Document:

EX-10.4

	 	 	 	Confirmation of OTC Warrant Transaction

	 	 	 	 	 
	Date:

	 	September 21, 2005
	 	ML Ref:
	To:

	 	Cyberonics, Inc. (“Counterparty”)
	 	

	
 
	 	 
	 	

	 
	 	 	 	 
	Attention:

	 	

	 	

	 
	 	 	 	 
	From:

	 	Merrill Lynch International (“ML”)
	 	

	
 
	 	 
	 	

	
 
	 	Merrill Lynch Financial Centre

2 King Edward Street

London EC1A 1HQ
	 	

	 	 	 	     

Dear Sir / Madam:

The purpose of this letter agreement (this “Confirmation”) is to confirm the terms and
conditions of the above-referenced transaction entered into between Counterparty and ML through its
agent Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPFS” or “Agent”) on
the Trade Date specified below (the “Transaction”). This Confirmation constitutes a
“Confirmation” as referred to in the Agreement specified below.

The definitions and provisions contained in the 2000 ISDA Definitions (the “Swap
Definitions”) and the 2002 ISDA Equity Derivatives Definitions (the “Equity
Definitions” and, together with the Swap Definitions, the “Definitions”), in each case
as published by the International Swaps and Derivatives Association, Inc., are incorporated into
this Confirmation. In the event of any inconsistency between the Swap Definitions and the Equity
Definitions, the Equity Definitions will govern, and in the event of any inconsistency between the
Definitions and this Confirmation, this Confirmation will govern. References herein to a
“Transaction” shall be deemed to be references to a “Share Option Transaction” for the purposes of
the Equity Definitions and to a “Swap Transaction” for the purposes of the Swap Definitions. For
purposes of this Transaction, “Warrant Style”, “Warrant Type”, “Number of Warrants” and “Warrant
Entitlement” (each as defined below) shall be used herein as if such terms were referred to as
“Option Style”, “Option Type”, “Number of Options” and “Option Entitlement”, respectively, in the
Definitions.

This Confirmation evidences a complete binding agreement between you and us as to the terms of
the Transaction to which this Confirmation relates. This Confirmation (notwithstanding anything to
the contrary herein), shall be subject to an agreement in the 1992 form of the ISDA Master
Agreement (Multicurrency Cross Border) (the “Master Agreement” or “Agreement”) as
if we had executed an agreement in such form (but without any Schedule and with elections specified
in the “ISDA Master Agreement” Section of this Confirmation) on the Trade Date of the first such
Transaction between us. In the event of any inconsistency between the provisions of that Agreement
and this Confirmation, this Confirmation will prevail for the purpose of this Transaction.

The terms of the particular Transaction to which this Confirmation relates are as follows:

General Terms:

	 	 	 	 	 
	Trade Date:
	 	September 21, 2005

	Warrant Style:
	 	European

	Warrant Type:
	 	Call

	Seller:
	 	Counterparty

	Buyer:
	 	ML

	Shares:
	 	Shares of common stock, par value of USD 0.01, of Counterparty (Security Symbol: “CYBX”).

	Number of Warrants:
	 	3.01205mm
	Multiple Exercise:
	 	Inapplicable

	Exercise Price:
	 	$	50.00	 
	Premium:
	 	$25.2 mm, Payable by ML to Counterparty on the Premium Payment Date.
	Premium Payment Date:
	 	September 27, 2005

	Exchange:
	 	NASDAQ

	Related Exchange(s):
	 	Applicable

	Procedures for Exercise:
	 	 	 	 
	 
	 	 	 	 
	Expiration Time:
	 	11:59 pm
	Expiration Date:
	 	Valuation Date

	Exercise Date:
	 	Expiration Date

	Multiple Exercise:
	 	Not Applicable

	Automatic Exercise:
	 	Applicable

	Valuation:
	 	 	 	 
	 
	 	 	 	 
	Valuation Date:
	 	The last Averaging Date

	Averaging Dates:
	 	The 15 Full Exchange Business Days beginning on the Averaging Period Start

	 
	 	Date.

	Full Exchange Business Day:
	 	A Scheduled Trading Day that has a scheduled closing time for its regular trading session

	 
	 	that is 4 pm (New York City time) or the then standard closing time for regular trading

	 
	 	on the Exchange.

	Averaging Date Disruption:
	 	Modified Postponement

	Averaging Period
Start Date:
	 	September 27, 2012.

	Settlement Terms:
	 	 	 	 
	 
	 	 	 	 
	Cash Settlement:
	 	Counterparty may elect to settle this Transaction by Cash Settlement or Net Physical

	 
	 	Settlement by providing ML with notice (“Settlement Notice”) in accordance with the

	 
	 	Settlement Method Election provisions herein and in Section 7.1 of the Equity

	 
	 	Definitions.  In the event that Counterparty does not so notify ML, this Transaction

	 
	 	shall be settled pursuant to the Default Settlement Method provision below.

	Settlement Currency:
	 	USD

	Settlement Price:
	 	The arithmetic mean of the closing price of the Shares on the Exchange on each Averaging

	 
	 	Date.

	Cash Settlement
Payment Date:
	 	Three (3) Currency Business Day after the Valuation Date

	Settlement Method Election:
	 	Applicable with respect to Cash Settlement or Net Physical Settlement only.

	Electing Party:
	 	Counterparty

	Settlement Method
Election Date:
	 	Exercise Date

	Default Settlement Method:
	 	Net Physical Settlement.  In the event that this Transaction is settled by Net Physical

	 
	 	Settlement, Counterparty shall deliver to ML on the 1st Full Exchange Business Day

	 
	 	following the Valuation Date a number of Shares (the “Delivered Shares”) equal to the Net

	 
	 	Physical Settlement Amount divided by the Settlement Price, provided that in the event

	 
	 	that the number of Shares calculated comprises any fractional Share, only whole Shares

	 
	 	shall be delivered and an amount equal to the value of such fractional share shall be

	 
	 	payable by the Counterparty to ML in lieu of such fractional Share.

	Net Physical Settlement Amount:
	 	With respect to the Valuation Date, an amount, as calculated by the Calculation Agent,

	 
	 	equal to the Number of Warrants multiplied by the Exercise Price Differential.

	Exercise Price Differential:
	 	In respect of the Valuation Date, an amount equal to the greater of: (a) the excess, if

	 
	 	any, of the Settlement Price over the Exercise Price, and (b) zero.

	Net Physical Settlement
Adjustment:
	 	Subject to the Maximum Deliverable Share Amount, if ML receives any Delivered Shares

	 
	 	under this Transaction:

(a) ML shall sell the Delivered Shares in a commercially reasonable
manner until the amount received by ML for the sale of the Shares
(the “Proceeds Amount”) is equal to the Net Physical
Settlement Amount. Any remaining Delivered Shares shall be returned
to Counterparty.

(b) If the Proceeds Amount is less than the Net Physical Settlement
Amount, Counterparty shall promptly deliver upon notice from ML
additional Shares to ML until the dollar amount from the sale of such
Shares by ML equals the difference between the Net Physical
Settlement Amount and the Proceeds Amount. In no event shall
Counterparty be required to deliver to ML a number of Shares greater
than the Maximum Deliverable Share Amount.

	 	 	 
	Conditions to Net

Physical Settlement:

	 	

(1) At least 15 Exchange Business Days prior

to the Expiration Date, Counterparty shall (i)

make available to ML an effective registration

statement (the “Registration Statement”) filed

pursuant to Rule 415 under the Securities Act

of 1933, as amended (the “Securities Act”), and

such prospectuses as ML may reasonably request

to comply with the applicable prospectus

delivery requirements (the “Prospectus”) for

the resale by ML of such number of Shares as ML

shall reasonably specify in accordance with

this paragraph, such Registration Statement to

be effective and Prospectus to be current until

the earliest of the date on which (A) all

Delivered Shares have been sold by ML or

returned to Counterparty pursuant to the Net

Physical Settlement Adjustment provision above,

(B) ML has advised Counterparty that it no

longer requires that such Registration

Statement be effective or (C) all remaining

Delivered Shares could be sold by ML without

registration pursuant to Rule 144 promulgated

under the Securities Act (the “Registration

Period”) or (ii) Counterparty has provided a

legal opinion in form and substance

satisfactory to ML (with customary assumptions

and exceptions) that the Shares issuable upon

exercise of these Warrants will be freely

tradable under the Securities Act upon delivery

to ML and not subject to any legend restricting

transferability. It is understood that the

Registration Statement and Prospectus may cover

a number of Shares equal to the aggregate

number of Shares (if any) reasonably estimated

by ML to be potentially deliverable by

Counterparty in connection with Net Physical

Settlement hereunder (not to exceed the Maximum

Deliverable Share Amount);

In addition, the following representation, which Counterparty shall
be deemed to make on each day during the Registration Period, shall
be true and correct:

“Counterparty represents that the Registration Statement, at
the time the same became effective, did not contain an untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading; Counterparty represents
that the Prospectus (as the same may be supplemented from
time to time) does not include an untrue statement of a
material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.”

Notwithstanding the foregoing, the Registration Statement and
Prospectus provided for by this paragraph shall be subject to the
same suspension of sales during “blackout dates” as provided in the
following paragraph (2).

(2) At least 10 Exchange Business Days prior to the Expiration Date,
Counterparty will enter into a Registration Rights Agreement with ML
in form and substance reasonably acceptable to ML, which agreement
will contain among other things, customary representations and
warranties and indemnification, restrictions on sales during
“blackout dates” as provided for in the Registration Rights Agreement
entered into between Counterparty and the Initial Purchaser of the
3.0% Convertible Notes of Counterparty due 2012, and other rights
relating to the registration of a number of Shares equal to the
number of Delivered Shares and others Shares deliverable hereunder up
to the Maximum Deliverable Share Amount.

(3) Counterparty shall promptly pay to ML a $0.04 per Share fee
with all Shares delivered in connection with Net Physical Settlement
pursuant to a Registration Statement.

In the event Counterparty fails to comply with any of the conditions set forth in “Net Physical
Settlement Terms” herein, Counterparty shall settle the Transaction through Cash Settlement;
provided however, that notwithstanding the foregoing, if

either (i) Counterparty is unable to provide for the sale of the
Shares under the Registration Statement as provided in the Resale
Registration Rights Agreement, (ii) if some Shares cannot be
registered under the Registration Statement due to Rule 415(a)(4)
under the Securities Act, or (iii) if some or all of the Delivered
Shares cannot be used to close out stock loans in the shares of
Counterparty affected to establish or maintain short positions by ML
in connection with this Transaction without a prospectus being
required by applicable law to be delivered to such lender,
Counterparty, in the case of (i) and (ii) above, may deliver
unregistered or registered Shares, the value of which, in the case of
unregistered Shares, shall be discounted to reflect market value and,
in the case of (iii) above, shall reflect the cost to ML of trading
Shares in order to close out its hedge position if any, in all cases
for purposes of calculating the Delivered Shares. In no event shall
Counterparty be required to top-up the delivery in cash.

Notwithstanding the foregoing, with respect to any Shares delivered
by Counterparty pursuant to Net Physical Settlement hereunder, in the
event that ML is unable to sell such Shares on the Exchange and would
otherwise incur material additional transaction costs, Counterparty
shall promptly pay in cash or Shares an additional amount to ML equal
to 2% of the Strike Price.

	 	 	 
	Limitations on Net Physical	 	 
	Settlement by Counterparty:

	 	The number of Shares that may be

delivered at settlement by Counterparty

shall not exceed 6.1 million at any time

(“Maximum Deliverable Share Amount”).
	 
	 	 
	
 
	 	Counterparty represents and warrants

that the number of Available Shares as

of the Trade Date is greater than the

Maximum Deliverable Share Amount.

Counterparty covenants and agrees that

Counterparty shall not take any action

of corporate governance or otherwise to

reduce the number of Available Shares

below the Maximum Deliverable Share

Amount.

For this purpose, “Available Shares” means the number of
Shares Counterparty currently has authorized (but not issued and
outstanding) less the maximum number of Shares that may be required
to be issued by Counterparty in connection with stock options,
convertibles, and other commitments of Counterparty that may require
the issuance or delivery of Shares in connection therewith.

	 	 	 	Adjustments:

	 	 	 	Dividends:

	 	 	 	 	 
	Extraordinary Dividends:	 	Any and all dividends paid by Counterparty.

	 
	 	 	 	 
	Method of Adjustment:

	 	Calculation Agent Adjustment
	 	

	 
	 	 	 	 
	Extraordinary Events:

	 	

	 	

	 
	 	 	 	 
	Consequences of Merger Events:

	 	(a) Share-for-Share:

Agreed Model:
	 	Cancellation and Payment

Inapplicable

(b) Share-for-Other: Cancellation and Payment

Agreed Model: Inapplicable

	 	(c)	 	Share-for-Combined: Cancellation
and Payment

	 	 	 	Agreed Model: Inapplicable

With respect to any Extraordinary Events hereunder, upon the
occurrence of Cancellation and Payment in whole or in part, the
parties agree that the amount to be paid, in accordance with the
Equity Definitions, shall constitute a Transaction Early Termination
Amount, subject to satisfaction by the payment or delivery of Shares
or cash as set forth in the Early Termination section below.

	 	 	 
	Tender Offer:

	 	Not Applicable
	 
	 	 
	Nationalization, Insolvency or Delisting:

	 	Cancellation and Payment
	 
	 	 
	Additional Disruption Events:

	 	

	 
	 	 
	Change in Law:

	 	Not Applicable
	 
	 	 
	Failure to Deliver:

	 	Not Applicable
	 
	 	 
	Insolvency Filing:

	 	Applicable
	 
	 	 
	Hedging Disruption Event:

	 	Not Applicable
	 
	 	 
	Increased Cost of Hedging:

	 	Not Applicable
	 
	 	 
	Hedging Party:

	 	ML
	 
	 	 
	Loss of Stock Borrow:

	 	Not Applicable
	 
	 	 
	Increased Cost of Stock Borrow:

	 	Not Applicable
	 
	 	 
	Determining Party:

	 	ML
	 
	 	 
	Non-Reliance:

	 	Applicable
	 
	 	 
	Agreements and Acknowledgments

Regarding Hedging Activities:

	 	

Applicable
	 
	 	 
	Additional Acknowledgments:

	 	Applicable

Other Provisions:

	 	 	 
	Early Termination:

	 	Notwithstanding any provision to the contrary,

upon the designation of an Early Termination Date

hereunder, a party’’s payment obligation in

respect of this Transaction only as determined in

accordance with Second Method and Market Quotation

(the “Transaction Early Termination Amount”) may,

at the option of Counterparty, be satisfied by the

party owing such amount by the delivery of a

number of Shares equal to the Transaction Early

Termination Amount divided by the Termination

Price (“Early Termination Stock Settlement”);

provided, however, that Counterparty must notify

ML of its election of Early Termination Stock

Settlement by the close of business on the day

that is two Business Days following the day that

the notice designating the Early Termination Date

is effective.
	
 
	 	 
	
 
	 	“Termination Price” means the closing price per

Share on the Exchange on the Early Termination

Date.
	
 
	 	 
	
 
	 	A number of Shares calculated as being due in

respect of any Early Termination Stock Settlement

will be deliverable on the third Exchange Business

Day following the date that notice pursuant to

Section 6(d)(i) of the Agreement specifying the

number of Shares deliverable is effective.

Section 6(d)(i) of the Agreement is hereby amended

by adding the following words after the word

“paid” in the fifth line thereof: “or any

delivery is to be made, as applicable.”

If ML receives Shares in connection with an Early

Termination Stock Settlement, ML shall sell such

Shares in a commercially reasonable manner until

the amount received by ML for the sale of such

Shares (net of transaction costs) (the “Proceeds

Amount”) is equal to the Transaction Early

Termination Amount. Any remaining Shares shall be

returned to Counterparty. If the Proceeds Amount

is less than the Transaction Early Termination

Amount, Counterparty shall promptly deliver

additional Shares to ML upon request until the

dollar amount from the sale of such additional

Shares by ML (net of transaction costs) equals the

difference between the Transaction Early

Termination Amount and the Proceeds Amount. In no

event shall Counterparty be required to deliver to

ML a number of Shares greater than the Maximum

Deliverable Share Amount.
	
 
	 	 
	prior to the Early Termination

	 	On or

Date (if

Early Termination Stock Settlement is elected),

Counterparty shall enter into a registration

rights agreement with ML in form and substance

reasonably acceptable to ML and shall satisfy the

conditions contained therein and Counterparty

shall file and diligently pursue to effectiveness

a Registration Statement pursuant to Rule 415

under the Securities Act. If and when such

Registration Statement shall have been declared

effective by the Securities and Exchange

Commission, Counterparty shall have made available

to ML such Prospectuses as ML may reasonably

request to comply with the applicable prospectus

delivery requirements for the resale by ML of such

number of Shares as ML shall specify (or, if

greater, the number of Shares that Counterparty

shall specify). Such Registration Statement shall

be effective and Prospectus shall be current until

the earliest of the date on which (A) all Shares

delivered by Counterparty in connection with an

Early Termination Date and all Shares held by ML

for hedging purposes have been sold by ML, (B) ML

has advised Counterparty that it no longer

requires that such Registration Statement be

effective or (C) all remaining Shares could be

sold by ML without registration pursuant to Rule

144 promulgated under the Securities Act (the

“Termination Registration Period”). It is

understood that the Registration Statement and

Prospectus will cover a number of Shares equal to

the number of Shares plus the aggregate number of

Shares (if any) reasonably estimated by ML to be

potentially deliverable by Counterparty in

connection with Early Termination Stock Settlement

hereunder, but in no event exceeding the Maximum

Deliverable Share Amount. On each day during the

Registration Period Counterparty shall represent

that each of its filings under the Securities Act,

the Securities Exchange Act of 1934 as amended

(the “Exchange Act”), or other applicable

securities laws that are required to be filed have

been filed and that, as of the respective dates

thereof and as of the date of this representation,

there is no misstatement of a material fact

contained therein or omission of a material fact

required to be stated therein or necessary to make

the statements therein not misleading.
	
 
	 	 
	
 
	 	If Counterparty is unable to deliver Shares

subject to an effective Registration Statement as
	 
	 	 
	set forth

	 	above, Counterparty may deliver

unregistered Shares in an amount determined by ML

based upon its commercially reasonable judgment of

the market value of such Shares. In no event

shall Counterparty be required to deliver to ML a

number of Shares greater than the Maximum

Deliverable Share Amount.
	 
	 	 
	Compliance with

Securities Laws:

	 	Each party represents and agrees that it has

complied, and will comply, in connection with this

Transaction and all related or contemporaneous

sales and purchases of Shares, with the applicable

provisions of the Securities Act, the Exchange

Act, and the rules and regulations thereunder,

including, without limitation, Rule 10b-5 and

Regulation M under the Exchange Act, provided that

each party shall be entitled to rely conclusively

on any information communicated by the other party

concerning such other party’s market activities

and provided further that Counterparty shall have

no liability as a result of a breach of this

representation due to ML’s gross negligence or

willful misconduct.

Each party further represents that if such party

(“X”) purchases any Shares from the other party

pursuant to this Transaction, such purchase(s)

will comply in all material respects with (i) all

laws and regulations applicable to X, and (ii) all

contractual obligations of X.
	 
	 	 
	 
	 	 
	 
	 	 
	
 
	 	Counterparty represents that as of the date hereof:
	 
	 	 
	
 
	 	(a) each of its filings under the Exchange Act

that are required to be filed from and including

the ending date of Counterparty’s most recent

prior fiscal year have been filed and that, as of

the respective dates thereof and as of the date of

this representation, there is no misstatement of

material fact contained therein or omission of a

material fact required to be stated therein or

necessary to make the statements therein in light

of the circumstances in which they were made not

misleading (when taken together with

Counterparty’s previous filings under the Exchange

Act);
	 
	 	 
	
 
	 	(b) Counterparty is not entering into this

Agreement to facilitate a distribution of the

common stock or in connection with a future

distribution of securities;
	 
	 	 
	
 
	 	(c) Counterparty is not entering into this

Agreement to create actual or apparent trading

activity in the common stock (or any security

convertible into or exchangeable for common stock)

or to manipulate the price of the common stock (or

any security convertible into or exchangeable for

common stock); and
	 
	 	 
	
 
	 	(d) the number of Available Shares on the date

hereof is greater than the Maximum Deliverable

Share Amount.

	 	 	 
	Account Details:

	 	

	 
	 	 
	Account for payments to Counterparty: Not Applicable

	 
	 	 
	Account for payment to ML: Chase Manhattan Bank, New York

	 
	 	 
	
 
	 	ABA# 021000021

FAO: ML Equity Derivatives

A/C: 066213118
	 
	 	 
	Agreement Regarding

Shares:

	 	

Counterparty agrees that, in respect of any Shares delivered to ML, such Shares shall be,

upon such delivery, duly and validly authorized, issued and outstanding, fully paid and

non-assessable and subject to no adverse claims of any other party. The issuance of such

Shares does not and will not require the consent, approval, authorization, registration or

qualification of any government authority, except such as shall have been obtained on or

before the delivery date of any Shares or in connection with any Registration Statement

filed with respect to any Shares.
	 
	 	 
	Covenant Regarding

Shares:

	 	

Counterparty covenants that it shall not take any action to decrease the number of

Available Shares below the Maximum Deliverable Share Amount.
	 
	 	 
	Bankruptcy Rights:

	 	In the event of Counterparty’s bankruptcy, ML’s rights in connection with this Transaction

shall not exceed those rights held by common shareholders. For the avoidance of doubt, the

parties acknowledge and agree that ML’s rights with respect to any other claim arising from

this Transaction prior to Counterparty’s bankruptcy shall remain in full force and effect

and shall not be otherwise abridged or modified in connection herewith.
	 
	 	 
	Set-Off:

	 	The Set-off provisions in the Agreement shall apply to this Transaction, except in the

event of Counterparty’s or ML’s bankruptcy, in which case each of the parties waives any

and all rights it may have to set-off, whether arising under any agreement, applicable law

or otherwise.
	 
	 	 
	Collateral:

	 	None.
	 
	 	 
	Transfer:

	 	Counterparty may transfer its rights and delegate its obligations under this Transaction in

accordance with Section 7 of the Master Agreement. ML may assign its rights and delegate

its obligations hereunder, in whole or in part, to any other person (an “Assignee”) without

the prior consent of the Counterparty, effective (the “Transfer Effective Date”) upon

delivery to Counterparty of an executed acceptance and assumption by the Assignee (an

“Assumption”) of the transferred obligations of ML under this Transaction (the “Transferred

Obligations”). On the Transfer Effective Date, (a) ML shall be released from all

obligations and liabilities arising under the Transferred Obligations; and (b) the

Transferred Obligations shall cease to be a Transaction(s) under the Agreement and shall be

deemed to be a Transaction(s) under the ISDA Master Agreement between Assignee and

Counterparty, provided that, if at such time Assignee and Counterparty have not entered

into a ISDA Master Agreement, Assignee and Counterparty shall be deemed to have entered

into an ISDA form of Master Agreement (Multicurrency-Cross Border) without any Schedule

attached thereto.
	 
	 	 
	Regulation:

	 	ML is regulated by The Securities and Futures Authority Limited and has entered into this

Transaction as principal.
	 
	 	 
	Indemnity:

	 	Each party agrees to indemnify the other party, its Affiliates and their respective

directors, officers, agents and controlling parties (each such person being an “Indemnified

Party”) from and against any and all losses, claims, damages and liabilities, joint and

several, to which such Indemnified Party may become subject because of a breach of any

representation or covenant hereunder, in the Agreement or any other Agreement relating to

the Agreement or Transaction and will reimburse any Indemnified Party for all reasonable

expenses (including reasonable legal fees and expenses) as they are incurred in connection

with the investigation of, preparation for, or defense of, any pending or threatened claim

or any action or proceeding arising therefrom, whether or not such Indemnified Party is a

party thereto.

Additional Agreements, Representations and Covenants of Counterparty, Etc.:

	 	(a)	 	Counterparty hereby represents and warrants to ML, on each day from the Trade
Date to and including the earlier of (i) September 27, 2005 and (ii) the date by which
ML is able to initially complete a hedge of its position created by this Transaction,
that:

	 	(1)	 	it will not, and will not permit any person or entity subject
to its control to, bid for or purchase Shares during such period except as
disclosed in the Offering Memorandum relating to the Reference Notes; and

	 	(2)	 	it has publicly disclosed all material information necessary
for it to be able to purchase or sell Shares in compliance with applicable
federal securities laws and that it has publicly disclosed all material
information with respect to its condition (financial or otherwise).

	 	(b)	 	The parties hereby agree that all documentation with respect to this
Transaction is intended to qualify this Transaction as an equity instrument for
purposes of EITF 00-19.

	 	(c)	 	No collateral shall be required by either party for any reason in connection
with this Transaction.

	 	(d)	 	ML may elect to defer exercise of any Warrant hereunder as provided below, and
Automatic Exercise shall not apply with respect to any Warrant, to the extent the
exercise of such Warrant would cause ML to become, directly or indirectly, the
beneficial owner of more than 8.0 percent of the class of the Counterparty’s equity
securities that is comprised of the Shares for purposes of Section 13 of the Exchange
Act (in such case, an “Excess Share Owner”).

ML shall provide prior notice to Counterparty, through the Agent, if the exercise of any
Warrant hereunder would cause ML to become directly or indirectly, an Excess Share
Owner; provided that the failure of ML to provide such notice shall not alter the
effectiveness of the provisions set forth in the preceding sentence and any purported
exercise in violation of such provisions shall be void and have no effect.

If ML elects not to exercise any Warrant because such exercise would cause ML to become,
directly or indirectly, an Excess Share Owner and ML thereafter disposes of Shares owned
by it or any action is taken that would then permit ML to exercise such Warrant without
such exercise causing it to become, directly or indirectly, an Excess Share Owner, then
ML shall provide notice of the taking of such action to Counterparty, through the Agent,
and such Warrant shall then become exercisable by ML to the extent such Warrant is
otherwise or had otherwise become exercisable hereunder. In such event, the Expiration
Date with respect to such Warrant shall be the date on which Counterparty receives such
notice from ML, and the related Settlement Date shall be as soon as reasonably
practicable after receipt of such notice but no more than three (3) Business Days
thereafter (but in no event shall the Settlement Date occur prior to the date on which
it would have otherwise occurred but for the provisions of this paragraph (d));
provided that the related Net Physical Settlement Amount shall be the same as
the Net Physical Settlement Amount but for the provisions of this paragraph (d). In
addition, within 30 days of the maturity date of the Settlement Date, Counterparty shall
use its reasonable efforts to refrain from activities which could reasonable be expected
to result in ML’s ownership of Shares exceeding 10% of all issued and outstanding
Shares.

	 	(e)	 	ML hereby agrees that from the Trade Date through to and including each
Settlement Date, it will:

	 	(1)	 	use its reasonable efforts to not become an “affiliate” of
Counterparty as such term is defined in Regulation 144(a)(1) under the
Securities Act;

(2) not vote any Shares, as to which it has the right to exercise a vote; and

	 	(3)	 	not permit any director, officer, employee, agent or affiliate
of ML to serve as a member of the board of directors of Counterparty.

ISDA Master Agreement

With respect to the Agreement, ML and Counterparty each agree as follows:

Specified Entities:

(i) in relation to ML, for the purposes of:

	 	 	 
	Section 5(a)(v):not applicable

	 	

	 
	 	 
	 

	 
	 	 
	Section 5(a)(vi):not applicable

	 	

	 
	 	 
	 

	 
	 	 
	Section 5(a)(vii):

	 	not applicable
	 

	 	

	Section 5(b)(iv):

	 	not applicable
	 

	 	

	 
	 	 
	and (ii) in relation to Counterparty, for the purposes of:

	 
	 	 
	Section 5(a)(v):not applicable

	 	

	 
	 	 
	 

	 
	 	 
	Section 5(a)(vi):not applicable

	 	

	 
	 	 
	 

	 
	 	 
	Section 5(a)(vii):

	 	not applicable
	 

	 	

	Section 5(b)(iv):

	 	not applicable
	 

	 	

“Specified Transaction” will have the meaning specified in Section 14 of this Agreement.

The “Credit Event Upon Merger” provisions of Section 5(b)(iv) of the Agreement will not
apply to ML and Counterparty.

The “Automatic Early Termination” provision of Section 6(a) of the Agreement will not apply
to ML or to Counterparty.

Payments on Early Termination for the purpose of Section 6(e) of the Agreement: (i) Market
Quotation shall apply; and (ii) the Second Method shall apply.

“Termination Currency” means USD.

Tax Representations:

	 	(I)	 	For the purpose of Section 3(e) of the Agreement, each party represents
to the other party that it is not required by any applicable law, as modified by
the practice of any relevant governmental revenue authority, of any Relevant
Jurisdiction to make any deduction or withholding for or on account of any Tax from
any payment (other than interest under Section 2(e), 6(d)(ii), or 6(e) of the
Agreement) to be made by it to the other party under the Agreement. In making this
representation, each party may rely on (i) the accuracy of any representations made
by the other party pursuant to Section 3(f) of the Agreement, (ii) the satisfaction
of the agreement contained in Section 4(a)(i) or 4(a)(iii) of the Agreement, and
the accuracy and effectiveness of any document provided by the other party pursuant
to Section 4(a)(i) or 4(a)(iii) of the Agreement, and (iii) the satisfaction of the
agreement of the other party contained in Section 4(d) of the Agreement; provided
that it will not be a breach of this representation where reliance is placed on
clause (ii) above and the other party does not deliver a form or document under
Section 4(a)(iii) of the Agreement by reason of material prejudice to its legal or
commercial position.

	 	(II)	 	For the purpose of Section 3(f) of the Agreement, each party makes the
following representations to the other party:

	 	(i)	 	ML represents that it is a corporation organized under
the laws of England and Wales.

	 	(ii)	 	Counterparty represents that it is a corporation
incorporated under the laws of the State of Delaware.

Delivery Requirements: For the purpose of Sections 3(d), 4(a)(i) and (ii)
of the Agreement, each party agrees to deliver the following documents:

Tax forms, documents or certificates to be delivered are:

Each party agrees to complete (accurately and in a manner reasonably
satisfactory to the other party), execute, and deliver to the other party,
United States Internal Revenue Service Form W-9 or W-8 BEN, or any successor
of such form(s): (i) before the first payment date under this agreement;
(ii) promptly upon reasonable demand by the other party; and (iii) promptly
upon learning that any such form(s) previously provided by the other party
has become obsolete or incorrect.

Other documents to be delivered:-

	 	 	 	 	 	 	 
	Party Required to	 	 	 	 	 	Covered by Section
	Deliver Document	 	Document Required to be Delivered	 	When Required	 	3(d) Representation
	Counterparty

	 	Evidence of the authority and

true signatures of each official

or representative signing this

Confirmation
	 	Upon or before

execution and

delivery of this

Confirmation
	 	

Yes
	 

	 	 
	 	 
	 	 
	 
	 	 	 	 	 	 
	Counterparty

	 	Certified copy of the resolution

of the Board of Directors or

equivalent document authorizing

the execution and delivery of

this Confirmation
	 	

Upon or before

execution and

delivery of this

Confirmation
	 	

Yes
	 

	 	 
	 	 
	 	 
	 
	 	 	 	 	 	 
	ML

	 	Guarantee of its Credit Support

Provider, substantially in the

form of Exhibit A attached

hereto, together with evidence

of the authority and true

signatures of the signatories,

if applicable
	 	

Upon or before

execution and

delivery of this

Confirmation
	 	

Yes
	 

	 	 
	 	 
	 	 

	 	 	 	 	 
	Addresses for Notices: For the purpose of Section 12(a) of the Agreement:

	 
	 	 	 	 
	Address for notices or communications to ML:
	 	 
	 
	 	 	 	 
	Address:

	 	Merrill Lynch International

Merrill Lynch Financial Centre
	 	

	 
	 	 	 	 
	 	 	2 King Edward Street, London EC1A 1HQ

	 
	 	 	 	 
	Attention:

Facsimile No.:

	 	Manager, Fixed Income Settlements

44 207 995 2004
	 	

Telephone No.: 44 207 995 3769

(For all purposes)

Additionally, a copy of all notices pursuant to Sections 5, 6, and 7 as well as any changes to
Counterparty’s address, telephone number or facsimile number should be sent to:

	 	 	 	 	 
	GMI Counsel

	 	

	 	

	 
	 	 	 	 
	Merrill Lynch World Headquarters
	 	 
	 
	 	 	 	 
	4 World Financial Center

New York, New York 10080

	 	

	 	

	 
	 	 	 	 
	Attention: Global Equity Derivatives
	 	 
	 
	 	 	 	 
	Facsimile No.:

	 	212 449-6576
	 	Telephone No.: 212 449-6309

Address for notices or communications to Counterparty for all purposes:

100 Cyberonics Blvd.

Houston, Texas 77058

Attention: General Counsel

Process Agent: For the purpose of Section 13(c) of the Agreement, ML appoints as its process
agent:

	 	 	 	Merrill Lynch, Pierce, Fenner & Smith Incorporated

	 	222	 	Broadway, 16th Floor

	 	 	 	New York, NY 10038

	 	 	 	Attention: Litigation Department

Counterparty does not appoint a Process Agent.

Multibranch Party. For the purpose of Section 10(c) of the Agreement: Neither ML nor
Counterparty is a Multibranch Party.

Calculation Agent. The Calculation Agent is ML.

Credit Support Document.

ML: Guarantee of ML&Co. in the form attached hereto as Exhibit A.

Counterparty: Not Applicable

Credit Support Provider.

With respect to ML: Merrill Lynch and Co. and with respect to Counterparty, Not Applicable.

Governing Law. This Confirmation will be governed by, and construed in accordance with, the laws
of the State of New York.

Netting of Payments. The provisions of Section 2(c) of the Agreement shall not be applicable to
this Transaction; provided, however, that with respect to this Agreement or any
other ISDA Master Agreement between the parties, any Share delivery obligations on any day of
Counterparty, on the one hand, and ML, on the other hand, shall be netted. The resulting Share
delivery obligation of a party upon such netting shall be rounded down to the nearest number of
whole Common Shares, such that neither party shall be required to deliver any fractional Common
Shares.

Accuracy of Specified Information. Section 3(d) of the Agreement is hereby amended by
adding in the third line thereof after the word “respect” and before the period the words “or, in
the case of audited or unaudited financial statements or balance sheets, a fair presentation of the
financial condition of the relevant person.”

Basic Representations. Section 3(a) of the Agreement is hereby amended by the deletion of
“and” at the end of Section 3(a)(iv); the substitution of a semicolon for the period at the
end of Section 3(a)(v) and the addition of Sections 3(a)(vi), as follows:

Eligible Contract Participant; Line of Business. It is an “eligible contract
participant” as defined in the Commodity Futures Modernization Act of 2000 and it
has entered into this Confirmation and this Transaction in connection with its
business or a line of business (including financial intermediation), or the
financing of its business.

Amendment of Section 3(a)(iii). Section 3(a)(iii) of the Agreement is modified to read as follows:

No Violation or Conflict. Such execution, delivery and performance do not
materially violate or conflict with any law known by it to be applicable to it, any
provision of its constitutional documents, any order or judgment of any court or
agency of government applicable to it or any of its assets or any material
contractual restriction relating to Specified Indebtedness binding on or affecting
it or any of its assets.

Amendment of Section 3(a)(iv). Section 3(a)(iv) of the Agreement is modified by inserting
the following at the beginning thereof:

“To such party’s best knowledge,”

Additional Representations:

Counterparty Representations. Counterparty (i) has such knowledge and experience in financial and
business affairs as to be capable of evaluating the merits and risks of entering into this
Transaction; (ii) has consulted with its own legal, financial, accounting and tax advisors in
connection with this Transaction; and (iii) is entering into this Transaction for a bona fide
business purpose to hedge the Reference Notes.

Counterparty is not and has not been the subject of any civil proceeding of a judicial or
administrative body of competent jurisdiction that could reasonably be expected to impair
materially Counterparty’s ability to perform its obligations hereunder.

As of the date hereof, Counterparty is not insolvent.

Acknowledgements:

(1) The parties acknowledge and agree that there are no other representations, agreements or other
undertakings of the parties in relation to this Transaction, except as set forth in this
Confirmation.

(2) The parties hereto intend for:

(a) this Transaction to be a “securities contract” as defined in Section 741(7) of Title 11
of the United States Code (the “Bankruptcy Code”), qualifying for the protections
under Section 555 of the Bankruptcy Code;

(b) a party’s right to liquidate this Transaction and to exercise any other remedies upon
the occurrence of any Event of Default under the Agreement with respect to the other party
to constitute a “contractual right” as defined in the Bankruptcy Code;

(c) all payments for, under or in connection with this Transaction, all payments for the
Shares and the transfer of such Shares to constitute “settlement payments” as defined in the
Bankruptcy Code.

(3) The parties acknowledge and agree that in the event of an Early Termination Date as a result of
an Event of Default, the amount payable under the Agreement will be a cash amount calculated as
described therein and that any delivery specified in this Transaction will no longer be required.

Amendment of Section 6(d)(ii). Section 6(d)(ii) of the Agreement is modified by deleting
the words “on the day” in the second line thereof and substituting therefor “on the day that is
three Local Business Days after the day”. Section 6(d)(ii) is further modified by deleting
the words “two Local Business Days” in the fourth line thereof and substituting therefor “three
Local Business Days.”

Amendment of Definition of Reference Market-Makers. The definition of “Reference Market-Makers” in
Section 14 is hereby amended by adding in clause (a) after the word “credit” and before the
word “and” the words “or to enter into transactions similar in nature to Transactions.”

Consent to Recording. Each party consents to the recording of the telephone conversations of
trading and marketing personnel of the parties and their Affiliates in connection with this
Confirmation. To the extent that one party records telephone conversations (the “Recording Party”)
and the other party does not (the Non-Recording Party”), the Recording Party shall in the event of
any dispute, make a complete and unedited copy of such party’s tape of the entire day’s
conversations with the Non-Recording Party’s personnel available to the Non-Recording Party. The
Recording Party’s tapes may be used by either party in any forum in which a dispute is sought to be
resolved and the Recording Party will retain tapes for a consistent period of time in accordance
with the Recording Party’s policy unless one party notifies the other that a particular transaction
is under review and warrants further retention.

Disclosure. Each party hereby acknowledges and agrees that ML has authorized Counterparty to
disclose this Transaction and any related hedging transaction between the parties if and to the
extent that Counterparty reasonably determines (after consultation with ML) that such disclosure is
required by law or by the rules of NASDAQ or any securities exchange.

Severability. If any term, provision, covenant or condition of this Confirmation, or the
application thereof to any party or circumstance, shall be held to be invalid or unenforceable in
whole or in part for any reason, the remaining terms, provisions, covenants, and conditions hereof
shall continue in full force and effect as if this Confirmation had been executed with the invalid
or unenforceable provision eliminated, so long as this Confirmation as so modified continues to
express, without material change, the original intentions of the parties as to the subject matter
of this Confirmation and the deletion of such portion of this Confirmation will not substantially
impair the respective benefits or expectations of parties to this Agreement; provided,
however, that this severability provision shall not be applicable if any provision of
Section 2, 5, 6 or 13 of the Agreement (or any definition or
provision in Section 14 to the extent that it relates to, or is used in or in connection
with any such Section) shall be so held to be invalid or unenforceable.

Affected Parties. For purposes of Section 6(e) of the Agreement, each party shall be
deemed to be an Affected Party in connection with Illegality and any Tax Event.

1

Please confirm that the foregoing correctly sets forth the terms of our agreement by executing the
copy of this Confirmation enclosed for that purpose and returning it to us.

Very truly yours,

MERRILL LYNCH INTERNATIONAL

By:      

Name:

Title:

Confirmed as of the date first above written:

CYBERONICS, INC.

By:      

Name:

Title:

Acknowledged and agreed as to matters relating to the Agent:

MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED,

solely in its capacity as Agent hereunder

By:      

Name:

Title:

2

EXHIBIT A

GUARANTEE OF MERRILL LYNCH & CO., INC.

FOR VALUE RECEIVED, receipt of which is hereby acknowledged, MERRILL LYNCH & CO., INC., a
corporation duly organized and existing under the laws of the State of Delaware (“ML & Co.”),
hereby unconditionally guarantees to Cyberonics, Inc. (the “Company”), the due and punctual payment
of any and all amounts payable by Merrill Lynch International, a company organized under the laws
of England and Wales (“ML”), under the terms of the Confirmation of OTC Warrant Transaction
between the Company and ML, dated as of [September 21, 2005] (the “Confirmation”), including, in
case of default, interest on any amount due, when and as the same shall become due and payable,
whether on the scheduled payment dates, at maturity, upon declaration of termination or otherwise,
according to the terms thereof. In case of the failure of ML punctually to make any such payment,
ML & Co. hereby agrees to make such payment, or cause such payment to be made, promptly upon demand
made by the Company to ML & Co.; provided, however that delay by the Company in giving such demand
shall in no event affect ML & Co.’s obligations under this Guarantee. This Guarantee shall remain
in full force and effect or shall be reinstated (as the case may be) if at any time any payment
guaranteed hereunder, in whole or in part, is rescinded or must otherwise be returned by the
Company upon the insolvency, bankruptcy or reorganization of ML or otherwise, all as though such
payment had not been made.

ML & Co. hereby agrees that its obligations hereunder shall be unconditional, irrespective of
the validity, regularity or enforceability of the Confirmation; the absence of any action to
enforce the same; any waiver or consent by the Company concerning any provisions thereof; the
rendering of any judgment against ML or any action to enforce the same; or any other circumstances
that might otherwise constitute a legal or equitable discharge of a guarantor or a defense of a
guarantor. ML & Co. covenants that this guarantee will not be discharged except by complete
payment of the amounts payable under the Confirmation. This Guarantee shall continue to be
effective if ML merges or consolidates with or into another entity, loses its separate legal
identity or ceases to exist.

ML & Co. hereby waives diligence; presentment; protest; notice of protest, acceleration, and
dishonor; filing of claims with a court in the event of insolvency or bankruptcy of ML; all demands
whatsoever, except as noted in the first paragraph hereof; and any right to require a proceeding
first against ML.

ML & Co. hereby certifies and warrants that this Guarantee constitutes the valid obligation of
ML & Co. and complies with all applicable laws.

This Guarantee shall be governed by, and construed in accordance with, the laws of the State
of New York.

This Guarantee may be terminated at any time by notice by ML & Co. to the Company given in
accordance with the notice provisions of the Confirmation, effective upon receipt of such notice by
the Company or such later date as may be specified in such notice; provided, however, that this
Guarantee shall continue in full force and effect with respect to any obligation of ML under this
Confirmation.

This Guarantee becomes effective concurrent with the effectiveness of the Confirmation, according
to its terms.

3

IN WITNESS WHEREOF, ML & Co. has caused this Guarantee to be executed in its corporate name by
its duly authorized representative.

MERRILL LYNCH & CO., INC.

By:     

Name:

Title:

Date:

4

COVER STATEMENT

CLIENT/COUNTERPARTY RELATIONSHIP

Dear Client/Counterparty:

Merrill Lynch is pleased to provide the attached statement of Generic Risks Associated with
Over-the-Counter Derivative Transactions under this Cover Statement that concerns, among other
things, the nature of our relationship with you in the context of such transactions. This
statement was developed for our new and our ongoing client/counterparties in response to
suggestions that OTC derivative dealers consider taking steps to ensure that market participants
utilizing OTC derivatives understand their risk exposures and the nature of their relationships
with dealers before they enter into OTC derivative transactions.

Merrill Lynch (“we”) are providing to you and your organization (“you”) the attached statement
of Generic Risks Associated with Over-the-Counter Derivative in order to identify, in general
terms, certain of the principal risks associated with individually negotiated over-the-counter
(“OTC”) derivative transactions. The attached statement does not purport to identify the nature of
the specific market or other risks associated with a particular transaction.

Before entering into an OTC derivative transaction, you should ensure that you fully
understand the terms of the transaction, relevant risk factors, the nature and extent of your risk
of loss and the nature of the contractual relationship into which you are entering. You should
also carefully evaluate whether the transaction is appropriate for you in light of your experience,
objectives, financial resources, and other relevant circumstances and whether you have the
operational resources in place to monitor the associated risks and contractual obligations over the
term of the transaction. If you are acting as a financial adviser or agent, you should evaluate
these considerations in light of the circumstances applicable to your principal and the scope of
your authority.

If you believe you need assistance in evaluating and understanding the terms or risks of a
particular OTC derivative transaction, you should consult appropriate advisers before entering into
the transaction.

Unless we have expressly agreed in writing to act as your adviser with respect to a particular
OTC derivative transaction pursuant to terms and conditions specifying the nature and scope of our
advisory relationship, we are acting in the capacity of an arm’s length contractual counterparty to
you in connection with the transaction and not as your financial adviser or fiduciary.
Accordingly, unless we have so agreed to act as your adviser, you should not regard transaction
proposals, suggestions or other written or oral communications from us as recommendations or advice
or as expressing our view as to whether a particular transaction is appropriate for you or meets
your financial objectives.

Finally, we and/or our affiliates may from time to time take proprietary positions and/or make
a market in instruments identical or economically related to OTC derivative transactions entered
into with you, or may have an investment banking or other commercial relationship with and access
to information from the issuer(s) of securities, financial instruments, or other interests
underlying OTC derivative transactions entered into with you. We may also undertake proprietary
activities, including hedging transactions related to the initiation or termination of an OTC
derivative transaction with you, that may adversely affect the market price, rate index or other
market factor(s) underlying an OTC derivative transaction entered into with you and consequently
the value of the transaction.

5

GENERIC RISKS ASSOCIATED WITH

OVER-THE-COUNTER DERIVATIVE TRANSACTIONS

OTC derivative transactions, like other financial transactions, involve a variety of significant
risks. The specific risks presented by a particular OTC derivative transaction necessarily depend
upon the terms of the transaction and your circumstances. In general, however, all OTC derivative
transactions involve some combination of market risk, credit risk, funding risk and operational
risk.

Market risk is the risk that the value of a transaction will be adversely affected
by fluctuations in the level or volatility of or correlation or relationship between
one or more market prices, rates or indices or other market factors or by
illiquidity in the market for the relevant transaction or in a related market.

Credit risk is the risk that a counterparty will fail to perform its obligations to
you when due.

Funding risk is the risk that, as a result of mismatches or delays in the timing of
cash flows due from or to your counterparties in OTC derivative transactions or
related hedging, trading, collateral or other transactions, you or your counterparty
will not have adequate cash available to fund current obligations.

Operational risk is the risk of loss to you arising from inadequacies in or failures
of your internal systems and controls for monitoring and quantifying the risks and
contractual obligations associated with OTC derivative transactions, for recording
and valuing OTC derivative and related transactions, or for detecting human error,
systems failure or management failure.

There may be other significant risks that you should consider based on the terms of a specific
transaction. Highly customized OTC derivative transactions in particular may increase liquidity
risk and introduce other significant risk factors of a complex character. Highly leveraged
transactions may experience substantial gains or losses in value as a result of relatively small
changes in the value or level of an underlying or related market factor.

Because the price and other terms on which you may enter into or terminate an OTC derivative
transaction are individually negotiated, these may not represent the best price or terms available
to you from other sources.

In evaluating the risks and contractual obligations associated with a particular OTC derivative
transaction, you should also consider that an OTC derivative transaction may be modified or
terminated only by mutual consent of the original parties and subject to agreement on individually
negotiated terms. Accordingly, it may not be possible for you to modify, terminate or offset your
obligations or your exposure to the risks associated with a transaction prior to its scheduled
termination date.

Similarly, while market makers and dealers generally quote prices or terms for entering into or
terminating OTC derivative transactions and provide indicative or mid-market quotations with
respect to outstanding OTC derivative transactions, they are generally not contractually obligated
to do so. In addition, it may not be possible to obtain indicative or mid-market quotations for an
OTC derivative transaction from a market maker or dealer that is not a counterparty to the
transaction. Consequently, it may also be difficult for you to establish an independent value for
an outstanding OTC derivative transaction. You should not regard your counterparty’s provision of
a valuation or indicative price at your request as an offer to enter into or terminate the relevant
transaction at that value or price, unless the value or price is identified by the counterparty as
firm or binding.

This brief statement does not purport to disclose all of the risks and other material
considerations associated with OTC derivative transactions. You should not construe this generic
disclosure statement as business, legal, tax or accounting advice or as modifying applicable law.
You should consult your own business, legal, tax and accounting advisers with respect to proposed
OTC derivative transactions and you should refrain from entering into any OTC derivative
transaction unless you have fully understood the terms and risks of the transaction, including the
extent of your potential risk of loss.

533289

6EX-10.185

Exhibit 10.185

PLEDGE AND ESCROW AGREEMENT

THIS PLEDGE AND ESCROW AGREEMENT (the “Agreement”) is made and entered into as of
September 30, 2005 (the “Effective Date”) by and among THE IMMUNE RESPONSE CORPORATION, a
corporation organized and existing under the laws of the State of Delaware (the “Pledgor”),
CORNELL CAPITAL PARTNERS, LP (the “Pledgee”), and DAVID GONZALEZ, ESQ., as escrow
agent (“Escrow Agent”).

RECITALS:

WHEREAS, in order to secure the full and prompt payment when due (whether at the stated
maturity, by acceleration or otherwise) of all of the Company’s obligations (the
“Obligations”) to the Pledgee or any successor to the Pledgee under the Convertible
Debenture (the “Convertible Debentures”) issued by the Company to the Pledgee on August 4,
2005 in the amount of One Million Dollars ($1,000,000) of principal, plus any interest, costs,
fees, and other amounts owed to the Pledgee thereunder, the Pledgor has agreed to irrevocably
pledge to the Pledgee Nine Million Three Hundred Twenty Six Thousand (9,326,000) shares (the
“Pledged Shares”) of the Pledgor’s common stock, and

WHEREAS, the Pledgor and the Pledgee are also party to the Securities Purchase Agreement dated
August 4, 2005 (the “Securities Purchase Agreement”), the Security Agreement dated August
4, 2005 (the “Security Agreement”), the Pledge and Escrow Agreement dated August 4, 2005,
and all other contracts entered into between the parties hereto (collectively, together with this
Agreement, the “Transaction Documents”).

NOW, THEREFORE, in consideration of the mutual covenants, agreements, warranties, and
representations herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

TERMS AND CONDITIONS

1. Pledge and Transfer of Pledged Shares.

1.1. The Pledgor hereby grants to Pledgee a security interest in all Pledged Shares as
security for Pledgor’s obligations under the Convertible Debentures. Simultaneously with the
execution of this Agreement the Pledgor shall deliver to the Escrow Agent stock certificates made
out in favor of the Pledgor representing the Pledged Shares, together with duly executed stock
powers or other appropriate transfer documents executed in blank by the Pledgor (the “Transfer
Document”), and such stock certificates and Transfer Documents shall be held by the Escrow
Agent until the full payment of all amounts due to the Pledgee under the Convertible Debentures and
through repayment in accordance with the terms of the Convertible Debentures, or the termination or
expiration of this Agreement.

1.2. Upon receipt of the Transfer Documents, the Plegdee shall release from Pledge the
6,000,000 shares of Common Stock of the Pledgor pledged to the Pledgee by Cheshire Associates LLC.

2. Rights Relating to Pledged Shares. Upon the occurrence of an Event of Default (as
defined herein) and transfer of some or all of the Pledged Shares to the Pledgee pursuant to the
Pledgee’s entitlement, the Pledgee shall be entitled to vote such transfered Pledged Shares, to
receive dividends and other distributions thereon, and to enjoy all other rights and privileges
incident to the ownership of such transfered Pledged Shares.

3. Release of Pledged Shares from Pledge. Upon the payment of all amounts due to the
Pledgee under the Convertible Debenture by repayment in accordance with the terms of the Note, the
parties hereto shall notify the Escrow Agent to such effect in writing. Upon receipt of such
written notice for payment of the amounts due to the Pledgee under the Convertible Debenture, the
Escrow Agent shall return to the Pledgor the Transfer Documents and the certificates representing
the Pledged Shares, (collectively the “Pledged Materials”), whereupon any and all rights of
Pledgee in the Pledged Materials shall be terminated. Notwithstanding anything to the contrary
contained herein, upon full payment of all amounts due to the Pledgee under the Convertible
Debenture, by repayment in accordance with the terms of the Note, this Agreement and Pledgee’s
security interest and rights in and to the Pledged Shares shall terminate.

4. Event of Default. An “Event of Default” shall be deemed to have occurred
under this Agreement upon an Event of Default under the Convertible Debenture.

5. Remedies. Upon and anytime after the occurrence of an Event of Default, the
Pledgee shall have the right to provide written notice of such Event of Default (the “Default
Notice”) to the Escrow Agent, with a copy to the Pledgor. As soon as practicable after receipt
of the Default Notice, the Escrow Agent shall deliver to Pledgee the Pledged Materials held by the
Escrow Agent hereunder. Upon receipt of the Pledged Materials, the Pledgee shall have the right to
(i) sell the Pledged Shares and to apply the proceeds of such sales, net of any selling
commissions, to the Obligations owed to the Pledgee by the Pledgor under the Convertible Debenture,
including, without limitation, outstanding principal, interest, legal fees, and any other amounts
owed to the Pledgee, and exercise all other rights and (ii) any and all remedies of a secured party
with respect to such property as may be available under the Uniform Commercial Code as in effect in
the State of New Jersey. To the extent that the net proceeds received by the Pledgee are
insufficient to satisfy the Obligations in full, the Pledgee shall be entitled to a deficiency
judgment against the Pledgor for such amount. The Pledgee shall have the absolute right (subject
to applicable securities laws) to sell or dispose of the Pledged Shares in any manner it sees fit
and shall have no liability to the Pledgor or any other party for selling or disposing of such
Pledged Shares even if other methods of sales or dispositions would or allegedly would result in
greater proceeds than the method actually used. The Escrow Agent shall have the absolute right to
disburse the Pledged Shares to the Pledgee in batches not to exceed 9.9% of the outstanding capital
of the Pledgor (which limit may be waived by the Pledgee providing not less than 65 days’ prior
written notice to the Escrow Agent).

5.1. Each right, power and remedy of the Pledgee provided for in this Agreement or any other
Transaction Document shall be cumulative and concurrent and shall be in addition to every other
such right, power or remedy. The exercise or beginning of the exercise by the Pledgee of any one
or more of the rights, powers or remedies provided for in this Agreement or any other Transaction
Document or now or hereafter existing at law or in equity or by statute or otherwise shall not
preclude the simultaneous or later exercise by the Pledgee of all such other rights, powers or
remedies, and no failure or delay on the part of the Pledgee to exercise any such right, power or
remedy shall operate as a waiver thereof. No notice to or demand on the Pledgor in any case shall
entitle it to any other or further notice or demand in similar or other circumstances or constitute
a waiver of any of the rights of the Pledgee to any other further action in any circumstances
without demand or notice. The Pledgee shall have the full power to enforce or to assign or contract
its rights under this Agreement to a third party.

5.2. Demand Registration Rights. In addition to all other remedies available to the Pledgee,
upon an Event of Default, the Pledgor shall promptly, but in no event more than thirty (30) days
after the date of the Default Notice, file a registration statement to register with the Securities
and Exchange Commission the Pledged Shares for the resale by the Pledgee. The Pledgor shall cause
the registration statement to remain in effect until all of the Pledged Shares have been sold by
the Pledgee.

6. Concerning the Escrow Agent.

6.1. The Escrow Agent undertakes to perform only such duties as are expressly set forth herein
and no implied duties or obligations shall be read into this Agreement against the Escrow Agent.

6.2. The Escrow Agent may act in reliance upon any writing or instrument or signature which
it, in good faith, believes to be genuine, may assume the validity and accuracy of any statement or
assertion contained in such a writing or instrument, and may assume that any person purporting to
give any writing, notice, advice or instructions in connection with the provisions hereof has been
duly authorized to do so. The Escrow Agent shall not be liable in any manner for the sufficiency
or correctness as to form, manner, and execution, or validity of any instrument deposited in this
escrow, nor as to the identity, authority, or right of any person executing the same; and its
duties hereunder shall be limited to the safekeeping of such certificates, monies, instruments, or
other document received by it as such escrow holder, and for the disposition of the same in
accordance with the written instruments accepted by it in the escrow.

6.3. Pledgee and the Pledgor hereby agree, to defend and indemnify the Escrow Agent and hold
it harmless from any and all claims, liabilities, losses, actions, suits, or proceedings at law or
in equity, or any other expenses, fees, or charges of any character or nature which it may incur or
with which it may be threatened by reason of its acting as Escrow Agent under this Agreement; and
in connection therewith, to indemnify the Escrow Agent against any and all expenses, including
attorneys’ fees and costs of defending any action, suit, or proceeding or resisting any claim (and
any costs incurred by the Escrow Agent pursuant to Sections 6.4 or 6.5 hereof). The Escrow Agent
shall be vested with a lien on all property deposited hereunder, for indemnification of attorneys’
fees and court costs regarding any suit, proceeding or otherwise, or any other expenses, fees, or
charges of any character or nature, which may be incurred by the Escrow Agent by reason of disputes
arising between the makers of this escrow as to the correct interpretation of this Agreement and
instructions given to the Escrow Agent hereunder, or otherwise, with the right of the Escrow Agent,
regardless of the instructions aforesaid, to hold said property until and unless said additional
expenses, fees, and charges shall be fully paid. Any fees set forth herein and costs charged by
the Escrow Agent for serving hereunder shall be paid by the Pledgor.

6.4. If any of the parties shall be in disagreement about the interpretation of this
Agreement, or about the rights and obligations, or the propriety of any action contemplated by the
Escrow Agent hereunder, the Escrow Agent may, at its sole discretion deposit the Pledged Materials
with the Clerk of the United States District Court of New Jersey, sitting in Newark, New Jersey,
and, upon notifying all parties concerned of such action, all liability on the part of the Escrow
Agent shall fully cease and terminate. The Escrow Agent shall be indemnified by the Pledgor, the
Company and Pledgee for all costs, including reasonable attorneys’ fees in connection with the
aforesaid proceeding, and shall be fully protected in suspending all or a part of its activities
under this Agreement until a final decision or other settlement in the proceeding is received.

6.5. The Escrow Agent may consult with counsel of its own choice (and the costs of such
counsel shall be paid by the Pledgor and Pledgee) and shall have full and complete authorization
and protection for any action taken or suffered by it hereunder in good faith and in accordance
with the opinion of such counsel. The Escrow Agent shall not be liable for any mistakes of fact or
error of judgment, or for any actions or omissions of any kind, unless caused by its willful
misconduct or gross negligence.

6.6. The Escrow Agent may resign upon ten (10) days’ written notice to the parties in this
Agreement. If a successor Escrow Agent is not appointed within this ten (10) day period, the
Escrow Agent may petition a court of competent jurisdiction to name a successor.

6.7 Conflict Waiver. The Pledgor hereby acknowledges that the Escrow Agent is general
counsel to the Pledgee, a partner in the general partner of the Pledgee, and counsel to the Pledgee
in connection with the transactions contemplated and referred herein. The Pledgor agrees that in
the event of any dispute arising in connection with this Agreement or otherwise in connection with
any transaction or agreement contemplated and referred herein, the Escrow Agent shall be permitted
to continue to represent the Pledgee and the Pledgor will not seek to disqualify such counsel and
waives any objection Pledgor might have with respect to the Escrow Agent acting as the Escrow Agent
pursuant to this Agreement.

6.8 Notices. Unless otherwise provided herein, all demands, notices, consents,
service of process, requests and other communications hereunder shall be in writing and shall be
delivered in person or by overnight courier service, or mailed by certified mail, return receipt
requested, addressed:

	 	 	 
	If to the Pledgor, to:

	 	The Immune Response Corporation
	 
	 	 
	
 
	 	5391 Darwin Court
	 
	 	 
	
 
	 	Carlsbad, CA 92008
	 
	 	 
	
 
	 	Attention: Michael K. Green
	 
	 	 
	
 
	 	Facsimile: (760) 431-8636
	 
	 	 
	With a copy to:

	 	Heller Ehrman LLP
	 
	 	 
	
 
	 	4530 La Jolla Village Drive, 7th Floor
	 
	 	 
	
 
	 	San Diego, CA 92122
	 
	 	 
	
 
	 	Attention: Hayden J. Trubitt, Esq.
	 
	 	 
	
 
	 	Facsimile: (858) 587-5903
	 
	 	 
	If to the Pledgee:

	 	Cornell Capital Partners, LP
	 
	 	 
	
 
	 	101 Hudson Street, Suite 3700
	 
	 	 
	
 
	 	Jersey City, NJ 07302
	 
	 	 
	
 
	 	Attention: Mark A. Angelo
	 
	 	 
	
 
	 	Telephone: (201) 985-8300
	 
	 	 
	
 
	 	Facsimile: (201) 985-8744
	 
	 	 
	If to the Escrow Agent:

	 	David Gonzalez, Esq.
	 
	 	 
	
 
	 	101 Hudson Street, Suite 3700
	 
	 	 
	
 
	 	Jersey City, NJ 07302
	 
	 	 
	
 
	 	Telephone: (201) 985-8300
	 
	 	 
	
 
	 	Facsimile: (201) 985-1964

Any such notice shall be effective (a) when delivered, if delivered by hand delivery or overnight
courier service, or (b) five (5) days after deposit in the United States mail, as applicable.

7. Binding Effect. All of the covenants and obligations contained herein shall be
binding upon and shall inure to the benefit of the respective parties, their successors and
assigns.

8. Governing Law; Venue; Service of Process. The validity, interpretation and
performance of this Agreement shall be determined in accordance with the laws of the State of New
Jersey applicable to contracts made and to be performed wholly within that state except to the
extent that Federal law applies. The parties hereto agree that any disputes, claims,
disagreements, lawsuits, actions or controversies of any type or nature whatsoever that, directly
or indirectly, arise from or relate to this Agreement, including, without limitation, claims
relating to the inducement, construction, performance or termination of this Agreement, shall be
brought in the state superior courts located in Hudson County, New Jersey or Federal district
courts located in Newark, New Jersey, and the parties hereto agree not to challenge the selection
of that venue in any such proceeding for any reason, including, without limitation, on the grounds
that such venue is an inconvenient forum. The parties hereto specifically agree that service of
process may be made, and such service of process shall be effective if made, pursuant to Section
6.8 hereto.

9. Enforcement Costs. If any legal action or other proceeding is brought for the
enforcement of this Agreement, or because of an alleged dispute, breach, default or
misrepresentation in connection with any provisions of this Agreement, the successful or prevailing
party or parties shall be entitled to recover reasonable attorneys’ fees, court costs and all
expenses even if not taxable as court costs (including, without limitation, all such fees, costs
and expenses incident to appeals), incurred in that action or proceeding, in addition to any other
relief to which such party or parties may be entitled.

10. Remedies Cumulative. No remedy herein conferred upon any party is intended to be
exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in
addition to every other remedy given hereunder or now or hereafter existing at law, in equity, by
statute, or otherwise. No single or partial exercise by any party of any right, power or remedy
hereunder shall preclude any other or further exercise thereof.

11. Counterparts. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute the same instrument.

12. No Penalties. No provision of this Agreement is to be interpreted as a penalty
upon any party to this Agreement.

13. JURY TRIAL. EACH OF THE PLEDGEE AND THE PLEDGOR HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVES THE RIGHT WHICH IT MAY HAVE TO A TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR
CAUSE OF ACTION BASED HEREON, OR ARISING OUT OF, UNDER OR IN ANY WAY CONNECTED WITH THE DEALINGS
BETWEEN PLEDGEE AND PLEDGOR, THIS PLEDGE AND ESCROW AGREEMENT OR ANY DOCUMENT EXECUTED IN
CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR
WRITTEN) OR ACTIONS OF ANY PARTY HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE.

1

IN WITNESS WHEREOF, the parties hereto have duly executed this Pledge and Escrow Agreement as
of the date first above written.

Cornell Capital Partners, LP

	 	 	 
	By:

Its:

	 	Yorkville Advisors, LLC

General Partner
	By:

	 	/s/ Mark Angelo
	
 
	 	 
	Name:

Title:

	 	Mark Angelo

Portfolio Manager

The Immune Response Corporation

	 	 	 
	By:

	 	/s/ Michael K. Green
	
 
	 	 
	Name:

Title:

	 	Michael K. Green

Vice President, Finance and Chief Financial Officer
	 
	 	 
	Escrow Agent

	 	

	 
	 	 
	By:

	 	/s/ David Gonzalez
	
 
	 	 
	Name:

	 	David Gonzalez, Esq.
	 
	 	 

2

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00091-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00091-of-00352.parquet"}]]