Document:

exhibit10_1.htm

    
      
        

      
Exhibit 10.1

    

    

    HAWK
CORPORATION

    

    ANNUAL
INCENTIVE COMPENSATION PLAN

    

    1.           PURPOSE

    

    The Hawk
Corporation Annual Incentive Compensation Plan (the “Plan”) is designed to
attract, retain, and reward highly-qualified executives who are important to the
Company’s success and to provide incentives relating directly to the financial
performance and long-term growth of the Company.

    

    2.           DEFINITIONS

    

    (a)                      “Award”
means an incentive award entitling an Executive Officer or Key Employee to
receive performance-based incentive compensation based on a percentage of EBITDA
or any other Performance Goal, or any other amounts determined by the Committee,
pursuant to terms and conditions of the Plan.  For Ronald E. Weinberg,
the Company’s Chief Executive Officer, the Award cannot be less than 1.75% of
the Company’s EBITDA pursuant to the terms of his employment
agreement.

    

    (b)                      “Board”
means the Board of Directors of Hawk Corporation.

    

    (c)           “Change
in Control” means the acquisition by any person or entity, directly, indirectly,
or beneficially, acting alone or in concert, of more than fifty percent (50%) of
the Company’s Class A Common Stock at any time outstanding.

    

    (d)                      “Code”
means the Internal Revenue Code of 1986, as amended.

    

    (e)                      “Committee”
means the Compensation Committee of the Board, or such other committee of the
board that is designated by the Board to administer the Plan, in compliance with
requirements of Section 162(m) of the Code.

    

    (f)         “Company”
means Hawk Corporation and any other corporation in which Hawk Corporation
controls, directly or indirectly fifty percent (50%) or more of the combined
voting power of all classes of voting securities.

    

    (g)                      “EBITDA”
means the Company’s earnings before interest, taxes, depreciation and
amortization (before consideration of the Awards) for each Plan
Year.

    

    (h)                      “Executive
Officer” means any officer of the Company subject to the reporting requirements
of Section 16 of the Securities Exchange Act of 1934, as amended (“Exchange
Act”).

    

    (i)         “Key
Employee” means any employee of the Company as may be designated by the
Committee.

    

    (j)         “Participant”
means an Executive Officer or Key Employee of the Company.

    

    (k)                      “Performance
Goal” means the goals considered by the Committee that are presently based on
the attainment of a combination of the following: EBITDA, earnings per share
from continuing operations, internal growth, new product development and
economic value added.  Such goals may be modified by the Committee to
also include any of the following: operating income, revenues, gross margin,
return on operating assets, return on equity, stock price appreciation, total
stockholder return (measured in terms of stock price appreciation and dividend
growth), cost control, acquisitions or divestitures, customer relationships, or
other items deemed material to the success of the Company. 

    

    (l)         “Plan”
means the Hawk Corporation Annual Incentive Compensation Plan.

    

    (m)                      “Plan
Year” means a period beginning on January 1 of each calendar year and continuing
through December 31 of such calendar year.

    
 3.           ELIGIBILITY

    

    Only
Executive Officers and Key Employees are eligible to participate in the
Plan.

    

    4.           ADMINISTRATION

    

    The
Committee shall administer the Plan.  The Committee has the authority
to interpret the Plan, to proscribe, amend and rescind rules and regulation
relating to the Plan and to make all other determinations deemed necessary or
advisable for the administration of the Plan, including anything necessary to
comply with the requirements of Section 162(m) of the Code.  The
Committee’s decisions shall be final, conclusive, and binding upon all
persons.

    

    The
Committee’s determinations under the Plan need not be uniform and may be made by
it selectively among persons who receive, or are eligible to receive, awards
under the Plan, whether or not such persons are similarly
situated.  With limiting the generality of the foregoing, the
Committee shall be entitled, among other things, to make nonuniform and
selective determinations and to establish nonuniform and selective performance
goals, performance criteria and the weightings thereof.

    

    5.           AWARDS

    

    The
Committee may make Awards to Participants with respect to each Plan Year,
subject to the terms and conditions set forth in the Plan.

    

    Within 90
days after the commencement of each Plan Year (or such other date as required by
Section 162(m) of the Code and the regulations promulgated thereunder), the
Committee shall, in writing, select the Participants for such Plan Year and set
the Performance Goal and target Award for each Participant for such Plan
Year.

    

    At the
end of the Plan Year, the Committee shall certify, in writing, prior to the
payment of any Award, the attainment of the Performance Goal for the Plan
Year.  Notwithstanding the attainment of the Performance Goal, the
Committee shall have the discretion to reduce or eliminate the Award amount
based upon the performance of the Company or the Participant or such other
factors as the Committee determines in its discretion.  The Committee
may not increase the amount of such Award or waive the achievement of the
Performance Goal.

    

    Payments
under this Plan shall be made within 75 days following the end of the applicable
Plan Year.  Payment of any award under the Plan shall be made in cash
or in stock or stock-based awards under the Company’s 2000 Long Term Incentive
Plan.

    

    The
Committee shall have the right to allow Participants to elect to defer up to
100% of their cash Award pursuant to the Company’s non-qualified deferred
compensation plan, subject to the terms and conditions as the Committee may
determine; provided, however, that the Participant’s election to defer such
payment of Awards complies with Section 409A of the Code and the regulations
promulgated thereunder, including but not limited to the requirement that the
election to defer such payment is made before the first day of the taxable year
during which the Participant’s services are performed.  In the case of
performance-based compensation that is based on a performance period of at least
12 months, an election to defer such compensation may generally be made no later
than the date that is six months before the end of the performance period,
provided that such compensation is not substantially certain to be paid on or
before the date of such election.  Notwithstanding the foregoing to
the contrary, a Participant may elect to defer the receipt of an Award payable
under this Plan with respect to the Plan Year in which he/she was first eligible
to participate in any Company-sponsored “account balance” plan as defined in the
Code, including this Plan within 30 days after the date that he became eligible,
and such election will be deemed to apply to an Award paid for services
performed subsequent to the election; provided, however, that the election
applies only to the portion of the Award equal to the total amount of the Award
for the service period multiplied by the ratio of the number of days remaining
in the performance period after the election over the total number of days in
the performance period.

    

    Whenever
payments are to be made under the Plan, the Company will withhold therefrom an
amount sufficient to satisfy any applicable governmental withholding tax
requirements related thereto.

    

    6.           EFFECTIVE
DATE, AMENDMENT AND TERMINATION

    

    The
effective date of the Plan is January 1, 2008.  The Committee may
amend, modify, suspend, or terminate the Plan for the purpose of meeting or
addressing any changes in legal requirements or for any other purpose permitted
by law.  The Committee will seek stockholder approval of any amendment
determined to require stockholder approval or advisable under the regulations of
the Internal Revenue Service or other applicable law or regulation.

     

    
      	
              7.

            	
              CHANGE
      IN CONTROL, TERMINATION OF EMPLOYMENT, DEATH OR
  DISABILITY

            

    

    

    A
Participant shall have no right to any Award under this Plan until that Award is
paid.  In the event of a Change in Control, any Awards accrued during
the Plan Year until the date of the Change of Control shall be immediately
payable.  If the Participant is terminated without cause or with good
reason by the Company, any unpaid Awards shall be paid in accordance with such
Participant’s termination agreement, and as otherwise determined by the
Committee; provided, however, if the Participant is a “specified employee” as
defined by the Section 409A of the Code, any Award payable under this Plan that
would be subject to the special rule regarding payments to “specified employees”
under Section 409A(a)(2)(B) of the Code shall be delayed by six months such that
the payment is made no earlier than the first date of the seventh month
following the date of that Participant’s termination of employment (or the date
of that Participant’s death, if earlier).  In the case of death or
disability (as determined in the sole discretion of the Committee in accordance
with the Code) of a Participant, his Award will be proportional to the service
to the Company during the Plan Year in which the death or disability
occurred.  Unpaid Awards may also be canceled at the discretion of the
Committee.

    

    8.           NONASSIGNABILITY

    

    No Award
or other benefit under the Plan shall be assignable or transferable by the
participant during the Participant’s lifetime.

    

    9.           NO
RIGHT TO CONTINUED EMPLOYMENT

    

    Nothing
in the Plan shall confer upon any employee any right to continue in the employ
of the Company or shall interfere with or restrict in any way the right of the
Company to discharge an employee at any time for any reason whatsoever, with or
without good cause.

    

    10.           LIABILITY
OF THE COMPANY

    

    Neither
the Company, nor any affiliate of the Company, nor any member of the Board or
the Committee, nor any other person participating in any determination of any
question under the Plan, or in the interpretation, administration and
application of the Plan, shall have liability to any party for an action taken
or not taken in good faith under the Plan.  Status as a Participant
shall not be construed as a commitment that any incentive award will be made
under the Plan to such Participant or to Participants
generally.  Nothing contained in this Plan (or any documents relating
to the Plan or to any incentive award under the Plan) shall confer upon any
employee of the Company any right to continue in the employ or other service of
the Company or its affiliates or constitute any contract or limit in any way the
right of the Company or its affiliates to change such person’s compensation or
other benefits..

    

    11.           FEDERAL
INCOME TAX CONSEQUENCES

    

    All
amounts paid pursuant to the Plan constitute taxable income to the Participant
when received.  If a Participant elects to defer a portion of the
award, such Eligible Employee may be entitled to defer the recognition of
income.  Generally, and subject to Section 162(m), the Company will be
entitled to a federal income tax deduction when amounts paid under the Plan are
included in employee income.  Subject to stockholder approval of the
Plan, the failure of any aspect of the Plan to satisfy Section 162(m) will not
void any action taken by the Committee under the Plan.

    

    Awards
granted to certain covered employees, defined in the Code as the Company’s chief
executive officer and the other three most highly compensated executive
officers, that are in excess of $1 million per year will be deductible as
performance-based compensation under Section 162(m) of the Code, if approved by
the Company’s stockholders.  However, stockholder approval of the Plan
is only one of several requirements under Section 162(m) that must be satisfied
for amounts payable under the Plan to qualify for the performance-based
compensation exemption under Section 162(m).

    

    12.           UNFUNDED
PLAN

    

    This Plan
shall be unfunded.  Neither the Plan nor any award under the Plan
shall create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company and a Participant or any other
person.  To the extent any Participant acquires a right to receive
payments from the Company pursuant to an Award, such right shall be no greater
than the right of any unsecured general creditor of the Company.

    

    13.           GOVERNING
LAW

    

    This Plan
and any controversy arising out of or relating to this Plan shall be governed by
and construed in accordance with the General Corporation Law of the State of
Delaware as to the matters within the scope thereof.  All other
matters shall be governed by and construed in accordance with the internal laws
of the State of Ohio without regard to any state’s conflict of law
principles.  Any legal action related to this Plan shall be brought
only in federal or state court located in Ohio.ex10_1.htm

  
    
      EXHIBIT
10.1

      SETTLEMENT AGREEMENT AND
RELEASE

      This
Settlement Agreement and Release (“Agreement”) is entered into between
(1) Wells Fargo Bank, National Association (“Wells Fargo” or “Indenture
Trustee”), solely in its capacity as Indenture Trustee on behalf of all Holders
of 3.0% Senior Subordinated Convertible Notes due 2012 of Cyberonics, Inc; and
(2) Cyberonics, Inc. (“Cyberonics”), as those terms are further defined
below.

      A.           DEFINITIONS

      1.           The
“Litigation” refers to (a) the appellate case currently styled:  Wells Fargo Bank National
Association v. Cyberonics, Inc., No. 07-20539, pending in the United
States Court of Appeals for the Fifth Circuit, (b) the state court action
originally filed by Cyberonics styled:  Cyberonics, Inc. v. Wells Fargo
Bank, National Association, As Trustee Under Indenture, Cause No.
2006-63284, filed in the 165th
Judicial District Court, Harris County, Texas; and (c) the removal of the state
court action to federal court styled:  Cyberonics, Inc. v. Wells Fargo
Bank, National Association, As Trustee Under Indenture, No. 4:07-CV-121,
filed in the United States District Court for the Southern District of Texas,
Houston Division.

      2.           The
“Notes” refers to the 3.0% Senior Subordinated Convertible Notes due 2012 issued
by Cyberonics, Inc. that were initially sold to Merrill Lynch, Pierce, Fenner
& Smith Incorporated on or about September 27, 2005 and subsequently resold
to other investors.

      3.           The
“Indenture” refers to the Indenture between Wells Fargo and Cyberonics that was
dated as of September 27, 2005 and executed contemporaneously with the issuance
of the Notes.

      4.           The
terms “Wells Fargo” and “Indenture Trustee” refer to Wells Fargo Bank, National
Association, the appellant in the Litigation, acting solely in its capacity as
Indenture

      
        
           

        

        
          1

          
            

          

        

        
           

        

      

      Trustee
on behalf of all Holders of the Notes, including its officers, directors,
employees, shareholders, agents, representatives, attorneys, subsidiaries,
affiliates, predecessors, successors, assigns, and all others who claim by,
under or through them.

      5.           “Cyberonics”
refers to Cyberonics, Inc., the appellee in the Litigation, including its
officers, directors, employees, shareholders, agents, representatives,
attorneys, subsidiaries, affiliates, predecessors, successors, assigns, and all
others who claim by, under or through them.

      6.           The
“Parties” refers to Wells Fargo and Cyberonics.  The term “Party”
means either Wells Fargo or Cyberonics.

      7.           “Effective
Date” refers to the date when all Parties have executed this
Agreement.

      8.           The
“Agreement” refers to this Settlement Agreement and Release.

      B.           RECITALS

      WHEREAS,
the Indenture Trustee sent Cyberonics a Notice of Default and Demand under the
Indenture on July 28, 2006, a Notice of Continuing Default on August 25, 2006,
and a Notice of Acceleration on September 27, 2006;

      WHEREAS,
Cyberonics filed a declaratory judgment action in Texas state court on October
3, 2006 seeking a declaration that no Event of Default had
occurred;

      WHEREAS,
the Indenture Trustee removed the declaratory judgment action to federal court
on January 10, 2007 and filed a counterclaim against Cyberonics for breach of
contract on January 18, 2007;

      WHEREAS,
the parties filed cross-motions for summary judgment or partial summary
judgment, and the federal district court issued a memorandum opinion on June 13,
2007, granting Cyberonics’ motion for summary judgment and denying the Indenture
Trustee’s cross-motion for partial summary judgment;

      
        
           

        

        
          2

          
            

          

        

        
           

        

      

      WHEREAS,
the Indenture Trustee appealed the federal district court’s ruling and the
Litigation is now pending before the United States Court of Appeals for the
Fifth Circuit and scheduled for oral argument on April 28, 2008;

      WHEREAS,
the Parties recognize that there is risk and expense inherent in all litigation
and desire to settle all their respective claims and disagreements;
and

      WHEREAS,
the Parties also desire to enter into a Supplemental Indenture, in a form
substantially similar to the document attached as Exhibit A to this
Agreement;

      ACCORDINGLY,
in consideration of the mutual terms, promises, conditions, releases,
warranties, covenants and agreements contained in this Agreement, the Parties
have decided, and hereby agree, to compromise and settle all of their respective
claims and disagreements, and to jointly seek the dismissal with prejudice of
the Lawsuit.

      C.           AGREEMENT

      NOW,
THEREFORE, in consideration for the mutual terms and conditions herein, the
Parties agree as follows:

      1.           Supplemental
Indenture

      Cyberonics
and the Indenture Trustee will enter into a Supplemental Indenture that grants
each Holder of the Notes an Optional Repurchase Right under terms and conditions
set forth in the Supplemental Indenture.  The Optional Repurchase
Right will give each Holder the right to require Cyberonics to repurchase all of
such Holder’s Securities or any portion of the principal amount thereof that is
equal to $1,000 or any integral multiple thereof at the times and under the
terms and conditions set forth in the Supplemental Indenture.  The
terms and conditions of this Optional Repurchase Right and of the Supplemental
Indenture will be substantially similar to the terms and conditions set forth in
the document attached as Exhibit A to this Agreement.

      
        
           

        

        
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      2.           Release
by Indenture Trustee

      With the
exception of any continuing obligations under this Agreement, Wells Fargo, as
Indenture Trustee, on behalf of itself and all Holders of the Notes, does hereby
release, acquit, and forever discharge Cyberonics from any and all claims,
causes of action, liabilities, duties, obligations, debts and demands, of any
nature whatsoever, now known or which may hereafter become known, with respect
to any of the matters referred to in the Litigation, matters relating to,
arising out of, or in any way concerning the claims that were or could have been
asserted in the Litigation, and matters based upon, arising out of, or in any
way concerning the alleged Events of Default and Acceleration described in the
Indenture Trustee’s notices to Cyberonics dated July 28, 2006, August 25, 2006,
and September 27, 2006.  The release contained in this paragraph
includes within its scope all claims of any sort or type, including claims for
money damages, pre- and post-judgment interest, statutory penalties, attorneys’
fees, injunctive relief, or any other type of relief.

      The
Indenture Trustee has the necessary authority to enter into this Agreement on
behalf of the beneficial holders of the Notes.  The Indenture Trustee
has obtained the consent of the beneficial holders of Notes representing more
than fifty percent (50%) of the aggregate principal amount of the Notes, and
such holders have consented to waive the alleged defaults and to the other terms
of this Agreement including the terms of Exhibits A, B, and C
hereto.

      3.           Release
by Cyberonics

      With the
exception of any continuing obligations under this Agreement and any objection
by Cyberonics to costs and attorneys’ fees the Indenture Trustee may seek in
connection with the Litigation, Cyberonics does hereby release, acquit, and
forever discharge Wells Fargo, as Indenture Trustee, and all Holders of the
Notes from any and all claims, causes of action,

      
        
           

        

        
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      liabilities,
duties, obligations, debts and demands, of any nature whatsoever, now known or
which may hereafter become known, with respect to any of the matters referred to
in the Litigation, matters relating to, arising out of, or in any way concerning
the claims that were or could have been asserted in the Litigation, and matters
based upon, arising out of, or in any way concerning the alleged Events of
Default and Acceleration described in the Indenture Trustee’s notices to
Cyberonics dated July 28, 2006, August 25, 2006, and September 27,
2006.  The release contained in this paragraph includes within its
scope all claims of any sort or type, including claims for money damages, pre-
and post-judgment interest, statutory penalties, attorneys’ fees, injunctive
relief, or any other type of relief.

      4.           Removal
from Oral Argument Calendar and Dismissal With Prejudice

      No later
than April 21, 2008, the Parties shall notify the Clerk of the United States
Court of Appeals for the Fifth Circuit that they have agreed to settle the
Litigation and will promptly file an agreed motion to dismiss with prejudice all
claims and counterclaims brought in the Litigation.  The agreed motion
will be in a form substantially similar to the document attached as Exhibit C to
this Agreement.

      5.           Costs
and Attorney’s Fees

      With the
exception of costs and attorneys’ fees to which the Indenture Trustee may be
entitled under the terms of the Indenture, each party shall bear its own costs
and attorneys’ fees incurred in connection with the Litigation.

      6.           Governing
Law

      This
Agreement shall be construed, enforced, and governed under the laws of the State
of Texas, without reference to choice of law principles.

      
        
           

        

        
          5

          
            

          

        

        
           

        

      

      7.           Entire
Agreement.  The Parties agree that this Settlement Agreement
constitutes the full, final, and complete settlement of their disputes and
supersedes all other written or oral exchanges, arrangements, or negotiations
between them concerning the subject matter of this Settlement Agreement, and
further state that there are no representations, agreements, arrangements, or
understandings, oral or written, concerning the subject matter of this Agreement
that are not fully expressed and incorporated herein.

      8.           Disputes.  If a
dispute arises over the meaning of this Settlement Agreement, the Party or
Parties losing the dispute shall pay the prevailing Parties’ costs, including
attorneys’ fees, incurred in resolving the dispute.

      9.           Severability.  In
the event that any provision of this Settlement Agreement shall be held to be
void, voidable, or unenforceable in any respect, the remaining portions shall
remain in full force and effect.

      10.           Agreement Inadmissible. This Settlement
Agreement shall not be admissible in any action, suit, or proceeding,
whatsoever, as evidence or as an admission of any claim or liability, provided,
however, that any Party hereto may use all or part of this Settlement Agreement
to the extent necessary to enforce any right conferred upon such Party by this
Settlement Agreement.

      11.           Settlement Not an Admission of
Liability.  The execution of this Settlement Agreement shall
not be construed as an admission of liability whether alleged as a part of the
Lawsuit or otherwise or an admission of the validity of any claim on the part of
any Party hereto.

      12.           Amendment.  This
Settlement Agreement may not be altered or amended except by an agreement in
writing signed by the Parties.

      
        
           

        

        
          6

          
            

          

        

        
           

        

      

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

      14.           Ownership.   Each
of the signatories hereto represents and warrants that it is fully authorized to
enter into this Settlement Agreement on behalf of the entity or entities for
which it executes the Settlement Agreement, and that they presently possess the
right to release all claims in accordance with the terms of this Settlement
Agreement.

      15.           Headings.  Headings
in this Settlement Agreement are for the convenience of the Parties and are not
to be used in construing the document.

      16.           Notices.  Any notice required
under this Agreement shall be made to the following:

      
        
          	 
      	
                  For
      Indenture Trustee:

                	
                  Jeffrey
      I. Ross

                
	 
      	 
      	
                  Anthony
      Ostlund Baer Louwagie & Ross P.A.

                
	 
      	 
      	
                  3600
      Wells Fargo Center

                
	 
      	 
      	
                  90
      South Seventh Street

                
	 
      	 
      	
                  Minneapolis,
      MN 55402

                
	 
      	 
      	
                  Telephone:  612.349.6969

                
	 
      	 
      	
                  Facsimile:  612.349.6996

                
	 
      	 
      	 
      
	 
      	 
      	
                  and

                
	 
      	 
      	 
      
	 
      	 
      	
                  Julie
      J. Becker

                
	 
      	 
      	
                  Vice
      President

                
	 
      	 
      	
                  Wells
      Fargo Bank, N.A.

                
	 
      	 
      	
                  625
      Marquette Avenue

                
	 
      	 
      	
                  MAC
      N9311-110

                
	 
      	 
      	
                  Minneapolis,
      MN 55479

                
	 
      	 
      	
                  Telephone:
      612.316.4772

                
	 
      	 
      	
                  Facsimile:
      612.667.9825

                
	 
      	 
      	 
      

        

      

       

      
        
           

        

        
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                For
      Cyberonics:

              	
                N.
      Scott Fletcher

              
	 
      	 
      	
                Vinson
      & Elkins, L.L.P.

              
	 
      	 
      	
                1001
      Fannin – Suite 2500

              
	 
      	 
      	
                Houston,
      Texas 77002-6760

              
	 
      	 
      	
                Telephone:  713.758.3234

              
	 
      	 
      	
                Facsimile:  713.615.5168

              
	 
      	 
      	 
      
	 
      	 
      	
                and

              
	 
      	 
      	 
      
	 
      	 
      	
                David
      S. Wise

              
	 
      	 
      	
                General
      Counsel

              
	 
      	 
      	
                Cyberonics,
      Inc.

              
	 
      	 
      	
                100
      Cyberonics Boulevard

              
	 
      	 
      	
                Houston,
      Texas 77058

              
	 
      	 
      	
                Telephone:  281.228.7268

              
	 
      	 
      	
                Facsimile:  281.283.5369

              

      

      

      16.           Reliance on
Counsel.  The Parties represent that their attorneys have fully
explained the meaning and effect of this Settlement Agreement.  The
Parties represent that they have read and understand this Settlement
Agreement.  The Parties acknowledge that they have not relied upon any
representation made by an adverse Party in executing this Settlement Agreement,
or any representation not specifically identified herein.

      17.           Jointly
Drafted.  Each Party has participated in the drafting and
negotiation of this Settlement Agreement.  For all purposes, this
Settlement Agreement shall be deemed to have been drafted jointly by the Parties
hereto.  Accordingly, any rule of law or any legal decision that would
require interpretation of any claimed ambiguities in this Settlement Agreement
against the Party that drafted it has no application and is expressly
waived.  The provisions of this Settlement Agreement shall be
interpreted in a reasonable manner to effect the intent of the Parties, and no
rule of strict construction shall be applied against any Party to this
Settlement Agreement.

      18.           Continuing Express
Representations.  The Parties warrant and represent to each
other that their respective decisions to settle the respective claims and to
execute this Settlement

      
        
           

        

        
          8

          
            

          

        

        
           

        

      

      Agreement
have been free and independent decisions, made after due consideration and
reflection, after arms-length negotiations and with the full opportunity for
them to seek and obtain legal advice from counsel of their own
choosing.  Each of the Parties warrants and represents to all others
that it has not relied or based its decision to execute this Settlement
Agreement on any other statement, assertion, position, claim, promise,
representation, warranty, or other communication made or asserted by any other
Party.

      19.           Further Acts.  The
Parties agree to do such other and further acts and to execute and deliver such
other and further documents as may be necessary or appropriate, and as the
Parties may reasonably request, in carrying out the intent and purposes of this
Settlement Agreement.

      20.           Successors and
Assigns.  This Settlement Agreement shall be binding upon and
inure to the benefit of the heirs, devisees, legal representatives and permitted
successors and assigns of the Parties.

      21.           Effective
Date.  This Settlement Agreement will become effective upon
execution by all signatories listed below:

      
        
           

        

        
          9

          
            

          

        

        
           

        

      

      Wells
Fargo Bank, National Association, Solely in Its Capacity

      As
Indenture Trustee and Not in Its Individual Capacity

      

      By:__/s/ Julie J.
Becker                                                                           

      

      Printed
Name:_Julie J.
Becker                                                                           

      

      Title:_Vice
President                                                                                     

      

      Date:__4-18-08                                                                           

      

      

      Cyberonics,
Inc.

      

      By:
_/s/ Daniel J.
Moore                                                                           

      

      Printed
Name:_Daniel J.
Moore                                                                                     

      

      Title:_President &
CEO                                                                           

      

      Date:_April 18,
2008                                                                                     

      
        
           

        

        
          10

          
            

          

        

        
           

        

      

      Exhibit
A to Cyberonics-Wells Fargo Settlement Agreement and Release

       

      

       

      CYBERONICS,
INC.

       

      AND

       

      WELLS
FARGO BANK, NATIONAL ASSOCIATION

       

      As
Trustee

       

      _______________________________

       

      SUPPLEMENTAL
INDENTURE

       

      Dated as
of April 18, 2008

       

      to

       

      Indenture

       

      Dated as
of September 27, 2005

       

      3.0%
Senior Subordinated Convertible Notes Due 2012

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      SUPPLEMENTAL
INDENTURE, dated as of April 18, 2008 (this “Supplemental Indenture”),
between CYBERONICS, INC., a Delaware corporation (the “Company”) and WELLS FARGO
BANK, NATIONAL ASSOCIATION, a national banking association duly organized under
the laws of the United States, as trustee (the “Trustee”).  All
capitalized terms used and not defined herein shall have the respective meanings
assigned to them in the Indenture (as defined below).

       

      WHEREAS,
the Company and the Trustee are parties to an Indenture, dated as of September
27, 2005 (the “Indenture”), pursuant to
which the Company issued its 3.0% Senior Subordinated Convertible Notes Due 2012
(the “Securities”);

       

      WHEREAS,
Section 7.2 of the Indenture provides that the Company and the Trustee may amend
the Indenture and the Securities without the consent of any Holders of
Securities to add to the covenants of the Company or provide Guarantees for the
benefit of the Holders of Securities;

       

      WHEREAS,
the directors of the Company have authorized and approved the amendments to the
Indenture set forth herein and will deliver to the Trustee resolutions of the
Board of Directors to that effect (the “Amendments”);

       

      WHEREAS,
the execution and delivery of this Supplemental Indenture have been duly
authorized and all conditions and requirements necessary to make this
Supplemental Indenture a valid and binding agreement have been performed and
complied with;

       

      NOW,
THEREFORE, for and in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which hereby are acknowledged, it
is mutually covenanted and agreed, for the equal proportionate benefit of all
Holders of the Securities, as follows:

       

      ARTICLE
I

       

      AMENDMENTS
TO INDENTURE

       

      Section 1.1    The following
definitions are hereby added to Section 1.1, as alphabetically
appropriate:

       

      “Company Optional Repurchase
Notice” shall have the meaning specified in Section 11.2(b)
hereof.

      

      “Optional Repurchase Date”
shall have the meaning specified in Section 11.2(a) hereof.

      

      “Optional Repurchase Price”
shall have the meaning specified in Section 11.2(a) hereof.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      “Optional Repurchase Right”
shall have the meaning specified in Section 11.2(a) hereof.

      

      Section 1.2    Section 11.2
is hereby amended and restated to read in its entirety as set forth
below:

      

      SECTION
11.2    Repurchase at Option of
Holders.

      

      (a)           On
December 27, 2011 (the “Optional Repurchase Date”),
each Holder shall have the right (the “Optional Repurchase
Right”) at
the Holder’s option, but subject to the provisions of Section 11.2(b)-(i)
hereof, to require the Company to repurchase, and upon the exercise of such
right the Company shall repurchase, all of such Holder’s Securities or any
portion of the principal amount thereof that is equal to $1,000 or any integral
multiple thereof (provided,
however, that no single Security may be repurchased in part unless the
portion of the principal amount of such Security to be Outstanding after such
repurchase is equal to $1,000 or integral multiples thereof), at a purchase
price in cash equal to 100% of the principal amount of the Securities to be
repurchased (the “Optional
Repurchase Price”), plus interest accrued and unpaid to, but excluding,
the Optional Repurchase Date.

       

      (b)           Prior
to or on the 20th Business Day before the Optional Repurchase Date, the Company
shall give to all Holders of Securities notice (the “Company Optional Repurchase
Notice”) in the manner provided in Section 14.2 hereof, of the Optional
Repurchase Right set forth herein.  The Company shall also deliver a
copy of the Company Optional Repurchase Notice to the Trustee.  The
Company Optional Repurchase Notice shall state:

       

      

      (1)           the
Optional Repurchase Price;

       

      

      (2)           a
description of the procedure which a Holder must follow to exercise an Optional
Repurchase Right, and the place or places where such Securities are to be
surrendered for payment of the Optional Repurchase Price and accrued and unpaid
interest, if any;

       

      

      (3)           that
on the Optional Repurchase Date the Optional Repurchase Price and accrued and
unpaid interest, if any, will become due and payable upon each such Security
designated by the Holder to be repurchased, and that interest thereon shall
cease to accrue on and after said date;

       

      
        
           

        

        
          2

          
            

          

        

        
           

        

      

      (4)           the
Conversion Rate then in effect, the date on which the right to convert the
Securities to be repurchased will terminate and the place where such Securities
may be surrendered for conversion; and

      

      (5)           the
place or places where such Securities, together with the Optional Repurchase
notice included in Exhibit A annexed
hereto are to be delivered for payment of the Optional Repurchase Price and
accrued and unpaid interest, if any.

       

      

      No
failure of the Company to give the foregoing notices or defect therein shall
limit any Holder’s right to exercise an Optional Repurchase Right or affect the
validity of the proceedings for the repurchase of Securities.

      

      (c)           If
any of the foregoing provisions or other provisions of this Article 11 are
inconsistent with applicable law, such law shall govern.

      

      (d)           To
exercise an Optional Repurchase Right, a Holder shall deliver to the Trustee
prior to the close of business on the Business Day immediately preceding the
Optional Repurchase Date:

       

      

      (1)           written
notice of the Holder’s exercise of such right, which notice shall set forth the
name of the Holder, the principal amount of the Securities to be repurchased
(and, if any Security is to be repurchased in part, the serial number thereof,
the portion of the principal amount thereof to be repurchased) and a statement
that an election to exercise the Optional Repurchase Right is being made
thereby, substantially in the form attached hereto as the Optional Repurchase
notice included in Exhibit A annexed
hereto; and

       

      

      (2)           the
Securities with respect to which the Optional Repurchase Right is being
exercised.

       

      

      Such
written notice shall be irrevocable unless the Company defaults in its
obligation to pay the Optional Repurchase Price on the Optional Repurchase Date
as required herein.

      

      (e)           In
the event an Optional Repurchase Right shall be exercised in accordance with the
terms hereof, the Company shall pay or cause to be paid to

       

      
        
           

        

        
          3

          
            

          

        

        
           

        

      

       the
Trustee the Optional Repurchase Price and any accrued and unpaid interest in
cash for payment to the Holder on the Optional Repurchase Date.

       

      

      (f)           If
any Security (or portion thereof) surrendered for repurchase shall not be so
paid on the Optional Repurchase Date, the principal amount of such Security (or
portion thereof, as the case may be) shall, until paid, bear interest to the
extent permitted by applicable law from the Optional Repurchase Date at the
Interest Rate, and each Security shall remain convertible into Common Stock
until the principal of such Security (or portion thereof, as the case may be)
shall have been paid.

       

      (g)           Any
Security which is to be repurchased only in part shall be surrendered to the
Trustee (with, if the Company or the Trustee so requires, due endorsement by, or
a written instrument of transfer in form satisfactory to the Company and the
Trustee duly executed by the Holder thereof or his attorney duly authorized in
writing), and the Company shall execute, and the Trustee shall authenticate and
make available for delivery to the Holder of such Security without service
charge, a new Security or Securities, containing identical terms and conditions,
each in an authorized denomination in aggregate principal amount equal to and in
exchange for the unrepurchased portion of the principal of the Security so
surrendered.

       

      

      (h)           All
Securities delivered for repurchase shall be delivered to the Trustee to be
canceled at the direction of the Trustee, which shall dispose of the same as
provided in Section 2.15 hereof.

       

      

      Section 1.3    Exhibit A
shall be amended to include the Optional Repurchase notice attached hereto as
Annex
A.

       

      ARTICLE
II

      

      MISCELLANEOUS
PROVISIONS

      

      Section 2.1    Upon execution
and delivery of this Supplemental Indenture, the terms and conditions of this
Supplemental Indenture shall be part of the terms and conditions of this
Indenture for any and all purposes, and all the terms and conditions of both
shall be read together as though they constitute one and the same instrument,
except that in the case of conflict, the provisions of this Supplemental
Indenture will control.

       

      Section 2.2    Each of the
Company and the Trustee hereby confirms and reaffirms the Indenture, as amended
and supplemented by this Supplemental Indenture.

       

      
        
           

        

        
          4

          
            

          

        

        
           

        

      

      Section 2.3    The Parties
may sign any number of copies of this Supplemental Indenture.  Each
signed copy shall be an original, but all of them together shall represent the
same agreement.  One copy is enough to prove this Supplemental
Indenture.

       

      Section 2.4    All provisions
of this Supplemental Indenture shall be deemed to be incorporated in, and made a
part of, the Indenture; and the Indenture, as amended and supplemented by this
Supplemental Indenture, shall be read, taken and construed as one and the same
instrument.

       

      Section 2.5    The recitals
contained herein shall be taken as the statements of the Company, and the
Trustee assumes no responsibility for their correctness.  The Trustee
shall not be liable or responsible for the validity or sufficiency of this
Supplemental Indenture or the due authorization of this Supplemental Indenture
by the Company.  In entering into this Supplemental Indenture, the
Trustee shall be entitled to the benefit of every provision of the Indenture
relating to the conduct of, affecting the liability of or according protection
to the Trustee, whether or not elsewhere herein so provided.

       

      [Remainder
of page left intentionally blank]

      

      
        
           

        

        
          5 

          
            

          

        

        
           

        

      

      IN WITNESS WHEREOF, the parties hereto
have caused this Supplemental Indenture to be duly executed as of the day and
year written above.

      

      
        	 
      	
                CYBERONICS,
      INC.

              
	 
      	 
      
	 
      	 
      
	 
      	
                By:                                                                           

              
	 
      	
                Daniel
      J. Moore

              
	 
      	
                President
      & Chief Executive Officer

              
	 
      	 
      
	 
      	 
      
	 
      	 
      
	 
      	
                WELLS
      FARGO BANK, NATIONAL ASSOCIATION,

              
	 
      	
                solely
      in its capacity as indenture trustee and not in its

              
	 
      	
                individual
      capacity

              
	 
      	 
      
	 
      	 
      
	 
      	
                By:                                                                           

              
	 
      	
                [Name]

              
	 
      	
                [Title]

              

      

      

      
        
           

        

        
          6

          
            

          

        

        
           

        

      

      ANNEX
A

      

      OPTIONAL
REPURCHASE

      

      NOTICE
OF EXERCISE OF REPURCHASE RIGHT

      

      TO:        CYBERONICS,
INC.

      

      100 Cyberonics Boulevard

      

      Houston,
Texas  77058

      

      Attention: [ ]

      

      The
undersigned registered owner of this Security irrevocably acknowledges receipt
of the Company Optional Repurchase Notice from Cyberonics, Inc. (the “Company”)
and requests and instructs the Company to repay the entire principal amount of
this Security, or the portion thereof (which is $1,000 principal amount or an
integral multiple thereof) below designated, in accordance with the terms of the
Indenture referred to in this Security, together with interest accrued and
unpaid, but excluding such date, to the registered holder hereof, in
cash.

      

      
        	
                Dated:

              	
                Your
      Name:

              	 
      
	 
      	 
      	
                (Print
      your name exactly as it appears on the face of this
    Security)

              
	 
      	
                Your

                Signature:

              	 
      
	 
      	 
      	
                (Sign
      exactly as your name appears on the face of this
  Security)

              
	 
      	
                Signature

                Guarantee*:

              	 
      

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

      
        	 
      	
                Social
      Security

                or
      other Taxpayer

                Identification
      Number:

              	 
      
	 
      	 
      	 
      

      

      Principal
amount to be repaid (if less than all): $

      

      *Participant
is a recognized Signature Guarantee Medallion Program (or other signature
guarantor acceptable to the Trustee).

      
        
           

        

        
          A-2 

          
            

          

        

        
           

        

      

      Exhibit
B to Cyberonics-Wells Fargo Settlement Agreement and Release

      

      CONSENT OF BENEFICIAL
HOLDERS

      The
undersigned beneficial holders of 3.0% Senior Subordinated Convertible Notes due
2012 of Cyberonics, Inc. consent to waive the alleged defaults in the appellate
case currently styled:  (a) Wells Fargo Bank National
Association v. Cyberonics, Inc., No. 07-20539, pending in the United
States Court of Appeals for the Fifth Circuit, (b) the state court action
originally filed by Cyberonics styled:  Cyberonics, Inc. v. Wells Fargo
Bank, National Association, As Trustee Under Indenture, Cause No.
2006-63284, filed in the 165th
Judicial District Court, Harris County, Texas; and (c) the removal of the state
court action to federal court styled:  Cyberonics, Inc. v. Wells Fargo
Bank, National Association, As Trustee Under Indenture, No. 4:07-CV-121,
filed in the United States District Court for the Southern District of Texas,
Houston Division, and consent to the other terms of the Settlement Agreement and
Release, including Exhibits A, B, and C thereto.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      Exhibit
B to Cyberonics-Wells Fargo Settlement Agreement and Release

      

      
        	
                By:___________________________________
      

              	
                 By:__________________________________

              
	 
      	 
      
	
                Printed
      Name:___________________________

              	
                Printed
      Name:___________________________

              
	 
      	 
      
	
                Principal
      Amount of Notes Held:_____________

              	
                Principal
      Amount of Notes Held:_____________

              
	 
      	 
      
	
                Date:__________________________________

              	
                Date:__________________________________

              
	 
      	 
      
	 
      	 
      
	
                By:___________________________________

              	
                By:___________________________________

              
	 
      	 
      
	
                Printed
      Name:___________________________

              	
                Printed
      Name:___________________________

              
	 
      	 
      
	
                Principal
      Amount of Notes Held:_____________

              	
                Principal
      Amount of Notes Held:_____________

              
	 
      	 
      
	
                Date:__________________________________

              	
                Date:__________________________________

              
	 
      	 
      
	 
      	 
      
	
                By:___________________________________

              	
                By:___________________________________

              
	 
      	 
      
	
                Printed
      Name:___________________________

              	
                Printed
      Name:___________________________

              
	 
      	 
      
	
                Principal
      Amount of Notes Held:_____________

              	
                Principal
      Amount of Notes Held:_____________

              
	 
      	 
      
	
                Date:__________________________________

              	
                Date:__________________________________

              
	 
      	 
      
	 
      	 
      
	
                By:___________________________________

              	
                By:___________________________________

              
	 
      	 
      
	
                Printed
      Name:___________________________

              	
                Printed
      Name:___________________________

              
	 
      	 
      
	
                Principal
      Amount of Notes Held:_____________

              	
                Principal
      Amount of Notes Held:_____________

              
	 
      	 
      
	
                Date:__________________________________

              	
                Date:__________________________________

              
	 
      	 
      
	 
      	 
      
	
                By:___________________________________

              	
                By:___________________________________

              
	 
      	 
      
	
                Printed
      Name:___________________________

              	
                Printed
      Name:___________________________

              
	 
      	 
      
	
                Principal
      Amount of Notes Held:_____________

              	
                Principal
      Amount of Notes Held:_____________

              
	 
      	 
      
	
                Date:__________________________________

              	
                Date:__________________________________

              
	 
      	 
      

      

      
        
           

        

        
          2

          
            

          

        

        
           

        

      

      Exhibit
C to Cyberonics-Wells Fargo Settlement Agreement and Release

      

       

      

       

      No.
07-20539

      __________________________________________

      

      IN THE
UNITED STATES COURT OF APPEALS

      FOR THE
FIFTH CIRCUIT

      __________________________________________

      

      CYBERONICS,
INC

      Plaintiff
– Appellee

      

      v.

      

      WELLS
FARGO BANK NATIONAL ASSOCIATION,

      as
Trustee Under Indenture

      Defendant
– Appellant

      

      

      __________________________________________

      

      On Appeal
from the United States District Court

      for the
Southern District of Texas

      Houston
Division

      ___________________________________

       

      JOINT
MOTION TO DISMISS APPEAL WITH PREJUDICE

      ___________________________________

       

      TO THE
HONORABLE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT:

      

      Pursuant
to Fed. R. App. P. 42(b), Appellant Wells Fargo Bank, National Association, as
Trustee Under Indenture, (“Wells Fargo”) and Appellee Cyberonics, Inc.
(“Cyberonics”) file this Joint Motion to Dismiss Appeal with

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      Prejudice
in light of settlement reached by the parties.  The parties would
respectfully show this Court as follows:

      1.           Appellant
Wells Fargo filed this notice of appeal on July 26, 2007.  The appeal
is docketed in this Court under docket number 07-20539.

      2.           The
parties timely filed briefs with this Court and notices of supplemental
authority.  The case is set for oral argument on April 28,
2008.

      4.           The
parties have agreed to and settled all disputes involved in this
litigation.

      5.           In
light of this settlement, the parties jointly move the Court to dismiss this
appeal, with costs to be taxed against the party incurring same pursuant to Fed.
R. App. P. 39(a).

      WHEREFORE,
PREMISES CONSIDERED, Appellant and Appellee pray that this Court dismiss the
appeal styled Wells Fargo Bank National Association v. Cyberonics, Inc., docket
number 07-20539, and order all costs to be borne by the party incurring those
costs.

       

      
        
           

        

        
          2

          
            

          

        

        
           

        

      

      Respectfully
submitted,

       

      

      

      /s/ Jeffrey I.
Ross_______________

      Anthony,
Ostlund & Baer, P.A.

      Jeffrey
I. Ross

      3600
Wells Fargo Center

      90 South
Seventh Street

      Minneapolis,
MN  55402

      Telephone:  612.349.6969

      Facsimile:  612.349.6996

      

      Attorneys
for Defendant-Appellant

      

      

      

      /s/ N. Scott
Fletcher___________

      Vinson
& Elkins LLP

      David T.
Harvin

      N. Scott
Fletcher

      Jeffrey
S. Johnston

      Elizabeth
A. Pannill

      Abigail
W. Giraud

      First
City Tower

      1001
Fannin, Suite 2500

      Houston,
Texas 77002-6760

      Telephone:  713.758.3234

      Facsimile:  713.615.5168

      

      Attorneys
for Plaintiff-Appellee

      

3

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