##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


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

Commission file number: 0-19806





Cyberonics, Inc.


(Exact name of registrant as specified in its charter)


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

Cyberonics Building


100 Cyberonics Blvd.


Houston, Texas


77058-2072


(Address of principal executive offices)


(Zip Code)


Registrants telephone number, including area code:


(281) 228-7200





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


None


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


Common Stock, $.01 Par Value


(Title of Class)





o þ


o þ


o þ


S-K 10-K 10-K. þ


12b-2


o þ o


12b-2 o þ














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##### 










TABLE OF CONTENTS


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






10-K,







1



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EXPLANATORY NOTE


10-K, 10-K. 10-Q








2



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






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

8-K


3



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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS


10-K




| |   |                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | continued market acceptance of our VNS Therapy
    Systemtm(VNS
    Therapy System) and sales of our product;                                                                                                                                                                                                             
|
| |  | refusal by third-party payers to cover or adequately reimburse
    Vagus Nerve Stimulation (VNS) Therapy (VNS
    Therapy) for treatment-resistant depression
    (TRD);                                                                                                                                              
|
| |  | intellectual property protection and potential infringement
    claims;                                                                                                                                                                                                                                                     
|
| |  | maintaining compliance with government regulations;                                                                                                                                                                                                                                                                         
|
| |  | obtaining necessary government approvals for new applications
    and retaining governmental approvals for existing applications;                                                                                                                                                                                           
|
| |  | product liability claims and potential litigation;                                                                                                                                                                                                                                                                          
|
| |  | reliance upon single suppliers and manufacturers for certain
    components;                                                                                                                                                                                                                                                
|
| |  | the development, satisfactory completion and results of clinical
    trials and/or market tests of the VNS Therapy System for the
    treatment of epilepsy, TRD or other disorders;                                                                                                                                        
|
| |  | the accuracy of managements estimates of future sales,
    expenses, and capital requirements;                                                                                                                                                                                                                             
|
| |  | changes in financial estimates and recommendations by securities
    analysts;                                                                                                                                                                                                                                              
|
| |  | changes in market valuations of medical device companies in
    general;                                                                                                                                                                                                                                                    
|
| |  | additions or departures of key management personnel;                                                                                                                                                                                                                                                                        
|
| |  | changes in the general condition of the economy;                                                                                                                                                                                                                                                                            
|
| |  | possible acceleration of our convertible note debt;                                                                                                                                                                                                                                                                         
|
| |  | maintaining adequate insurance at economical rates;                                                                                                                                                                                                                                                                         
|
| |  | our ability to retire or refinance our debt at or before its
    maturity, which could be affected by conditions in financial
    markets or our financial position, and our ability to obtain any
    replacement long-term financing on terms as favorable to us, if
    at all;                                          
|
| |  | the results of the previously disclosed inquiries by the SEC
    staff and the U.S. Attorney;                                                                                                                                                                                                                               
|
| |  | the impact of the restatement of our financial statements and
    any other actions that might be taken or required as a result of
    such inquiries or the review by the Audit Committee of our stock
    option grants, procedures, and practices, including a default
    under our credit facility or debt instruments;
|
| |  | the potential identification of new material weaknesses in our
    internal controls over financial reporting;                                                                                                                                                                                                              
|
| |  | risks and costs associated with the governmental inquiries or
    the Audit Committee review and any litigation relating thereto
    or to our stock option grants, procedures, and practices
    (including the previously disclosed private litigation);                                                                  
|
| |  | uncertainties associated with our efforts to regain compliance
    with the requirements of the NASDAQ Panel to avoid possible
    delisting of the Companys stock from NASDAQ for failure to
    file timely periodic reports with the SEC;                                                                               

4



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| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | uncertainties associated with any appeal concerning any possible
    delisting by NASDAQ; and
|
| |  | uncertainties associated with stockholder litigation.                                        

10-K


5



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PART I







|        |         
|------- | --------
|Item 1. | Business

General








| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | satisfying the urgent unmet medical need in TRD and developing
    and expanding our intellectual property, regulatory and market
    franchise in the global TRD market;
|
| |  | repositioning VNS Therapy in a unique, defensible market
    position in epilepsy to rejuvenate growth and accelerate
    penetration of the global epilepsy market; and 
|
| |  | focusing our financial resources to develop and expand future
    revenue growth.                                                                                        



follow-up




start-up


6



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10-K.


Epilepsy






| |                         
| | ------------------------
| | Epilepsy Market Overview





| |                               
| | ------------------------------
| | Traditional Epilepsy Therapies



tm




| |                         
| | ------------------------
| | VNS Therapy for Epilepsy



7



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Improvements in Disease Symptoms. follow-up


Side Effects.


Depression






| |                           
| | --------------------------
| | Depression Market Overview







| |                           
| | --------------------------
| | VNS Therapy for Depression





| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a 60-patient open-label
    pilot study (D-01) that included long-term follow-up;                                                                          
|
| |  | a 235-patient
    randomized, double-blind, placebo-controlled study
    (D-02) with long-term open-label follow-up;                                       
|
| |  | an open-label post-marketing study in Europe
    (D-03); and                                                                                               
|
| |  | a 127-patient
    observational study of treatment-resistant depressed patients
    receiving
    standard-of-care
    treatment but no VNS Therapy (D-04).

Clinical Study Results.


8



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| |                                    
| | -----------------------------------
| | Post FDA Approval Study Commitments

460-patient 2,000-patient


Clinical Research Studies


mechanism-of


VNS Therapy System




9



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Pulse Generator.


Bipolar Lead.


Programming Wand and Software.


Tunneling Tool.


Accessory Pack.


10



---



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Manufacturing and Sources of Supply






Marketing and Sales




| |              
| | -------------
| | United States



peer-to




11



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| |              
| | -------------
| | International



Third-Party Reimbursement


follow-up






12



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| |         
| | --------
| | Medicare

60-22).


30-day




| |         
| | --------
| | Medicaid





| |               
| | --------------
| | Private Payers





13



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Product Development




tm tm tm tm tm tm tm tm


tm tm tm




Competition




14



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Patents, Licenses and Proprietary Rights








15



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Government Regulation








16



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Procedure for Release of Establishment
Inspection Report to the Inspected Establishment, follow-up follow-up




460-patient 2,000-patient


17



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18



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Product Liability and Insurance






Employees




Financial Information




Internet Website and Availability of Public Filings with the
SEC


www.cyberonics.com. 10-K, 10-Q, 8-K,


19



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|         |             
|-------- | ------------
|Item 1A. | Risk Factors



| |                                           
| | ------------------------------------------
| | Our common stock price constantly changes.





| |   |                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in the general conditions of the economy;                                                                                                                                                                                                                                                                           
|
| |  | regulatory activities and announcements;                                                                                                                                                                                                                                                                                    
|
| |  | federal and state enforcement initiatives related to medical
    device companies;                                                                                                                                                                                                                                          
|
| |  | changes in market valuations of medical device companies in
    general;                                                                                                                                                                                                                                                    
|
| |  | national and regional coverage determinations by third-party
    payers, including private insurance companies, Medicare, state
    Medicaid programs and others;                                                                                                                                                           
|
| |  | results of studies regarding the safety and efficacy of drugs or
    devices that are potential competitors to our VNS Therapy
    treatment for various indications including epilepsy,
    depression, Alzheimers Disease, anxiety and other
    disorders;                                                              
|
| |  | results of studies regarding the safety and efficacy of our VNS
    Therapy treatment for various indications including epilepsy,
    depression, Alzheimers Disease, anxiety and other
    disorders;                                                                                                                     
|
| |  | quarterly variations in our sales and operating results;                                                                                                                                                                                                                                                                    
|
| |  | announcements of significant contracts, acquisitions or capital
    commitments;                                                                                                                                                                                                                                            
|
| |  | changes in financial estimates by securities analysts;                                                                                                                                                                                                                                                                      
|
| |  | additions or departures of key personnel;                                                                                                                                                                                                                                                                                   
|
| |  | the results of the previously disclosed inquiries by the SEC
    Staff and the U.S. Attorney;                                                                                                                                                                                                                               
|
| |  | the impact of the restatement of our financial statements and
    any other actions that might be taken or required as a result of
    such inquiries or the review by the Audit Committee of our stock
    option grants, procedures, and practices, including a default
    under our credit facility or debt instruments;
|
| |  | the potential identification of new material weaknesses in our
    internal controls over financial reporting;                                                                                                                                                                                                              
|
| |  | risks and costs associated with inquiries or Audit Committee
    review and any litigation relating thereto or to our stock
    option grants, procedures, and practices (including the
    previously disclosed private litigation);                                                                                       
|
| |  | uncertainties associated with compliance with the requirements
    of the NASDAQ Panel to avoid possible delisting of our stock
    from NASDAQ for failure to file timely periodic reports with the
    SEC;                                                                                                               
|
| |  | uncertainties associated with any appeal concerning any possible
    delisting by NASDAQ; and                                                                                                                                                                                                                               
|
| |  | uncertainties associated with stockholder litigation.                                                                                                                                                                                                                                                                       



20



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






| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | sales and marketing expenses related to our U.S. launch of
    VNS Therapy in TRD and to our re-launch of VNS Therapy in
    epilepsy;                                            
|
| |  | clinical expenses related to our commitment for post-market
    studies in the TRD indication;                                                                                    
|
| |  | regulatory expenses related to our post-market surveillance and
    other regulatory obligations and manufacturing expenses; and                                                  
|
| |  | general administrative expenses, including substantial expenses
    related to internal and governmental investigations of our stock
    option granting practices and procedures.



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






| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | the extent to which the VNS Therapy System gains market
    acceptance;                                                                        
|
| |  | the timing of obtaining marketing approvals for the VNS Therapy
    System for other indications;                                              
|
| |  | the existence and timing of any approvals for reimbursement by
    third-party payers;                                                         
|
| |  | the rate and size of expenditures incurred as we expand our
    clinical, manufacturing, sales and marketing efforts;                          
|
| |  | our ability to retain qualified sales personnel; and                                                                                           
|
| |  | the availability of key components, materials and contract
    services, which depends on our ability to forecast sales among
    other things.



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




21



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






| |   |                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | requiring the dedication of a portion of our cash to service our
    indebtedness and to pay off the principal at maturity, thereby
    reducing the amount of our expected cash available for other
    purposes, including funding our research, development and
    commercialization efforts and capital expenditures;
|
| |  | increasing our vulnerability to general adverse economic
    conditions;                                                                                                                                                                                                                                                  
|
| |  | limiting our ability to obtain additional financing; and                                                                                                                                                                                                                                                                  
|
| |  | placing us at a possible competitive disadvantage to less
    leveraged competitors and competitors with better access to
    capital resources.                                                                                                                                                                          

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




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




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


10-K 10-K


22



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Cyberonics, Inc. v. Wells
Fargo Bank, N.A., as Trustee Under Indenture 06-63284, Wells Fargo Bank, N.A. v. Cyberonics, Inc. 06-CV




10-K. 10-K, 10-Q, 10-Q.


10-K 10-Q, 10-Q 10-Q; 10-K




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




23



---



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




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




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




24



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


our selling model.




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




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




25



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




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




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




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




26



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




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




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




27



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460-patient 2,000-patient


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


qui tam




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




28



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




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




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




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




29



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##### Table of Contents





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




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









|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments








|        |           
|------- | ----------
|Item 2. | Properties








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings








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



30



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PART II







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



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







31



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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

10-K.


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

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10-K.


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

10-K


33



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

10-K


10-K.




Going Concern


start-up


10-K 10-K


34



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Business Overview




follow-up




start-up






| |                                                 
| | ------------------------------------------------
| | Restatement of Consolidated Financial Statements



35



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Incorrect measurement dates were used for certain
    stock option grants made principally during the period from 1998
    to 2003. Under applicable accounting principles, and
    particularly Accounting Principles Board Standard No. 25,
    Accounting for Stock Issued to Employees
    (APB 25), the date of final approval of a stock
    option is the basis for determining the measurement
    date to be used in comparing the exercise price of the
    option to the fair value of our stock on the measurement date.
    In accordance with APB 25 and related interpretations, we
    should have recorded compensation expense in an amount per share
    subject to each option to the extent the fair market value of
    our stock on the measurement date exceeded the exercise price of
    the option. We have determined that in some instances we
    previously used an incorrect measurement date and failed to
    record such compensation expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | The stock option grant process in place during this time period
    required the Compensation Committee of the Board to approve all
    stock option grants. This was frequently accomplished through
    the use of unanimous written consents that were prepared by
    management and sent by overnight delivery to Compensation
    Committee members to review, execute and return. For certain
    grants issued during this period, the date of effective approval
    by the Compensation Committee was subsequent to the grant date
    as recorded in our records and used as the measurement date in
    preparing our consolidated financial statements. Electronic data
    available for unanimous written consent documents executed by
    the Compensation Committee during the time period from 1998 to
    2003 indicated that the documents were created and therefore
    approved on a date later than the grant dates. With respect to
    grants for which the electronic data indicated such dating
    issues, but for which other contemporaneous documentation exists
    that establishes the date of final approval by all Compensation
    Committee members (such as, for example, signed and dated
    approval faxes), we relied on that other documentation to
    determine the date of effective approval and the appropriate
    measurement date. With respect to grants for which the
    electronic data indicated such dating issues, but for which no
    such other contemporaneous documentation exists, we used a
    measurement date corresponding to the date on which the
    unanimous written consent document was last saved
    electronically, plus four calendar days to allow for the
    approval process conducted using overnight shipping of approval
    documents to and from Compensation Committee members. Under
    APB 25, to the extent that the fair market value of our
    stock on the revised measurement date exceeded the exercise
    price of the option, we were required to recognize compensation
    expense with respect to that option at the time of the grant.
    The cumulative effect of these measurement date revisions on our
    consolidated financial statements through April 29, 2005 is
    approximately $5.3 million in aggregate pre-tax non-cash
    stock-based compensation expense.
|
| | In light of the significant judgment used in establishing
    revised measurement dates, alternate approaches to the one used
    could have resulted in different aggregate pre-tax non-cash
    stock-based compensation expense charges than those recorded in
    the restatement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | While we used a measurement date for certain grants
    corresponding to the date on which the unanimous written consent
    document was last saved electronically plus four calendar days
    to allow for the approval process, the cycle time for securing
    approval could have been as short as two calendar days, or may
    have extended to as long as 17 calendar days, as observed in one
    situation. To assess the sensitivity of the aggregate pre-tax
    non-cash stock-based compensation charges attributable to the
    estimated cycle time for the approval process for these grants,
    management has performed variability analyses corresponding to
    the range from (1) the earliest possible approval, which
    was defined as two calendar days following the date the
    unanimous written consent document was last saved
    electronically, to (2) the longest cycle time observed for
    approval of one of these grants, which was 17 calendar days
    following the date the unanimous written consent document was
    last saved electronically.
|
| | Within this time period spanning from two to 17 calendar days
    following the date the unanimous written consent document was
    last saved electronically, we calculated the range of aggregate
    pre-tax non-cash stock-based compensation charges that would
    have resulted if the measurement date used for each grant
    corresponded to the date within this time period that would have
    yielded the highest and lowest option prices applicable to that
    grant. Under this scenario, the aggregate pre-tax non-cash
    stock-based compensation charges for these grants through
    April 29, 2005 would have been as high as $9.5 million
    and as low as $3.5 million, compared to our value of
    $5.3 million.                                                                                                                                                                                                                                                                                                                                                  
|
| | In addition, we also identified certain grants where evidence
    other than electronic unanimous written consent data exists that
    supports a measurement date other than the grant date. These
    grants were issued in 2001 and 2002, resulting in additional
    pre-tax non-cash stock-based compensation expense through
    April 29, 2005, of approximately $1.1 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (2) The existence of multiple documents with different
    dates evidencing approval for the same grants resulted in a
    scenario that is considered re-pricing under GAAP. Our
    internal investigation identified several grants to directors,
    officers and employees where it appeared that the approval
    criteria under GAAP were met on multiple dates. The documents
    evidencing approval included communications between management
    and members of the Compensation Committee and subsequently
    completed unanimous written consent forms signed by the
    Compensation Committee members. Ultimately, grants were issued
    to individuals at the price determined by using as the
    measurement date the date of that subsequently completed
    unanimous written consent, resulting in a price lower than the
    price that would have resulted from use of the earlier dated
    documents to evidence approval of the grant. It is not clear
    which documents were intended to constitute final approval.                                             
|
| | Based on the existence of multiple approval documents with the
    subsequent approval at a lower stock price, these grants were
    deemed to involve re-pricing within the meaning of the
    applicable accounting literature. Variable accounting treatment
    has been applied in accordance with the provisions of FASB
    Interpretation 44, Accounting for Certain Transactions
    involving Stock Compensation (FIN 44),
    which was effective July 1, 2000 and provided for a
    look back period to December 15, 1998 for
    re-priced stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | The effect of accounting for these grants as having been
    re-priced is to increase our cumulative compensation expense
    through April 29, 2005 by approximately $8.6 million
    to account for the additional pre-tax non-cash stock-based
    compensation expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (3) The cancellation of certain stock option grants that
    were subsequently reissued at a lower price than the original
    grant constituted re-pricing that rendered the grants subject to
    variable accounting treatment. On certain occasions from
    fiscal year 1999 through fiscal year 2001, we cancelled certain
    stock option grants and subsequently reissued new grants.
    Therefore, these grants were deemed to be re-priced and subject
    to variable accounting treatment in accordance with FIN 44.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | The cumulative impact of the restatement through April 29,
    2005 associated with this type of error is approximately
    $1.9 million in additional pre-tax non-cash stock-based
    compensation expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (4) Stock option grants issued to non-employees were
    either not recorded or were recorded incorrectly. From
    fiscal year 1997 through fiscal year 2001, we issued certain
    stock option grants to                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | various consultants. Compensation expense for some of the grants
    was recorded at the time the grants were issued; however, the
    grants were not correctly recorded in accordance with GAAP in
    effect at the time of the grants. Compensation expense was not
    recorded at all for the remaining grants.
|
| | The cumulative impact of this type of error on the consolidated
    financial statements through April 29, 2005 is
    approximately $1.0 million in additional pre-tax non-cash
    stock-based compensation expense.                                                                                               
|
| | (5) Other miscellaneous errors related to stock
    options. The cumulative impact for all other types of errors
    on the consolidated financial statements through April 29,
    2005 is approximately $0.5 million in additional pre-tax
    non-cash stock-based compensation expense.                          





| |                    
| | -------------------
| | Related Proceedings

Regulatory Proceedings.


Legal Proceedings.


NASDAQ Delisting. 10-K 10-Q


Critical Accounting Policies






38



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##### Table of Contents





Accounts Receivable.


Inventories. first-in,


Property and Equipment.


Revenue Recognition.


Research and Development.


Stock Options. Accounting for
Stock-Based Compensation Accounting for Stock-Based Compensation 
Transition and Disclosure, Accounting for Stock Issued to
Employees Share Based Payment


Stock Options (Restated).


39



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Income Taxes.


Results of Operations (Annual)




| |          
| | ---------
| | Net Sales





40



---



##### Table of Contents







| |             
| | ------------
| | Gross Profit









| |                   
| | ------------------
| | Operating Expenses

Selling, General and Administrative (SG&A) Expenses.


Research and Development (R&D) Expenses.




| |                
| | ---------------
| | Interest Income





| |                 
| | ----------------
| | Interest Expense



41



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##### Table of Contents







| |                  
| | -----------------
| | Other Income, Net





| |             
| | ------------
| | Income Taxes



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

Results of Operations (Quarterly)  See also
Note 19. Quarterly Financial Information 
Unaudited.


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




| |          
| | ---------
| | Net Sales







| |             
| | ------------
| | Gross Profit





42



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##### Table of Contents





| |                   
| | ------------------
| | Operating Expenses

Selling, General and Administrative (SG&A) Expenses.


Research and Development (R&D) Expenses.




| |                            
| | ---------------------------
| | Interest Income and Expense





| |                  
| | -----------------
| | Other Income, Net





| |             
| | ------------
| | Income Taxes



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




| |          
| | ---------
| | Net Sales



43



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| |             
| | ------------
| | Gross Profit





| |                   
| | ------------------
| | Operating Expenses

Selling, General and Administrative (SG&A) Expenses.


Research and Development (R&D) Expenses.




| |                            
| | ---------------------------
| | Interest Income and Expense





| |                  
| | -----------------
| | Other Income, Net





| |             
| | ------------
| | Income Taxes



44



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




| |          
| | ---------
| | Net Sales







| |             
| | ------------
| | Gross Profit





| |                   
| | ------------------
| | Operating Expenses

Selling, General and Administrative (SG&A) Expenses.


Research and Development (R&D) Expenses.




| |                            
| | ---------------------------
| | Interest Income and Expense



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| |                  
| | -----------------
| | Other Income, Net





| |             
| | ------------
| | Income Taxes



Liquidity and Capital Resources




| |         
| | --------
| | Overview





| |           
| | ----------
| | Cash Flows



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



| |                     
| | --------------------
| | Operating Activities



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| |                     
| | --------------------
| | Investing Activities





| |                     
| | --------------------
| | Financing Activities







Debt Instruments and Related Covenants




| |               
| | --------------
| | Line of Credit

10-K, 10-Q 10-Q) 10-Q 10-Q).


47



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10-K 10-Q, 10-Q 10-Q; 10-K






| |                  
| | -----------------
| | Convertible Notes



10-K 10-K Cyberonics, Inc. v. Wells Fargo Bank, N.A. as
Trustee Under Indenture 06-63284, Wells Fargo Bank N.A. v. Cyberonics, Inc. 06-CV




48



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Contractual Obligations






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






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



Factors Affecting Future Operating Results and Common Stock
Price









|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk





49



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|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data








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








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Disclosure Controls and Procedures




10-K. 10-Q


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|    |                                                 
|--- | ------------------------------------------------
|(a) | Evaluation of Disclosure Controls and Procedures

13a-15(e) 15d-15(e)




|    |                                                                     
|--- | --------------------------------------------------------------------
|(b) | Managements Report on Internal Control Over
    Financial Reporting

13a-15(f) 15d-15(f)




Internal Control 
Integrated Framework






| |   |                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Failure to recognize stock option granting practices as a
    significant risk and to ensure that all individuals involved in
    the granting process understood their appropriate roles and
    responsibilities and the consequences of their actions;
|
| |  | Lack of communication between individuals involved in the
    compensation approval process and personnel responsible for the
    accounting treatment of equity-based awards;                                                                           

51



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| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lack of accounting expertise and knowledge related to accounting
    for certain equity-based awards;                                                                      
|
| |  | Inadequate policies and procedures regarding maintenance of
    records supporting the granting activities, grant date, and
    authorization of equity-based transactions;
|
| |  | Inadequate policies and procedures regarding preparation and
    retention of documentation of stock option granting procedures
    and practices; and                     
|
| |  | Inadequate supervision and training for personnel involved in
    the stock option granting process.                                                                       







|    |                                                         
|--- | --------------------------------------------------------
|(c) | Changes in Internal Control Over Financial
    Reporting







| |   |                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Establishing that all equity grants, other than grants to our
    Board, must be approved by the Compensation Committee at a
    meeting of the Compensation Committee held on or before the
    effective date of the grant;
|
| |  | Establishing that equity grants to non-executive members of our
    Board must be approved by a vote of the full Board at a meeting
    of our Board held on or before the effective date of the grant;                      
|
| |  | Establishing that all internal approvals of grant awards must be
    obtained in writing prior to any Board Compensation Committee
    action granting an equity award;                                                      
|
| |  | Establishing predefined dates for the granting of all
    equity-based awards; and                                                                                                                                           
|
| |  | Establishing responsibility in one office for maintenance of
    records documenting all grant approvals.                                                                                                                    





| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Establishing additional education and training for personnel in
    areas associated with the stock option granting processes and
    other compensation practices to increase competency levels of
    the personnel involved; and
|
| |  | Establishing documented communication channels between
    Compensation Committee and personnel responsible for accounting
    treatment of the stock option grants upon approval.                                                 

Audit Committee Oversight




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






Managements Report on Internal Control
Over Financial Reporting Internal
Control  Integrated Framework












| |   |                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Failure to recognize stock option granting practices as a
    significant risk and to ensure that all individuals involved in
    the granting process understood their appropriate roles and
    responsibilities and the consequences of their actions;
|
| |  | Lack of communication between individuals involved in the
    compensation approval process and personnel responsible for the
    accounting treatment of equity-based awards;                                                                           
|
| |  | Lack of accounting expertise and knowledge related to accounting
    for certain equity-based awards;                                                                                                                                                    

53



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| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Inadequate policies and procedures regarding maintenance of
    records supporting the granting activities, grant date, and
    authorization of equity-based transactions;
|
| |  | Inadequate policies and procedures regarding preparation and
    retention of documentation of stock option granting procedures
    and practices; and                     
|
| |  | Inadequate supervision and training for personnel involved in
    the stock option granting process.                                                                       





Internal
Control  Integrated Framework Internal Control  Integrated Framework




| |                 
| | ----------------
| | /s/     KPMG LLP





54



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|         |                  
|-------- | -----------------
|Item 9B. | Other Information






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant

Directors and Executive Officers




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



55



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® ® ®






10-year






56



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start-up






16-year ® ®




57



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Audit Committee Information






| |   |                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | monitoring actions we take to comply with our internal
    accounting and control policies as well as external accounting,
    legal and regulatory requirements;                                                                                   
|
| |  | reviewing the qualifications and independence of the registered
    public accounting firm engaged for the purpose of preparing or
    issuing an audit report for inclusion in our Annual Report on
    Form 10-K (the
    independent auditors);
|
| |  | reviewing our consolidated financial statements and internal
    controls with management and the independent auditors; and                                                                                                                         
|
| |  | selecting our independent auditors and evaluating their
    performance.                                                                                                                                                                            



58



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www.cyberonics.com


Nominating Procedures






S-K


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Section 16(a) Beneficial Ownership Reporting
Compliance






Code of Ethics


www.cyberonics.com







|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Compensation of Non-Employee Directors




| |                  
| | -----------------
| | 2006 Compensation





| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | cash compensation, consisting of annual retainers for board and
    committee membership and meeting and committee fees; and
|
| |  | equity compensation, consisting of stock option grants or
    restricted stock grants under our 2005 Stock Option Plan.     



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






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

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

Changes for 2007 Compensation






| |                                                                     
| | --------------------------------------------------------------------
| | Compensation and Other Information Concerning Executive
    Officers

Summary Compensation Table




61



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






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

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



| | 
| | 
| | 



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



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

63



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Aggregated Option Exercises in the Last Fiscal Year




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






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

Ten-Year Option Repricings






Employment Agreements


Robert P. Cummins.


64



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10-K


Pamela B. Westbrook. 10-K 10-Q


65



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##### Table of Contents



Other Named Executive Officers. 12-month


Executive Severance Agreements




Other Compensatory Arrangements






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mr. Terry will receive a salary at the annual rate of
    $300,000 per year while he continues to serve as our
    Interim Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Mr. Parker will receive, in addition to his base salary of
    $196,650, a supplemental bi-weekly payment at the annual rate of
    $100,000 while he continues to serve as our Interim Chief
    Operating Officer. This supplemental payment will be included
    with Mr. Parkers base salary for purposes of
    calculating his bonus under our annual bonus and overachievement
    bonus plans for our executive officers. Mr. Parker is
    eligible to receive an annual bonus of up to 50% of his total
    salary and an annual overachievement bonus in such amount as may
    be determined by the Compensation Committee.
|
| |  | Mr. Riccardi will receive, in addition to his base salary
    of $149,784, a supplemental bi-weekly payment at the annual rate
    of $100,000 while he continues to serve as our Interim Chief
    Financial Officer. This supplemental payment will be included
    with Mr. Riccardis base salary for purposes of
    calculating his bonus under our corporate bonus plan, pursuant
    to which Mr. Riccardi is eligible to receive a bonus of up
    to 30% of his total salary. In addition, the Compensation
    Committee agreed that we will reimburse                                                                       

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##### Table of Contents



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

Compensation Committee Interlocks and Insider
Participation




Report of the Compensation Committee


Compensation Policy.


Base Salaries.


Bonuses.


Overachievement Bonus.


Restricted Stock Awards.


Compensation of Chief Executive Officer.


67



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10-K




| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | Respectfully submitted by the Compensation Committee of the
    Board of Directors of Cyberonics,
|
| | Stanley H. Appel, M.D.                                                                           
| | Tony Coelho*                                                                                     
| | Kevin S. Moore*                                                                                  
| | Reese S. Terry*                                                                                  






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

68



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Stock Performance Graph
















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



| |                                     
| | ------------------------------------
| | Equity Compensation Plan Information



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

69



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



| |                                                                   
| | ------------------------------------------------------------------
| | Security Ownership of Certain Beneficial Owners and
    Management



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

70



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






| |   |              
| | - | -------------
| | * | Less than 1%.



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



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

71



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##### Table of Contents





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






|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions





Accounting for Stock Issued to
Employees, Share
Based Payment,




72



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##### Table of Contents








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services



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






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



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##### Table of Contents






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

Exhibits


INDEX TO EXHIBITS


10-K. S-K.


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

74



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##### Table of Contents



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

75



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##### Table of Contents



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

76



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##### Table of Contents



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

77



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

78



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

Financial Statements and Schedules. S-X





10-K


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

79



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SIGNATURES






| |                 
| | ----------------
| | Cyberonics, Inc.



| |     |                     
| | --- | --------------------
| | By: | /s/ John A. Riccardi

| |                                
| | -------------------------------
| |                                
| | John A. Riccardi               
| | Interim Chief Financial Officer



POWER OF ATTORNEY


attorneys-in 10-K, attorneys-in




|                                                         |  |                                                                                                    |  |                 |  | 
|-------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | --------------- |  | 
|Signature                                                |  | Title                                                                                              |  | Date           
|                                                         |  |                                                                                                    |  |                
|                                                        
|/s/ REESE S.
    TERRY, JR.Reese
    S. Terry, Jr.       |  | Interim Chief Executive Officer (Principal Executive Officer)                                      |  | January 5, 2007
|                                                        
|/s/ JOHN A. RICCARDIJohn
    A. Riccardi                 |  | Interim Chief Financial Officer (Principal Financial Officer and
    Principal Accounting Officer) |  | January 5, 2007
|                                                        
|/s/ STANLEY H.
    APPEL, M.D.Stanley
    H. Appel, M.D. |  | Director                                                                                           |  | January 5, 2007
|                                                        
|/s/ TONY COELHOTony
    Coelho                           |  | Director                                                                                           |  | January 5, 2007
|                                                        
|/s/ GUY C. JACKSONGuy
    C. Jackson                     |  | Director                                                                                           |  | January 5, 2007
|                                                        
|/s/ KEVIN S. MOOREKevin
    S. Moore                     |  | Director                                                                                           |  | January 5, 2007
|                                                        
|/s/ ALAN J. OLSENAlan
    J. Olsen                       |  | Director                                                                                           |  | January 5, 2007

80



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

81



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CONSOLIDATED FINANCIAL STATEMENTS


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


TOGETHER WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRMS REPORT


F-1



---



##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM












Internal Control  Integrated
Framework








| |             
| | ------------
| | /s/ KPMG LLP





F-2



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY





CONSOLIDATED BALANCE SHEETS


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



F-3



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF OPERATIONS


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



F-4



---



##### Table of Contents





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND


COMPREHENSIVE INCOME (LOSS)


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



F-5



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS


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



F-6



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|        |             
|------- | ------------
|Note 1. | Restatements

Stock-Based Compensation Expense.










| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Incorrect measurement dates were used for certain
    stock option grants made principally during the period from 1998
    to 2003. Under Accounting Principles Board Standard
    No. 25, Accounting for Stock Issued to
    Employees(APB 25), the date of final
    approval of a stock option is the basis for determining the
    measurement date to be used in comparing the
    exercise price of the option to the fair value of our common
    stock on the measurement date. In accordance with APB 25,
    with respect to periods prior to April 29, 2006, we should
    have recorded compensation expense in an amount per share
    subject to each option to the extent the fair market value of
    our stock on the measurement date exceeded the exercise price of
    the option. We have determined that in some instances we
    previously used an incorrect measurement date and failed to
    record such compensation expense.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | The stock option grant process in place during this time period
    required the Compensation Committee to approve all stock option
    grants. This was frequently accomplished through the use of
    unanimous written consents that were prepared by management and
    sent by overnight delivery to Compensation Committee members to
    review, execute and return. For certain grants issued during
    this period, the date of effective approval by the Compensation
    Committee was subsequent to the grant date as recorded in our
    records and used as the measurement date in preparing our
    consolidated financial statements. Electronic data available for
    unanimous written consent documents executed by the Compensation
    Committee during the time period from 1998 to 2003 indicated
    that the documents were created and therefore approved on a date
    later than the grant dates. With respect to grants for which the
    electronic data indicated such dating issues, but for which
    other contemporaneous documentation exists that establishes the
    date of final approval by all Compensation Committee members
    (such as, for example, signed and dated approval faxes), we
    relied on that other documentation to determine the date of
    effective approval and the appropriate measurement date. With
    respect to grants for which the

F-7



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | electronic data indicated such dating issues, but for which no
    such other contemporaneous documentation exists, we used a
    measurement date corresponding to the date on which the
    unanimous written consent document was last saved electronically
    plus four calendar days to allow for the approval process that
    was conducted using overnight shipping of approval documents to
    and from Compensation Committee members. Under APB 25, to
    the extent that the fair market value of our stock on the
    revised measurement date exceeded the exercise price of the
    option, we were required to recognize compensation expense with
    respect to that option at the time of the grant. The cumulative
    effect of these measurement date revisions on our consolidated
    financial statements through April 29, 2005 is
    approximately $5.3 million in aggregate pre-tax non-cash
    stock-based compensation expense.                                                                                 
|
| | In light of the significant judgment used in establishing
    revised measurement dates, alternate approaches to the one used
    could have resulted in different pre-tax non-cash stock-based
    compensation expense charges than those recorded in the
    restatement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | In addition, we also identified certain grants where evidence
    other than electronic unanimous written consent data exists that
    supports a measurement date other than the grant date. These
    grants were issued in 2001 and 2002, resulting in additional
    pre-tax non-cash stock-based compensation expense through
    April 29, 2005, of approximately $1.1 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | (2) The existence of multiple documents with different
    dates evidencing approval for the same grants resulted in a
    scenario that is considered re-pricing under GAAP. Our
    internal investigation identified several grants to directors,
    officers and employees where it appeared that the approval
    criteria under GAAP were met on multiple dates. The documents
    evidencing approval included communications between management
    and members of the Compensation Committee and subsequently
    completed unanimous written consent forms signed by the
    Compensation Committee members. Ultimately, grants were issued
    to individuals at the price determined by using as the
    measurement date the date of that subsequently completed
    unanimous written consent, resulting in a price lower than the
    price that would have resulted from use of the earlier dated
    documents to evidence approval of the grant. It is not clear
    which documents were intended to constitute final approval.
|
| | Based on the existence of multiple approval documents with a
    subsequent approval at a lower stock price, these grants were
    deemed to involve re-pricing within the meaning of the
    applicable accounting literature. Variable accounting treatment
    has been applied in accordance with the provisions of Financial
    Accounting Standards Board (FASB) Interpretation 44,
    Accounting for Certain Transactions involving Stock
    Compensation(FIN 44), which was
    effective July 1, 2000 and provided for a look back period
    to December 15, 1998 for re-priced stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | The effect of accounting for these grants as having been
    re-priced is to increase our cumulative compensation expense
    through April 29, 2005 by approximately $8.6 million
    to account for the additional pre-tax non-cash stock-based
    compensation expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | (3) The cancellation of certain stock option grants that
    were subsequently re-issued at a lower price than the original
    grant constituted re-pricing that rendered the grants subject to
    variable accounting treatment. On certain occasions from
    fiscal year 1999 through fiscal year 2001, we canceled certain
    stock option grants and subsequently reissued new grants.
    Therefore, these grants were deemed to be re-priced and are
    subject to variable accounting treatment in accordance with
    FIN 44.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | The cumulative impact of this type of error on the consolidated
    financial statements through April 29, 2005 is
    approximately $1.9 million in additional pre-tax non-cash
    stock-based compensation expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (4) Stock option grants issued to non-employees were
    either not recorded or were recorded incorrectly. From
    fiscal year 1997 through fiscal year 2001, we issued certain
    stock option grants to                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-8



---



##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | various consultants. Compensation expense for some of the grants
    was recorded at the time the grants were issued; however, the
    grants were not correctly recorded in accordance with GAAP in
    effect at the time of the grants. Compensation expense was not
    recorded at all for the remaining grants.
|
| | The cumulative impact of this type of error on the consolidated
    financial statements through April 29, 2005 is
    approximately $1.0 million in additional pre-tax non-cash
    stock-based compensation expense.                                                                                               
|
| | (5) Other miscellaneous errors related to stock
    options. The cumulative impact for all other types of errors
    on the consolidated financial statements through April 29,
    2005 is approximately $0.5 million in additional pre-tax
    non-cash stock-based compensation expense.                          





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






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



F-9



---



##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




CONSOLIDATED STATEMENTS OF OPERATIONS


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

F-10



---



##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




CONSOLIDATED BALANCE SHEET


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

F-11



---



##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




CONSOLIDATED STATEMENTS OF CASH FLOWS


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

F-12



---



##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



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



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

F-13



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



|        |                                                                
|------- | ---------------------------------------------------------------
|Note 2. | Summary of Significant Accounting Policies and Related
    Data

Nature of Operations.




Consolidation.


Use of Estimates.


F-14



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Foreign Currency Translation.


Cash Equivalents.


Restricted Cash.


Investments in Short-term Marketable Securities.


Fair Value of Financial Instruments.


Accounts Receivable.


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

Inventories. first-in


Property and Equipment.


Leases. Accounting for
Leases,


F-15



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Long-Lived Assets. Accounting for the Impairment or Disposals of
Long-Lived Assets,


Stock Options. Accounting for
Stock-Based Compensation Accounting for Stock-Based Compensation 
Transition and Disclosure.


Accounting for Stock Issued to Employees




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

Revenue Recognition.


F-16



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Research and Development.


Product Warranty.




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

License Agreements.


Income Taxes.




Net Earnings (Loss) Per Share. Earnings Per Share


F-17



---



##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



Earnings Per Share, Earnings Per
Share,


Comprehensive Income (Loss).


Reclassifications.


Note 3.     Going Concern


start-up


F-18



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




10-K 10-K




|        |            
|------- | -----------
|Note 4. | Inventories



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



|        |                       
|------- | ----------------------
|Note 5. | Property and Equipment



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

F-19



---



##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |               
|------- | --------------
|Note 6. | Line of Credit





8-K 10-K 10-K 10-Q


12b-25 10-Q 10-K 10-Q, 10-Q;


F-20



---



##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


10-K


10-K 10-Q, 10-Q 10-Q; 10-K




|        |                    
|------- | -------------------
|Note 7. | Accrued Liabilities



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



|        |                  
|------- | -----------------
|Note 8. | Convertible Notes



F-21



---



##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




90-day




| |                                           
| | ------------------------------------------
| | Convertible Notes Indenture Default Notice

10-Ks 10-K 10-K




10-Ks 10-K 10-K 10-K


F-22



---



##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Cyberonics, Inc. v. Wells Fargo Bank, N.A., as
Trustee Under Indenture, 06-63284,


Wells Fargo
Bank, N.A. v. Cyberonics, Inc., 06-CV






|        |                                    
|------- | -----------------------------------
|Note 9. | Convertible Note Hedge and Warrants





|         |                     
|-------- | --------------------
|Note 10. | Stockholders Equity

Preferred Stock.


Deferred Compensation.




F-23



---



##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








Preferred Share Purchase Rights.




|         |                                   
|-------- | ----------------------------------
|Note 11. | Stock Incentive and Purchase Plans

Stock Options.


F-24



---



##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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

F-25



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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









F-26



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Options Outstanding and Exercisable by Price Range


As of April 28, 2006


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



Stock Purchase Plan.


Stock Recognition Program.




|         |                              
|-------- | -----------------------------
|Note 12. | New Accounting Pronouncements

Inventory Costs  an Amendment to ARB
No. 43, Chapter 4 Inventory Pricing, ...under some circumstances,
items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require
treatment as current period charges... so abnormal.


F-27



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Exchanges of Nonmonetary Assets, Accounting for Nonmonetary Transactions,


Share-Based Payment Accounting for
Stock-Based Compensation. Accounting for Stock Issued to
Employees, 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. Employers Accounting for Employee Stock Ownership
Plans.


Accounting for Conditional Asset
Retirement Obligations  an interpretation of FASB
Statement No. 143 ). Accounting for Asset Retirement Obligations,


F-28



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Accounting Changes and Error Corrections  a
replacement of Accounting Principles Board (APB) Opinion
No. 20 and FASB Statement No. 3. Accounting
Changes, Reporting Accounting Changes in Interim Financial
Statements,


Accounting for Certain Hybrid Financial
Instruments  an amendment of FASB Statements
No. 133 and 140 Accounting for Derivative Instruments and Hedging
Activities ,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities


Accounting for Servicing of Financial
Assets  an amendment of FASB Statement
No. 140 Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities


Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement
No. 109.


F-29



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Accounting for Income
Taxes.


Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial
Statements




|         |             
|-------- | ------------
|Note 13. | Income Taxes



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



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

F-30



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



Accounting for
Income Taxes.


F-31



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                                 
|-------- | --------------------------------
|Note 14. | Employee Retirement Savings Plan





|         |                              
|-------- | -----------------------------
|Note 15. | Commitments and Contingencies

Post-market Clinical Surveillance. D-21, follow-up


License Agreements.






Lease Agreements.


F-32



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





Other Commitments.




|         |           
|-------- | ----------
|Note 16. | Litigation





| |                                       
| | --------------------------------------
| | Senate Finance Committee Investigation



F-33



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                
| | -------------------------------
| | Securities Class Action Lawsuit

Richard Darquea v. Cyberonics Inc.,
et al. H:05-cv-02121. Stanley
Sved v. Cyberonics, Inc., et al., H:05-cv-2414 H-05-2121, In re Cyberonics, Inc. Securities Litigation,








F-34



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                                              
| | -------------------------------------------------------------
| | Governmental Investigations of Options Granting
    Practices







| |                        
| | -----------------------
| | NASDAQ Delisting Notice

12b-25 10-K 10-K 8-K 10-K


10-K,


10-Q 10-Q)


F-35



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




10-K 10-Q 10-Q 10-Q)


10-K, 10-Q 10-Q.




| |                                  
| | ---------------------------------
| | Stockholder Derivative Litigation

Rudolph v. Cummins, et al


Smith v. Cummins, Adel v. Cummins, McKeehan v. Cummins, Nussbaum v.
Cummins, Wunschel v. Cummins,




F-36



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                             
| | ----------------------------
| | Indenture Default Litigation

10-K, 10-Q 10-Q.


10-K 10-Q, 10-Q 10-Q; 10-K




10-K 10-K


F-37



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Cyberonics, Inc. v. Wells Fargo Bank, N.A., as Trustee
Under Indenture 06-63284, Wells Fargo Bank, N.A. v. Cyberonics, Inc. 06-CV








|         |               
|-------- | --------------
|Note 17. | Concentrations











F-38



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|         |                       
|-------- | ----------------------
|Note 18. | Geographic Information

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

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





F-39



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                                            
|-------- | -------------------------------------------
|Note 19. | Quarterly Financial Information  Unaudited





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

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






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

F-40



---



##### Table of Contents





CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


CONSOLIDATED BALANCE SHEETS


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


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






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

F-41



---



##### Table of Contents





CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


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


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

F-42



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##### Table of Contents





CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


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


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

F-43



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                  
|-------- | -----------------
|Note 20. | Subsequent Events



| |                                                                               
| | ------------------------------------------------------------------------------
| | Governmental Investigation of Options Granting Practices
    and Other Matters





| |                        
| | -----------------------
| | NASDAQ Delisting Notice

10-K, 10-Q, 10-Q.




| |                                  
| | ---------------------------------
| | Stockholder Derivative Litigation





| |                                           
| | ------------------------------------------
| | Convertible Notes Indenture Default Notice

10-K 10-K 10-K




10-K 10-K 10-K 10-K


Cyberonics, Inc. v. Wells Fargo Bank, N.A., as
Trustee Under Indenture, 06-63284,


F-44



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Wells Fargo
Bank, N.A. v. Cyberonics, Inc., 06-CV






| |                                                                    
| | -------------------------------------------------------------------
| | Excise Tax Remediation Under Internal Revenue Code
    Section 409A









| |                                           
| | ------------------------------------------
| | Departure of Directors or Certain Officers

10-K




F-45



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##### Table of Contents



CYBERONICS, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


10-K 10-Q




| |                         
| | ------------------------
| | Stock Repurchase Program



F-46



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##### Table of Contents



INDEX TO EXHIBITS


10-K. S-K.


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



---



##### Table of Contents



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



---



##### Table of Contents



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



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##### Table of Contents



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



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##### Table of Contents



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



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##### Table of Contents



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