedules (including

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Schedules to this Agreement), exhibits (including Exhibits to this Agreement)
and any other papers whatsoever (collectively, "Documents") delivered by or on
behalf of St. Jude in connection with this Agreement and the transactions
contemplated thereby are true, complete and authentic. The representations and
warranties of St. Jude contained in this Agreement contain no untrue statements
of any material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not false or misleading.

ARTICLE 5

COVENANTS OF CYBX

CYBX agrees that:

5.1 Conduct of CYBX. Except as set forth in Section 5 of the
Disclosure Schedule, from the date hereof until the Effective Time, CYBX shall
conduct its business in the ordinary course consistent with past practice and
will use its best efforts to preserve intact its business organization and
relationships with third parties and to keep available the services of its
present officers and employees. Without limiting the generality of the
foregoing, from the date hereof until the Effective Time without the prior
written consent of the St. Jude:

5.1.1 CYBX will not declare, set aside or pay any
dividend or other distribution with respect to any shares of capital stock of
CYBX.

5.1.2 CYBX will not amend or alter any term of any
outstanding CYBX securities.

5.1.3 CYBX will not, without the consent of St. Jude,
(i) incur, assume or guarantee any debt other than in the ordinary course of
business consistent with historic practices; (ii) issue or sell any securities
convertible into or exchangeable for debt securities of CYBX; or (iii) issue or
sell any options or other rights to acquire from CYBX, directly or indirectly,
any debt securities of CYBX or any securities convertible into or exchangeable
for any such debt securities.

5.1.4 CYBX will not create, assume or incur any Lien
on any material asset of CYBX.

5.1.5 CYBX will not relinquish any material contract or
other material right of CYBX, make any payment (direct or indirect) of any
liability of CYBX before the same becomes due in accordance with its terms or
make any change in its operations that is in any such case material to CYBX
taken as a whole.

5.1.6 CYBX will not adopt any change in any method of
accounting or accounting practice used by CYBX other than by reason of a
concurrent change in generally accepted accounting principles and upon the
recommendation of CYBX's independent public accountants.

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5.1.7 CYBX will not, without the prior written consent
of St. Jude (i) grant or make any severance or termination payments to any
officer, director or employee of CYBX, except pursuant to written agreements in
effect on the date hereof and set forth in the Disclosure Schedule; (ii) enter
into any employment, deferred compensation or other similar agreement (or enter
into any amendment to any such existing agreement) with any officer, director or
employee of CYBX; (iii) increase benefits payable under any existing severance
or termination pay policies or employment agreements; or (iv) pay or provide for
any increase in compensation, bonus, or other benefits payable to officers,
directors or employees of CYBX except for normal increases to non-managerial
employees consistent with past practice or to the extent required under existing
employment and labor agreements.

5.1.8 CYBX will not amend its Certificate of
Incorporation or Bylaws.

5.1.9 CYBX will not merge or consolidate with any
person, acquire any stock or other ownership interest in any person or the
assets of any business as an entity or liquidate, dissolve or otherwise
reorganize or seek protection from creditors.

5.1.10 Except for those transactions which constitute
an Acquisition Proposal, CYBX will not take any action, the taking of which, or
omit to take any action, the omission of which, would reasonably be expected to
cause any of the representations and warranties in Section 3 to be inaccurate in
any respect at or as of any time prior to the Effective Time.

5.1.11 Except for the sale of inventory and the
disposition of obsolete or defective equipment, CYBX will not without the prior
written consent of St. Jude sell, transfer, mortgage, or otherwise dispose of,
or encumber, or agree to sell, transfer, mortgage or otherwise dispose of or
encumber, any assets or properties, real, personal or mixed.

5.1.12 CYBX will not (a) enter into any other
agreements, commitments or contracts (including without limitation joint venture
agreements or material license agreements) which, individually or in the
aggregate, are material to CYBX, except agreements, commitments or contracts for
the purchase, sale or lease of goods or services, consistent with past practice
or contemplated by the disclosures set forth in Section 5 of the Disclosure
Schedule; or (b) otherwise make any material change in any existing material
agreement, commitment or arrangement.

5.1.13 Except with the prior written consent of St.
Jude, CYBX will not make any investment of a capital nature with a maturity in
excess of 90 days either by purchase of stock or securities, contributions to
capital, property transfers or otherwise, or by the purchase of any property or
assets of any other individual, firm or corporation.

5.1.14 Except with the prior written consent of St.
Jude, CYBX will not purchase any capital items which singly have an installed
purchase price greater than $5,000, or in the aggregate have a purchase price in
excess of $50,000.

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5.1.15 Except with respect to the issuance of shares
pursuant to the exercise of stock options outstanding on the date hereof granted
under the Stock Option Plans, CYBX will not redeem, repurchase or otherwise
acquire any CYBX securities.

5.1.16 CYBX will not agree or commit to do any of the
matters set forth in Sections 5.1.1 through 5.1.15.

5.2 CYBX's Shareholders' Meeting; Proxy Material.

5.2.1 CYBX agrees that it shall prepare and file with
the SEC under the 1934 Act, and shall use all reasonable efforts to have cleared
by the SEC, and promptly thereafter shall mail to shareholders of CYBX, a proxy
statement (the "Proxy Statement"). The Proxy Statement shall be in form and
substance reasonably satisfactory to CYBX and St. Jude and shall contain the
recommendation of the Board of Directors of CYBX in favor of the Merger. CYBX
shall promptly take all action necessary in accordance with Delaware Law
(including notice of dissenters' rights) and its Certificate of Incorporation
and Bylaws to convene, a meeting of its shareholders (the "CYBX Shareholders
Meeting"). The shareholder vote or consent required for approval of the Merger
shall be no greater than that set forth in the Delaware Law. CYBX shall use its
commercially reasonable efforts to solicit from shareholders of CYBX proxies in
favor of the Merger.

5.2.2 CYBX represents and warrants to St. Jude that the
Proxy Statement, insofar as it contains or incorporates by reference information
pertaining to CYBX, will comply in all material respects with the requirements
of the 1934 Act, and the applicable rules and regulations adopted under said
Act, and that such information will contain no untrue statements of any material
fact and will not omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. CYBX will promptly
advise St. Jude in writing if at any time prior to the Effective Time of the
Merger it shall obtain knowledge of any facts that might make it necessary or
appropriate to amend or supplement the Proxy Statement in order to make the
statements contained or incorporated by reference therein not misleading or to
comply with applicable law.

5.2.3 After the Proxy Statement has cleared SEC review
(or a determination of "No Review" has been communicated by the SEC), CYBX
shall, subject to approval by St. Jude and its counsel, cause the Proxy
Statement to be mailed to its shareholders at such time as St. Jude shall
reasonably request and in accordance with applicable federal and state law. CYBX
will not, without giving prior notice to, and without the prior approval (which
shall not be unreasonably withheld) of, St. Jude, use any proxy material other
than the Proxy Statement and any other proxy material filed with the SEC prior
to or concurrently with the filing of the Proxy Statement.

5.3 Access to Information. CYBX will give St. Jude, its
counsel, financial advisors, auditors and other authorized representatives full
access to the offices, properties, books and records of CYBX, will promptly
furnish to St. Jude, its counsel, financial advisors, auditors and authorized
representatives such financial and operating data and other information as such
persons may

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reasonably request and will instruct CYBX's employees, counsel and financial
advisors to fully cooperate with the other party in its investigation of the
business of CYBX; provided that no investigation pursuant to this section shall
affect any representation or warranty given by CYBX to St. Jude hereunder. The
information obtained hereunder will be subject to the confidentiality agreements
set forth in Section 9.6 below.

5.4 Notices of Certain Events. CYBX shall promptly notify St.
Jude of:

5.4.1 any notice or other communication from any
person alleging that the consent of such person is or may be required in
connection with the transactions contemplated by this Agreement;

5.4.2 any notice or other communication from any
governmental or regulatory agency or authority in connection with the
transactions contemplated by this Agreement;

5.4.3 any actions, suits, claims, investigations or
proceedings commenced or, to the best of CYBX's knowledge, threatened against,
relating to or involving or otherwise affecting CYBX which relate to the
consummation of the transactions contemplated by this Agreement or which, if
pending on the date of this Agreement, would have been required to have been
disclosed in Section 3.10 of the Disclosure Schedule; and

5.4.4 any other event or change of fact or circumstance
causing any representation contained in Section 3 of this Agreement to be, as of
the date of such event or change, incorrect or misleading.

5.5 Consents, Approvals and Filings. CYBX will use its
commercially reasonable efforts to obtain as promptly as possible (i) all
necessary approvals, authorizations, consents, licenses, clearances or orders of
governmental and regulatory authorities required in order for CYBX to perform
its obligations hereunder; and (ii) all consents or approvals of third parties
required in connection with the contracts identified in Section 3.17.2 of the
Disclosure Schedule.

5.6 Commercially Reasonable Efforts. Subject to the fiduciary
duties of its Board of Directors, CYBX shall use its commercially reasonable
efforts (i) to cause to be fulfilled and satisfied all of the conditions to the
Merger to be fulfilled and satisfied by it; (ii) to cause to be performed all of
the matters required of it at or prior to the Effective Time; and (iii) to
achieve full compliance with applicable law. CYBX shall use its commercially
reasonable efforts to make all of its warranties and representations contained
in this Agreement true and correct in all material respects as at the Effective
Time, with the same effect as if the same had been made and this Agreement had
been dated as at the Effective Time.

5.7 Exclusivity. In order to induce St. Jude to enter into this
Agreement, CYBX agrees, on its own behalf and on behalf of its officers,
directors, employees and agents, subject to the fiduciary duties of the Board of
Directors of CYBX, that it will not, for so long as this Agreement

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remains in effect, directly or indirectly, (a) take any further action to
solicit, initiate or encourage any offer or indication of interest from any
person with respect to any Acquisition Proposal (as hereinafter defined),
including without limitation, any such further action through any investment
banker, broker, finder or other intermediary previously engaged or which may be
engaged for the purpose of soliciting, initiating or encouraging such offer or
indication of interest; or (b) engage in negotiations with, or disclose any
non-public information relating to the businesses, assets or operations which
are the subject of this Agreement or afford access to the properties, books or
records of CYBX to, any person that has made, or that CYBX has good reason to
believe may be considering making, an Acquisition Proposal. CYBX will promptly
notify St. Jude after receipt of any Acquisition Proposal or indication that any
person is considering making an Acquisition Proposal or any request for
non-public information relating to the businesses, assets or operations or for
access to the properties, books or records of CYBX by any person that has made,
or that CYBX has good reason to believe may be considering making an Acquisition
Proposal, and will keep St. Jude informed of any such offer, indication or
request. CYBX will not enter into any agreement relating to any such Acquisition
Proposal for a period of seven (7) days following receipt by St. Jude of such
notification by CYBX. "Acquisition Proposal" means any proposal to (i) effect a
merger or consolidation or similar transaction involving CYBX or any of its
subsidiaries, (ii) purchase, lease, or otherwise acquire ten percent (10%) or
more of the assets of CYBX or any of its subsidiaries, (iii) purchase or
otherwise acquire (including by way of merger, consolidation, share exchange or
similar transaction) beneficial ownership (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934) of securities representing ten percent (10%) or
more of the voting power of CYBX or any of its subsidiaries, or (iv) the
assignment, transfer, licensing or other disposition of, in whole or in part,
the patents, patent rights, trade secrets or other technology of CYBX or any of
its subsidiaries, other than in the ordinary course of business.

5.8 Return of Confidential Information. Prior to the Effective
Time, CYBX shall exercise its right under all confidentiality or other
non-disclosure agreements entered into with parties approached by CYBX or its
agents since September 30, 1994 to retrieve any and all information provided by
or on behalf of CYBX to such parties.

5.9 Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of CYBX or Merger Subsidiary, any
deeds, bills of sale, assignments or assurances and to take and do, in the name
and on behalf of CYBX or Merger Subsidiary, any other actions and things to
vest, perfect or confirm of record or otherwise in the Surviving Corporation any
and all right, title and interest in, to and under any of the rights, properties
or assets of CYBX acquired or to be acquired by the Surviving Corporation as a
result of, or in connection with, the Merger.

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ARTICLE 6

COVENANTS OF ST. JUDE

6.1 Commercially Reasonable Efforts. Subject to the fiduciary
duties of its Board of Directors, St. Jude shall use its commercially reasonable
efforts (a) to cause to be fulfilled and satisfied all of the conditions to the
Merger to be fulfilled and satisfied by it, (b) to cause to be performed all of
the matters required of it at or prior to the Effective Time and (c) to achieve
full compliance with applicable law. St. Jude shall use its commercially
reasonable efforts to make all of its warranties and representations contained
in this Agreement true and correct in all material respects as at the Effective
Time, with the same effect as if the same had been made and this Agreement had
been dated as at the Effective Time. The obligations of St. Jude pursuant to
this Section 6.1 shall in no way limit St. Jude's right to terminate this
Agreement pursuant to Section 8.2 hereof.

6.2 Consents, Approvals and Filings. St. Jude will use its
commercially reasonable efforts to obtain as promptly as possible all necessary
approvals, authorizations, consents, licenses, clearances or orders of
governmental and regulatory authorities required in order for St. Jude to
perform its obligations hereunder. The obligations of St. Jude pursuant to this
Section 6.2 shall in no way limit St. Jude's right to terminate this Agreement
pursuant to Section 8.2 hereof.

6.3 Advice of Changes. St. Jude will promptly advise CYBX
orally and in writing of (i) any event occurring subsequent to the date of this
Agreement which would render any representation or warranty of St. Jude
contained in this Agreement, if made on or as of the date of such event or the
Effective Time, untrue, inaccurate or incomplete in any material respect; and
(ii) any material adverse change in the working capital, financial condition,
assets, liabilities (whether absolute, accrued, contingent or otherwise),
operating profits, business or prospects of St. Jude.

6.4 Director and Officer Liability. For six years after the
Effective Time, St. Jude will cause the Surviving Corporation to indemnify and
hold harmless the present and former officers and directors of CYBX in respect
of acts or omissions occurring prior to the Effective Time to the extent
provided under CYBX's Certificate of Incorporation, Bylaws and indemnification
agreements in effect on the date hereof; provided that in the event any claim or
claims are asserted or made within such six year period, all rights to
indemnification in respect of any such claim or claims shall continue until
final disposition of any and all such claims. For six years after the Effective
Time, St. Jude will cause the Surviving Corporation at the Surviving
Corporation's expense to provide officers and directors liability insurance in
respect of acts or omissions occurring prior to the Effective Time covering each
such person currently covered by each respective CYBX's officers' and directors'
liability insurance policy on terms with respect to coverage and amount no less
favorable than those of such policy in effect on the date hereof; provided, that
in the event any claim or claims are asserted or made within such six year
period, all rights to indemnification in respect of any such claim or claims
shall continue until final disposition of any and all such claims. If the annual
premiums of such insurance would exceed the premiums in effect as of the date of
the Agreement, St. Jude shall use its commercially

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reasonable efforts to procure such level of insurance having the same coverage
as in effect as of the date of the Agreement for an annual premium equal to such
current premium amount.

6.5 Employee Benefit Matters.

6.5.1 From and after the Closing Date, St. Jude shall
or shall cause the Surviving Corporation or another subsidiary of St. Jude to
provide employees of CYBX and its subsidiary ("Affected Employees") with
comparable compensation and benefits as those provided to employees with similar
status and tenure of St. Jude and its subsidiaries.

6.5.2 St. Jude or its subsidiaries shall give each
Affected Employee full credit for all service with CYBX and its affiliates for
all purposes (other than for benefit accumulation under a defined benefit
pension plan) under all employee benefit plans and arrangements (including, but
not limited to, any "employee benefit plan" as defined in Section 3(3) of ERISA)
maintained for such employees' benefit on and after the Closing Date.

6.5.3 For purposes of computing deductible amounts
(or like adjustments or limitations on coverage) under any "employee welfare
benefit plan" (as defined in Section 3(1) of ERISA), expenses and claims
previously recognized for similar purposes under the applicable employee welfare
benefit plan of CYBX or its subsidiary for the current plan year shall be
credited or recognized under the comparable plan maintained after the Closing by
St. Jude or its subsidiaries on behalf of Affected Employees. Medical plan
coverage shall not be denied to any Affected Employee with respect to a
particular claim under any plan maintained by St. Jude or its subsidiaries on
the basis of the existence of a pre-existing condition.

6.5.4 Notwithstanding anything to the contrary set
forth in this Section 6.5, St. Jude shall have no obligation to employ an
employee of CYBX or to continue the employment of any employee of CYBX offered
employment or employed by St. Jude or its subsidiaries.

ARTICLE 7

CONDITIONS TO THE MERGER

7.1 Conditions to the Obligations of CYBX. The obligation of
CYBX to consummate the Merger is subject to the satisfaction of the following
further conditions, unless waived by CYBX in its discretion:

7.1.1 St. Jude and Merger Subsidiary shall have
performed in all material respects all of their obligations hereunder required
to be performed by them at or prior to the Effective Time.

7.1.2 The representations and warranties of St. Jude
and Merger Subsidiary contained in this Agreement and in any certificate or
other writing delivered by St. Jude and Merger

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Subsidiary pursuant hereto shall be true in all respects at and as of the
Effective Time as if made at and as of such time.

7.1.3 Receipt by CYBX of a certificate signed by an
officer of St. Jude and Merger Subsidiary to the effect set forth in Sections
7.1.1 and 7.1.2.

7.1.4 Receipt by CYBX of all documents it may
reasonably request relating to the existence of St. Jude and Merger Subsidiary
and their corporate authority for this Agreement, all in form and substance
satisfactory to CYBX.

7.1.5 No court of competent jurisdiction or an
administrative, governmental or regulatory authority has issued a final
non-appealable order, decree or ruling, or taken any other action, having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger.

7.1.6 Approval of the Merger by the shareholders of
CYBX and all approvals of applications to public authorities, Federal, state or
local, the granting of which is necessary for the consummation of the Merger,
shall have been obtained.

7.1.7 CYBX shall have received a written opinion of
CYBX's financial advisor, addressed to CYBX for inclusion in the Proxy
Statement, that the Merger is fair, from a financial point of view, to the
shareholders of CYBX.

ARTICLE 8

TERMINATION

This Agreement may be terminated and the Merger contemplated by this
Agreement may be abandoned at any time prior to the Effective Time
(notwithstanding the adoption of this Agreement and approval of the Merger by
the shareholders of CYBX) under the following circumstances and in the following
manner:

8.1 Termination by Mutual Consent. By mutual written consent
duly authorized by the Board of Directors of St. Jude and by the Board of
Directors of CYBX.

8.2 Termination by St. Jude. St. Jude may terminate this
Agreement at any time, with or without cause.

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8.3 Termination by CYBX. CYBX may terminate this Agreement in
the following circumstances:

8.3.1 If the closing of the sale by CYBX to St. Jude of
shares of CYBX Common Stock pursuant to that certain Common Stock Purchase
Agreement between CYBX and St. Jude dated of even date herewith has not occurred
by the time specified in Section 6.1 thereof; provided, however, that CYBX may
not terminate this Agreement where such failure is the result of acts of CYBX
which constitute a breach of CYBX's obligations or covenants set forth in this
Agreement or in the Common Stock Purchase Agreement.

8.3.2 If the Merger has not been consummated by October
18, 1996.

8.3.3 If a court of competent jurisdiction or an
administrative, governmental or regulatory authority has issued a final
non-appealable order, decree or ruling, or taken any other action, having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger.

8.3.4 If, at CYBX's Shareholders Meeting, as defined in
Section 5.2 (including any adjournment or postponement thereof), the requisite
vote of the shareholders of CYBX is not obtained.

8.3.5 If prior to CYBX's Shareholders Meeting, as
defined in Section 5.2 (including any adjournment or postponement thereof), (i)
the Board of Directors of CYBX has recommended, approved, accepted or entered
into a definitive agreement regarding an Acquisition Proposal as defined in
Section 5.7; or (ii) an Acquisition Proposal has been made and the Board of
Directors of CYBX has withdrawn or modified in a manner adverse to St. Jude its
recommendation of the Merger.

8.3.6 If (i) CYBX is not in material breach of its
obligations under this Agreement; and (ii) there has been (A) a material breach
by St. Jude of any of its representations and warranties under this Agreement
such that the conditions in Section 7.1.2 will not be satisfied, or (B) a
material failure by St. Jude to perform any of its obligations under this
Agreement such that the conditions in Section 7.1.1 will not be satisfied, and,
in both case (A) and (B), the breach or failure cannot, in the reasonable
judgment of CYBX, be cured by October 18, 1996 following receipt by St. Jude of
notice of the breach or such breach or failure is not in fact cured by such
date.

8.3.7 If St. Jude materially breaches any of St. Jude's
obligations under Sections 6.1 or 6.2 and such breach is not cured by St. Jude
within 30 calendar days following receipt by St. Jude of notice of the breach.

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8.4 Effects of Termination.

8.4.1 In the event of the termination of this Agreement
pursuant to Sections 8.1, 8.2 or 8.3, the following shall occur:

(a) the obligation of the parties to
consummate the Merger and the other actions and transactions contemplated hereby
will expire;

(b) the provisions of this Section 8.4
shall survive and the provisions of Section 9.6 of this Agreement (and of the
confidentiality agreements referred to therein) shall survive for a period of
seven years;

(c) each party will bear its own expenses
incurred in connection with this Agreement, and the St. Jude and CYBX will share
equally the Transaction Costs (as defined below), and will promptly upon request
reimburse the party which paid any such expenses; provided, however, that if
CYBX pays a Termination Fee pursuant to Section 8.4.2 each party will bear such
Transaction Costs as it may have incurred and payment pursuant to this Section
8.4.1(c) will not apply; and

(d) except as provided in Sections 8.4.2
and 8.4.3 or in the event of a wilful breach hereof by CYBX, no party will have
any liability to any other party as a result of the termination of this
Agreement.

8.4.2 In addition to the provisions of Section 8.2.1,
in recognition of the efforts and expenses expended and incurred by St. Jude
with respect to CYBX, the opportunity CYBX presents to the St. Jude, and the
potential intangible damage to the St. Jude if (i) this Agreement is terminated
pursuant to Section 8.3.5 or (ii) (A) any third party makes an Acquisition
Proposal or acquires 50% or more of the outstanding CYBX Common Stock prior to
the CYBX Shareholders Meeting, (B) the requisite vote of the shareholders of
CYBX is not obtained, (C) this Agreement is terminated, and (D) within six
months after the execution of this Agreement, (x) CYBX enters into an agreement
relating to an Acquisition Proposal or (y) an Acquisition Proposal is
consummated, then, in either such event, CYBX will pay to St. Jude, within five
business days after demand by St. Jude, which may be made upon the earlier of
the events specified in clauses (i) or subclauses (x) and (y) of clause (ii) by
wire transfer of immediately available funds to an account designated by St.
Jude for such purpose, a termination fee (the "Termination Fee") equal to
$3,500,000. For purposes of this Section 8.4.2, the term Acquisition Proposal
shall not include any sale by CYBX of debt or equity securities (whether
pursuant to a private placement or public offering) effected for the sole
purpose of raising equity capital. A transaction will be deemed to have been
effected for the sole purpose of raising equity capital if the shareholders of
CYBX immediately prior to such transaction continue to own a majority of the
outstanding voting securities of CYBX immediately after such transaction unless
the transaction, by its express terms, results in, or is one step in a process
the completion of which would result in, (i) the acquisition by the acquiring
party of a majority of CYBX's outstanding voting stock, (ii) a merger or
consolidation or similar transaction involving CYBX or any of its

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subsidiaries, (iii) a sale, lease, or other disposition by CYBX of 10% or more
of the assets of CYBX or any of its subsidiaries, or (iv) the assignment,
transfer, licensing or other disposition of, in whole or in part, the patents,
patent rights, trade secrets or other technology of CYBX or any of its
subsidiaries, other than in the ordinary course of business.

8.4.3 In the event that CYBX fails to make timely
payment of the Termination Fee to the St. Jude when due pursuant to Section
8.4.2 CYBX will reimburse the other party for its legal and other expenses
(including interest on the Termination Fee from the date of demand at the rate
of 10% per annum) incurred in connection with the efforts to obtain said
payment.

ARTICLE 9

MISCELLANEOUS

9.1 Notices. All notices, requests and other communications to
any party hereunder shall be in writing and shall be given,

if to St. Jude or Merger Subsidiary, to:

St. Jude Medical, Inc.
One Lillehei Plaza
St. Paul, MN 55117
Attn: President and Chief
Executive Officer

with a copy addressed as above, to the attention of the Vice
President and General Counsel.

with a copy to:

Lindquist & Vennum
4200 IDS Center
80 South 8th Street
Minneapolis, MN 55402
Attn: Thomas H. Garrett
612-371-3274(o)
612-688-8365(h)

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if to CYBX, to:

Cyberonics, Inc.
17448 Highway 3, Suite 100
Webster, TX 77598-4138
Attn: President

with a copy to:

Kenneth M. Siegel
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94303

or such other address as such party may hereafter specify for the purpose by
notice to the other parties hereto. Each such notice, request or other
communication shall be effective if given by any other means, when delivered at
the address specified in this section.

9.2 Amendment and Modification. To the fullest extent permitted
by applicable law, this Agreement may be amended, modified and supplemented with
respect to any of the terms contained herein by mutual consent of the respective
Boards of Directors of CYBX, St. Jude and Merger Subsidiary, or by their
respective officers duly authorized by such Boards of Directors, by an
appropriate written instrument executed at any time prior to the Effective Time
of the Merger.

9.3 Waiver of Compliance. To the fullest extent permitted by
law, each of St. Jude, Merger Subsidiary and CYBX may, pursuant to action by its
respective Board of Directors, or its respective officers duly authorized by its
Board of Directors, by an instrument in writing extend the time for or waive the
performance of any of the obligations of the other or waive compliance by the
other with any of the covenants, or waive any of the conditions of its
obligations, contained herein; provided, however, that the obtaining of the
approval of the shareholders referred to in Section 7.1.6 hereof shall not be
waivable. No such extension of time or waiver shall operate as a waiver of, or
estoppel with respect to, any subsequent or other failure.

9.4 No Survival of Representations and Warranties. The
respective representations and warranties of each party hereto contained herein
shall not be deemed to be waived or otherwise affected by any investigation made
by the other parties hereto. The representations, warranties and agreements in
this Agreement will terminate at the Effective Time or upon termination of this
Agreement pursuant to Section 8.1, as the case may be, except for the agreements
set forth in Sections 6.4,8.4 and 9.6, to the extent set forth therein.

9.5 No Third Party Rights. Except as otherwise provided in
this Agreement, nothing herein expressed or implied is intended, nor shall be
construed, to confer upon or give any person,

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firm or corporation, other than St. Jude, Merger Subsidiary and CYBX and their
respective security holders, any rights or remedies under or by reason of this
Agreement.

9.6 Confidentiality. The confidentiality obligations of the
parties set forth in the confidentiality agreements between the parties dated as
of June 6 and October 17, 1995 are incorporated herein by reference, and the
parties agree to honor and perform all obligations set forth therein.

9.7 Expenses.

9.7.1 Each party hereto will bear all expenses incurred
by it in connection with this Agreement and the transactions contemplated
hereby.

9.7.2 St. Jude and CYBX shall share equally all
expenses relating to the printing and mailing of the Proxy Statement and all SEC
registration fees applicable to the Merger. The expenses referenced in this
Section 9.7.2 shall be referred to as the "Transaction Costs."

9.8 Assignment. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties;
provided, however, that Merger Subsidiary may assign this Agreement and its
rights, interests and obligations hereunder to another directly or indirectly
wholly-owned subsidiary of St. Jude without the consent of CYBX.

9.9 GOVERNING LAWS. THIS AGREEMENT AND THE LEGAL RELATIONS
BETWEEN THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF DELAWARE.

9.10 Counterparts. This Agreement may be executed
simultaneously in two or more counterparts and by the different parties hereto
on separate counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.

9.11 Headings and References. The headings of the Sections and
Articles of this Agreement are inserted for convenience of reference only and
shall not constitute a part hereof. All references herein to Sections and
Articles are to sections and articles of this Agreement, unless otherwise
indicated.

9.12 Entire Agreement. This Agreement (including the exhibits
hereto, the Disclosure Schedules and the documents referred to herein, all of
which form a part hereof) and the confidentiality agreements referenced in
Section 9.6 contain the entire understanding of the parties hereto in respect of
the subject matter contained herein and supersede all prior agreements and
understandings between the parties with respect to such subject matter. There
are no restrictions,

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<PAGE> 80
promises, representations, warranties, covenants, or undertakings, other than
those expressly set forth or referred to herein or therein.

9.13 Exchange of Documents. Counsel to St. Jude and counsel to
CYBX have exchanged lists which the parties agree accurately reflect the
documents which they have delivered and received in connection with the
negotiation of this Agreement.

9.14 Publicity. Upon execution of this Agreement by St. Jude,
Merger Subsidiary and CYBX, the parties shall jointly issue a press release, as
agreed upon by them. Neither party shall, without the prior written consent of
the other, issue any statement or communication to the public or to the press
regarding this Agreement, or any of the terms, conditions or other facts with
respect to the Agreement, except as required by law or the rules of NASDAQ and
then, only (a) upon receipt of a written opinion from such party's legal
counsel; (b) to the extent required by law or the rules of NASDAQ; and (c) upon
prior notice to the other party, which notice shall include a copy of the
issuing party's opinion of legal counsel, together with a copy of the proposed
statement or communication to be issued to the press or public.

9.15 Interpretation. This Agreement has been fully negotiated
by the parties through their legal counsel. Accordingly, in interpreting this
Agreement, the rule of interpretation requiring that documents be construed
against the draftsman shall be inapplicable.

9.16 Further Assurance. The parties hereto agree that each
will execute and deliver to the other any and all documents in addition to those
expressly provided for herein that may be necessary to carry out the provisions
of this Agreement, whether before, at or after the Closing.

9.17 Severability. The unenforceability or invalidity of any
provision of this Agreement shall not affect the enforceability or validity of
any other provision.

(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.

ST. JUDE MEDICAL, INC.

/s/ Ronald A. Matricaria
------------------------------------------
Ronald A. Matricaria
President and Chief Executive Officer

SJM ACQUISITION CORP.

/s/ Kevin T. O'Malley
------------------------------------------
Kevin T. O'Malley
Director and Secretary

CYBERONICS, INC.

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

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<PAGE> 82
VECTOR Vector Securities International, Inc.
SECURITIES 1751 Lake Cook Road, Suite 350
INTERNATIONAL Deerfield, Illinois 60015
Telephone (708) 940-1970
Fax (708) 940-0774

April 8, 1996 ANNEX II

The Board of Directors
Cyberonics, Inc.
17448 Highway 3, Suite 100
Webster, TX 77598-4135

Members of the Board:

You have requested our opinion as investment bankers with respect to
the fairness, from a financial point of view as of the date hereof, to the
holders of common stock, par value $.01 per share ("Common Stock"), of
Cyberonics, Inc., a Delaware corporation ("Cyberonics"), of the consideration to
be received by such stockholders pursuant to the terms of the March 29, 1996
draft Agreement and Plan of Merger (the "Agreement"), to be entered into by and
among Cyberonics, St. Jude Medical, Inc., a Minnesota corporation ("St. Jude"),
and a wholly-owned subsidiary of St. Jude ("Acquisition").

Under the terms and conditions of the March 29, 1996 draft of the
Agreement, Cyberonics will, among other things, merge with and into Acquisition
(the "Merger"), and Cyberonics will thereby become a wholly-owned subsidiary of
St. Jude. As a result of the Merger, all of the issued and outstanding shares of
Common Stock (other than shares owned by St. Jude or its affiliates or treasury
shares) will be converted into the right to receive an aggregate of $72,090,699
in cash (the "Aggregate Cash Consideration"). The terms and conditions of the
Merger are more fully set forth in the March 29, 1996 draft of the Agreement.

In arriving at the opinion set forth herein, we have, among other
things: (i) reviewed the financial terms of the Merger as set forth in the March
29, 1996 draft of the Agreement; (ii) held discussions with the senior
management of Cyberonics concerning the business, operations and prospects of
Cyberonics; (iii) reviewed certain business and financial information on
Cyberonics, including financial projections, prepared and provided by the
management of Cyberonics; (iv) reviewed certain documents filed by Cyberonics
since 1993 with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934; (v) reviewed the price and trading history of
the Common Stock of Cyberonics; (vi) compared the financial terms of the Merger
with those of other transactions which we deemed comparable; and (vii) performed
such other studies, analyses, investigations and inquiries as we deemed
appropriate.

In connection with our opinion, we have not assumed any
responsibility for independent verification of any information supplied or
otherwise made available to us regarding Cyberonics and we have assumed and
relied on such information being accurate and complete in all respects. We have
not undertaken an independent evaluation or appraisal of the assets of
Cyberonics, nor have we been furnished with any such evaluations or appraisals.
With respect to the financial projections of Cyberonics referred to above, we
have assumed, with your

<PAGE> 83
consent, that they have been reasonably prepared on bases reflecting the best
available estimates and judgments of the management of Cyberonics as to the
future financial performance of Cyberonics. We assume no responsibility for and
express no view as to such forecasts or the assumptions under which they are
prepared. Our conclusions are based solely on information available to us on or
before the date hereof and reflect economic, market and other conditions as of
such date. In connection with the preparation of this opinion, we have not given
effect to St. Jude's purchase of $12 million of Cyberonics' Common Stock and the
transactions related thereto occurring in connection with the Agreement. In
rendering our opinion, we assumed that the transaction contemplated by the
Merger will be consummated on the terms described in the March 29, 1996 draft of
the Agreement, without any material waiver of or modification by Cyberonics or
St. Jude, and that obtaining any necessary regulatory approvals for the
transaction will not have an adverse effect on Cyberonics.

We are familiar with Cyberonics, having acted as its financial
advisor in connection with, and participating in certain negotiations leading
to, the Agreement, for which we will receive a fee, substantially all of which
is contingent on the closing of the transactions contemplated by the Agreement.
In addition, Cyberonics has agreed to indemnify us for certain liabilities
arising out of our advisory services and the rendering of this opinion. Vector
Securities International, Inc. is a full service securities firm and in the
course of its normal trading activities may from time to time effect
transactions and hold positions in securities of Cyberonics and/or St. Jude.

Our opinion set forth below is directed to the Board of Directors of
Cyberonics and does not address Cyberonics' underlying business decision to
effect the Merger or constitute a recommendation to any stockholder of
Cyberonics with respect to the approval of the Merger. Our opinion is not to be
reproduced, quoted or published in any manner without our prior written consent,
except that this letter may be reproduced in full in the proxy statement to be
filed with the Securities and Exchange Commission in connection with the Merger.

On the basis of and subject to the foregoing, including the various
assumptions and limitations set forth herein, and based upon such other matters
as we consider relevant, it is our opinion as of the date hereof that the
Aggregate Cash Consideration to be received by the stockholders of Cyberonics
(other than St. Jude or any of its affiliates who own shares of Cyberonics
Common Stock) in the Merger is fair to such stockholders from a financial point
of view.

Very truly yours,

VECTOR SECURITIES INTERNATIONAL, INC.

By: /s/ W. Gregory Shearer
----------------------------------
W. Gregory Shearer
Managing Director

2
<PAGE> 84
ANNEX III

SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE

(a) Any stockholder of a corporation of this State who holds
shares of stock on the date of the making of a demand pursuant to subsection (d)
of this section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in favor
of the merger or consolidation nor consented thereto in writing pursuant to
Section228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.

(b) Appraisal rights shall be available for the shares of any
class or series of stock of a constituent corporation in a merger or
consolidation to be effected pursuant toSection251, 252, 254, 257, 258, 263 or
264 of this title:

(1) Provided, however, that no appraisal rights under
this section shall be available for the shares of any class or series of stock,
which stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or consolidation,
were either (i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or (ii) held of record by more
than 2,000 holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote of the holders of
the surviving corporation as provided in subsections (f) or (g) of Section251 of
this title.

(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares of any
class or series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant to
Sections251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:

a. Shares of stock of the corporation
surviving or resulting from such merger or consolidation, or depository receipts
in respect thereof;

b. Shares of stock of any other
corporation, or depository receipts in respect thereof, which shares of stock or
depository receipts at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than 2,000
holders;

<PAGE> 85
c. Cash in lieu of fractional shares or
fractional depository receipts described in the foregoing subparagraphs a. and
b. of this paragraph; or

d. Any combination of the shares of
stock, depository receipts and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.

(3) In the event all of the stock of a subsidiary
Delaware corporation party to a merger effected under Section253 of this title
is not owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary Delaware
corporation.

(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be available for
the shares of any class or series of its stock as a result of an amendment to
its certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially all
of the assets of the corporation. If the certificate of incorporation contains
such a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.

(d) Appraisal rights shall be perfected as follows:

(1) If a proposed merger or consolidation for which
appraisal rights are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the record
date for such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder electing
to demand the appraisal of his shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand for
appraisal of his shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of his shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A stockholder
electing to take such action must to do by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or

(2) If the merger or consolidation was approved
pursuant toSection228 or 253 of this title, the surviving or resulting
corporation, either before the effective date of the merger or consolidation or
within 10 days thereafter, shall notify each of the stockholders entitled to
appraisal rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the constituent
corporation, and shall include in such notice a copy of this section. The notice
shall be sent by certified or registered mail, return receipt requested,
addressed to the stockholder at his address as it appears on the records of the
corporation. Any stockholder entitled to appraisal rights may, within

<PAGE> 86
20 days after the date of mailing of the notice, demand in writing from the
surviving or resulting corporation the appraisal of his shares. Such demand will
be sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
his shares.

(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.

(f) Upon the filing of any such petition by a stockholder,
service of a copy thereof shall be made upon the surviving or resulting
corporation, which shall within 20 days after such service file in the office of
the Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded payment
for their shares and with whom agreements as to the value of their shares have
not been reached by the surviving or resulting corporation. If the petition
shall be filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.

(g) At the hearing on such petition, the Court shall determine
the stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who have
demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.

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<PAGE> 87
(h) After determining the stockholders entitled to an
appraisal, the Court shall appraise the shares, determining their fair value
exclusive of any element of value arising from the accomplishment or expectation
of the merger or consolidation, together with a fair rate of interest, if any,
to be paid upon the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings until
it is finally determined that he is not entitled to appraisal rights under this
section.

(i) The Court shall direct the payment of the fair value of
the shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree may
be enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of any
state.

(j) The costs of the proceeding may be determined by the Court
and taxed upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.

(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal rights as provided
in subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal of
his demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.

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<PAGE> 88
(l) The shares of the surviving or resulting corporation to
which the shares of such objecting stockholders would have been converted had
they assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.

5
<PAGE> 89
ANNEX IV
===============================================================================
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, 1995
OR

/ / 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 19, 1995, was $18,359,376 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 19, 1995, registrant had outstanding 9,500,660 shares of
Common Stock.
---------------
DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates certain information by reference from the
definitive proxy statement for the Annual Meeting of Stockholders to be held on
December 7, 1995 (the "Proxy Statement").

===============================================================================
<PAGE> 90
PART I

ITEM 1. BUSINESS

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 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.

In 1988, the Company began clinical trials of its NCP System for the
treatment of refractory partial seizures. As of June 30, 1995, NCP Systems had
been implanted in an aggregate of over 400 patients at leading epilepsy
treatment centers in the United States, Canada, Germany, Holland, The United
Kingdom, France, Switzerland, Belgium, Spain, Italy, Japan, Sweden, Norway,
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.

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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 January 1995,
the Company announced that it had submitted a major PMA amendment responding to
the FDA's questions and concerns, thus providing a mechanism for continued PMA
review.

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 October 1994, the Company announced that the FDA had requested
that Cyberonics submit a request to withdraw its PMA application and resubmit an
application at such time the company has completed its additional study. In
January 1995, the Company announced that the FDA had agreed that Cyberonics'
initial PMA application need not be voluntarily withdrawn. The decision allows
the Company's PMA application to remain active during the course of the
additional study and decreases the likelihood of needing to repeat the major
regulatory steps required for full PMA submission and filing acceptance. At that
time, the Company also 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. During the first half of fiscal 1996, the
Company expects to receive from the FDA the results of their review of the PMA
application as currently on file, which includes the aforementioned PMA
amendment responding to previously received FDA questions.

In January 1995, the Company also announced that it had received
permission to begin enrolling patients into its additional confirmatory trial,
under which an additional 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 at least through June 1996, and may take significantly
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 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.

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<PAGE> 92
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."

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

4
<PAGE> 93
"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. Two new antiepileptic drugs, felbamate and gabapentin, recently
received FDA approval, while one additional drug, lamotrigine, has received FDA
Advisory Committee recommendation for 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 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

5
<PAGE> 94
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, 1995, NCP
Systems had been implanted in an aggregate of over 400 patients at leading
epilepsy treatment centers in the United States, Canada, Germany, Holland, The
United Kingdom, France, Switzerland, Belgium, Spain, Italy, Japan, Sweden,
Norway, 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
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."

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- 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, 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.

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.

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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, 1995, approximately
400 patients had been implanted with NCP Systems, of whom approximately 275 were
implanted pursuant to clinical trials conducted at leading epilepsy treatment
centers in North America, Europe and Japan. The patients participating in the
trials were on average 33 years old, had suffered from epilepsy for 22 years,
were taking two antiepileptic drugs and were experiencing an average of
approximately 60 seizures per month prior to implant of the NCP System. All
patients in the trials continue to be treated with the antiepileptic drugs they
were receiving prior to implant of the NCP System.

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. As of June 30, 1995, a total of 115 patients had
been 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, 1995, 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 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 led patients to withdraw from the
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, 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
occurrence of such problems 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
result of operations. Clinical events are reported to the FDA in regular

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reports, whether or not related to the NCP System. The Company has reported
three 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 November 1991, the Company established an additional clinical
trial for the NCP System. The study was initially approved for implanting NCP
Systems in up to 100 patients, and subsequently expanded to 150 patients, with
all types of refractory seizures, and lowered the eligible age from 12 to two
years old. To date, approximately 130 patients had been implanted with an NCP
System under this clinical study. Cyberonics is not planning to make additional
implants under this study. In July 1994, the Company announced that it intends
to 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,
Cyberonics received FDA permission to begin enrolling up to 230 patients into
its additional confirmatory trial. Completion of the trial and submission of the
data is expected to take through at least June 1996, and may take significantly
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, via local
educational programs and through direct communications among physicians. The
Company intends to continue to sponsor scientifically rigorous trials of the NCP
System

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conducted by respected clinical investigators in influential medical centers in
key markets, to support investigators in the 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, 1995, the Company had signed distribution
agreements or letters of intent for Sweden, Norway, Finland, Spain, Australia,
Japan, 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 the
FDA's 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 must pass a GMP 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

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assembled on printed circuit boards by a contract manufacturer using
surface-mount technology. The boards are then 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 for attachment of
an epoxy header to which the lead connects. The Company expects to begin
performing epoxy header attachment in-house during fiscal 1996. The fully
assembled NCP Generator is returned to the Company 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

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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.

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 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, and has agreed to pay minimum royalties of $35,000 for
fiscal 1996 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

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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.

In addition to the license agreements, as of June 30, 1995 the
Company had 33 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 27 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 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

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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 ask for additional information at any time. Ultimately, an
FDA scientific advisory panel comprised of physicians and others with expertise
in the relevant field 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 weight 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, 1994, had received FDA approval for NCP Systems to be implanted in up to 270
patients at 38 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.

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confirmatory trial and submission of the data is expected to take at least
through June 1996, and may take significantly longer.

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 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 will be 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. 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 recordkeeping, 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 twelve
member countries of the European Union and is pursuing other regulatory
approvals outside the United States.

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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
third-party payors of most importance 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. 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 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.

16
<PAGE> 105
EMPLOYEES

As of June 30, 1995, the Company had 36 full-time employees,
including 8 in research and development, 5 in clinical and regulatory affairs,
12 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.

17
<PAGE> 106
ITEM 2. PROPERTIES

The Company leases approximately 16,591 square feet in Webster,
Texas. This facility contains approximately 5,700 square feet of manufacturing
space and approximately 10,900 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 requirements through at least June 30, 1996.

ITEM 3. LEGAL PROCEEDINGS

Not Applicable.

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

Not Applicable.

18
<PAGE> 107
EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company, their ages as of June 30,
1995, and certain additional information about them, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Reese S. Terry, Jr............................... 53 Chairman of the Board, President, Chief
Executive Officer and Secretary
John K. Bakewell................................. 34 Vice President, Finance and Administration
and Chief Financial Officer
William H. Duffell, Jr., Ph.D.................... 36 Vice President, Clinical
and Regulatory Affairs
Stephen D. Ford.................................. 45 Vice President, Manufacturing
Remi E. Martin................................... 44 Vice President, International
</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. In May 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 25 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. 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 to May 1993. From May 1988 to October
1990, Mr. Bakewell served as Manager with the Entrepreneurial Services 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 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.

19
<PAGE> 108
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. Martin joined the Company as Vice President, International in
December 1991. Prior to joining the Company, Mr. Martin held various executive
positions with Baxter Healthcare Corporation, a hospital supply and medical
device company, including serving as Vice President of European Sales and
Marketing for the Edwards Divisions from November 1986 to June 1989. From 1990
until he joined the Company, Mr. Martin served as the European Business Director
for Surgical Laser Technologies, Inc., a medical laser company. Mr. Martin holds
a B.S. in Marketing from E.D.C., Paris.

20
<PAGE> 109
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 1994 and 1995 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, 1994
- -------------------------------
First Quarter.............................................................. $12.25 $ 8.75
Second Quarter............................................................. $12.75 $ 9.00
Third Quarter.............................................................. $13.00 $ 6.50
Fourth Quarter............................................................. $ 9.00 $ 7.25
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
</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 September 19, 1995, there were 113 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.

21
<PAGE> 110
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, 1995 and 1994, and for each of the years in the three-year period
ended June 30, 1995 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, 1993, 1992 and
1991 are derived from audited financial statements not included herein.

<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------------

1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:

Net sales.................................. $ 966,989 $ 399,689 $ 149,775 $ 53,890 $ --

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

Operating expenses:

Research and development ............. 5,678,024 4,323,671 3,390,037 2,305,858 2,866,123

Selling, general and administrative 2,906,589 2,519,037 2,154,070 1,273,428 613,302
----------- ----------- ----------- ----------- -----------
Total operating expenses ....... 8,584,613 6,842,708 5,544,107 3,579,286 3,479,425

Interest and other income (net)............ 726,271 635,129 323,075 75,240 116,237
----------- ----------- ----------- ----------- -----------

Net loss .................................. $(7,238,810) $(5,925,725) $(5,121,720) $(3,492,703) $(3,363,188)
=========== =========== =========== =========== ===========

Net loss per share ........................ $ (.79) $ (.66) $ (.65) $ (.53) $ (.59)
=========== =========== =========== =========== ===========

Shares used in computing net loss per share 9,218,008 8,945,968 7,882,857 6,529,766 5,725,102
</TABLE>

22
<PAGE> 111
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:

Cash, cash equivalents and
marketable securities............................. $ 11,852,619 $ 18,468,154 $ 24,385,755 $ 3,372,529 $ 1,223,470
Working capital..................................... 8,988,373 9,676,289 20,489,855 2,825,599 468,939
Total assets........................................ 13,560,593 19,756,148 25,195,514 4,089,522 1,487,791
Convertible debt.................................... -- -- -- -- 1,000,000
Capital lease obligations, net of current portion... -- 72,562 183,818 220,890 150,623
Redeemable Convertible Preferred Stock.............. -- -- -- 12,548,453 5,548,453
Accumulated deficit................................. (27,808,921) (20,570,111) (14,644,386) (9,522,666) (6,029,963)
Common stockholders' equity......................... $ 11,443,555 $ 18,503,398 $ 24,134,127 $ (9,444,338) $ (6,011,935)
</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
Investigational Device Exemption ("IDE") from the United States Food and Drug
Administration ("FDA"). The Company has been unprofitable to date, has no
significant 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, 1995, the Company had
incurred a cumulative net deficit of approximately $27.8 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. In January 1995,
the Company announced that it had submitted a major PMA amendment responding to
the FDA's questions and concerns, thus providing a mechanism for continued PMA
review.

23
<PAGE> 112
In October 1994, the Company announced that the FDA had requested
that Cyberonics submit a request to withdraw its PMA application and resubmit an
application at such time the company has completed its additional study. In
January 1995, the Company announced that the FDA had agreed that Cyberonics'
initial PMA application need not be voluntarily withdrawn. The decision allows
the Company's PMA application to remain active during the course of the
additional study and decreases the likelihood of needing to repeat the major
regulatory steps required for full PMA submission and filing acceptance. At that
time, the Company also 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. During the first half of fiscal 1996, the
Company expects to receive from the FDA the results of their review of the PMA
application as currently on file, which includes the aforementioned PMA
amendment responding to previously received FDA questions.

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 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. 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 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 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

24
<PAGE> 113
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 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, 1995, the Company has funded approximately
$530,000 of its equipment needs with proceeds from an equipment lease agreement.
Except for capital lease obligations, the Company had no short- or long-term
borrowings outstanding at June 30, 1995. The Company 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 the fiscal year ending June
30, 1996, the Company may require additional funds either before or after that
date. 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.

25
<PAGE> 114
The Company's liquidity will 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.

In order to ensure that existing levels of working capital are
sufficient to complete the Company's confirmatory clinical trial, during April
1995 the Company implemented a cost reduction program whereby it is seeking to
reduce or eliminate expenses for activities which do not relate to United States
clinical trial activities. This program has resulted in the curtailment of
certain operational activities not directly related to obtaining United States
regulatory approval for the NCP System.

RESULTS OF OPERATIONS

Net Sales. Cyberonics has been granted regulatory approval to market
and sell the NCP System internationally in the twelve member countries of the
European Union (the United Kingdom, Germany, The Netherlands, France, Spain,
Italy, Belgium, Denmark, Greece, Portugal, Ireland and Luxenbourg) and has
permission to sell in certain other international markets including Sweden,
Norway, 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, 1996, 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. Moreover, the Company is not
eligible for reimbursement for NCP Systems implanted in patients covered by
Medicare or Medicaid. 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, 1995 totaled $966,989 compared
to $399,689 and $149,775 for the years ended June 30, 1994 and 1993,
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, 1995, consisted of $762,802 from international markets, $179,787
from domestic risk-sharing arrangements and $24,400 from domestic
investigational centers to which the Company provides research funding.

26
<PAGE> 115
the Company's license agreements totaled $46,000 during each of the years ended
June 30, 1995, 1994 and 1993, 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. Any future amounts which may exceed this minimum will
be included as a component of the Company's cost of sales.

The Company's gross margin percentage was 64.1% for the year ended
June 30, 1995 compared to 70.5% and 66.3% for fiscal 1994 and 1993,
respectively. The fiscal 1995 decrease is attributable primarily to the addition
of royalties in excess of minimum amounts into cost of sales during the year and
higher component and third-party contractor costs, offset partially by 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
$5,678,024, $4,323,671 and $3,390,037 during the years ended June 30, 1995, 1994
and 1993, respectively. The increased level of research and development
expenditures is due primarily to increased personnel costs associated with
continued product and process development and process certification efforts, and
the implementation of a Company-wide quality system and the costs associated
with the Company's confirmatory clinical trial. The Company expects research and
development spending to increase significantly during fiscal 1996 as the
Company's confirmatory clinical trial proceeds.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $2,906,589, $2,519,037 and $2,154,070 during the
years ended June 30, 1995, 1994 and 1993, respectively. The continued increases
from year to year were primarily due to expanded international market
development and marketing activities.

Interest Income, net. Net interest income totaled $688,909, $629,993
and $326,408 during the years ended June 30, 1995, 1994 and 1993, respectively.
The Company expects to have interest income that will partially offset operating
losses for several fiscal quarters. Interest income increased during fiscal 1995
in comparison with fiscal 1994, despite lower levels of invested funds, due to
improved interest rates in United States fixed income markets.

Other Income (Expense), net. Other income (expense) totaled $37,362,
$5,136 and $(3,333) during the three years ended June 30, 1995, 1994 and 1993,
respectively. For fiscal 1995 and 1994, other income consisted of net gains
resulting from foreign currency transactions.

Income Taxes. At June 30, 1995, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $24.7 million
which expire during the years 2003 through 2010, and tax credit carryforwards of
approximately $1 million for federal income tax purposes which do not expire.
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.

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, 1995 as compared to the years ended June 30, 1994 and 1993.

27
<PAGE> 116
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-14
hereof.

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

Not applicable.

28
<PAGE> 117
PART III

Certain information required by Part III is omitted from this Report
in that the Registrant intends to file a definitive proxy statement pursuant to
Regulation 14A with the Securities and Exchange Commission (the "Proxy
Statement") relating to its annual meeting of stockholders not later than 120
days after the end of the fiscal year covered by this Report, and such
information is incorporated by reference herein.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information concerning the Company's directors required by this
Item is incorporated by reference to the Company's Proxy Statement under the
heading "Election of Directors."

Information regarding executive officers is included in Part I hereof
under the caption "Executive Officers of the Registrant" and is incorporated by
reference into this Item 10.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to
the Company's Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The information required by this Item is incorporated by reference to
the Company's Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference to
the Company's Proxy Statement.

29
<PAGE> 118
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-14 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, 1995 and 1994............................................ F-2
Consolidated Statements of Operations for the Three Years Ended June 30, 1995....................... F-3
Consolidated Statements of Stockholders' Equity for the Three Years Ended June
30, 1995............................................................................................ F-4
Consolidated Statements of Cash Flows for the Three Years Ended June 30, 1995....................... 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* Stock Purchase Warrant dated May 1, 1992.
10.8* Amended and Restated Stockholders Agreement dated October 16, 1992.
11 Statement Regarding Computation of Net Loss Per Share.
23.1 Consent of Independent Public Accountants.
24 Power of Attorney (see page 33).
</TABLE>

30
<PAGE> 119
* Incorporated by reference to the Company's Registration Statement on
Form S-1 (Reg. No. 33-45118) declared effective February 10, 1993.

(1) Document indicated is a compensatory plan.

(b) Rep rts on Form 8-K.

Not Applicable

See Item 14(a)(3) above

31
<PAGE> 120
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 20, 1995 BY: /s/ Reese S. Terry, Jr.
-----------------------
Reese S. Terry, Jr.
Chairman of the Board, President and
Chief Executive Officer

32
<PAGE> 121
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, President September 20, 1995
- --------------------------------------------
Reese S. Terry, Jr. and Chief Executive Officer
(Principal Executive Officer)

/s/ John K. Bakewell Vice President, Finance and Administration September 20, 1995
- --------------------------------------------
John K. Bakewell and Chief Financial Officer
(Principal Financial and Accounting Officer)

/s/ Robert P. Cummins Director September 20, 1995
- --------------------------------------------
Robert P. Cummins

/s/ Thomas A. Duerden Director September 20, 1995
- --------------------------------------------
Thomas A. Duerden, Ph.D.

/s/ Dennis J. Gorman Director September 20, 1995
- --------------------------------------------
Dennis J. Gorman
</TABLE>

33
<PAGE> 122
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, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1995. 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, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1995, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Houston, Texas
August 1, 1995

F-1
<PAGE> 123
<TABLE>
<CAPTION>
CYBERONICS, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30,
-------------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ......................................... $ 8,862,993 $ 4,608,063
Securities held to maturity ....................................... 1,029,898 5,529,471
Accounts receivable ............................................... 339,658 74,031
Inventories ....................................................... 605,556 425,299
Prepaid expenses................................................... 267,306 219,613
------------ ------------
Total Current Assets ....................................... 11,105,411 10,856,477
Securities held to maturity ............................................ 1,959,728 8,330,620
Property and equipment, net ............................................ 481,975 551,216
13,479 17,835
------------ ------------
Other assets, net ...................................................... $ 13,560,593 $ 19,756,148
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................................. $ 574,915 $ 279,874
Accrued liabilities ............................................... 1,480,497 791,853
Current portion of capital lease obligations ...................... 61,626 108,461
------------ ------------
Total Current Liabilities .................................. 2,117,038 1,180,188
Capital lease obligations, net of current portion ...................... -- 72,562
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; 9,499,261 and 9,051,054 shares issued and outstanding
at June 30, 1995 and 1994, respectively ......................... 94,993 90,511
Additional paid-in capital ........................................ 39,329,006 39,205,998
Deferred compensation ............................................. (131,800) (223,000)
Accumulated deficit ............................................... (27,808,921) (20,570,111)
Cumulative translation adjustment ................................. (39,723) --
------------ ------------
Total Stockholders' Equity ................................. 11,443,555 18,503,398
------------ ------------
$ 13,560,593 $ 19,756,148
============ ============
</TABLE>

See accompanying notes to financial statements

F-2
<PAGE> 124
<TABLE>
<CAPTION>
CYBERONICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED JUNE 30,
-------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net sales ...................................... $ 966,989 $ 399,689 $ 149,775
Cost of sales .................................. 347,457 117,835 50,463
----------- ----------- -----------
Gross profit .................... 619,532 281,854 99,312
Operating expenses:
Research and development .................. 5,678,024 4,323,671 3,390,037
Selling, general and administrative ....... 2,906,589 2,519,037 2,154,070
----------- ----------- -----------
Total operating expenses ........... 8,584,613 6,842,708 5,544,107
----------- ----------- -----------
Loss from operations ............ (7,965,081) (6,560,854) (5,444,795)
Interest income, net ........................... 688,909 629,993 326,408
Other income (expense), net .................... 37,362 5,136 (3,333)
----------- ----------- -----------
Net loss ........................ $(7,238,810) $(5,925,725) $(5,121,720)
=========== =========== ===========

Net loss per share .............. $ (.79) $ (.66) $ (.65)
=========== =========== ===========
Shares used in computing net loss
per share .................... 9,218,008 8,945,968 7,882,857
=========== =========== ===========
</TABLE>

See accompanying notes to financial statements

F-3
<PAGE> 125
<TABLE>
<CAPTION>
CYBERONICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

ADDITIONAL CUMULATIVE
COMMON STOCK PAID-IN DEFERRED ACCUMULATED TRANSLATION
------------------------
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT ADJUSTMENT
---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1992 ..................... 1,134,724 $ 11,347 $ 472,381 $ (405,400) $ (9,522,666) $ --
Issuances of Common Stock in initial public
offering, net of offering costs ............. 2,000,000 20,000 22,010,129
Conversions of all Preferred Stock upon closing
of initial public offering .................. 5,768,034 57,680 16,490,773
Stock options exercised ....................... 6,868 69 16,515
Warrants exercised ............................ 5,185 52 (52)
Issuance of Common Stock under Employee
Special Recognition Stock Program ........... 1,320 13 13,806
Amortization of deferred compensation ......... 91,200
Net loss for the year ......................... (5,121,720)
---------- ------------ ------------ ------------ ------------ ------------
Balances at June 30, 1993 ..................... 8,916,131 89,161 39,003,552 (314,200) (14,644,386) --
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 ......... 91,200
Net loss for the year ......................... (5,925,725)
---------- ------------ ------------ ------------ ------------ ------------
Balances at June 30, 1994 ..................... 9,051,054 90,511 39,205,998 (223,000) (20,570,111) --
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 ......... 91,200
Translation adjustment ........................ (39,723)
Net loss for the year ......................... (7,238,810)
========== ============ ============ ============ ============ ============
Balances at June 30, 1995 ..................... $9,499,261 $ 94,993 $ 39,329,006 $ (131,800) $(27,808,921) $ (39,723)
========== ============ ============ ============ ============ ============
</TABLE>

See accompanying notes to financial statements

F-4
<PAGE> 126
CYBERONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net loss .......................................... $ (7,238,810) $ (5,925,725) $ (5,121,720)
Non-cash items included in net loss:
Depreciation and amortization ................. 329,738 314,266 237,860
Compensation expense related to certain stock
options and common stock issuances .......... 91,200 91,200 91,200
Issuance of Common Stock under Employee
Stock Recognition Program ................... 750 27,826 13,819
Change in operating assets and liabilities:
Accounts receivable ........................... (265,627) (58,228) (15,629)
Inventories ................................... (180,257) (230,040) (57,249)
Prepaid expenses .............................. (47,693) (143,399) 3,189
Accounts payable and accrued liabilities ...... 983,685 332,500 65,344
Other .................................................. 4,356 (4,228) 6,223
------------ ------------ ------------
Net Cash Used In Operating Activities ... (6,322,658) (5,595,828) (4,776,963)
Cash Flow From Investing Activities:
Purchases of property and equipment ............... (260,497) (356,606) (267,184)
Purchases of marketable securities ................ (8,050,344) (15,483,500) (15,946,461)
Maturities of marketable securities ............... 18,920,809 17,569,870 --
------------ ------------ ------------
Net Cash Provided By (Used In)
Investing Activities .................. 10,609,968 1,729,764 (16,213,645)
Cash Flow From Financing Activities:
Proceeds from:
Issuance of Common Stock, net of offering costs 126,740 175,970 22,046,737
Issuance of Redeemable Convertible Preferred
Stock ....................................... -- -- 4,000,000
Capital leases obligations .................... -- -- 128,838
Payments of capital lease obligations ............. (119,397) (141,137) (118,202)
------------ ------------ ------------
Net Cash Provided By Financing Activities 7,343 34,833 26,057,373
------------ ------------ ------------
Effect of exchange rate changes on cash and cash
equivalents ..................................... (39,723) -- --
------------ ------------ ------------
Net Increase (Decrease) In Cash and
Cash Equivalents ...................... 4,254,930 (3,831,231) 5,066,765
Cash and cash equivalents at beginning of year .... 4,608,063 8,439,294 3,372,529
------------ ------------ ------------
Cash and cash equivalents at end of year. $ 8,862,993 $ 4,608,063 $ 8,439,294
============ ============ ============
</TABLE>

Interest payments totaled $13,348, $29,104 and $39,730 during the years ended
June 30, 1995, 1994 and 1993, respectively.

Investing and financing activities not resulting in cash receipts or payments
consist of conversions of $16,548,453 of Redeemable Convertible Preferred Stock
into shares of the Company's Common Stock during the year ended June 30, 1993.

See accompanying notes to financial statements

F-5
<PAGE> 127
CYBERONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1995

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED DATA

Description of Business. Cyberonics, Inc. ("Cyberonics" or the
"Company"), was incorporated in the State of Delaware on December 9, 1987, to
design, develop, manufacture and bring to market medical devices which deliver a
novel therapy, vagus nerve stimulation, for the treatment of epilepsy and other
debilitating neurological disorders. Cyberonics markets its proprietary
implantable device, the NCP(R) System, internationally while it continues
clinical testing under 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.

Consolidation. In November 1992, the Company established Cyberonics
Europe S.A., a wholly-owned subsidiary focused on the Company's international
markets. The accompanying consolidated financial statements include the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.

Presentation. Certain amounts in the financial statements of prior
years have been reclassified to conform to the presentation used for the year
ended June 30, 1995.

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.

At June 30, 1995 and 1994, the Company's entire investment portfolios
consisted of securities held to maturity. Securities held to maturity are
primarily various types of corporate bonds, floating rate notes and asset-
backed investments with various maturity dates over the next 18 months and have
a fair market value of $3,002,788

F-6
<PAGE> 128
and a gross unrealized holding gain of $13,162 at June 30, 1995. At June 30,
1995, the Company's investment portfolio consists of the following:

<TABLE>
<CAPTION>
FAIR MARKET CARRYING
VALUE VALUE
----------- ----------
<S> <C> <C>
Securities held to maturity--
Current--
Corporate debt $1,001,740 $1,029,898
Noncurrent--
Corporate debt 1,352,640 1,382,323
Collateralized mortgage obligations 648,408 577,405
---------- ----------
2,001,048 1,959,728
---------- ----------
Total securities held to maturity $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.

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, 1995, consisted of $762,802 from international markets, $179,787
from domestic risk-sharing arrangements and $24,400 from domestic
investigational centers to which the Company provides research funding.

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.

Income Taxes. In 1992, the Financial Accounting Standards Board
issued Statement No. 109, "Accounting for Income Taxes." Effective July 1, 1992,
Cyberonics adopted the provisions of the new statement, changing from its
previous method of accounting for income taxes as set forth in APB Opinion No.
11. In adopting Statement No. 109, there was no effect on the Company's net loss
for the year ended June 30, 1993 and no cumulative effect on the Company's
accumulated deficit at July 1, 1992. Deferred income taxes reflect the impact of
temporary differences between financial accounting and tax bases of assets and
liabilities. Such differences relate primarily to

F-7
<PAGE> 129
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, 1995.

Net Loss Per Share. The Company's net loss per share is based on the
weighted average number of common shares outstanding, adjusted as described
below. With one exception, common equivalent shares are excluded from the per
share calculations, as the effect of their inclusion is antidilutive. Pursuant
to Securities and Exchange Commission Staff Accounting Bulletins, all common,
preferred and common equivalent shares issued during the 12 months preceding or
in contemplation of the Company's initial public offering (using the treasury
stock method and the Company's initial public offering price of $12 per share)
have been included in the calculation of common and common equivalent shares
outstanding as if they were outstanding for all periods prior to completion of
the Company's initial public offering. Options and warrants granted by the
Company prior to December 31, 1991 and not in contemplation of an offering have
been excluded from the calculation of common and common equivalent shares
outstanding because such options and warrants are antidilutive. Shares of
Redeemable Convertible Preferred Stock are treated as if converted to common
stock on the respective dates of original issuance.

NOTE 2. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1995 1994
-------- --------
<S> <C> <C>
Raw materials and components $259,402 $248,463
Work-in-process 180,944 102,335
Finished goods 165,210 74,501
-------- --------
$605,556 $425,299
======== ========
</TABLE>

NOTE 3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Furniture and fixtures $ 231,478 $ 199,282
Office equipment 46,256 40,123
Computer equipment 555,455 438,115
Research and development equipment 93,147 91,578
Manufacturing equipment 466,779 367,054
Leasehold improvements 243,124 237,810
----------- -----------
1,636,239 1,373,962
Accumulated depreciation (1,154,264) (822,746)
----------- -----------
$ 481,975 $ 551,216
=========== ===========
</TABLE>

F-8
<PAGE> 130
NOTE 4. ACCRUED LIABILITIES

Accrued liabilities are as follows:

<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1995 1994
---------- ----------
<S> <C> <C>
Clinical costs $ 804,587 $ 224,964
Payroll and other compensation 297,977 163,710
Professional services 144,000 216,076
Customer deposits 85,279 108,600
Warranties 106,635 57,503
Other 42,019 21,000
---------- ----------
$1,480,497 $ 791,853
========== ==========
</TABLE>

NOTE 5. PREFERRED STOCK

In October 1992, the Company issued an additional 500,000 Series D
shares of its Redeemable Convertible Preferred Stock (the "Preferred Stock") in
exchange for proceeds totaling $4,000,000, bringing the aggregate shares of
Series A through D Preferred Stock issued and outstanding to 3,845,357. In
February 1993, concurrent with the closing of the Company's initial public
offering, all Series A through D preferred shares, with a paid in value totaling
$16,548,453, were converted into 5,768,034 shares of the Company's Common Stock
at a conversion rate of three common shares for each two shares of Preferred
Stock. Except for certain registration rights, all rights, preferences and
privileges associated with the Company's previously outstanding Preferred Stock
were terminated upon conversion.

Effective upon the February 1993 closing of its initial public
offering, 2,500,000 shares of undesignated Preferred Stock became authorized and
available for future issuance, of which none have been issued through June 30,
1995. 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.

NOTE 6. STOCKHOLDERS' EQUITY

Common Stock. During the year ended June 30, 1993, stock option
exercises, warrant exercises and issuances of Common Stock under the Employee
Stock Recognition Program increased the number of common shares by 6,868, 5,185
and 1,320, respectively. In February 1993, the Company issued 2,000,000 shares
of its Common Stock in an initial public offering. Proceeds from the issuance
totaled $22,030,129, net of underwriting discounts and other offering costs of
$1,989,871. As described in Note 5, concurrent with the closing of the offering,
all outstanding shares of Preferred Stock were converted into shares of the
Company's Common Stock at a rate of three common shares for each two shares of
Preferred 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.

F-9
<PAGE> 131
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.

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. During
the year ended June 30, 1993, the warrant holder 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, 1995, 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; options to purchase 105,000 shares vest in
increments upon achievement of certain operational objectives or 10 years from
their date of grant; 22,500 shares vest in increments upon satisfaction of
certain marketing milestones or 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. In certain circumstances involving a
change in control, the vesting of options is accelerated.

F-10
<PAGE> 132
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, 1992 690,100 741,650 244,410 $ .07 - 3.00
Granted (266,249) 266,249 -- 3.00 - 8.00
Options becoming exercisable -- -- 151,969 .07 - 7.00
Exercised -- (6,868) (6,868) .37 - 3.00
Canceled or forfeited 62,582 (62,582) -- .37 - 7.00
-------- -------- --------

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
======== ======== ========
</TABLE>

For certain options granted, the Company recognizes as compensation
expenses 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. An aggregate deferred expense of $456,000 resulted from
the issuance of certain options during the year ended June 30, 1992. The Company
recognized $91,200 of this amount as compensation expense in each of the years
ended June 30, 1995, 1994 and 1993.

Stock Purchase Plan. In January 1992, the Company's shareholders
adopted the Cyberonics, Inc. Employee Stock Purchase Plan (the "Stock Purchase
Plan"), which became effective in April 1993. Under the Stock Purchase Plan,
100,000 shares of the Company's Common Stock are 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, respectively. At June 30, 1995, 42,276 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

F-11
<PAGE> 133
performances and/or contributions at the discretion of the Company's President,
based on nominations made by fellow employees. At June 30, 1995, 4,030 shares
remain available for future issuances under the program.

NOTE 8. INCOME TAXES

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

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Domestic $(6,604,780) $(5,749,017) $(5,121,720)
Foreign (634,030) (176,708) --
----------- ----------- -----------
$(7,238,810) $(5,925,725) $(5,121,720)
=========== =========== ===========
</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,
-------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
U.S. statutory rate (34.0)% (34.0)% (34.0)%
Effect of unused tax loss and tax credit 31.4 32.7 33.3
carryforwards
Amortization of deferred compensation .4 .5 .6
Other, net 2.2 .8 .1
----- ----- -----
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,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets:
Federal net operating loss carryforwards $ 8,406,147 $ 6,166,683
Tax credit carryforwards 1,003,964 699,395
Start-up costs, net of amortization 170,676 303,916
Depreciation 77,448 89,054
Clinical costs 60,180 76,488
Other, net 189,979 160,429
----------- -----------
Total deferred tax assets 9,908,394 7,495,965
Total deferred tax liabilities, net (12,676) (7,158)
Deferred tax valuation reserve (9,895,718) (7,488,807)
----------- -----------
Net deferred tax assets and liabilities $ -- $ --
=========== ===========
</TABLE>

At June 30, 1995 the Company has net operating loss carryforwards of
approximately $24,700,000 for federal income tax purposes, which expire during
the years 2003 through 2010, and tax credit carryforwards of approximately
$1,000,000 for federal income tax purposes which do not expire. As required
under Statement No. 109, for financial reporting purposes, a valuation allowance
totaling $9,895,718 is established as of June 30, 1995, to fully offset the
Company's net deferred tax assets, including those relating to its
carryforwards. The

F-12
<PAGE> 134
valuation allowance increased by $2,406,911 during fiscal 1995 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.

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 contribution was made to the Plan for the year ended
June 30, 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, 1995. 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 $26,000 during fiscal year 1995 and
$10,000 during each of the fiscal years 1994 and 1993, and has agreed to pay
minimum royalties of $35,000 in fiscal 1996 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
bi-directional lead to a non-exclusive license.

F-13
<PAGE> 135
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>
1996 $200,805
1997 199,092
1998 66,363
--------
$466,260
========
</TABLE>

Obligations for property and equipment purchased under capital leases
relate primarily to office, computer and research equipment and leasehold
improvements to the Company's facility. These obligations are due as follows:

<TABLE>
<S> <C>
Year ended June 30, 1996 $ 73,035
Amount representing interest (11,409)
--------
Current portion of capital lease obligations $ 61,626
========
</TABLE>

Other Arrangements. During fiscal 1995, the Company 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 $700,000 at June 30, 1995.

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, 1995, management believes that the Company
has no significant concentrations of credit risk and has incurred no 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.

F-14
<PAGE> 136
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>
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
============ ========= ========= ============

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, 1995 and 1994. 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>
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>

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH ANNUAL
QUARTER QUARTER QUARTER QUARTER TOTALS
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>

1994
- ----
Net sales $ 72,552 $ 77,402 $ 165,800 $ 83,935 $ 399,689
Gross profit 45,304 47,887 110,793 77,870 281,854
Operating expenses 1,753,057 1,903,244 1,627,386 1,559,021 6,842,708
Net loss (1,526,638) (1,726,073) (1,361,035) (1,311,979) (5,925,725)
Net loss per share $ (.17) $ (.19) $ (.15) $ (.15) $ (.66)
Shares used in computing net
loss per share 8,916,947 8,923,566 8,950,388 8,992,972 8,945,968

</TABLE>

F-15
<PAGE> 137
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-16
<PAGE> 138

ANNEX V
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

--------

FORM 10-K/A
AMENDMENT NO. 1

(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, 1995

/ / 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 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 .
--- ---

At October 13, 1995, registrant had outstanding 9,501,085 shares of
Common Stock.

--------

================================================================================
<PAGE> 139
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding executive officers is included in Part I hereof
under the caption "Executive Officers of the Registrant" and is incorporated by
reference into this Item 10.

The names and certain information about the Company's directors are set
forth below:

<TABLE>
<CAPTION>
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION SINCE
- ------------------------ --- ------------------------------------------- --------
<S> <C> <C> <C>
Reese S. Terry, Jr. ........ 53 Chairman of the Board, Executive Vice
President and Secretary of the Company 1987
Robert P. Cummins .......... 42 Chief Executive Officer and President
of the Company; General Partner, Vista
Partners, L.P. and Vista III Partners, L.P. 1988
Thomas A. Duerden, Ph.D. ... 65 Independent Business Consultant 1988
Dennis J. Gorman ........... 37 General Partner, Sevin Rosen Funds 1988
</TABLE>

Except as set forth below, each of the nominees has been engaged in the
principal occupation described above during the past five years. There is no
family relationship between any director or executive officer of the Company.

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. In May 1995, Mr.
Terry assumed the additional duties of President and Chief Executive Officer
until Mr. Cummins was appointed to these positions in September, 1995. 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 over 25 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 to be the 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.

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

2
<PAGE> 140
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.

Mr. Gorman has been a director of the Company since March 1988.
Mr. Gorman is a general partner of the partnership that controls Sevin Rosen
Fund III, L.P. and other venture capital funds affiliated with Sevin Rosen
Management Company, a position he has held since 1984. Mr. Gorman holds an S.B.
and an S.M. in electrical engineering and computer science, and a masters degree
in business from the Massachusetts Institute of Technology.

BOARD MEETINGS AND COMMITTEES

The Board of Directors of the Company held a total of twelve meetings,
and acted by written consent one time, during the fiscal year ended June 30,
1995. 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 Dennis J. Gorman and Mitchell
J. Blutt, a former director of the Company met one time during the fiscal year
ended June 30, 1995. 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 directors Dennis J. Gorman and Thomas
A. Duerden.

The Compensation Committee, which consisted of directors Robert P.
Cummins and Thomas A. Duerden in fiscal 1995, met or acted by unanimous written
consent seven 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 directors Dennis J. Gorman and Thomas A. Duerden.

During the fiscal year ended June 30, 1995, no current director missed
more than one meeting of the Board of Directors or Committee on which such
director served.

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, 1995, all Section
16(a) filing requirements applicable to its officers, directors and ten-percent
stockholders were complied with, except that Forms 5 for Mr. Terry, Mr. Martin,
Mr. Bakewell and Mr. Ford were filed late.

3
<PAGE> 141
ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table. The following table sets forth the compen-
sation paid by the Company for the year ended June 30, 1995 to the Chief
Executive Officer of the Company for fiscal 1995 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
------------
ANNUAL COMPENSATION SECURITIES
FISCAL ---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION
- --------------------------- ------ ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Allen W. Hill(1) ....................... 1995 $170,290 $10,190 25,000 $24,500(2)
President and Chief Executive Officer 1994 174,524 2,234 -- --
1993 150,643 -- 37,500 --

Reese S. Terry, Jr ..................... 1995 127,746 11,158 20,000 5,544(3)
Chairman of the Board and Executive 1994 121,763 2,234 -- --
Vice President 1993 115,340 -- -- --

Remi E. Martin ......................... 1995 139,851 33,843 20,000 --
Vice President, International 1994 100,000 10,862(4) -- --
1993 100,000 -- -- 9,403(5)

John K. Bakewell(6) .................... 1995 101,620 8,630 55,000 226(3)
Vice President Finance and Adminis- 1994 96,380 12,234 -- --
tration and Chief Financial Officer 1993 13,159 -- 45,000 --

Stephen D. Ford ........................ 1995 98,762 8,158 45,000 220(3)
Vice President, Manufacturing 1994 95,000 2,234 -- --
1993 80,417 -- 20,000 --
</TABLE>

- -------------------------------
(1) Mr. Hill resigned from the Company effective May 5, 1995. Reese S.
Terry assumed the responsibilities of president and chief executive
officer from May 5, 1995 to September 21, 1995. Robert P. Cummins, the
Company's current chief executive officer was appointed chief executive
officer on September 21,1995.

(2) Mr. Hill received $24,500 during the fiscal year ended June 30, 1995
pursuant to his separation agreement. See "--Employment Agreements."

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

(4) Includes $2,234 paid pursuant to the Company-wide bonus plan and $8,628
paid pursuant to a sales-related plan applicable only to Mr. Martin.

(5) Consists of sales commissions paid.

(6) 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.

4
<PAGE> 142
Option Grants in Last Fiscal Year. The following table sets forth each
grant of stock options made during the year ended June 30, 1995 to each of the
Named Executive Officers:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM ($)(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% 10%
- ----------------------- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Allen W. Hill ....... 25,000 4.5% 4.75 8/01/95(2) -- --

Reese S. Terry, Jr .. 20,000 3.6% 4.75 9/21/04 59,745 151,406

Remi E. Martin ...... 20,000 3.6% 4.75 9/21/04 59,745 151,406

John K. Bakewell .... 15,000 2.7% 4.75 9/21/04 44,809 113,554
15,000 2.7% 3.50 12/09/04 33,017 83,671
25,000 4.5% 3.25 5/02/05 51,098 129,492

Stephen D. Ford ..... 20,000 3.6% 4.75 9/21/04 59,745 151,406
25,000 4.5% 3.2 5/02/05 51,098 129,492
</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.

(2) Mr. Hill resigned from the Company effective May 5, 1995. All of the
unexercised options held by Mr. Hill expired 90 days after his
resignation.

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,
1995 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: OPTIONSAT FISCAL YEAR-END:
NAME ON EXERCISE(#) REALIZED-($)(1) EXERCISABLE/UNEXERCISABLE(#)(2) EXERCISABLE/UNEXERCISABLE($)(3)
------------------ -------------- --------------- ------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Allen W. Hill 317,500 $1,149,350 -- / -- -- / --
Reese S. Terry, Jr. -- -- -- / 20,000 -- / --
Remi E. Martin -- -- 41,250 / 53,750 $157,988 / $129,263
John K. Bakewell -- -- 20,250 / 79,750 $ 1,500 / $ 44,750
Stephen D. Ford -- -- 24,917 / 65,083 $ 24,375 / $44,375
</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,
1995. All other options are indicated as "Unexercisable."

(3) Market value of underlying securities at fiscal year-end ($4.50/per
share) minus the exercise price.

5
<PAGE> 143
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, 1995 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.

EMPLOYMENT AGREEMENTS

The Company entered into a separation agreement with Allen Hill
effective as of May 5, 1995 pursuant to which Mr. Hill received $15,167 per
month beginning on June 5, 1995 and ending on September 5, 1995.

The Company entered into Change of Control Agreements with Mr. Bakewell
and Mr. Ford, both Named Executive Officers, in May 1995, pursuant to which such
officers will receive an amount equal to 50% of his then-current annual salary
in the event of any change of control of the Company before May 1996.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Mr. Hill, although not a member of the Compensation Committee, assisted
the Compensation Committee in assessing the Company's executive compensation
structure, other than with respect to himself.

6
<PAGE> 144
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth as of October 13, 1995 certain
information with respect to the beneficial ownership of the Company's Common
Stock (i) by each person known by the Company to own beneficially more than five
percent of the outstanding shares of Common Stock, (ii) by each director of the
Company, (iii) by each of the Named Executive Officers and (iv) by all directors
and executive officers as a group. Except as otherwise noted below, the Company
knows of no agreements among its stockholders which relate to voting or
investment of its shares of Common Stock.

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED(1)
-------------------------
DIRECTORS, EXECUTIVE OFFICERS AND PERCENTAGE
FIVE PERCENT STOCKHOLDERS NUMBER OWNERSHIP
- ------------------------------------------- --------- ----------
<S> <C> <C>
Vista III, L.P.(2) 1,573,204 16.6%
36 Grove Street
New Canaan, CT 06840

Sevin Rosen Fund III, L.P.(3) 1,368,750 14.4%
Dennis J. Gorman(4) 1,378,350 14.5%
Two Galleria Tower
13455 Noel Road
Dallas, TX 75240

Pfizer Hospital Products Group, Inc. 1,106,849 11.6%
235 East 42nd Street
New York, NY 10017

Reese S. Terry, Jr.(5) 940,165 9.9%
c/o Cyberonics, Inc.
17448 Highway 3, Suite 100
Webster, TX 77598-4135

Chemical Venture Capital Associates 517,198 5.4%
270 Park Avenue, 5th Floor
New York, NY 10012

Robert P. Cummins(6) 16,000 *

Allen W. Hill(7) 342,081 3.6%

Remi E. Martin(8) 56,920 *

John K. Bakewell(9) 32,672 *

Stephen D. Ford(10) 38,550 *

Thomas A. Duerden, Ph.D.(11) 29,500 *

All officers and directors as a group 2,844,155 29.5%
(8 persons)(12)
</TABLE>

- -------------------------------
* Less than 1%

7
<PAGE> 145
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of 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 Common Stock shown as beneficially owned by
them.

(2) Mr. Cummins, the chief executive officer and a director of the Company,
is a limited partner of the partnership that controls Vista III, L.P.
(3) Mr. Gorman, a director of the Company, is a general partner of the
partnership that controls Sevin Rosen Fund III, L.P.

(4) Includes 1,368,750 shares owned by Sevin Rosen Fund III, L.P. Mr.
Gorman, a director of the Company, is a general partner of the
partnership that controls Sevin Rosen Fund III, L.P. Mr. Gorman
disclaims beneficial ownership of the shares held by Sevin Rosen Fund
III, L.P. except to the extent of his proportionate interest in that
fund. Also includes 1,800 shares owned by Mr. Gorman's wife's self
directed IRA. Also includes 6,000 shares subject to options exercisable
within 60 days of October 13, 1995.

(5) Includes 148,500 shares held in trusts for the benefit of Mr. Terry's
children of which Mr. Terry serves as trustee. Also includes 4,165
shares subject to options exercisable within 60 days of October 13,
1995.

(6) Includes 6,000 shares subject to options exercisable within 60 days of
October 13, 1995.

(7) Mr. Hill resigned from the Company effective May 5, 1995.

(8) Includes 43,750 shares subject to options exercisable within 60 days of
October 13, 1995.

(9) Includes 31,542 shares subject to options exercisable within 60 days of
October 13, 1995.

(10) Includes 36,082 shares subject to options exercisable within 60 days of
October 13, 1995.

(11) Includes 6,000 shares subject to options exercisable within 60 days of
October 13, 1995.

(12) Includes 143,456 shares subject to options held by executive officers
and directors which are exercisable within 60 days of October 13, 1995.
Also includes shares which may be determined to be beneficially owned
by officers and directors. See Notes 3, 5, and 7. Excludes shares held
by Allen Hill, who resigned from the Company effective May 5, 1995.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain stockholders of the Company, including Messrs. Hill and Terry
and venture capital firms affiliated with directors Cummins and Gorman, 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.

8
<PAGE> 146
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.

9
<PAGE> 147
SIGNATURES

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

Registrant

CYBERONICS, INC.

October 26, 1995 BY: /s/ Reese S. Terry, Jr.
--------------------------------
Reese S. Terry, Jr.
Chairman of the Board, Executive
Vice President and Secretary

Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment 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/ Robert P. Cummins President, Chief Executive Officer and Director October 26, 1995
- ----------------------------- (Principal Executive Officer)
Robert P. Cummins

*/s/ John K. Bakewell Vice President, Finance and Administration October 26, 1995
- ----------------------------- and Chief Financial Officer
John K. Bakewell (Principal Financial and Accounting Officer)

*/s/ Reese S. Terry, Jr. Director October 26, 1995
- -----------------------------
Reese S. Terry, Jr.

*/s/ Thomas A. Duerden Director October 26, 1995
- -----------------------------
Thomas A. Duerden, Ph.D.

*/s/ Dennis J. Gorman Director October 26, 1995
- -----------------------------
Dennis J. Gorman

*By: /s/ Reese S. Terry
- -----------------------------
Reese S. Terry, Jr., Attorney-in-Fact
</TABLE>
<PAGE> 148
ANNEX VI
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the fiscal quarter ended: March 31, 1996 or

/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the transition period from to
---------------- ----------------

Commission file number: 0-19806

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, Suite 100
Webster, Texas 77598-4135
----------------------------------------- ------------------------
(address of principal executive offices) (zip code)

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

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

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

CLASS OUTSTANDING AT MAY 1, 1996
Common Stock - $0.01 par value 9,511,295

================================================================================
<PAGE> 149
CYBERONICS, INC.

INDEX

<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION

Item 1 Financial Statements:
Consolidated Balance Sheets
March 31, 1996 (unaudited) and June 30, 1995 ...................... 3
Consolidated Statements of Operations (unaudited)
three and nine months ended March 31, 1996 and 1995 ............... 4
Consolidated Statements of Cash Flows (unaudited)
nine months ended March 31, 1996 and 1995 ......................... 5
Notes to Consolidated Financial Statements ........................ 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................... 8

PART II. OTHER INFORMATION

Item 6 Exhibits and Reports on Form 8-K ...................................... 14
</TABLE>

-2-
<PAGE> 150
PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CYBERONICS, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1995
-------------- ------------
<S> <C> <C>
ASSETS (unaudited)

Cash and cash equivalents ..................................... $ 4,273,134 $ 8,862,993

Securities held to maturity ................................... -- 1,029,898
Accounts receivable ........................................... 467,211 339,658
Inventories ................................................... 620,129 605,556

Prepaid expenses .............................................. 230,642 267,306

------------ ------------
Total current assets .................................... 5,591,116 11,105,411
Securities held to maturity ................................... 219,201 1,959,728

Property and equipment, net ................................... 362,275 481,975
Other assets, net ............................................. 11,987 13,479

------------ ------------
$ 6,184,579 $ 13,560.593
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable .............................................. $ 57,014 $ 574,915
Accrued liabilities ........................................... 1,616,252 1,480,497
Capital lease obligations ..................................... -- 61,626
------------ ------------
Total current liabilities ............................... 1,673,266 2,117,038
Commitments and contingencies

Stockholders' equity:
Preferred stock, $.01 par value, 2,500,000 shares authorized;
none issued or outstanding ................................ -- --
Common stock, $.01 par value, 25,000,000 shares authorized;
9,509,345 and 9,499,261 shares issued and outstanding at
March 31, 1996 and June 30, 1995, respectively ............ 95,093 94,993
Additional paid-in capital .................................. 39,194,453 39,329,006

Deferred compensation ....................................... (7,136) (131,800)
Accumulated deficit ......................................... (34,753,862) (27,808,921)
Cumulative translation adjustments .......................... (17,235) (39,723)

------------ ------------
Total stockholders' equity .............................. 4,511,313 11,443,555
------------ ------------
$ 6,184,579 $ 13,560,593
============ ============
</TABLE>

See accompanying notes to financial statements.

-3-
<PAGE> 151
CYBERONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
March 31, March 31,
-------------------------- --------------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales ................................................. $ 292,818 $ 282,721 $ 885,364 $ 569,328
Cost of goods sold ........................................ 71,615 88,707 227,934 185,851
----------- ----------- ----------- -----------
Gross profit .............................................. 221,203 194,014 657,430 383,477

Operating expenses:
Research and development .............................. 1,999,229 1,310,138 6,035,392 3,674,720
Selling, general and .................................. 665,947 680,074 1,936,456 1,975,432
administrative ....................................... -- -- --
Total operating expenses ......................... 2,665,176 1,990,212 7,971,848 5,650,152
----------- ----------- ----------- -----------
Loss from operations ...................................... (2,443,973) (1,796,198) (7,314,418) (5,266,675)
Interest income, net ...................................... 168,606 178,128 438,593 483,364
Other expense ............................................. (64,929) (3,227) (69,116) (13,971)
----------- ----------- ----------- -----------
Net loss .................................................. $(2,340,296) $(1,621,297) $(6,944,941) $(4,797,282)
=========== =========== =========== ===========
Net loss per share ........................................ $ (0.25) $ (0.17) $ (0.73) $ (0.53)
=========== =========== =========== ===========
Shares used in computing
net loss per share ...................................... 9,509,345 9,268,992 9,504,508 9,129,051
=========== =========== =========== ===========
</TABLE>

See accompanying notes to financial statements.

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<PAGE> 152
CYBERONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
MARCH 31,
---------------------------
1996 1995
----------- ------------
<S> <C> <C>
Cash Flow From Operating Activities:
Net loss .................................................................. $(6,944,941) $ (4,797,282)
Non-cash items included in net loss:
Depreciation and amortization ........................................... 171,350 207,087
Compensation expense (income) related to certain stock options and
common stock issuances ................................................ (42,100) 68,400
Change in operating assets and liabilities:
Accounts receivable ..................................................... (127,553) (179,321)
Inventories ............................................................. (14,573) (193,483)
Prepaid expenses ........................................................ 36,664 2,908
Accounts payable and accrued liabilities ................................ (382,146) 24,748
----------- ------------
Net Cash Used In Operating Activities ............................... (7,303,299) (4,866,943)
Cash Flow From Investing Activities:
Purchases of property and equipment ....................................... (51,650) (160,216)
Purchases of marketable securities ........................................ (2,393,740) (4,423,490)
Maturities of marketable securities ....................................... 5,164,165 10,570,801
----------- ------------
Net Cash Provided By Investing Activities ........................... 2,718,775 5,987,095
Cash Flow From Financing Activities:
Proceeds from issuance of Common Stock .................................... 32,311 74,738
Payments of capital lease obligations ..................................... (61,626) (95,175)
Other ..................................................................... 1,492 6,888
----------- ------------
Net Cash Used In Financing Activities ............................... (27,823) (13,549)

Effect of exchange rate changes on cash and cash equivalents ............... 22,488 16,023
----------- ------------
Net (decrease) increase in cash and cash equivalents ................ (4,589,859) 1,122,626

Cash and cash equivalents, at beginning of period ........................... 8,862,993 4,608,063
----------- ------------
Cash and cash equivalents, at end of period ................................. $ 4,273,134 $ 5,730,689
=========== ============
</TABLE>

See accompanying notes to financial statements.

-5-
<PAGE> 153
CYBERONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

March 31, 1996

NOTE 1 - BASIS OF PRESENTATION:

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information, and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the nine months
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for the full year ending June 30, 1996. The financial information
presented herein should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended June 30, 1995.

NOTE 2 - CASH, CASH EQUIVALENTS AND INVESTMENTS:

At March 31, 1996 and June 30, 1995, the Company's entire investment
portfolio consisted of securities held to maturity. Securities held to
maturity are primarily various types of corporate bonds, floating rate notes
and asset-backed investments with various maturity dates over the next 18
months and have a fair market value of $206,683 and a gross unrealized holding
loss of $12,518 at March 31, 1996.

NOTE 3 - REVENUE RECOGNITION:

Revenue from product sales is generally recognized upon shipment to
the customer. 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. 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 nine months ended
March 31, 1996 consisted of $775,833 from international markets and $109,531
from domestic risk-sharing arrangements.

NOTE 4 - INVENTORIES:

Inventories consist of the following:

<TABLE>
<CAPTION>
March 31, 1996 June 30, 1995
-------------- -------------
(unaudited)
<S> <C> <C>
Raw materials and components ........................ $297,310 $259,402
Work-in-process ..................................... 207,429 180,944
Finished goods ...................................... 115,390 165,210
-------- --------
$620,129 $605,556
======== ========
</TABLE>

-6-
<PAGE> 154
NOTE 5 - ACCRUED LIABILITIES:

Accrued liabilities are as follows:

<TABLE>
<CAPTION>
March 31, 1996 June 30, 1995
-------------- -------------
(unaudited)
<S> <C> <C>
Clinical costs ...................................... $1,130,341 $ 804,587
Payroll and other compensation ...................... 157,481 297,977
Professional services ............................... 105,588 144,000
Customer deposits ................................... 61,116 85,279
Warranties .......................................... 148,204 106,635

Other ............................................... 13,522 42,019

---------- ----------
$1,616,252 $1,480,497
========== ==========
</TABLE>

NOTE 6 - AGREEMENT AND PLAN OF MERGER:

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 will purchase
2,181,818 shares of the Company's newly-issued Common Stock for $5.50 per
share, providing proceeds to the Company of $12 million before deducting
commissions and other offering costs. Subject to approval by the Company's
stockholders and certain regulatory approvals, the Merger Agreement 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.

-7-
<PAGE> 155
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q 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 below. Readers are also encouraged to refer to
the Company's Annual Report on Form 10-K (including the Form 10-K/A filed with
respect thereto) for a further discussion of the Company's business and the
risks and opportunities attendant thereto.

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
Investigational Device Exemption ("IDE") from the United States Food and Drug
Administration ("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 March 31, 1996, the Company
had incurred a cumulative net deficit of approximately $34.8 million.

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 October 1994, the Company announced that the FDA had requested that
Cyberonics submit a request to withdraw its PMA application and resubmit an
application at such time the company has completed its additional study. In
January 1995, the Company announced that the FDA had agreed that Cyberonics'
initial PMA application need not be voluntarily withdrawn. The decision allows
the Company's PMA application to remain active during the course of the
additional study and decreases the likelihood of needing to repeat the major
regulatory steps required for full PMA submission and filing acceptance. At
that time, the Company also 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.

In January 1995, 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 20 major
investigational centers in the United States. Approximately 190 to 200
patients are expected to complete

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<PAGE> 156
the confirmatory trial. Completion of the trial and submission of the data is
expected to take at least through the fall of 1996, and may take significantly
longer.

In October 1995, the Company announced that the FDA had completed its
scientific review of the PMA application as currently on file, including the
aforementioned PMA amendment responding to previously received FDA questions.
The findings of the review, as communicated in written correspondence from the
FDA call for Cyberonics to complete and submit the results of its ongoing
additional clinical study and to provide clarifications and additional
information on the existing PMA application.

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 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.

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 felbamate
announced that, in conjunction with recommendations from the FDA, it was
advising that patients

-9-
<PAGE> 157
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.

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.

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 March 31, 1996, the Company has funded approximately
$530,000 of its equipment needs with proceeds from an equipment lease
agreement. The Company has no short- or long-term borrowings outstanding at
March 31, 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 the remainder of its current
fiscal year ending June 30, 1996, 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 will 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. The Company believes that the proceeds
from this investment, if and when received, will be sufficient to fund its
operations as an independent entity through at

-10-
<PAGE> 158
least June 30, 1997. In the event that the Company's stockholders do not
approve the Merger Agreement and, as a result, St. Jude does not make the
equity investment, the Company will need to raise additional capital from other
sources. Moreover, even if the St. Jude investment is consummated, the Company
would need to raise additional capital in the event that the Merger is not
consummated. The availability of financing 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 upon stockholder approval, 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, 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, 1996, 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 three months ended March 31, 1996 totaled $292,818
compared to $282,721 for the three months ended March 31, 1995. Net sales for
the nine months ended March 31, 1996 totaled $885,364 compared to $569,328 in
the same period of the prior year. 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

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<PAGE> 159
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 deferred risk-sharing provisions, for the nine
months ended March 31, 1996, consisted of $775,833 from international markets
and $109,531 from domestic risk-sharing arrangements.

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 cumulative net sales, and from 4% to 4.75% thereafter. Minimum royalty
obligations under the Company's license agreements totaled $46,000 during the
year ended June 30, 1995, 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. Any future amounts which may exceed this minimum
will be included as a component of the Company's cost of sales.

The Company's gross margin percentage was 75.5% for the three months
ended March 31, 1996 compared to 68.6% for the prior year period. The
improvement 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
consist 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 $1,999,229 and $1,310,138 during the three months ended March 31, 1996
and 1995, respectively. Research and development expenses were $6,035,392 and
$3,674,720 during the nine months ended March 31, 1996 and 1995, 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 the third quarter. With the most
costly phases of the trial now being complete, the Company expects the costs
associated with clinical and regulatory activities to decrease during the
fourth quarter.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $665,947 and $680,074 during the three months
ended March 31, 1996 and 1995, respectively. Selling, general and
administrative expenses totaled $1,936,456 and $1,975,432 during the nine
months ended March 31, 1996 and 1995, respectively. The third quarter decrease
from period to period was primarily due to broad expense control efforts and a
credit of approximately $110,000 related to deferred compensation amortization
for unvested and expired employee stock options for terminated employees,
mostly offset by additional expenditures for international 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 $168,606 and
$178,128 during the three months ended March 31, 1996 and 1995, respectively,
and $438,593 and $483,364 for the nine months ended March 31, 1996 and 1995,
respectively. The Company expects to have interest income that will partially
offset operating losses for several fiscal quarters.

Other Income (Expense), net. Other expense totaled $64,929 and $3,227
during the three months ended March 31, 1996 and 1995, respectively, and
$69,116 and $13,971 for the nine months ended March 31, 1996 and

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<PAGE> 160
1995, respectively. Other income (expense) consists of net gains and losses
resulting from foreign currency transactions.

Income Taxes. 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.

Effect of Inflation. The Company believes that inflation has not had
a material impact on its operating or financial ratios during the three and
nine months ended March 31, 1996 as compared to the prior year periods.

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<PAGE> 161
PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
(a) Exhibits.

<S> <C>
10.1 Employment Agreement dated September 30, 1995 between
the Company and Robert P. Cummins, as amended on
January 10, 1996 and April 10, 1996.

10.2 Employment Retention Agreement dated September 30,
1995 between the Company and John K. Bakewell, as
amended on April 10, 1996.

10.3 Change of Control Agreement dated May 8, 1995 between
the Company and John K. Bakewell as amended on January
10, 1996 and April 10, 1996.

10.4 Change of Control Agreement dated May 8, 1995 between
the Company and Steve Ford, as amended on January 10,
1996.

10.5 Retention Bonus Agreement dated as of October 1, 1996
between the Company and Steve Ford.
</TABLE>

(b) Reports on Form 8-K.

The Company filed a Current Report on Form 8-K on April 9,
1996 relating to an Agreement and Plan of Merger entered into
with St. Jude Medical, Inc. and a wholly-owned subsidiary of
St. Jude.

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<PAGE> 162
SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

CYBERONICS, INC.
Registrant

BY: /s/ JOHN K. BAKEWELL
-----------------------------------------
John K. Bakewell
Vice President, Finance and Administration
and Chief Financial Officer (principal
financial and accounting officer)

Dated: May 2, 1996

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<PAGE> 163
P
R
O
X
Y

CYBERONICS, INC.

PROXY FOR SPECIAL MEETING OF STOCKHOLDERS

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

THE UNDERSIGNED STOCKHOLDER OF CYBERONICS, INC., A DELAWARE CORPORATION,
HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL MEETING OF STOCKHOLDERS AND
PROXY STATEMENT, EACH DATED JUNE 21, 1996, AND HEREBY APPOINTS REESE S. TERRY
AND JOHN K. BAKEWELL, AND EACH OF THEM, PROXIES AND ATTORNEYS-IN-FACT, WITH FULL
POWER TO EACH OF SUBSTITUTION, ON BEHALF AND IN THE NAME OF THE UNDERSIGNED, TO
REPRESENT THE UNDERSIGNED AT THE SPECIAL MEETING OF STOCKHOLDERS OF CYBERONICS,
INC. TO BE HELD ON JULY 23, 1996 AT 10:00 A.M., CENTRAL DAYLIGHT TIME, AT SOUTH
SHORE HARBOR HOTEL AND CONFERENCE CENTER, 2500 SOUTH SHORE BLVD., LEAGUE CITY,
TEXAS, AND AT ANY ADJOURNMENT OR ADJOURNMENTS THEREOF, AND TO VOTE ALL SHARES OF
COMMON STOCK THAT THE UNDERSIGNED WOULD BE ENTITLED TO VOTE IF THEN AND THERE
PERSONALLY PRESENT, ON THE MATTERS SET FORTH BELOW.

THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE. IF NO SPECIFICATION IS INDICATED, THE SHARES REPRESENTED BY
THIS PROXY WILL BE VOTED FOR EACH OF THE PROPOSALS ON THE REVERSE SIDE HEREOF.

CONTINUED AND TO BE SIGNED ON REVERSE SIDE

SEE REVERSE
SIDE
<PAGE> 164
X PLEASE MARK
VOTES AS IN
THIS EXAMPLE

1. PROPOSAL TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF MERGER BY AND
AMONG ST. JUDE MEDICAL, INC., SJM ACQUISITION CORP. AND CYBERONICS, INC.,
DATED APRIL 8, 1996.

FOR AGAINST ABSTAIN
/ / / / / /

2. PROPOSAL TO APPROVE THE SALE OF 2,181,818 SHARES OF CYBERONICS, INC.
COMMON STOCK TO ST. JUDE MEDICAL, INC. AT A CASH PURCHASE PRICE OF $5.50
PER SHARE.

FOR AGAINST ABSTAIN
/ / / / / /

PLEASE SIGN EXACTLY AS NAME APPEARS ON YOUR STOCK CERTIFICATE. IF THE STOCK IS
HELD BY JOINT TENANTS OR AS COMMUNITY PROPERTY, BOTH SHOULD SIGN. EXECUTORS,
ADMINISTRATORS, TRUSTEES, GUARDIANS, ATTORNEYS AND CORPORATE OFFICERS SHOULD
INSERT THEIR TITLES.

SIGNATURE:______________________________________ DATE_______________________