UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF TEXAS

In re CYBERONICS, INC . SECURITIES )LITIGATION )

}

This Document Relates To: )}

ALL ACTIONS.

Master File No. H-05-212 1

CONSOLIDATED COMPLAINT FORVIOLATIONS OF THE SECURITIESLAWS

CLASS ACTION

DEMAND FOR JURY TRIAL

INTRODUCTION

1 . This is a class action brought on behalf of the plaintiffs and all other persons, other

than defendants and their affiliates, who purchased the securities of defendant Cyberonics, Inc.

("Cyberonics" or the "Company") during the period from June 15, 200, and through October 1,

2004, inclusive (the "Class Period") . Cyberonics is a medical device company focused on the

development and marketing of a programmable electrical pulse generator for cranial nerve

stimulation. The generator -- an implantable device known as the Cyberonics Implanted Vagus

Nerve Stimulation System ("VNS System" or the "Device") -- was in July 1997initially approved as

an adjunctive therapy for epilepsy indicated for reducing the frequency of seizures in patients over

12 years of age with partial onset seizures that are refractory or resistant to drugs under a premarket

approval application ("PMA") by the U .S . Food and Drug Administration (FDA) .

2. During the Class Period, defendants made materially false and misleading

representations regarding the efficacy, safety and marketability of Cyberonics' VNS System as a

therapy for treatment-resistant depression ("T RD") . Specifically, defendants made false and

misleading statements about the safety and effectiveness based on its clinical trial results submitted

with its initial PMA supplement ("PMA-S"), the Company's state of regulatory compliance, as well

as the regulatory steps involved, including whether or not approval would require FDA inspection of

the Company's facilities, systems and records .

3 . Defendants' misrepresentations deceived the investment community as to th e

Company's longstanding regulatory noncompliance, the issues attendant and prospects for FDA

approval of the device, the nature of the Company's regulatory path and strategy following the

receipt of its .not-approvable letter, the true economic viability of the device in the eyes of medical

insurers, as well as the true obstacles and prospects for the potential acquisition of the Company . As

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a consequence, the market price of Cyberonics common stock was artificially inflated, reaching a

high closing price of $38.40 during the Class Period.

4. As a result of its concealment of the fatally defective nature of its PMA-S application,

Cyberonics shocked the market, announcing on August 1 .2, 2004, that the FDA had issued the

Company a not-approvable letter, causing the price of the stock to fall by as much as 40% . Although

the Company had previously told investors that no FDA inspection was required, defendants

concealed the fact that an FDA inspection had begun a month prior to its receipt of the letter . In the

midst of its continued concealment of the FDA inspection, the Company also attracted the interest of

Advanced Neuromodulation Systems, Inc . ("ANSI") in making a merger bid . On August 20, 2004,

following the news that ANSI had acquired a 14 .9% stake in the Company, the price of Cyberonics

stock climbed 30% .

5. On September 15, 2004, the price of Cyberonics stock rose again, by as much as 22%,

closing just above ANSI's bid price, at $23 .23, on volume of over 12 million shares. The Company

announced that it would not entertain the proposed "business combination" with ANSI, purportedly

relying, in part, on the Company's assessment of its true value . Although this rise in the price of

Cyberonics served to signal the interest of investors in a greater premium for their stock in the

Company, on September 15, 2004, FDA closed out its inspection of Cyberonics facilities, issuing the

Company a punishing Form 483, listing serious and numerous objectionable violations . Unaware of

the inspection, its shocking outcome or its effect on any merger prospects . investors were left to

wonder if the Company's stubborn behavior in resisting a deal suggested a positive outcome and

premium for their shares .

6 . The depth of the Company's problems with FDA in seeking approval of the PMA-S

was finally confirmed on October 1, 2004, as ANSI announced that it was no longer interested i n

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pursuing its $22 per share bid for Cyberonics . Citing a "lack of clarity and certainty" regarding the

Company 's PMA-S application , the price of the Company' s stock fell 7 .817v to close at S 18 .85 .

OVERVIEW

7. At all relevant times, Cyberonics' business was the development and manufacture o f

the Vagus Nerve Stimulation (" NS") System, an implanted device that delivers electrica l

stimulations to the brain. The VNS System is a battery-powered vagus nerve stimulator that i s

surgically implanted under the sin of the chest and attached to the vagus nerve in the lower neck .

This device delivers short bursts of electrical energy to the brain . The device was originall y

approved by the FDA in 1997 only for use in people with epilepsy whose seizures are not well-

controlled by medication. Patients usually cannot stop taking epilepsy medications because of th e

stimulator, but they often experience fewer seizures and they may be able to reduce the dose of their

medication .

8. Throughout the Class Period, Cyberonics represented to investors that the VN S

System as an FDA-approved therapy for TRD represented a potential $66 billion marketin g

opportunity, several times larger than its epilepsy marketing opportunity! As a result, FDA approva l

of the VNS System as a therapy for TRD was essential in proving that the Company's technolog y

had a future in the marketplace and would produce the growth expected by the investment

community .

9. It has been estimated people with depression have up to a 1 5% risk for suicide, with

the highest risk in patients who are hospitalized for depression .2 A vast number of drugs have been

` See btt :1lvv : jw. bes.wcs~rl earl>et 1~ . : c'? Ct 1115 tr 14 7 .l tml , last t c~ , ed onNovember 17, 2005 .

2 See htt :, lac al ..about.coni're oi-ts/ (X3(. S i .htm? iam=rnetai &ter s=c e . ression , last accessedon November 17, 2005 .

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approved for treatment of depression, In 2003, the FDA reported the following functiona l

classification for a variety of these drugs :

Classification of Antidepressant Drugs

Function

Monoamine oxidase inhibitor

Norepinephrine transport blocker

Serotonin transport blocker

Dopamine transport blocker

Serotonin 5-HHT- 2A receptor blocker

Antidepressan t

Marplan (isocarboxazid)Nardil (pbenelzine)Parnate (tranylcypro nine )

Asendin (amoxapine)NorpraminPertofrane (desipramine)AdapinSinequan (doxepin)Ludiomil (maprotiline)AventylPamelor (nortriptyline)Vivactil (protriptyline )

Elavil (amitriptylin.e)Celexa (citalopram)Anafranil (clomipramine)Prozac (fluoxetine)Luvox (fluvoxamine)Tofranil (imipramine)Paxil (paroxetine)Zoloft (sertraline)Surmontil (trimipraine)Effexor (verilafaxine )

Wellbutrin (bupropion )

Remeron (mirtazapine)Serzone (nefazodone)Desyrel (trazodone )

10. Over the past 15 years, the number of safe and effective medication treatments for

depression has dramatically increased . Newer medications, including some of the drugs listed abov e

offer efficacy with fewer side effects and reduced adverse effects . In spite of these benefits and

3 See "The Lowdown on Depression," at hit . ° _fda., ov/fdac/feast re /2003/ i03 do p .htmi , lastaccessed on November 17, 2005 .

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efforts to inform the general population about the diagnosis and treatment of depression, treatment

issues linked to patient non-compliance with treatment recommendations is a serious issue . 4

11 . Although specific factors such as side effects lead to high rates of noncompliance

with medication treatment, noncompliance is a "multifactorial phenomenon," dependant on a

number of factors, including, (i) rational and intentional decisions based on beliefs about the. illness,

(ii) concerns over side effects ; (iii) ineffectiveness of treatment; (iv) costs of the medication ; (iv)

decisions influenced by the symptoms of the disorder; and (iv) many other cultural and attitudinal

factors .

12. To further complicate matters, historical data from health care providers, payers and

physicians point to a stagnation in the "delivery of care" for depression disorders and other menta l

health conditions .5 In fact, across the board, treatment rates for depression made little to no

advancement during the period from 1999 to 2002 . Furthermore, data from commercial health care

providers and payers (e .g., health insurance providers) in 2002 pointed to a slight downward trend in

two of the three indicator rates for patient management using antidepressant medications . Finally,

data from Medicare has demonstrated that only I in 10 patients sees a health care provider the

recommended three times in the 12 weeks following the diagnosis of a new episode of clinical

depression .

13 . During the Class Period, defendants made material misrepresentations to and

concealed material information from the investing public regarding the PMA-S for its VNS System,

about the safety, effectiveness and marketability of the device as a therapy for treatment-resistant

depression, including, inter alia, the following :

4 For an expert discussion of the reasons behind patient noncompliance in the treatment of depressivedisorders, see Delgado, P .L., "Approaches to the enhancement of patient adherence to antidepressantmedication treatment" J . Cli . Psychiatry, 2000; 61 Suppl 2:6-9 .

5 See "The State Of Health Care Quality 1-003 - Industry Trends and Analysis," published by theNational Committee For Quality Assurance, 200 L Street, N W, Suite 500, Washington DC 20036, at

.ttp ://ww . cr a.or{ C m ur tc tic ; .3 S '_ .'_ f' . t +T 1 ' ; 0 ~r~! QH~ I.I I RT~OC .I {f̀ ,last accessed on November 17, 2005 .

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(a) Defendants falsely represented that its Company-sponsored research justifie d

the need and economic value of the VNS System as a therapy for TRD . Not only were the

Company's marketing claims wildly untrue, but they were in fact the result of the Company's own

paid efforts to place a "marketing hook" in the academic literature to spin the available facts and dat a

about TRD ;

(b) Despite the fact that the expedited review status of the PMA-S served t o

suggest a good working relationship with FDA, in fact, defendants had serious disagreements with .

FDA reviewers on the basis of safety and effectiveness issues concerning the very nature of th e

Company's clinical study approach as satisfactory evidence of the safety and effectiveness essentia l

for PMA-S approval .

(c) Despite the efforts of the investment community to get to the bottom of th e

mechanism of action of the VNS device for depression, the Company's own regulatory and clinica l

staff worked to counter any suggestion or implication by others that its depression clinical data an d

results were suggestive of effectiveness founded on a "placebo effect ;"

(d) Aware of its own justification of need, economic analysis and implications o f

its own clinical data, the Company concealed the fact that its clinical study approach and results

actually diminished prospects for reimbursement from payers and medical insurers ;

(e) Despite assurances to the investment community that the Company ha d

successfully gained an important regulatory advantage for the P'v1 A-S application, in that FD A

would not perform any inspections in connection with the PIA-S, FDA inspectors would and, in

fact, did inspect do Fondants' facilities, manufacturing operations and quality practices in connectio n

with the VNS Device ;

(f) In spite of the importance of any patient experience, data or knowledg e

regarding serious injuries or suicide in connection with the use of the Device and the PMA-S6

application, the Company left unaddressed a number of serious and alarming patient complaint s

from off-label use of the VNS System that were not limited to juvenile use for epilepsy ; and

(g) Despite its assurances that an FDA inspection would not occur, on Septembe r

15, 2004, the FDA closed out a two months long inspection of the Company's facilities, systems and

records, issuing a Form 483 that contained numerous objectionable observations, demonstrative o f

longstanding regulatory noncompliance dating back to 2002, and having a material adverse impact

on the approvability of the Company's PMA-S .

14. Then, on October 1, 2004, the truth about these complex matters was finally reveale d

in a press release issued by ANSI , citing a "lack of clarity and certainty" regarding Cyberonics '

PMA-S application . Citing these uncertainties, ANSI noticed investors that it was finall y

terminating its merger bid for Cyberonics . As a result of the extremely disappointing news of

October 1, 2004, signaling to investors that the Company's issues with FDA were far greater than

previously believed, the price of the Company's stock tumbled an additional $ I .61 or 7.8% from its

closing price of $20 .46 on September 30 , 2004, closing on October 1, 2005 at $18 .85, on heightened

volume of 3 .6 million shares . In all, the Company's false and misleading statements, representations

and concealment of material information in connection with its PMA-S application caused the price

of Cyberonics shares to decline over 50% from its peak of $38.40 on June 16, 2004, resulting in

millions of dollars in damages to investors .

JURISDICTION AND VENUE

15 . Plaintiffs, on behalf of themselves and all others similarly situated, allege tha t

defendants violated § 10(b) and 20(a) of the Securities Exchange Act of 1.934 (the "Exchange Act")

and Securities and Exchange Commission ("SEC") Rule lob-5, 17 C .F.R. §240, 1 Ob-5 . Jurisdiction

is conferred pursuant to §27 of the Exchange Act . Venue is proper in this District pursuant to §27 o f

the Exchange Act . The corporate headquarters of Cyberonics are located in the District . In

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connection with the acts and conduct alleged herein, defendants, directly and indirectly, used th e

means and instrumentalities of interstate commerce, including the United States mails and th e

facilities of the national securities exchanges .

THE PARTIES

16 . Lead Plaintiffs EFCAT, Inc ., John E. and Cecilia Catogas, Blanca Rodriguez and

Mohamed Bakry purchased Cyberonics securities during the Class Period and were damaged thereb y

as set forth in their respective Plaintiff Certifications attached hereto .

IT Defendant Cyberonics designs, develops, manufactures and markets medical devices ,

including the Cyberonics Implanted Vagus Nerve Stimulation (VNS) System, submitted under a

premarket approval application supplement ("Implanted Vagus Nerve Stimulation System, PM A

P970003/S 50," or "PMA--S") to FDA as a therapy for depression . Cyberonics maintains its corporate

and administrative offices where the Company's day-to-day business activities are conducted at 10 0

Cyberonics Blvd., Houston Texas, 77058 .

18, Defendant Robert P . Cummins ("Cummins") was Chairman and CEO of Cyberonics .

In those positions, defendant Cummins was responsible for communications to the investmen t

community and knew the material, adverse non-public information about the VNS System, th e

PMA-S for the TRD indication and the clinical studies alleged herein from : (i) corporate documents ,

including the Company's regulatory submissions to the FDA prior to and during the Class Period ;

and (ii) oral and written communications with other corporate officers and employees . During 53

weeks ending April 30, 2004, defendant Cummins was granted 250,000 stock options or 16 % of the

total options granted to all employees during that period .6 Moreover, as of June 21, 2004, defendant.

6 For this and other details governing the holdings, employment and severance agreements between .Cyberonics and all of the individual defendants, see the Company's SEC Form DEF 14A, filed onAugust 27, 2004 .

8

Cummins beneficially owned 1,087,928 or 4 .4% of all outstanding Cyberonics stock . Pursuant to his

five year employment contract commencing in June of 2003, in the event of a change of control,

Defendant Cummins will be entitled to a payment which is the greater of three years annual base

salary and bonus or the remaining term of the contract. Additionally, the employment agreement

provides that if any payments to Mr. Cummins by the Company would be subject to any excise tax

imposed by Section 4999 of the Internal Revenue Code, a "gross-up" payment will be made to place

Mr. Cummins in the same net after-tax position as would have been the case if no excise tax had

been imposed .

19, Defendant Richard L . Rudolph ("Rudolph") was Vice President of Clinical an d

Medical Affairs and Chief Medical Officer ("CMO") of Cyberonics . Along with defendant Totah,

defendant Rudolph conducted the Company's extensive communications with the FDA concerning

the VNS System clinical studies, the PMA-S submission for the TRD indication and subsequent

amendments and as a result, was fully informed about the safety, efficacy and marketability issues

for the TRD indication, including issues in the design and results of the clinical studies. In

connection with his 2002 severance agreement with the Company, Rudolph was provided certain

benefits during a protected period following a change of control . The Severance Agreements

generally provided for the payment of . (a) three times the sum of his base salary and bonus amount ;

plus (b) that portion of the base salary earned, and vacation pay vested for the prior year and accrued

for the current year to the date of termination but not paid or used, and all other amounts previously

deferred or earned but not paid as of such date under all Company bonus or pay plans or programs .

Additionally, the Severance Agreements provide that if any payments would be subject to any excise

tax imposed by section 4999 of the Internal Revenue Code, a "gross-up" payment will be made to

place Rudolph in the same net after-tax position as would have been the case that no excise tax ha d

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been imposed . During the Class Period, defendant Rudolph sold approximately $1 .91 million worth

of his Cyberonics stock.

20. Defendant Alan Totah (' Totah") was Vice President of Regulatory Affairs of

Cyberonics . Along with defendant Rudolph, defendant Totah conducted the Company's extensive

communications with the FDA concerning the VNS System clinical studies, the PMA-S submissio n

for the TRD indication and subsequent amendments and as a result, was fully informed about the

safety, efficacy and marketability issues for the TRD indication, including issues in the design and

results of the clinical studies . In connection with his 2002 severance agreement with the Company,

Totah was provided certain benefits during a protected period following a change of control . The

Severance Agreements generally provided for the payment of (a) three times the sum of his base

salary and bonus amount ; plus (b) that portion of the base salary earned, and vacation pay vested for

the prior year and accrued for the current year to the date of termination but not paid or used, and all

other amounts previously deferred or earned but not paid as of such date under all Company bonus

or pay plans or programs . Additionally, the Severance Agreements provide that if any payments

would be subject to any excise tax imposed by section 4999 of the Internal Revenue Code, a -gross-

up" payment will be made to place Totah in the same net after-tax position as would have been the

case that no excise tax had been imposed. During the Class Period, defendant Totah sold

approximately $76,000 worth of his Cyberonics stock .

21 . Defendant Michael A. Cheney ("Cheney") was Vice President of Marketing of

Cyberonics. In connection with his 2002 severance agreement with the Company, Cheney was

provided certain benefits during a protected period following a change of control . The Severance

Agreements generally provided for the payment of (a) three times the sum of his base salary and

bonus amount ; plus (h) that portion of the base salary ea rted, and vacation pay vested for the prior

year and accrued for the current year to the date of termination but not paid or used, and all other

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amounts previously deferred or earned but not paid as of such date under all Company bonus or pay

plans or programs. Additionally, the Severance Agreements provide that if any payments would be

subject to any excise tax imposed by section 4999 of the Internal Revenue Code, a "gross-up"

payment will be made to place Cheney in the same net after-tax position as would have been the case

that no excise tax had been imposed. These interests and provisions were indicative of an intention to

sell the Company and provided Cheney with motivation in connection with a merger or buyout of

the Company. During the Class Period, defendant Cheney sold approximately $69,530 worth of his

Cyberonics stock.

22. Defendant W. Steven Jennings was Vice President of Sales of Cyberonics . In

connection with his 2003 severance agreement with the Company, Jennings was provided certain

benefits during a protected period following a change of control, The Severance Agreements

generally provided for the payment of : (a) three times the sum of his base salary and bonus amount ;

plus (b) that portion of the base salary earned, and vacation pay vested for the prior year and accrued

for the current year to the date of termination but not paid or used, and all other amounts previously

deferred or earned but not paid as of such date under all Company bonus or pay plans or programs .

Additionally, the Severance Agreements provide that if any payments would be subject to any excise

tax imposed by section 4999 of the Internal Revenue Code, a "gross-up" payment will be made to

place Jennings in the same net after-tax position as would have been the case that no excise tax had

been imposed . During the Class Period, defendant Jennings sold approximately $168,000 worth of

his Cyberonics stock .

23 . Defendant Pamela B . Westbrook ("Westbrook-) was Vice President of Finance and

Administration and CFO of Cyberonics . In this position, defendant Westbrook conducted the

Corrmpan 's communications to the investment community along with defendants Cummins,

Rudolph and Totah . Defendant Westbrook knew the material, adverse non-public information about

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the VNS System, the PMA-S for the TRD indication and the clinical studies alleged herein from:

(i) corporate documents, including the Company's regulatory submissions to the FDA prior to and

during the Class Period ; and (ii) oral and written communications with other corporate officers and

employees . In connection with her 2002 severance agreement with the Company, Westbrook was

provided certain benefits during a protected period `allowing a change of control . The Severance

Agreements generally provided for the payment of: (a) three times the sum of his base salary and

bonus amount; plus (b) that portion of the base salary earned, and vacation pay vested for the prior

year and accrued for the current year to the date of termination but not paid or used, and all other

amounts previously deferred or earned but not paid as of such date under all Company bonus or pay

plans or programs. Additionally, the Severance Agreements provide that if any payments would be

subject to any excise tax imposed by section 4999 of the Internal Revenue Code, a "gross-up"

payment will be made to place Westbrook in the same net after-tax position as would have been the

case that no excise tax had been imposed.

INDIVIDUAL DEFENDANTS' INVOLVEMENT IN THESCHEME TO DEFRAUD

24. Individual Defendants, by reason of their executive and Board positions, were

controlling persons of Cyberonics during the Class Period and had the power and influence, and

exercised the same, to cause Cyberonics to engage in the conduct complained of herein .

25 . During the Class Period, each Individual Defendant occupied a position that made

him or her privy to non-public information concerning Cyberonics . Because of this access, each of

these defendants knew the adverse material facts specified herein and that they were being

concealed .

26. Each of the defendants is liable for making false and misleading statements, and/or

for willfully participating in a scheme and course ofbu,in « that opef"Ited as a fraud on purchasers

of Cyberonies securities and damaged Class members in violation of the federal securities laws . Al l

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of the defendants pursued a common goal, i.e. . inflating the price of Cyberonics stock by making

false and misleading statements and concealing material adverse information . The scheme and

course of business was designed to and did : (i) deceive the investing public, including plaintiffs and

other Class members ; `ii) artificially inflate the price of Cyberonics securities during the Class

Period; (iii) allow defendants to sell over 62,000 shares of Cyberonics at inflated prices ; and

(iv) cause plaintiffs and the other members of the Class to purchase Cyberonics securities at inflated

prices and to sustain damages .

27. Each defendant had the opportunity to commit and participate in the violations of la w

described herein . The Individual Defendants were top officers and Directors of Cyberonics and they

controlled its press releases, corporate reports, SEC filings and its communications with analysts,

including the documents that are alleged herein to have been materially false and misleading . Thus,

the defendants controlled the public dissemination of, and could misrepresent, the information about

Cyberonics business, products and finances that reached the public and caused the inflation in the

price of Cyberonics securities .

28. The Individual Defendants had actual knowledge that each of the representations

alleged herein were materially false and misleading when made and/or omitted material informatio n

based on the Company's own submissions to and communications with the FDA, including : (a) the

PMA-S application for the VNS System, indicated as a therapy for TRD ; (b) all protocols, protocol

amendments, data and reports comprising the clinical studies and programs supporting the PMA-S ;

(c} subsequent amendments, FDA communications and correspondence for the expedited review of

the PMA-S ; (d) all communications in connection with and including the not-approvable letter ; and

(e) all communications in connection N it's t .h : FDA inspection of the Company', facilities, systems

and records initiated on July 12, 2004, inclusive of communications regarding (i) the findings or

events causing FDA to reconsider any previous decision not to make an inspection, (ii) the course o f

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the inspection, (iii) the FDA F©r 483 received at the close of inspection, and (iv) attempts to

resolve all objectionable observations.

29. Among other things :

(a) Defendants had studied the marketplace and were well aware of th e

competitive advantages and disadvantages of the various medications, treatments and therapies

available for the management of depression disorders, differentiating its VNS System from other

approaches. Defendants made numerous representations as to the competitive advantages and

purported superiority of its VNS System as a therapy for TRD while being well aware of their own

sponsoring of academic publications supportive of their justification and economic analysis for the

product . Defendants made false and misleading statements regarding the size of the market and the

issues of patient noncompliance in treating depression, including the outrageous proposition that the

VNS System might receive general acceptance in the treatment of millions of patients, generating

annual revenues approaching $66 billion.

(b) Defendants were well-aware of the marketplace and therapy options for TRD .

Defendants were able to compare that information with information known to and concealed by

them regarding the VNS System, to formulate claims designed to mislead investors (such as their

ability to achieve safety and efficacy claims necessary to ensure the economic success of the

product), including the ability to obtain reimbursement for the product from medical insurers and

payers necessary to assure a market for the product.

(c) Defendants were well aware of the shortcomings of their own clinical studies,

including the fact that a randomized and blinded study of VNS System as a therapy for TRD failed

to yield statistically significant results, that the study in combination with another provided no

further evidence of effectiveness beyond data suggestive of a "placebo effect," as well as the

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economic implications of those limitations with respect to the willingness of commercial insurers t o

pay for the device as a therapy for TRD .

(d) Defendants were well-aware or in conscious and reckless disregard of the stat e

of their own regulatory noncompliance. Defendants were equally aware or reckless in thei r

comments regarding their good record of regulatory compliance, as reason for their statement that n o

FDA inspection was required in connection with the PMA-S application . Defendants knew an d

concealed that, shortly after the FDA panel review in June of 2004 and prior to any decisio n

regarding approval, an FDA inspection was initiated .

(e) Defendants were aware of the implications of the FDA inspection, including

the possibility that this additional regulatory hurdle could, in connection with the PMA-S, burden the

Company with additional conditions of approval, further delaying any eventual approval action o r

upon serious findings of adverse and alarming issues potentially cause FDA to issue a not-

approvable letter .

(l') Defendants knew that the two months long duration of its FDA inspection ha d

resulted in serious and alarming observations, capable of alarming the investment community at the

very time of its interactions with one or more medical device companies having either a significant

ownership stake in or having made a merger bid for Cyberonics . Defendants knew that the receipt of

its FDA Form 483 presented serious obstacles, not only for the PMA-S, but also as to it s

manufacturing and commercial operations generally, including the manufacture and sale of it s

commercially available products. Defendants knew that any disclosure of these issues woul d

adversely impact the interest of these other medical device companies, the investing public and th e

price of Cyberonics shares .

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BACKGROUND TO THE RELEVANT PERIOD

Premarket Approval (PMA)7

Premarket approval (PMA) is the FDA process of scientific and regulatory review to evaluate

the safety and effectiveness of Class III medical devices. Class III devices are those that support or

sustain human life, are of substantial importance in preventing impairment of human health, or

which present a potential, unreasonable risk of illness or injury. Due to the level of risk associated

with Class III devices, FDA has determined that general and special controls alone are insufficient to

assure the safety and effectiveness of class III devices . Therefore, these devices require a premarket

approval (PMA) application under section 515 of the FD&C Act in order to obtain marketing

clearance .

30. PMA is the most stringent type of device marketing application required by FDA.

The applicant must receive FDA approval of its PMA application prior to marketing the device .

PMA approval is based on a determination by FDA that the PMA contains sufficient valid scientific

evidence to assure that the device is safe and effective for its intended use(s) . At the heart of the

decision-making process is the evaluation of the applicant's statement of material facts, bearing on

the safety and effectiveness for the intended use(s) . Each statement is a representation that tends to

show that the safety or effectiveness of a device is more probable than it would be in the absence of

such a representation . A false affirmation or silence or an omission that would lead a reasonable

person to draw a particular conclusion as to the safety or effectiveness of a device also may be a

false statement of material fact, even if the statement was not intended by the person making it to be

misleading or to have any probative effect .

31 . FDA regulations provide 180 days to review the PMA and make a determination . In

reality, the review time is normally longer. Before approving or denying a PMA, the appropriate

4 These and the FDA regulatory requirements for medical devices that follow are excerpted fromhtep;//ww .fda.gov/c rrhldevadv=iceftpr al , last accessed on November 19, 2005 .

16

FDA advisory committee may review the PMA at a public meeting and provide FDA with the

committee's recommendation on whether FDA should approve the su mission . FDA will then make

its approvability decision by issuing to the applicant : (i) an approval order, allowing the applicant to

market the device; {ii) an approvable letter requiring the applicant to address minor issues that

otherwise prevent issuance of an approval order; (iii) a not-approvable letter requiring the applicant

to address, if possible, any major, serious deficiencies which would appear to otherwise lead to an

order denying approval ; or (iv) an order denying approval of the application . After FDA notifies the

applicant that the PMA has been finally approved or denied, a notice is published on the Internet (1)

announcing the data on which the decision is based, and (2) providing interested persons an

opportunity to petition FDA within 30 days for reconsideration of the decision .

PMA Supplements

32 . A PMA supplement ("PMA-S") is a supplemental application to a previously

approved PMA for approval of a change or modification in a class III medical device, including all

information submitted with or incorporated by reference . After FDA's approval of a PMA, an

applicant may submit a PMA supplement for review and approval by FDA before making a change

affecting the safety or effectiveness of the device for which the applicant has an approved PMA .

While the burden for determining whether a supplement is required is primarily on the PMA holder,

changes for which an applicant submits a PMA supplement include, but are not limited to, the

following types of changes if they affect the safety or effectiveness of the device :

(a) New indications for use of the device ;

(b) Labeling changes ;

(c) The use of a different facility or establishment to manufacture, proc-c_,", or

package the device ;

(d) Changes in sterilization procedures ;

17

(e) Changes in packaging ;

(f) Changes in the performance or design specifications, circuits, components,

ingredients, principle of operation, or physical layout of the device ; and

(g) Extension of the expiration date of the device based on data obtained under a

new or revised stability or sterility testing protocol that has not been approved by FDA .

33 . All procedures and actions that apply to a PIMA application also apply to PMA

supplements except that the information required in a supplement is limited to that needed to support

the change . The sufficiently detailed summary necessary to enable a general understanding of th e

data and information in the application, as is typically required for a PMA application is also

required for a supplement, when the supplement is submitted for new indications for use of the

device, significant changes in the performance or design specifications, circuits, components,

ingredients, principles of operation, or physical layout of the device, or when otherwise required by

FDA. A PMA supplement shall include a separate section that identifies each change for which

approval is being requested and explains the reason for each such change .

Data Requirements

34. There are administrative elements of a PMA application but good science and

scientific writing is a key to the approval of PMA application . If a PMA application lacks element s

listed in the administrative checklist, FDA will refuse to file a PMA . application and will not proceed

with the in-depth review of scientific and clinical data . If a PMA application lacks valid clinical

information and scientific analysis on sound scientific reasoning, it will delay FDA's review and

approval. PMA applications that are incomplete, inaccurate, inconsistent, omit critical information,

or are poorly o rgr-: : i7ed have resulted in delays in approval or denial of P.i I A applications .

Manufacturers should perform a € uality control audit of a PMA application before sending it to FDA .

to assure that it is scientifically sound and presented in a well-organized format .

18

35 . The technical sections containing data and information should allow FDA to

determine whether to approve or disapprove the application . These sections are usually divided int o

non-clinical laboratory studies and clinical investigations . The non-clinical laboratory studies '

section includes information on microbiology, toxicology, immunology, biocompatibility, stress ,

wear, shelf life and other laboratory or animal tests . Non-clinical studies for safety evaluation mus t

be conducted in compliance with Good Laboratory Practices for Nonclinical Laboratory Studies . The

clinical investigations' section includes study protocols, safety and effectiveness data, advers e

reactions and complications, device failures and replacements, patient information, patien t

complaints, tabulations of data from all individual subjects, results of statistical analyses, and an y

other information from the clinical investigations .

Quality System ("QS" )

36. All manufacturers (including specification developers) of Class II and III devices and

select Class I devices are required to follow design controls [§820 .301 during the development o f

their device . The design control requirements are basic controls needed to ensure that the devic e

being designed will perform as intended when produced for commercial distribution .

37. The manufacturer (including specification developer) must establish and maintai n

procedures to control the design of the device in order to ensure that specified design requirements

are met [820 .30(a)] . Design controls include establishing and maintaining plans that describe the

design and development activities and also define responsibility for implementation [820.30(b)] . The

plans must identify and describe the interfaces with different groups or activities that provide, o r

result in, input to the design and development process 820 .30() I . The design process also includes :

(a) Conducting a ri,'-:; ~ nalvsis [820,30(g) -I ;

(b) I ?cr;tifying design input or requirements for the device .820.30(c)] ;

(c) developing the design output or specifications for the device [820 .30(d)] ;

19

(d) verifying that the design output meets the design input [820 .30(f) ] ;

(e) holding design reviews at appropriate points during the design process t o

identify significant problems with the design or the design process [ :820.30(e)] ;

(f validating that the design meets defined user needs and intended use s

[820.30(g)l ;

(g) validating any software used in the device [820 .30(g)] ;

(h) transferring the device design to production specifications [820.30(h) ] ;

(i) controlling changes to the design during the design process and changes in the

design of products on the market [820.30(i)] ; and

{j) documenting design control activities in the design history file [820 .30(j)] .

38 . PMA submissions should include a complete description of design controls that th e

manufacturer implements to comply with the QS regulation . If this information is lacking, FDA

cannot complete the premarket review process .

39. The manufacturer must have procedures in place and must maintain documentation i n

the design history file to demonstrate compliance with the design control requirements of §820 .30

and completion of the activities identified in the design plan . The design history file must be mad e

available for FDA inspection. FDA will evaluate the adequacy of manufacturers' compliance wit h

design control requirements in pre-approval inspections for Class III devices and also during routin e

quality systems inspections for all classes of devices subject to design control .

40. The PMA submission must include a complete description of the methods used in ,

and the facilites and controls used for, the manufacture,. processing, packing, storage, and wher e

appropriate, installation of the device. The description must include sufficient detail that a perso n

generally familiar with the Quality System/Good Manufacturing Practice requirements can make a

knowledgeable judgment about the quality control used in the manufacturing of the device .

20

41, Device manufacturers include not only facilities that manufacture or assemble the

finished device but also facilities operated or contracted by the PMA applicant to perform a segment

of the manufacturing operation such as sterilization or packaging . Contracted facilities may either

provide the required manufacturing information applicable to their operation directly to the PMA

applicant for inclusion in the PMA submission or submit such information directly to FDA in a

Device Master File. The PEA applicant should provide written authorization to reference the Device

Master File information in the PMA submission.

42. The Office of Compliance (OC) reviews the Quality System design and

manufacturing information in the PM A submission . OC determines whether the manufacturer has

described the processes in sufficient detail and make a preliminary determination of whether the

manufacturer meets the QS requirements . If the manufacturer has provided an adequate description

of the design and manufacturing process, a pre-approval inspection can be initiated .

Preapproval Inspection

43 . In making the determination of the firm's ability to design, manufacture or process the

device, the Office of Compliance (OC) may issue an inspection assignment to the appropriate FDA

district office . The inspection assignment is issued when OC determines, accurately or inaccurately

based on information provided by the applicant, that the manufacturer has demonstrated in the PMA

submission that the design and manufacturing process meets the QS regulation requirements and the

facility is ready for inspection .

44. Inspection includes an assessment of the firm's capability to design and manufactur e

the device as claimed in the PMMA and confirms that the firm's Quality System is in compliance with

21 CFR 820. Quaff ,_, yS , w -1 3i Regulation. The inspectional process considers the extent to which the

firm has established a formal QS program and has assured that the approved design is properly

translated into specifications via process validation . The inspection follows guidance outlined i n

21 .

Medical Device Premarket Approval Inspections , C.P. 7383 .001, and Inspections of Medical Device

Manufacturers , C.P. 7382.845 .

45. Postapproval inspections are conducted within eight to twelve months of approval o f

the PMA submission . These inspections will primarily focus on any changes that may have been

made in the device design, manufacturing process, or quality systems . Inspections are conducted in

accordance with Inspections of Medical Device Manufacturers, C .P. 7382.845 .

Determination of Safety and Effectiveness (*86(L7) - Relevant Factors

46. In determining the safety and effectiveness of a device for Premark-et Approval of

class III devices, FDA will consider the following, among other relevant factors :

(a) The persons for whose use the device is represented or intended ;

(b) The conditions of use for the device, including conditions of use prescribed ,

recommended, or suggested in the labeling or advertising of the device, and other intende d

conditions of use ;

(c) The probable benefit to health from the use of the device weighed against any

probable injury or illness from such use ; and

(d) The reliability of the device .

Valid Scientific Evidence

47. Although the manufacturer may submit any form of evidence to the FDA in a n

attempt to substantiate the safety and effectiveness of a device, the FDA relies upon only vali d

scientific evidence to determine whether there is reasonable assurance that the device is safe and

effective. After considering the nature of the device and the rules in §860 .7, FDA determines

whether the evidence submitted or otherwise available to the FDA is valid scientific evidence for th e

purpose of determining the safety or effectiveness of a particular device and whether the availabl e

evidence, when taken as a whole, is adequate to support a determination that there is reasonabl e

assurance that the device is safe and effective for its conditions of use .22

48, Valid scientific evidence is evidence from well-controlled investigations, partially ,

controlled studies, studies and objective trials without matched controls, well-documented cas e

histories conducted by qualified experts, and reports of significant human experience with a

marketed device, from which it can fairly and responsibly be concluded by qualified experts that

there is reasonable assurance of the safety and effectiveness of a device under its conditions of use .

49. The evidence required may vary according to the ch aracteristics of the device, it s

conditions of use, the existence and adequacy of warnings and other restrictions, and the extent o f

experience with its use . Isolated case reports, random experience, reports lacking sufficient details t o

permit scientific evaluation, and unsubstantiated opinions are not regarded as valid scientifi c

evidence to show safety or effectiveness .

Safety

50. There is reasonable assurance that a device is safe when it can be determined, based

upon valid scientific evidence, that the probable benefits to health from use of the device for its

intended uses and conditions of use, when accompanied by adequate directions and warnings against

unsafe use, outweigh any probable risks . The valid scientific evidence used to determine the safety

of a device must adequately demonstrate the absence of unreasonable risk of illness or injury

associated with the use of the device for its intended uses and conditions of use .

51 . Among the types of evidence that may be required, when appropriate, to determin e

that there is reasonable assurance that a device is safe are investigations using laboratory animals ,

investigations involving human subjects, and nonclinical investigations including in vitro studies .

Effectiveness

52. There is reasonable assurance that a device is effective when it can be determined,

based upon valid scientific evidence, that in a significant portion of the target population, the use o f

the device for its intended uses and conditions of use, when accompanied by adequate directions fo r

use and warnings against unsafe use, will provide clinically significant results . The valid scientific23

evidence used to determine the effectiveness of a device shall consist principally of well-controlle d

investigations .

Well-Controlled Clinical Investigation

53 . The following principles are recognized by the scientific community as the essential s

of a well-controlled clinical investigation. They provide the basis for FDA determination whether

there is reasonable assurance that a device is effective based upon well-controlled investigations and

are also useful in assessing the weight to be given to other valid scientific evidence .

54. The plan or protocol for the study and the report of the results of a well-controlle d

investigation shall include the following :

(a) A clear statement of the objectives of the study ;

(b) A method of selection of the subjects that :

(i) Provides adequate assurance that the subjects are suitable for th e

purposes of the study, provides diagnostic criteria of the condition to be treated or diagnosed,

provides confirmatory laboratory tests where appropriate and, in the case of a device to prevent a

disease or condition, provides evidence of susceptibility and exposure to the condition against which

prophylaxis is desired ;

(ii) Assigns the subjects to test groups, if used, in such a way as to

minimize any possible bias ;

(iii) Assures comparability between test groups and any control groups o f

pertinent variables such as sex, severity or duration of the disease, and use of therapy other than th e

test device ;

(iv) An explanation of the methods of observation and recording of result s

utilized, including the variables l ,c:, s _ l•ed, quantitation, assessment of any subject's response, and

steps taken to minimize any possible bias of subjects and observers ;

24

(v) A comparison of the results of treatment or diagnosis with a control i n

such a fashion as to permit quantitative evaluation . The precise nature of the control must be

specified and an explanation provided of the methods employed to minimize any possible bias of the

observers and analysts of the data. Level and methods of "blinding," if appropriate and used, are to

be documented. Generally, the four types of comparisons recognized ar e

(1) No treatments .

Where objective measurements of effectiveness are available and placebo effect is

negligible, comparison of the objective results in comparable groups of treated and

untreated patients ;

(2) Placebo control .

Where there may be a placebo effect with the use ofa device, comparison of the results

of use of the device with an ineffective device used under conditions designed t o

resemble the conditions of use under investigation as far as possible ;

(3) Active treatment control .

Where an effective regimen of therapy may be used for comparison, e .g., the condition

being treated is such that the use of a placebo or the withholding of treatment would b e

inappropriate or contrary to the interest of the patient ;

(4) Historical control .

In certain circumstances, such as those involving diseases with high and predictabl e

mortality or signs and symptoms of predictable duration or severity, or in the case o f

prophylaxis where morbidity is predictable, the results of use of the device may be

compared quantitatively with prior experience historically derived from the adequatel y

documented natural history of the disease or condition in comparable patients o r

25

populations who received no treatment or who followed an established effective regimen

(therapeutic, diagnostic, prophylactic) .

Data Analysis

55 . The PMA application must include a discussion of the conclusions drawn fro m

studies conducted with the medical device [814 .20((vi)I- FDA does not prescribe specific statistica l

analyses for given devices and/or situations . All statistical analyses used in an investigation shoul d

be appropriate to the analytical purpose, and thoroughly documented .

56. The discussion should demonstrate that the data and information in the application

constitute valid scientific evidence within the meaning of §860 .7 (discussed above) and provide

reasonable assurance that the device is safe and effective for its intended use . The indications for us e

is based on the nonclinical and clinical studies described in the PMA. Indications for use for a device

include a general description of the disease or condition the device will diagnose, treat, prevent, cure ,

or mitigate, including a description of the patient population for which the device is intended . Any

differences related to gender, race, ethnicity, or age, etc . should be discussed in the data analysis an d

included in the labeling.

57. The concluding discussion must present benefit and risk considerations related to th e

device including a discussion of any adverse effects of the device on health and any proposed

additional studies or surveillance the applicant intends to conduct following approval of the PMA .

Management of Pharmacoresistant Depression8

58 . Patients receiving antidepressant monotherapy may be partially or totally resistant t o

treatment in 10 to 30 percent of cases . Several factors may contribute to treatment failure, includin g

undiagnosed or misdiagnosed medical conditions. Patients who do not respond or only p tr ti !iv

See "Practical management of treatment-resistant depression," Cadieux R J . Am Faro Physician .1998 Dec:58(9) 2059-62 and all references cited within .

26

respond to an antidepressant should first be reassessed to make sure the original diagnosis o f

depression was correct. Mon-psychiatric drugs can cause or exacerbate depression . Treatment

response could also be caused by eating disorders, substance abuse or dependence . Psychotic or

bipolar related depression types may require concurrent pharmacotherapy such as antipsychotic o r

augmentative psychotherapy. Poor patient compliance and adverse effects may be additiona l

obstacles to successful treatment . Prescribing antidepressant medication in dosages that are too low

and for lengths of time that are too short are common causes of treatment failure . Only 11. percent of

patients requiring antidepressant therapy received either an adequate therapeutic dosage or an

adequate duration of therapy.

59. Switching to an antidepressant with a different mechanism of action is ofte n

associated with a better response rate . Uncontrolled trials suggest that switching from a tricycli c

antidepressant to an alternative antidepressant class may result in a 50 to 60 percent positiv e

response rate . Electroconvulsive therapy is still the most effective treatment for psychotic depressio n

and severe refractory depression. The clinician should not hesitate to recommend it and should

reassure patients as to its appropriate and safe use under medically monitored conditions .

Depression and Suicide

60. The National Institute Of Mental Health, a division of the National Institutes o f

Health reports the following9 :

Although the majority of people who have depression do not die by suicide,having major depression does increase suicide risk compared to people withoutdepression. The risk of death by suicide may, in part, be related to the severity of thedepression. New data on depression that has followed people over long periods oftime suggests that about 2 percent of those people ever treated for depression in anoutpatient setting will die by suicide . Among those ever treed for depression in aninpatient hospital setting, the rate of death, by suicide is twice as high (4 pc---C~~ .t) .

9 See "Frequently Asked Questions about Suicide" athtt ://w .w.nimh.n .i . ov/suicide revetition/ uicidefa .cfm . last accessed on November 20, 2005 .

27

Those treated for depression as inpatients following suicide ideation or suicideattempts are about three times as likely to die by suicide (6 percent) as those whowere only treated as outpatients . There are also dramatic gender differences inlifetime risk of suicide in depression. !Whereas about 7 percent of men with a lifetimehistory of depression will die by suicide, only I percent of women with a lifetimehistory of depression will die by suicide .

Another way about thinking of suicide risk and depression is to examine thelives of people who have died by suicide and see what proportion of them weredepressed. From that perspective, it is estimated that about 60 percent of people whocommit suicide have had a mood disorder (e .g., major depression, bipolar disorder,dysthymia) . Younger persons who kill themselves often have a substance abusedisorder in addition to being depressed .

The "Placebo Effect"

61 . Regarding the "placebo effect," FDA published an article in the January-February

2000 FDA Consumer Magazine entitled, "The Healing Power of 'lacebos .,,1° The article states in

part :

One patient stands out in the memory of Stephen Straus, M.D., for herremarkable recovery, more than 10 years ago, from chronic fatigue syndrome . Thewoman, then in her 30s, was "very significantly impaired," says Straus, chief of theLaboratory of Clinical Investigation at the National Institute of Allergy andInfectious Diseases . "She had no energy, couldn't work, and spent most of her time athome." But her strength was restored during a study to test the effectiveness of anexperimental chronic fatigue drug .

"She and her parents were so thrilled with her recovery that they wereblessing me and my colleagues," recalls Straus, the principal investigator on thatstudy.

Like many drug studies, the chronic fatigue medication trial was a "placebo-controlled" study, meaning that a portion of the patients took the experimental drug,while others took look-alike pills with no active ingredient, with neither researchersnor patients knowing which patients were getting which .

It's human nature, Straus explains, for patients and investigators alike to tryand guess in each case : Is it the real drug or a dummy pill? But people shouldn't kidthemselves, he says, that they can consistently tell the actual drug from the sham byseeking out tell-tale signs of improvement .

10 See " tt .//www.fda.gov/fdac/features/2000/100-beal .html," list accessed on November 20, 2005 .

28

Turns out, the woman 's quick turnaround from chronic fatigue occurredafter taking placebo pills, not the experimental drug. Straus says, "She wasamazed by the revelation that she'd gotten better on placebo . "

Research has confirmed that a fake treatment, made from an inactivesubstance like sugar, distilled water, or saline solution , can have a "placebo effect"--that is, the sham medication can sometimes improve a patient's condition simplybecause the person has the expectation that it will be helpful. For a given medicalcondition, it's not unusual for one-third of patients to feel better in response totreatment with placebo .

"Expectation is a powerful thing, " says Robert DeLap, M.D., head of oneof the Food and Drug Administration 's Offices of Drug Evaluation. "The moreyou believe you're going to benefi t from a treatment, the more likely it is that youwill experience a benefit. "

To separate out this power of positive thinking and some other variables froma drug's true medical benefits, companies seeking FDA approval of a new treatmentoften use placebo-controlled drug studies. If patients on the new drug faresignificantly better than those taking placebo, the study helps support the conclusionthat the medicine is effective .

Benefiting from Belief

Researchers have been studying the placebo effect for decades . In 1955,researcher H .K. Beecher published his groundbreaking paper "The PowerfulPlacebo," in. which he concluded that, across the 26 studies he analyzed, an averageof 32 percent of patients responded to placebo . In the 1960s, breakthrough studiesshowed the potential physiological effects of dummy pills--they tended to speed uppulse rate, increase blood pressure, and improve reaction speeds, for example, whenparticipants were told they had taken a stimulant, and had the opposite physiologicaleffects when participants were told they had taken a sleep-producing drug .

Yet, even after 40 years, big questions remain about the interplay ofpsychological and physiological mechanisms that contribute to the placebo effect .Today's brain imagery techniques do lend support, though, to the theory that thoughtsand beliefs not only affect one's psychological state, but also cause the body toundergo actual biological changes .

The phenomenon needn't baffle us, says Michael Jospe, a professor at theCalifornia School of Professional Psychology who has studied the placebo effect formore than 20 years . He points out that all people experience physiological reactionsto anticipation and stress --sometl7in . like the fight-cur-flight response--that help themto survive and cope. When you step out of your office and a spider jumps out at you,Jospe analogizes, "you'll get a fright and have a physiological reaction . And the nexttime you go out that way, the thought that it could happen again can produce aphysiological reaction before you even open the door." So, he says, the relationshipbetween a thought and a negative psychophysiological reaction like fear is somethingwe experience daily .

29

That goes for positive associations, too . Jospe continues . "The placebo effectis part of the human potential to react positively to a healer . You can reduce apatient's distress by doing something which might not be medically effective ." It'slike kids and Band-Aids, Jospe says . "When you put a Band-Aid on a child and it hasstars or comics on it, it can actually make the kid feel better by its soothing effect,though there's no medical reason it should make the child feel better . "

There is no medical reason, either, that look-alike placebo tablets used in a1997 study of benign enlargement of the prostate gland should have made the studyparticipants feel better . But in this Canadian study, more than half of the men whogot the placebo pills reported significant relief from their symptoms, including fasterurine flow. Researcher J . Curtis Nickel theorized that the patients' positiveexpectations of the experimental drug's benefits may have caused therapeutic smoothmuscle relaxation by decreasing nerve activity affecting the bladder, prostate andurethra . Study participants on placebo complained of side effects, too (sometimescalled the "nocebo" effect), ranging from impotence and reduced sex drive to nausea,diarrhea and constipation .

It's this powerful placebo effect, coupled with the fact that many medicalconditions involve a natural course of better and worse periods (arthritis and multiplesclerosis are examples of diseases with flair-ups and lulls), that can make it difficultto know if a health upswing should be credited to a drug effect . One way to accountfor such variables in a drug study : give one group of patients placebo and another theexperimental drug, and see if the drug group's health improvements sufficientlysurpass those from placebo . In Straus' study, the chronic fatigue syndrome drugfailed to adequately demonstrate its superiority over dummy pills .

Proof in the Placebo

FDA doesn't require that a drug study include a placebo control group,DeLap says, only that its design be capable of establishing a drug's safety andeffectiveness . Non-placebo types of drug studies include "head-to-head" studies,which compare the experimental drug to an existing treatment, and historicallycontrolled studies, which compare the new drug's effects with information gatheredin the past about the expected progression of a medical condition .

Often, however, a placebo control can provide the clearest insight into what atreatment can accomplish, according to DeLap, especially with some psychiatric andother drugs in which the placebo effect is known to play a particularly weighty role .In fact, DeLap says, in some cases the placebo effect "makes it almost hopeless,statistically" to use studies that test a new treatment side-by-side against an existingone and determine whether the new treatment works .

The placebo controls that have traditionally been used to test medicationshave recently been used, too, to test the effectiveness of surgical procedures . In onewell-publicized study sponsored by the National Institutes of Health, half of theParkinson's disease patients enrolled in the trial underwent a sham surgery in whichdoctors drilled holes into their skulls but didn't implant the potentially beneficialhuman fetal tissue in their brains .

30

While FDA doesn't evaluate the safety or effectiveness of most surgicaltechniques, the agency does regulate surgical implantation of animal cells or re-enaineered human tissues . The agency has approved at least one sham surgery-controlled trial, which will study the effectiveness of implanted pig fetal cells forParkinson's .

Even with the powerful scientific advantages of including a placebo control,researchers and FDA must look at each treatment individually to decide if the use ofplacebos is appropriate and ethical . In fact, much medical research does not involve aplacebo control because "it's just not an option, ethically," DeLap says .

To determine whether a placebo-controlled trial is acceptable, drug companyand FDA experts ask : For what condition is this drug being tested? What is thenatural progression of the disease? How serious is the risk if a patient gets a placeborather than an active treatment?

In DeLap's specialty, oncology, placebo-controlled studies are oftenunacceptable because of the great risk to cancer patients of any treatment delays . Fora headache, on the other hand, patients in a study may be uncomfortable for a time,but are not at risk of a lasting health impact . So, for those conditions in which thedownside of being on placebo is modest and short-lived, DeLap says, it's anindividual's prerogative to say, "I know what I'm getting into, and I want to furtherthis scientific research. "

To help ensure that patients know the pros and cons of enrolling in a study,each participant must sign an "informed consent" form, which clearly explains : thepurpose of the study what enrollees will be asked to do (take a pill twice a day forthree months, for example, and visit the doctor once a week for blood and otherlaboratory tests) the possible benefits and known adverse reactions associated withthe experimental treatment other therapies that are available for their condition.

Even willing participants can't sign away their right to a well-designed study,though, DeLap points out. "We can't fall into the trap of thinking that, once someonesays 'I'm willing to participate,' their consent covers us for deficiencies . Ourresponsibilities go way beyond getting informed consent ." One such responsibility :As a study progresses, researchers monitor results so if major positive or negativedrug effects are seen, the study can be stopped . The first major clinical study of theAIDS drug AZT (zidovudine), for example, was halted early when researchers sawthat AZT patients were living significantly longer than others in the study .

Still, some critics say today's safeguards are not sufficient and oppose the useof placebo-controlled studies in almost all drug research . Patients desperately seekingto end their suffering, some say, may not be capable of giving true informed consent .

DeLap and other FDA experts view any far-reaching ban on placebos inresearch as paternalistic . "We at FDA don't have an ethical blind spot, as some wouldsuggest," De Lap says . "A patient's right to the best treatment is always paramount .But the social hope is that careful scientific research. can help us learn beyond a

31

s ..idow of a doubt what works and what doesn't, so that these patients` kids will havebt:tter treatments available to them."

Placebos in the Doctor's Office : Opposing View s

Today, when 16-year-cold Jennifer Kennedy (not her real name) fromRockville, Md., has a panic attack, she simply distracts herself with a book orcrossword puzzle . But at their height, several years ago, the attacks scared her somuch that she finally went to the emergency room . "I thought I was going to die froma heart attack," says Kennedy .

She didn't believe her doctor when he told her to "just relax" and she wouldfeel okay, and he ended up prescribing pills . He didn't tell her until two weeks later,after her panic attacks had subsided, that the pills were simply placebos with noactive medical ingredient.

Those who oppose the use of placebo pills in medical practice say that suchdeceit can undermine the essential trust between patient and doctor .Gastroenterologist Michael Kirsch, M .D., has called doctors who prescribe placebosoutside medical research "con artists ." Kirsch asks in a 1998 editorial in Priorities,the magazine of the nonprofit American Council on Science and Health, "If usingplacebos therapeutically is ethical and reasonable, shouldn't we encourage judges torender extralegal activist rulings, winegrowers to bottle 'placebo' vintages, curators todisplay masterpiece look-alikes misleadingly, and journalists and newscasters tosanitize news?" He continues, "In such a world, all of us would be groping for truthin a hall of mirrors . "

But placebo researcher Michael Jospe disagrees with what he calls this "strict,grumpy approach that concludes that any doctor who uses placebos is actingunethically." Some circumstances, he says, justify this kind of benevolent deception--like when a patient insists on a medicine that is unnecessary and carries needlessrisks .

"You've got to be there on the oncology ward," Jospe says, "and see howsuffering people get so demanding of drugs that might be extremely harmful to them .if you look at sugar pills in the broader context of a supportive doctor-patientrelationship rather than just as ripping off the patient, you may come to a differentconclusion" about the ethics of placebos .

It's not uncommon for a patient to feel betrayed initially upon hearing thatthey were given a placebo, Jospe says, but a sensitive doctor can explain to thepatient, "No, that the placebo worked doesn't mean you're crazy . You were just indistress and thus more prone to reacting to anything with the potential to help . "

Kennedy admits to feeling deceived when she first found out the pills herdoctor prescribed were fake, but says she now appreciates the doctor's decision toprescribe the placebo. "At first, I felt stupid. But that day at the hospital, the doctormust have realized I wasn't going to accept 'you're fine, it's all in your mind .' Theplacebo helped me realize that I'm not unhealthy and I'm going to be okay . Now, I

32

depression disorders and other mental health conditions . In fact, across the board, treatment rates

for depression made little to no advancement during the period from 1999 to 2002 . Furthermore,

data from commercial health care providers and payers in 2002 pointed to a slight downward trend

in two of the three indicator rates for patient management using antidepressant medications . Finally,

data from Medicare has demonstrated that only I in 10 patients sees a health care provider the

recommended three times in the 12 weeks following the diagnosis of a new episode of clinical

depression.69. Finally, during the July 23, 2003 conference call, Alex Arrow of the investment firm

of Lazard Freres addressed the issue of a "Placebo effect : "

Alexander Arrow - Lazard Freres & Co - Analys t

OK, great. If I could squeeze in one last question? If one of the main goalsfor FDA approval is to disprove the placebo hypothesis for the DO-4 patients, that is,the results that were seeing, because of the [inaudible] for depression are not due tothe suggestibility of the patient but rather actually due to the Vagus nervestimulation ; is there an argument that you can put into words today for why it is thatyou can disprove the placebo hypothesis, when thepatients in theD0-4group knewthat they weren'tgetting the device? The ones in the long-term phase DO-2 all knewthat they were .

So, if playing devil's advocate, you could say well, maybe it's the placeboeffect. Is there a way that you can look at this data and say concretely, no it is not,because of XYZ, based on these results ?

Richard Rudolph - Cyberonic - Chief Medical Office r

With regard to that specific issue, I think you have to look no further than theresults from the acute study . If there was a big placebo effect, there would've been alot higher a response than the acute study .

Robert Cummins - Cyberonics - CEO

13 See the NCQA press release of September 18, 2003 entitled "New Report Finds Health CareSystem's "Quality Gaps" Cane 57,000 Deaths Annually," athtt2://www.-tiega.oreCoinrr.i << , , ;1 -1,~i \ t-,Tx W ,ht and "The State Of Health Care Quality2003 - Industry Trends and A a' W is," pu b-1 i >hed by the National Committee For Quality Assurance .200 L Street, N W, Suite 500. ' Win ton DC 26036. athw / •w ° .nc a rw Co n t a . i ,: ,i -ions, `fit' {~ r it _'X are S0H REPORT2C 3.pdf,both last accessed on November 17, 2005 .

36

And further more, we're not aware that in any therapy a one-year placeboeffect, especially in this patient population .

Alexander Arrow - Lazard Freres & Co - Analys t

In the acute study, I thought. that there was a, you know, a non-statisticalsignificant difference [inaudible] .

Richard Rudolph - Cyberonic - Chief Medical Office r

What I'm indicating is that if patients were going to get significant placeboeffect, you would've had a lot higher a rate of improvement in the acute study . And,as Skip said, I think the whole field accepts that patients this sick are just not going toremain well over a year, from a placebo effect . Placebo effects tend to be verytransient .

Robert Cummins - Cyberonics - CEO

Alex, unfortunately we need to move on to the next question .

70 . Defendants statements were false and misleading, tending to support their own

conclusions in the absence of any publicly available objective support to the contrary . The very basi s

of a placebo effect is psychological . Even FDA recognizes the powerful nature of a placebo effect .1 4

.'Expectation is a powerful thing," says Robert DeLap, M .D., head of one ofthe Food and Drug Administration's Offices of Drug Evaluation. "The more youbelieve you're going to benefit from a treatment, the more likely it is that you willexperience a benefit . "

71 . Again, defendants also knew or were in conscious disregard of the fact that one very

important and proven method for assisting depressed patients is counseling . Since any patients

enrolled in defendants' studies were immersed in the mix of communications and facts regarding the

potential of the VNS to help them, the level of patient attention and care in connection with the trial s

' -" See 162 .

37

could easily have explained a placebo effect in the uncontrolled studies, relative to a lack o f

statistically significant results in the D-02 controlled studies .

72. As a result of these facts, at the very least, the Company's statement of a potentia l

$66 billion marketing opportunity for TRD was a blatant falsehood. "z Nevertheless, not only did the

Company present investors with a faulty economic analysis, but it actually planned to submit a

PMA-S to FDA for what defendants knew to be an extremely expensive and highly invasiv e

treatment with little medical value . On October 27, 2003, the Company announced its submission t o

FDA,'6 inclusive of its clinical safety and efficacy data and results for TRD, a "supplement" o r

PMA-S to the Company's earlier approved epilepsy PMA .

73 . Regardless of the questionable nature of its economic analysis, depression clinical

results and true prospects for PMA-S approval, defendants were motivated to pursue merge r

opportunities . On December 10, 2003, while the Company's stock traded at a price of $32 .10 per

share, the Company issued a press release entitled, "CYBERONICS AMENDS SHAREHOLDE R

RIGHTS PLAN TO PERMIT BOSTON SCIENTIFIC TO ACQUIRE UP TO 20% OF

CYBERONICS' SHARES ." The press release stated in part :

HOUSTON, Texas, December 1.0, 2003 -- Cyberonics, Inc .(NASDAQ:CYBX) today announced that its Board of Directors approved anamendment of the Company's shareholder rights plan to permit Boston Scientific to

15 Defendants' outrageous claims purport to double the revenues of the medical device market . In2004, the entire U.S . medical devices market generated approximately 67 .8 billion dollars inrevenues . See htt :/Iwww.frost .co 1 . rodlservlet/subscri tion-brocli .ure, ag?id=HCMD, lastaccessed on November 17, 2005 .

16 See defendants' press release of October 27, 2003 entitled, "CYBERONICS SUBMITSDEPRESSION PMA SUPPLFM 1. .l .: IN, ` TO FDA," atitt,p ://www.cvberonies .comi r , .R=- .. ~ t ~ etaa ,ash,`?I:D= 97B 45-5A4 -453F-q B-EE 69 gF2ED , last accessed or November 20, 2005 .

38

increase its ownership from up to 15% to up to 20% of Cy eronics' outstandingshares from December 10, 2003 to January 15, 2004 .

"Cyberonics' Board of Directors and senior management team were pleasedto honor Boston Scientifics' request to increase their ownership position,"commented Robert P . ("Skip") Cummins, Cyberonics' Chairman and ChiefExecutive Officer. "As a rapidly growing, med-tech industry leader, BostonScientific is in a unique position to appreciate what Cyheronics has accomplished inepilepsy and the enormous unmet need for an effective and tolerable long-termtherapy for treatment resistant depression . "

74. The commitment that defendants disclosed suggested that Boston Scientific ("BS )C")

might increase its stake to 20% prior to the Company's tentative February 22, 2004 FDA advisory

committee panel review,17 in advance of any approval action in connection with its PMA-S

application . The Company's PMA -S application was subject to "expedited review,"18 involving

frequent communications and interactions with. FDA reviewers , so as to allow - purportedly -- the

free flow of information between the agency and the Company .

75 . During defendants' conference call of January 7, 2004, defendant Totah provide d

further insight into the Company's plans, regulatory requirements and steps for PMA-S approval ,

stating in part :

Alan Totah - Cyberonics, Inc. - Vice President Regulatory Affairs & Quality

Thank you, Skip, and good morning everyone .

Please refer to slide 8 in your package if you have that, or else the video that'sup on the screen. The title of this slide is Client U.S. Depression RegulatoryApproval .

1- see 198 and 99 .

The ` 4 pedi ud review" status of the Company's PMA-S application can be confirmed at,fda.gov scripts/cdrl ciciocslc PM Pte . .cf `? D= 0 , last accessed on

November 14, 2005.

39

As you can see we like, in our regulatory process, to a climb up MountEverest, and to date we have completed four of the six steps in that climb . The nextstep in the process will be the Neurological Devices Panel meeting which we havetargeted now for April 2004 .

The April date matches one of the proposed 2004 CDRH NeurologicalDevice Panel dates published recently on the FDA's website . Please note that theFDA has not officially notified Cyberonics of our panel date at this time . Based upona potential panel date of April 2004, Cyberonics would reasonably expect to reachthe summit, noted on the slide, where the FDA will make their decision regardingapprovability of the depression PMA-S by July 2004 .

Now, we've listed here on the slide some reasons why we are confident thatwe can expect these decisions to be reached in that time frame . And I'd like to gothrough those with you now .

The first item, as you'll note is that the six-month original epilepsy PISAapproval time line, which was achieved when we first started the company. Thesecond item is the VNS depression to expedite a review status was granted by FDAduring the clinical trial phase because the new VNS indication for depression hasbeen deemed by the FDA as a potential break-through therapy for this indication.According to FDA there are no legally marketed therapies for the safe and effectivetreatment of patients suffering from treatment-resistant depression .

Next we have the very enviable VNS safety record. Currently we have over22,000 VNS systems have been implanted worldwide with over 56,000 device yearsof experience and each day this number continues to go up .

Next, the neuro device approval precedence. Cyberonics has provided at leastone year of clinical data on 460 patients in the application we provided to FDA,which is far more than typically FDA and the Neurological Devices Panel membershave historically reviewed in other applications .

Next, consistent compelling statistically and clinically significant VNS datafor all clinical endpoints with most reaching robust statistical significance havebeen reported to FDA .

The next item that's of importance is that the pre-PMA-S meeting was uniquein the following aspects. A two-hour versus a normal one-hour meeting wasscheduled and conducted with. FDA. Next, Cyberonics was allowed to present aclinical data summary, which is unusual, as the pre-PMA-S meetings do not typicallyallow for this type of presentation . This meeting is routinely focused upon the formatof the application elements .

Next, the meeting was attended as one would reasonably expect by the branchchief, the lead reviewer assigned to the application, and . of course, a statistician..Surprisingly the meeting was also attended by the division director, the assistantdivision director, the biometric compliance officer, and the FDA NeurologicalDevices Panel scheduling secretary .

40

During the meeting, FDA agreed to an interactive review process which wehad requested in our application, and I'm happy to report that that process is ongoingand has been scheduled on a biweekly basis and we've had many phone calls withthem since that meeting .

Next item is the biometric clinical site audits were discussed and a programwas set up and is underway to complete these study site audits in a timely manner .

Finally, after the meeting we were advised by the FDA that althoughnormally a manufacturing facility inspection is required for panel trackapplication , such as the one we submitted, based upon our current qualitycompliance record and the fact that our VNNS deviceplatform has not changed, noinspection of Cyberonics manufacturingfacility will be required by the FDA. Thisis a real plus to Cyberonics, as this removes another administrative regulatory stepfrom the submission review and approval process .

Next, of course, I've already mentioned it, but the interactive review isongoing as we speak today, and then the letter received from FDA accepting thePMA-S for filing was very encouraging . First the letter clearly acknowledged theneed for a safe and effective treatment for patients suffering from depression, and Iquote, "Who are intolerant or resistant to other legally marketed therapies ."Secondly, FDA acknowledged in the letter that the clinical data used to support theexpedited review must meet the published requirements for valid scientific evidence,which is obtained from well-designed, monitored, controlled clinical trials . Note thatneither FDA's letter nor the federal regulations specifically require that those trials berandomized, and that Cyberonics firmly believes that our studies were well designed,monitored, and controlled .

Finally, as Skip referred in his announcement earlier, the final letterspecifically states that, and I quote, "A meeting of the Neurological Devices Panelwill be held at which your P M A supplement will be reviewed and you will benotified of the location and date of this meeting . "

Finally, the proposed 2 004 Neurological Devices Panel dates have beenpublished by the FDA recently on their CDRH website. The proposed dates areApril Ist and 2nd, August 5th and 6th, and October 28th and 29th. Given theexpedited review status of the VNS depression P MA supplement application, andthe ongoing interactive review process , C'yberonics believes it is prudent fordepression business planning purposes to target the proposed April Ist or 2nd,2004, panel date pending formal notification by the FDA.

76 . Though it appeared that the Company no longer expected a February 2004 pane l

meeting by the time of its January 7, 2004 conference call, defendant Totah confirmed to th e

investment community the Company's product safety record, expedited review status . allowing for

41

frequent interactions with FDA reviewer,,,, 19 Additionally, the Company reported since the VNS

System was already on the market, no additional . DA inspections would be required in connection

with PMA-S approval . This highly material representation served two purposes . First, it assured

investors that, in connection with the Company's purported safety record, its operations were in

compliance with FDA quality and medical device regulations . Finally, it removed from investors'

minds any risk of burdensome "approvable" conditions or "not-approvable" status resulting from

objectionable observations during an FDA inspection .20

DEFENDANTS' FALSE AND MISLEADINGSTATEMENTS DURING THE CLASS PERIOD

77 . On June 1.5, 2004, the Company issued a press release entitled, "FDA ADVISORY

PANEL RECOMMENDS APPROVAL OF CYBERONICS' DEPRESSION DEVICE - Conferenc e

Call Scheduled for June 16, 2004 at 4 :00 PM EDT." On this day, the Neurological Devices Panel of

the Medical Devices Advisory Committee finally met to make recommendations and vote on the

approvability of the Company's PMA-S No . P970003/S50 . The panel reviewed the Company's

application and indicated use of the device, for the adjunctive long term treatment of chronic or

recurrent depression for patients who are experiencing a major depressive episode that has not had

an adequate response to two or more antidepressant treatments . 2 1 The press release stated in part :

1 q Regarding the Company ' s numerous safety-related objectional observations, demonstrative of ahistory of regulatory noncompliance , see the Company 's FDA "Warning Letter" of December 22,2004 , at 1124.

20 As investors would later team, FDA would send an inspection team to visit the Company inconnection with the PMA-S application and would ultimately issue the Company a Warning Le ter .See 124.

"$ The lengthy and highly technical transcript of FDA advisory panel review of June 15, 2004 can befound on the FDA website, at http .,//w-vvw . fda.govv/ollrrils/dockets/acf(0 /transcri is/2Oo4-4047tlJam.A summary of that transcript can be accessed at htt : / ~ .fda.~~o >ro rmsidc c etslac 04/ iz t s/4047ml . df (both documents last accessed on November 3, 2 005) .

42

HOUSTON. Texas, June 15, 2004 -- Cyberonics, Inc . (NASDAQ :CYBX)announced that the Neurological Devices Panel of FDA's M'1cdiLal Devices AdvisoryCommittee today voted 5 to 2 to recommend approx al with conditions ofCyberonics' VNS TherapvrT System "as an adjunctive long-terra treatment ofchronic or recurrent depression for patients over the age of 18 who are experiencing amajor depressive episode that has not had an adequate response to four or moreadequate antidepressant treatments ." Regarding conditions, the Panel recommendedseveral labeling changes, that the VNS depression prescribers and implantingsurgeons have appropriate experience and adequate training in the implantation andprogramming of the YNS Therapy System, that patients receive adequate educationand that Cyberonics implement a long-term depression patient registry followingapproval . FDA's Division of General and Restorative Neurological Devices willconsider the deliberations, vote and recommendation of the Advisory Panel and makethe final decision on approval of the VNS Therapy System for the proposedindication for use .

"The Panel's recommendation represents a major step forward toward U .S .availability of the first FDA-approved, safe, tolerable and effective long-termtreatment for patients with treatment-resistant depression," commented Robert P .("Skip") Cummins, Cyberonics' Chairman of the Board and Chief Executive Officer ."Millions of Americans today suffer from treatment-resistant depression (TRD), adevastating, lifelong and life-threatening illness . According to published studies,15% of previously hospitalized patients commit suicide and annual depressiontreatment costs in the United States exceed $30 billion including $137 billion fordrugs alone . Today's Panel vote suggests that not only was there agreement on thesignificant unmet need, but also that the comprehensive one-year data andanalyses on 460 patients included in Cyberonics ' PMA-Supplement demonstratedthe safety and effectiveness of VNS Therapy as an adjunctive long-term treatmentfor chronic or recurrent treatment resistant depression .

"Cyberonies is looking forward to working with FDA to finalize labelingthat will ensure informed use of VNS Therapy, implement the Panel'srecommendations and obtain a timely approvability decision," continued Mr .Cummins . "The Panel's recommended conditions are consistent with Cyberonics'depression plans and epilepsy history, including the proposed depression patientregistry, which will be similar to our existing epilepsy registry . The Panel's vote is atribute to the patients, families, psychiatrists and other clinicians whose courage,determination and pioneering spirit made the last six years of depression clinicalstudies possible . Special thanks go to (1) the six VNS patients, Drs . John Rush andHarold Sackeim, the American Psychiatric Association and the Depression andBipolar Society of America for speaking at today's meeting, (2) the Advisory Paneland FDA for their timely reviews of our PMA-Suppler e .t and all supportinginformation and (3) last but not least to the dedicated men and women onCyberonics' depression team led by Dr. Richard Rudolph, Vice President of Clinicaland Medical Affairs and Chief Medical Officer and Alan Totah, Vice President ofRegulatory Affairs and Qualityfor their unwavering commitment to the 4 millionAmericans and theirfamilies suffering with T RD.

43

"Cyberonics' mission is to improve the lives of people touched by epilepsy,depres,,WN ~ nd other chronic illnesses that prove to be treatable with our patentedtherapy, VNS," concluded fir . Cummins . "The plan to accomplish our mission inepilepsy in fiscal 2005 has been implemented and the plan to properly scale ourorganization to accomplish our mission in depression will be implemented as soonas we are confident of depression approval. "

78 . The press release of June 15, 2004 was false and misleading for the followin g

reasons. From a time prior to the beginning of the Class Period, defendants knew or were i n

conscious and reckless disregard of the fact that the Company's sponsored research to justify th e

need and economic value of the VNS System as a therapy for TRD was untrue, false and misleading .

Nevertheless, the Company boasted that its "comprehensive one-year data and analyses on 460

patients included in Cyberonics' PMA-Supplement demonstrated the safety and effectiveness of

VNS Therapy as an adjunctive long-term treatment for chronic or recurrent treatment-resistan t

depression ." Moreover, the Company continued to speak of its "unwavering commitment to the 4

million Americans and their families suffering with TRD ." These statements pointed to that ver y

same untrue, false and misleading justification and economic analysis underpinning the purported

commercial success of the VNS System for depression . Indeed, according to one confidentia l

witness with knowledge ("CWI"), the Company violated protocols for the VNS clinical studies .

CWI is a former employee of Cyberonics who held various positions with the Company at times

relevant to this action and defendants' knowledge, including VNS Specialist, Territory Manager and

Team Leader . CW1 specifically referred to the VMS clinical studies as "awful science" based on

"extremely flawed" study design . A most noteworthy problem with the VNS clinical studie s

indicated by CW1 was that Cyberonics employed inadequate study site coordinators. CW1 further

explained that companies normally hire several study site coordinators when conducting clinica l

trials to ensure that the study protocols are being followed . According to C W1, study site

coordinator's responsibilities include traveling to each clinical trial site (hospital) . approximately 26

44

sites nationwide in Cyberonics case, to ensure that physicians are following the study protocol .

According to CW 1, only 3 of the approximately 26 sites actually followed the protocols .

79. Moreover, defendants falsely represented the nature of their relationship with FDA i n

terms of the ap revahility of the PMA-S . Defendants stated, "Cyberonics is looking forward t o

working with FDA to finalize labeling that will ensure informed use of VNS Therapy, implement the

Panel's recommendations and obtain a timely approvability decision ." This statement implied tha t

approvability hinged on a successful panel review that, once achieved, would progress th e

application to the end of the process, product labeling and the approvability decision . However,

defendants knew and attempted to conceal that there actually were serious disagreements with FDA

reviewers concerning the safety and effectiveness of the VNS System as therapy for TRD, resulting

from the Company's clinical study approach and results that were, apparently , repeatedly addressed

in the Company's confidential communications to FDA reviewers.' '2 Indeed, according to another

confidential witness with knowledge who was present at the June 2004 panel meeting ("CW2' -

22 Absent any reason to doubt defendants' expressions of satisfaction and prior positive remarksregarding the FDA review process, investors were not in a sense of the curious remarks of Dr .Pena, the FDA scientist charged with efficacy review in the June 2004 advisory committeetranscript- In the context of the letter, Pena's remarks were, despite defendants ' own accoun t of theirpositive and productive dealings with the agency, indicative of a strained relationship with FDA,including the fact that FDA clearly and repeatedly underscored its serious and unaddressed safety-related concerns, stating in part :

MEMBER BALO: I was wondering in your discussions with the sponsor when they weresubmitting D-04, did the FDA ever request them to have safety data?

DR . PENA : The D-04 was conducted local IRBJurisdiction so it didn 't require anyFDA approval. In addition, when they submitted the revised statistical p lan back anSeptember 3, 2002, FDA responded with a correspondence letter saying that we hadserious concerns with this comparison .

We additionally had conference calls thatfurthe r arther underscored those concerns. So I thinkwe had a lot of concerns about that comparison and use of that open label controlledstudy, observational controlled study.

45

CW2 is a former employee of Cyber©nics who held various positions with the Company at time s

relevant to this action and defendants' knowledge, including Assistant Program Coordinator ,

Program Coordinator and Senior Program Coordinator), CW2 perceived as a Company insider that

there were too many questions left unanswered for the FDA advisory committee .

80. Finally, defendants knew or were in conscious and reckless disregard of the fact tha t

the Company's clinical data and results were suggestive of limited medical effectiveness .

Defendants emphasized their interpretation of the panel results as solid evidence of the safety an d

effectiveness of the VNS System for TRD, while it was clear that the D-02 blinded and randomized

study did not yield any statistically significant results . Moreover, the D-02/D-04 study comparison

defendants had engineered was not only troubling from a safety standpoint to FDA reviewers, but

defendants dismissed concerns from the investment community that clinical results and comparison

did not disprove the possibility of a placebo effect .23 These facts pointed to the very real possibility

that Company's clinical study approach and results actually diminished prospects for reimbursement

from medical insurers .24

81 . On the news of June 15, 2004, including the Company's glowing claims of succes s

and expectations to '!finalize labeling" for the device with FDA, the price of Cyberonics stock

23 Defendants have sought evidence of a mechanism of action, in the form of an impact on cerebralblood flow ("CBF") resulting from VNS stimulation. Surprisingly, while defendants sponsored theresearch, which was conducted during 2003 but undisclosed to investors, on August 27, 2004, twoweeks after defendants received their not approvable letter from FDA, researchers collaborating withthe Company submitted for publication the results of a study which concluded that "acute VNS doesnot have an influence on CBF velocity in depressed patients ." See FN 40 . This submission .,however, was still not public until May 2005 when the article was published . Id. To date, defendantshave not been able to propose a mechanism of action for the VNS System for the treatment of TAD .

'' In August of. 005, the Blue Cross Blue Shield Technical Evaluation Center finally evaluated theclinical data underlying the Company's .nn-approvable letter of August 12, 2004 and found noobjective support for concluding any improvement of health outcomes.Seeh tp:/ ww ° .bebs.coni/tee/voi2O/20 08 .btmi , last accc ~: d on November 18, 2005 . See also 126 .

46

rocketed upward, achieving a two-day gain of $18.82 or ninety-six percent, on record volume` s

totaling over 72 million shares, closing on June 17, 2004 at $38.40 per share.

82. The highly positive movement in the Company's stock resulting from the Company' s

disclosure of June 15, 2004 demonstrated that investors were convinced defendants' false and

misleading statements, including (i) the basis for and dimensions of the Company's enormous

depression marketing opportunity, (ii) the positive aspects of the Company's frequent and productive

communications with FDA, (iii) that no FDA inspections of its facilities were required prior to

approval, and (iv) the purportedly successful and highly encouraging nature of the panel review .

83 . On June 18, 2004, defendant Richard L . Rudolph, CMO of Cyberonics, sold 2,90 5

shares of the Company's stock, for proceeds of $107,485 .

84. On June 23, 2004, defendant W. Steven Jennings, Vice President of Sales of

Cyberonics, sold 5,000 shares of the Company's stock, for proceeds of $168,000 .

85. On June 25, 2004, Michael A . Cheney, Vice President of Marketing of Cyberonics ,

sold 1,000 shares of the Company's stock, for proceeds of $35,000 .

86. On June 25, 2004, defendant Richard L. Rudolph, CMO of Cyberonics, sold 50,000

shares of the Company's stock, for proceeds of $1,803,000 .

87. On June 28, 2004, defendant Michael. A. Cheney, Vice President of Marketing of

Cyberonics, sold 1,000 shares of the Company's stock, for proceeds of $35,000 .

88 . On June 28, 2004, defendant Alan D . Totah, Vice President of Regulatory Affairs o f

Cyberonics, sold 1,410 shares of the Company's stock, for proceeds of $51,042 .

`5 Trading was halted for the advisory committee deliberations on June 15, 2005 . Trading in theCompany's shares achieved record volume of 44 million shares on June 16, 2004, followed by heavyvolume of 28 million shares on June 17, 2004 .

47

89. On August I i, 2004, the Company issued a press release entitled, "CYBERONIC S

REPORTS Q i RESULTS - Conference call scheduled for 4 :30 PM EDT." The press release stated

in part :

HOUSTON, Texas, August 11, 2004 -- Cyberonics, Inc . (NASDAQ:CYBX)today announced financial results for the first quarter ended July 30,2004 of its fiscalyear ending April 29, 2005 . Net sales were $25 .1 million, compared to net sales of$26.7 million for the quarter ended July 25, 2003 . U.S . net sales for the first quarterwere $22.5 million compared to U.S . net sales of $25 .0 million for the first quarterlast year . International sales for the first quarter were $2 .6 million, compared to $1 .7million for the first quarter last year .

Robert P . ("Skip") Cummins, Cyberonics' Chairman of the Board and ChiefExecutive Officer commented, "Cyberonics' goals for fiscal 2005 are to maintain ourepilepsy business while at the same time obtaining regulatory approval andsuccessfully launching VNS TherapyTM as a treatment for chronic or recurrenttreatment-resistant depression . We made good progress towards those objectives inthe first quarter. In Ql, Cyberonics not only obtained a favorable FDA AdvisoryPanel depression recommendation , but we also prudently managed our depressioninvestments to report a better than planned net loss and positive cash flow. "

"Depression investments are both direct and indirect," continued Mr.Cummins. "In Q1, direct new indications expenses were essentially on plan at $3 .4million. Indirect depression investments increased in QI and were made primarily byCyberonics' U .S. sales and operations departments . A successful depression launchwill require approximately six months to adequately scale Cyberonics' sales andoperations organizations and processes to accomplish our mission both in epilepsyand depression. A delicate balance between the regulatory approval process and asuccessful launch must be maintained with investments triggered by regulatorymilestones . One such milestone was the favorable Advisory Panel recommendationthat triggered (1) an investment of U .S. epilepsy sales resources in depression pre-launch activities and (2) the commencement of the recruiting process to identify andqualify the additional sales personnel necessary to support depression . Those twoinvestments are reflected in a sequential increase in administration expenses and asequential decrease in U .S. sales . The other Q1 indirect depression investment wasmade in operations, In Q1 a planned one-time doubling of production to evaluatethe scalability of Cyberonics' manu, facturing personnel, equipment and processeshighlighted several opportunities for improvements that were made in QI with aone-quarter impact on gross margin. "

"We continue to work with FDA to obtain a favorable depression decision,"concluded Mr . Cummins . "Regulations and precedents would suggest that FDAshould make its decision by October . We are optimistic that FDA 's decision will befavorable considering that (1) all PMA-Supplements with ExpeditedReview statusanda favorable Panel recommendation in the last seven years have been approved

48

by FDA, (2) 4.4 million Americans suffering with treatment-resistant depressiontoday have no FDA-approved, safe and effective long-term treatment, (3) U YSTherapy is the only anti-depressant to have Expedited Review status, (4) FDA'sAdvisory Panel including four deputized psychiatrists voted in favor of approvalwith straightforward conditions, (5) the one-year data from the VNS studies showsremark-able safety and efficacy in a group of patients with extreme, previouslyunstudied levels of treatment resistant depression, and (6) widespread support forapproval has been expressed by psychiatric thought leaders, patients and payers . "

"Our guidance for the second quarter reflects planned progress in depressionand an increase in depression spending," commented Pamela B . Westbrook, VicePresident, Finance and Administration and Chief Financial Officer . "We expect thatdirect new indications expenses will increase to at least $6 million and that indirectinvestments to properly scale and train our U.S. sales organization will alsoincrease. As a result, we expect sales for the second quarter to be essentially flatversus Q I at $25 million and that gross margin will be 84% . Although we are notplanning to hire the majority of the sales personnel to support a depression launchuntil we receive a formal communication from FDA, we expect that the net loss forthe quarter will be approximately $9 million or $0 .38 per fully diluted sharereflecting an increase in direct and indirect depression spending . With our strongbalance sheet, including $62 million in cash, Cyberonics has more than adequatecapital to internally fund its growth and development going forward . "

90. On August 12, 2004, following the press release, defendants made the followin g

statements and remarks :

Mark Landy - Susquehanna Financial - Analys t

Anything that has come out of the D02 study I know that you reported safetypanel (indiscernible) up until the trial end and you've been following those patients .Anything in terms of safety data that's come out of those patients that we shouldknow about or is it pretty much nothing untoward ?

Skip Cummins - Cyberonics - Chairman and CE O

No, we provided up-to-date safety data to the panel and there's been nomaterial developments one way or another in that regard . As you know, we've seenvery good safety in tolerability in patients with extreme TRD even in terms of theclassic issues, regarding depression for antidepressant safety, which would besuicide, suicidality, and worsening depression . The annual incidents of all those inthis group of patients with extreme TR.D was quite comparable to what's beenreported in the FDA database of drug studies of nonresistant patients . So in a groupthat you would expect to be at a much higher risk for those typical depression safety,issues we as a matter of fact found no greater incidence than you would see in yourtypical drug study of nonresistant patients .

49

91 . The press release and conference call comments of August 11, 2004 were false and

misleading for the following reasons . From a time prior to the beginning of the Class Period,

defendants knew or were in conscious and reckless disregard of the fact that the Company's

sponsored research to justify the need and economic value of the VNS System as a therapy for TRD

was untrue, false and misleading. Nevertheless, the Company continued to represent that, in the time

since the panel review, the Company was continuing to work with FDA and was optimistic that FDA

would issue a favorable decision . Moreover, defendants stated that the fate of 4 .4 million Americans

was at stake, representing the $60 billion economic market defendants used their false and

misleading Company-sponsored research and methodology to define .

92. Moreover, defendants falsely represented the nature of their relationship with FDA in

terms of the approvability of the PMA-S . Defendants again implied that approvability hinged on a

successful panel review that, once achieved, would progress the application to the end of the process,

product labeling and the approvability decision . In addition, defendants made it a point to reinforce

their safety claims, that safety data requirements addressing suicide, suicidality, and worsening

depression had been met . However, defendants knew that there actually were serious disagreements

with FDA reviewers concerning the safety and effectiveness of the VNS System as therapy for TRD,

resulting from the Company's clinical study approach and results that were, apparently , repeatedly

addressed in the Company 's confidential communications to FDA reviewers but not disclosed to

the investing public.

93 . Defendants knew or were in conscious and reckless disregard of the fact that th e

Company's clinical data and results suggested limited medical effectiveness . Defendants emphasized

their interpretation of the panel results as solid evidence of the safety and effectiveness of the VNS

System for TRD, while it was clear that the D-02 blinded and randomized study did not yield any

statistically significant results . Moreover, the D-02/D-0 study comparison defendants had

50

engineered was not only troubling from a safety standpoint to FDA reviewers, but that the

effectiveness defendants claimed did not disprove the possibility of a placebo effect . These facts

pointed to the fact that Company's clinical study approach and results actually diminished prospects

for reimbursement from medical insurers . Nevertheless, defendants again pointed to ` .avers," as if

commercial medical insurers, Medicare and Medicaid had already lined up behind defendants' data

and assertions, while having no objective basis to do so .

94. Finally, defendants knew and concealed that, on July 12, 20 04, FDA inspectors had

descended on Cyberonics to begin an inspection of the Company's facilities, systems and records in

connection with its PMA-S . Moreover, unlike the extremely short FDA inspection that occurred on

January 22 to 25, 30 and February 1, 2001, triggering the FDA Warning Letter of March 23, 2001,26

the current inspection, initiated a month prior to the August 11, 2004 press release, was ongoing and

unlikely to end soon . The fact that defendants knew and concealed the inspection ran counter to the

Company's affirmative representations of January 7, 2004, that on the basis of the Company's good

regulatory compliance record, no such inspection would occur, eliminating an additional regulatory

step that could conceivably impact any FDA approvability decision. Indeed, defendants made no

effort to correct the earlier representations at all, let alone that the inspection had begun .

95. Not only did defendants choose to conceal the ongoing FDA inspection, defendant s

knew that the agency was in a position to immediately learn of and act upon serious issues or

information uncovered during the inspection process, including answers to questions from Company

employees and information about the VNS product and clinical lots, obtained from Company

manufacturing records. In fact, despite the extremely serious nature of the ongoing FDA inspection

and the .. :_iv re, impact it would 12av on product approval, defendants enumerated in the press

26 The FDA "Warning Letter" of March 31, 2001 can be accessed atlitt ://www .fda .e oy/foiiwarnii letters, glO54d. df.

51

release of August 11, 2004 their "six reasons" why investors should expect a product approval,

while emphasizing that preparations for key commercialization requirements, in the form o f

"necessary depression-related" investments in manufacturing operations, along with additional

investments in its sales organization had already been accomplished during the first quarter of 2004 .

96. On August 12, 2004, the Company issued a press release entitled "FDA IGNORE S

PANEL RECOMMENDATION AND DETERMINES CYBERONICS' EXPEDITED REVIE W

DEPRESSION PMA-SUPPLEMENT NOT-APPROVABLE - 4 .4 Million Americans with

treatment-resistant depression left with no long-term treatment option ." The press release stated i n

part :

HOUSTON, Texas, August I2, 2004 -- Cyberonics, Inc. (NASDAQ:CYBX)today announced that late yesterday it was notified by FDA in writing that"notwithstanding their (the Neurological Devices Panel's) recommendation, weregret to inform you that (your) PMA-Supplement, absent additional information,must be considered not-approvable ." FDA's stated reasons included worseningdepression, potential biases stemming from a non-randomized control and aninability to distinguish one-year VNS effects from placebo and concomitanttreatment effects .

"We are shocked and bewildered by FDA's decision to ignore its expertAdvisory Panel's recommendation," commented Robert P . ("Skip") Cummins,Cyberonics' Chairman of the Board and Chief Executive Officer . "FDA's Center forNeurological and Restorative Devices had no prior depression experience before theVNS submission and as a result . FDA deputized four of the seven voting members ofits expert Advisory Panel . All four of these deputized members were psychiatrists,including three who also serve on the antidepressant drug Advisory Panel . All of thereasons cited in yesterday's not-approvable letter were addressed at the Panelmeeting on June 15 prior to the Panel's vote recommending approval . FDA has nowchosen inexplicably to ignore not only the recommendation of its panel of experts,but also the strong recommendations of numerous psychiatric thought leaders and thecompelling testimony and needs of people with treatment-resistant depression . whotoday have no long-term treatment for their lifelong and life-threatening illness ."

"Depression is the leading cause of disability for women in the U .S ., andevery month an estimated 2,500 Americans with treatment-resistant depressioncommit suicide," continued Mr . Cummins . "The VNS studies targeted patients withextreme treatment-resistant depression that are excluded from other antidepressantstudies, including studies ofelectro-convulsive therapy (ECT). Despite the extremetreatment resistance of the VNS patients, after one year of treatment, one out of sixwere depression free and 56% had realized a meaningful benefit . Most importantly,approximately 70% of the VNS responders sustained their response out to two years .

52

By comparison, an active control group of similarly resistant patients treated for oney I,tr with currently available treatments (no VNS) predictably showed minimalrc ponse and no sustained response . Once again, FDA's specially chosen AdvisoryPanel of experts considered this one-year data to be compelling and sufficient torecommend approval . "

`This is the first Expedited Review PMA-Supplement in history with afavorable Panel recommendation that has been determined by FDA to be not-approvable," concluded Mr . Cummins . "In its letter, FDA seems to be rationalizingits unprecedented decision based on FDA's seemingly arbitrary preference for arandomized controlled study that is neither required by the regulations nor the normin the majority of device approval precedents reported by FDA in a recent CDRHStaff College Report . Apparently, FDA believes that the absence of a randomizedcontrol is adequate justification to leave 4 .4 million Americans at significant suiciderisk without a treatment option . FDA's expert Advisory Panel, people living withtreatment-resistant depression, psychiatric thought leaders, payers and all of us atCyberonics strongly disagree. "

"We are in the process of arranging a meeting with senior FDA managementto discuss their letter," commented David S . Wise, Cyberonics' Vice President andGeneral Counsel . "We are actively considering all regulatory and legal options,including those successfully employed by other device companies to reverseinexplicable decisions and obtain PMA approvals . "

97. On August 12, 2004, following the press release, defendants made the following

statements and remarks :

Robert Cummins - Cyberonics, Inc . - Chairman, President, CE O

Hello seems more appropriate than good morning for the subject of our calltoday, and we'll dispense with any forward-looking statements disclaimer because Idon't think they are appropriate . Needless to say, last night when we finished our callI didn't anticipate that we would be talking to you again this morning with the newsthat we are about to present, but, indeed here we are, and with me, as usual, is PamWestbrook, our Chief Financial Officer . I will apologize in advance for being not aswell organized as we've been on past conference calls, but as you might guess thiswas rather shocking, and I haven't had time to adequately prepare our normal wellmessaged script, so, it will be a little helter-skelter, and I apologize for that.

But, anyway, late last evening we received, from FDA, out of the blue aninexplicable, not-approvable, letter. Needless to say, we are shocked and continueto be shocked, and bewildered by FDAs decision to ignore its expert advisorypanels recommendation. FDAs Center for Neurological and Restorative Devices hadno prior depression experience, or knowledge, for that matter, before the D . N. S .submission, and as a result, FDA deputized 4 of the 7 voting members of its expertadvisory panel . Now that's fairly unusual, and as you know from yesterday's call, wewere not inform or we didn't learn of these deputized members and the make up ofthe panel until the afternoon of the day before . But, nonetheless, all 4 of these

53

deputized members were psychiatrists, including 3 who also serve on theantidepressant drug advisory panel .

Apparently, FDA believes that the absence of a randomized control isadequate justification to leave 4.4 million Americans at significant suicide riskwithout a treatment option. FDAs expert advisory panel including 3 of the 4deputized members of that pa el, people living with treatment resistant depression,

psychiatric thought leaders, pavers and all ofus at cyberonics, obviously, strongly,disagree.

Yet, many of you will know doubt recall the interesting three-week period inJanuary of this year where we first accelerated then pushed back our depressionspending plans . A lot of people wondered about our motivations and why we didthat . Well, within one week after our September, 2003, pre PMA meeting with FDA,a tentative February 22nd panel date was confirmed with us. With that, weaccelerated our plans and properly disclosed that revised guidance to you . Threeweeks, after then receiving our 87 volume PMAs, we were told, would, whoa, that's alot of information, and there's no way for FDA to finish their review in time for aFebruary 22 panel . So, the panel would have to be in April . We then, once again,properly disclosed re-revised guidance to you . Not because we were crazy. Notbecause we were trying to read a crystal ball . But because of tentative confirmationsof panel base and promises made to us by FDA . Promises that were, obviously,broken .

I'll give you one last example . Immediately after the panel, senior FDAmanagement complimented us on the thoroughness of our panel presentation, andsaid that if all presentations were as good as ours had been FDA's job would be mucheasier .

In the ten weeks since the panel, when over 5,000 Americans havecommitted suicide, our regulatory team has been working with FDAs reviewer,following up on information presented at the panel. We had no discussions withthe division director or other members of FDAs senior management because the

final review seems to be proceeding, Until yesterday evening. When, out of the blue,Alan Totah received a call from the division director, asking for our fax number soshe can fax a not-approvable letter . For the first expedited review, PMT. supplement,in history, with a favorable panel vote from FDAs especially chosen, deputized panelof experts, to receive such a letter .

So, where does FDAs inexplicable, unprecedented decision leave those 4 .4million Americans with TRD? With exactly what they had before Cyberonics had thecourage, with the help of psychiatric thought leaders, to embark on a six-yeardevelopment program to develop a treatment for them . And that is nothing. No

54

hope, and nothing but a bunch of expensive, ineffective drugs, who's safety andefficacy in patients with TRD has never been, and never will be, studied . A bunchof drugs with as many failed acute studies as there are successful studies . A bunchof f drugs who's efficacy is rarely, if ever, tested beyond eight to ten weeks . And, ofcourse, with ECT. And more ECL And more ECT. And more ECT and more E ` :

And, last but not least, as one ofthe patients testimony verified at the panelmeeting with tt final option that way too many Americans, 2500 every month, to bespecific, choose to relieftheir pain, andthat's suicide. And all because FDA wantsa randomized control that is inconsistent with device regulations and deviceapproval precedence.

And, last but not least, in the words of the thought leader that is I have sharedthis inexplicable decision with, it leaves us outraged. And with reneweddetermination and support to reverse this inexplicable decision and bring hopeback to 4.4 million Americans who today really only have one way out. And weknow what that one way out is.

Alexander Arrow - Lazard Freres & Co. LLC - Analyst

Thanks . Just a few questions, if I may. The other precedence that you werereferring to, Skip, in which there was a inexplicable decision that later wasoverturned through the appeals process that you are describing to, if you couldmention any of those specific examples that would help us in our abilities handicapthe likelihood that you will be able to succeed in that appeals process . The mostrecent one we know of was six years ago when there was a panel vote in favor anFDA decision against and then a successful appeal . Are you aware of more recentonce than that?

Robert Cummins - Cyberonics, Inc . - Chairman, President, CEO

If you look in the neurodivision, every approval over the last seven years hasbeen a highly contentious approval . Just look at the ANSI case where FDA changedthe rules and changed its minds and then ANSI cried foul, and ultimately, I believeit was about six months after FDA changed its minds inexplicably that A NSI endedup getting PMA approval for their IPG . So, take a look at that case, and that,although, obviously not as similar situation is close enough with the same divisionthat it certainly provides some insight into what the alternative , alternatives andoptions we would have would be .

Alexander Arrow - Lazard Freres & Co. LLC - Analyst

Next question, since there is such buy-in from the psychiatric community,the prospect for off-label use, at least in that small part of the market which could beself paying , could you address how much off-label use you might be able to see intreating depression already?

55

Robert Cummins - Cyber©nics . Inc. - Chairman, President, CEO

First of all one of the astounding things about this decision from FDA is thatFDA is, emphasizes informed use, which means, get approval, have appropriatelabeling, and then physicians can prescribe the product on an informed basis . Rightnow patients with TRD, and the clinicians who treat them, have none of that . Most ofthe treatments that are used to treat them are used off label and with no informationon safety and efficacy . So, basically, the psychiatrists that are treating these peopleare flying blind today, trying whatever, without information that would suggestbasing effectiveness of the long-term treatment . Yet, when we provide FDA with allof the data necessary to make an informed use decision, with compelling long-termdata, all of a sudden it's not good enough . Now, in our case, we are aware of someoff label use, but, we obviously are not calling on psychiatrists . We are notsupporting it. We are not promoting it, because, again, Cyberonics is a high integritycompany that does play by the rules, despite the fact the rules seem . to change atFDAs whim. So, we do play by the rules . We are not going to promote off label . Weare aware that some of it's been done and, again, keep in minds that VNS as atreatment for depression has been available for at least two years in Canada and inEurope, and we are aware of the number of Americans who have gone to Europe andgone to Canada to get the treatment because, again, 4.4 million Americans todayhave no treatment options. None. And, now they still don't because FDA hasdecided that, in this case, they need a randomized control .

Bill Slattery - Unidentified - Analyst

Skip, I see this is putting you in a very awkward position, in one sense youare litigating with the agency or approaching litigation . In the other sense you'renegotiating. I wouldn't want to be in your shoes, especially after this call. Thequestion I have, specifically, if I think about negotiations to get to an agreeable trialdesign, 6 to 12 months, and 12 months to control the study, and 12 months tocomplete the study, we are talking three to four years before you have data in front ofthe agency again . Would you take that route .

Robert Cummins - Cyberonics, Inc . - Chairman, President, CEO

Yeah, basically, what you are talking is best case, if we were to start theprocess today, best case is we probably would have a submission into FDA for theirreview, expedited review, in about three years . So, three years give or take sixmonths, we would be kind of right back to where we are today, which is starting aprocess that seems to be ever changing with goal posts that seem to be moving fromright to left and north and south .

K. McKay - Unidentified - Analyst

When would you expect that you would have your strategy in place, andgo back to the FDA as far as negotiation or discussion on this ?

Robert Cummins - Cyberonics, .Inc. - Chairman, President, CEO56

Well, we already have approaches being made to the highest levels of FDAmar agc-ru,i ii_ to contact them, and we've also, just so you know, following the panelmeeting, there have been significant expressions of support from all walks of life,political, professional, patient advocacy, medical, et cetera, expressed to FDA . So,and what I can tell you is, many, many people approached us who wanted to go toFDA, and we said, no, look, they are doing their work, they seem to be crossproceeding, let them do their work . But now unfortunately, I don't control thatbecause patient and clinician outrage will take its course . It's beyond my controlnow. So, we are going to meet with FDA, as soon as we possibly can, and try to getsomebody at a high level there to understand that this unprecedented decision wasa mistake.

K. McKay - Unidentified - Analyst

So, within the next few weeks, or is that your objective?

Robert Cummins - Cyberonics, Inc . - Chairman, President, CE O

Well I would be in Washington, D .C . right now if they would have agreed tomeet today, but the person who is working on the meeting, a very senior regulatoryattorney that we've worked with in DC, hasn't called me and told me when I need tobe there . But, I believe when I will go there I will be meeting with more than justFDA. Because there are a lot of other interested parties in Washington , D.C. thatwill be very disappointed in this decision .

K. McKay - Unidentified - Analyst

Okay. Thank you.

98. The conference call continued, with defendants stating in part :

Stephen Sabba - Sturza's Medical Research - Analys t

Hi, thanks for taking my question . I actually have a question about, twoquestions, really . One, it seems to me that if there's a problem with IRBs signing onto long-term studies, I'm wondering why you can't do VNS versus ECT . Because, itseems that part of the issue with the sham procedure is that the person feels thatsomething is being done, something, and even though ECT isn't an implant it issomething quite similar, I think, in people's minds and that's part of, really . theplacebo effect . And, secondly, I'm wondering if you don't, feel that your language issomewhat inflammatory, and that's not helping you in the future with the FDAusing inflammatory language using vis-a-vis the FDA .

Robert Cummins - Cyberonics, Inc . - Chairman, President, CEO

On the inflammatory language side, we have always dealt with FDA veryfairly and in good faith, And, all I can tell you is, a letter out of the blue, yesterday,with no heads up from FDA senior management, given the process that we've bee n

57

through in depression , in itself is our opinion more inflammatory than anylanguage that I would use.

Stephen Sabba - Sturza 's Medical Research - Analyst

You keep saying arbitrary, inexplicable, it's obviously one of therandomized control trial, and you could have done one and that would have solvedthe problem.

Robert Cummins - Cyberonics, Inc . - Chairman, President, CE O

That's inconsistent with regulation and device approval precedence and avote of their panel .

Stephen Sabba - Sturza's Medical Research - Analys t

Most devices though, the primary implants are objective, and the problemwith depression is there's a high degree of subjectivity, and that's, you know, so it'san unprecedented indication . You have to realize that, right? Is that not the case ?

Robert Cummins - Cyberonics, Inc . - Chairman, President, CE O

Of course, that's why we rely on psychiatric thought leader who use endpoints that are standardized and well accepted in the industry and with FDA .

Stephen Sabba - Sturza's Medical Research - Analyst

issue.

study.

But you didn't provide a randomized control trial. That seems to be the

Robert Cummins - Cyberonics, Inc . - Chairman, President, CE O

No, but there is no randomized control trial precedent with a one-year

Operator

Your next question comes from Frank Habell a

Frank Unidentifiable - Investors Market Asset Management - Analyst

Skip, good mo='n ing, this is Frank [ inaudible ] at [Investors Market AssetManagement] . Of course, we are disappointing as everyone about the decision . But.do you have any reason to believe today that there was any undue influencebrought on by FDA or the directors or by anyone before or after the advisory panelmeeting?

Robert Cummins - Cyberonics, Inc . - Chairman, President, CE O

58

Until yesterday when I was asked that question and, for instance, on[inaudible] and [Kraemer], I always get that question about the undue influence ofthe drug companies, I always discounted it, believing that that wouldn't be the case .However, at this point, I have to say I don't know. But, the manner in which thisdecision was made, raises all sorts of questions in our minds that will never beanswered, and I don't know if it's productive to even speculate . But, what I can tellyou, as you know from reading the Wall Street Journal, et cetera, that there's a firestorm going on right now among Congress, FDA, clinicians, patients, the drugcompany's, et cetera, about the under reporting of failed studies, and also about theunder reporting of suicides associated with antidepressants, specifically in off labeladolescent use . So, there is, and there are bipartisan activity going on in congresstoday focused on that very issue . So, the answer to your question is, I don't know .One thing I do know is 3 of the 4 deputized members, that FDA deputized, werefrom the drug advisory panel and 2 of those 3 voted in favor of the approval . So, ifthere is undue influence, it must have come, as you said, after thepanel meeting,because, the panel recommended the approval , and it was a spec ifically chosenpanel of experts with expertise in psychiatry and with experience on the FDAantidepressant drug panel .

Frank Unidentifiable - Investors Market Asset Management - Analys t

After reading the [inaudible] article, and connecting the dots, one wouldseem to think that in reading that [inaudible] and Kraemer, the street .com and someof the, what 1'11 call action in the prices of stock, brought on perhaps by the hedgefund communities, you have the confluence of a lot of factors that are going on here,and I would hope, as a long investors, a long time investor in Cyberonics ,you wouldyou exhaust whatever remedies there are to be able to uncover, if there is anyundue influence, no matter what the source ?

Robert Cummins - Cyheronics, Inc . - Chairman, President, CEO

Well, the other thing I can tell you is this, is that you don't have to have agreat imagination to imagine the significant interest that would be potentiallyaligned against approval of this device. We have some very powerful data thatshows nothing works in this patient population .

Frank Unidentifiable - Investors Market Asset Management - Analyst

Hi, you talked a lot about suicides in the severely depressed population andthe implication of the FDAs action. But, Idon 't recall see any data suggesting thatVNNS has any impact on suicide. Can you comment on that ?

Robert Cummins - Cyberonics, Inc . - Chairman, President, CEO

Again, if you check on our website we provided the slide that was presentedto the panel that compared suicide and suicide attempts in the VATS cohort versus acon study of the FDA joint database. What that showed was no increase in suicide inour extreme TRD population relative to the nonresistant populations that are

59

typically studied in those drug studies . Now, while there is no data, what I can tellyou is the patients I 've met that were part of the studies, virtually every one of themhad attempted suicide prior to entering our study . And the ones I've met have saidthey no longer even remotely consider suicide . So, the data confirms that there's noelevated suicide risk, and anecdotes would suggest that, perhaps, the opposite mightbe true .

Frank Unidentifiable - Investors Market Asset Management - Analyst

Okay, but anecdotes is a little different than making statements aboutsuicide that would have been prevented had this device been approved by the FDA,don't you think ?

Robert Cummins - Cyberonics, Inc . - Chairman, President, CE O

We are not saying that they would have been prevented . We are just sayingthat that is the nature of this illness, and with no treatment options there will continueto be suicides .

Frank Unidentifiable - Investors Market Asset Management - Analyst

But with the treatment option, as well, that statement is also true.

Robert Cummins - Cyberonics, Inc . - Chairman, President, CEO

Correct. It's undefined what impact approval of VNS could have on suiciderates.

99. Having the opposite effect of defendants' previous positive representati ons regarding

its success in connection with the panel review for the PMA-S, the news of the not-approvabte letter

on August 12, 2004 shocked the market . Defendants repeatedly referred to the "not -approvable"

letter as "inexplicable" in that they represented that FDA had raised unreasonable and unfair

concerns with the very design of the Company's studies . 27 However, these representations were

false and misleading. FDA had, apparently, repeatedly addressed serious issued in the Company's

confidential communications with FDA reviewers .28 Indeed, according to another confidential

"And, all I can tell you is, a letter out of the blue, yesterday, with no heads up from FDA seniormanagement, given the process that we've been through in depression, in itse lf is our opinion moreinflammatory than any language that I would use ." See 199 .

See FN 22 (comments of Dr. Pena).

60

witness with knowledge ("CW3"). the Company and FDA had been in regular communication .

CW3 is a former employee of Cyberonics who held various positions with the Company at times

relevant to this action and defendants' knowledge, including Engineering Technical Writing

Consultant . CW3 investigated and developed physician's manuals for submission with the

Company's PMA-S . CW3 worked directly with defendant Rudolph during the Class Period, as well

as closely with Engineers, Regulatory Affairs and the Clinical and Marketing Departments . CW3

explained that Rudolph was on the telephone with FDA on a daily basis and asked CW3 to make

changes to the FDA submission almost daily . Moreover, the Company's downright hostile

comments regarding the letter were blatantly false and misleading, as they sought to thoroughly

abuse FDA, as if Company representatives had just learned of FDA's serious safety-related

concerns and on the basis of the allegedly supportive positions and views of the members of the

June 2004 FDA advisory panel and medical insurance payers, amongst others .29

100 . Unbeknownst to investors and contrary to the Company 'spriorassertions, on July

12, 2005, nearly a month priorprior to the issuance of the not-approvable letter, FDA had begun a full

inspection of the Company's facilities, systems and records, to ascertain its state of regulatory

compliance and approvability of the PISA-S. This inspection was well known within the Company,

according to CW3, as was the fact that it was not proceeding well, the rumor within the Company -

with expected pro-Company spin - being that FDA "was on a witch hunt" and was being "nit

picky." The fact that FDA inspectors had descended on the facility stood in stark contrast to the

Company's prior assurances to investors that, on the basis of the Company's good regulatory

compliance record, no such inspection would occur. Rather than inform investors of the reasons

behind this unexplained inspection, the Company concealed it .

29 "FDA's expert Advisory Panel, people living with treatment-resistant depression, psychiatricthought leaders . payers and all of us at Cyberonics strongly disagree ." See defendants press releaseof August 12, 2004, at 1 97 .

61

101 . Moreover, the Company now represented that it had not heard frog FDA since the

time of the panel review30 and that its purported conspiracy theory, pointing to "undue influence"

by drug companies was probably at the root of the not-approvable letter .3' Nevertheless, the

inspection was a critical event since, in certain circumstances,particularly where repeat violations

ofnon-compliance are observed, an inspection in connection with approval activitie s could cause

or contribute to the issuance of a not-approvable letter . 2

102. in fact, during the course of the inspection, FDA inspectors o bserved numerous

violations, including inadequate investigation of the reasons for thousands of device reimplants,

numerous medical "adverse events" and unaddressed injury, death and malfunction reports arising

from "unapproved use" of the device ."33 Not only were investors uninformed, but the Company

made false and misleading statements concerning the "critical path" for any eventual PMA- S

30 "In the ten weeks since the panel, when over 5,000 Americans have committed suicide, ourregulatory team has been working with FDAs reviewer, following up on information presented at thepanel. We had no discussions with the division director or other members of FDAs seniormanagement because the final review seems to be proceeding." See 198 .

31 "So, if there is undue influence, it must have come, as you said, after the panel meeting , because,the panel recommended the approval, and it was a specifically chosen panel of experts with expertisein psychiatry and with experience on the FDA antidepressant drug panel " and "Well, the other thingI can tell you is this , is that you don't have to have a great imagination to imagine the significantinterest that would be potentially aligned against approval of this device." See If 99.

32 Administrative actions under the compliance policy that could result from an unsatisfactory pre-approval inspection could include rigorous enforcement of FDA's recidivist policy , as well asdisapproval of the PMA-S. "At the discretion of the district , notification to CDR H may occur priorto an inspection, while the inspection is ongoing, or after issuance of the Form FDA-483 .Notification would typically be made by a compliance officer, but could be made by the investigatorand/or district management ." See Compliance Program Manual for FDA Staff - PART V athtt a www .fda_ v o a/c gn I7382 845/html/7382 84 5 E rt5 .htm , last accessed on November 16,2005 .

13 Neither FDA nor the Company can prevent off label use of medical devices . However, ti-','H emany of the Company's "unaddressed" complaints of injuries and deaths arising from "unapproveduses" of the V NS System were the result of unapproved pediatric use, it is logical to infer that theCompany's failure to respond to others served to concealdepression-related use and serious safety-related concerns from FDA and may have been a contributing factor in the agency's non-approvable decision. See 1124 .

62

approval . Although the Company talked about the pursuit of an appeals process to reverse FDA's

"inexplicable" decision, defendants knew or were in conscious and reckless disregard of the fact that

the first step in any process was to deal in good faith with FDA inspectors regarding regulatory

noncompliance issues. Nevertheless, a key element of the Company's "regulatory strategy"

appeared to be to adopt a recalcitrant position towards corrective actions in its successive

negotiations with FDA having a direct, negative impact on the prospects and timing of approval of

the Company's PMA-S. 1 4

103. Defendants also knew and concealed that the advisory committee was not in a

position to address the regulatory noncompliance of the Company's manufacturing operations,

systems and records . Defendants were well-aware of their history of violative medical device

reporting practices and that FDA noted that the Company's VNS device may have caused or

contributed to a death and numerous patient infection events . Defendant Cummins was well-aware

of his previous interactions in 2001 with FDA, regarding these safety-related issues,35 causing some

15 months of remedial interactions beyond the issuance of a "Warning Letter" dated March 31,

2001. Despite this, the Company concealed its continued conscious and reckless disregard of FDA

medical device reporting requirements, specifically the failure to investigate and evaluate the caus e

34 The Company failed to comply with FDA demands for resolution of its numerous violations onSeptember 17, 2004, October 7, 2004 and again on December 8, 2004, forcing the issuance of a"Warning Letter." Seel 124 .

35 The FDA " arcing Letter" of March 31, 2001 can be accessed athtt ://www .f'da .gov/foi/waming letters! I O54d. df. Following the end of the Class Period, duringdefendants' conference call on April 7, 2005 entitled, "Cyberonics Conference Call to DiscussClosure of FDA Warning Letter," defendant Cummings recollected the 2001 violations and WarningLetter event : "Recall that a previous FDA inspection that occurred from January 22nd throughFebruary 1st of 2001 resulted in a MDR reporting warning letter dated Alarch 23, 2001 . In thatwarning letter, Cyberonics was notified that our responses were c ; npletcc and adequate. However,we were not notified at that time that the w : fti„g letter was r d niT :isi.ratively closed. A follow-upeffectiveness check inspection occurred from January 10th through January 22nd of 2002 . We werethen officially notified that the larch 23, 2001 warning letter was closed on June 26th of 2002 . Inother words, the preceding warning letter was not officially closed for some 15 months after thewarning letter was issued, and our responses were deemed by FDA to be complete and adequate . "

63

of each medical adverse event as required by 21 CFR 803- 6 and the generally worsened state of

regulatory compliance for the manufacture and quality assurance for the Company . While the

advisory panel would have no reason to inquire or make judgments about these reckless, chronic and

potentially life-threatening quality practices, FDA would be expected to obtain all corrective

measures, particularly through actions that would negatively impact approvability of the PMMA-s for

the VNS device . Despite these serious and alarming issues impacting approvability of the PMA-s,

defendants instead focused investors on "labeling" and "scale" of its organization as key

commercialization issues .

104. Finally, defendants knew or were in conscious and reckless disregard of the fact that

the Company's clinical data and results suggested limited medical effectiveness . Defendants

emphasized that their interpretation of the panel results was solid evidence of the safety and

effectiveness of the VNS System for TRD, while it was clear that the D-02 blinded and randomized

study did not yield any statistically significant results . Moreover, the D-02/D-04 study comparison

defendants had engineered was not only troubling from a safety standpoint to FDA reviewers, but

that the effectiveness defendants claimed did not disprove the possibility of a placebo effect . These

facts pointed to the very real possibility that Company's clinical study approach and results actually

diminished prospects for reimbursement from medical insurers . Nevertheless, defendants again

pointed to "payers," as if commercial medical insurers, Medicare and Medicaid had already lined up

behind defendants' data and assertions, while having no objective basis to do so .

105 . Amidst the shocking news and defendants' continued concealment, those truly abused

by the Company's false, misleading and antagonistic statements and representations were, in fact,

the Company's own investors . On August 12, 2004, defendants' concealed, bellicose relationshi p

~6 See FN 35 . During defendants' conference call on April 7, 2005 entitled . "Cyberonics ConferenceCall to Discuss Closure of FDA 4arnin ;5 Leater," defendant Cummings recollected the 2001 and2004 Warning Letters, and with respect to the 2004 letter, he falsely stated : "MDR reporting wasnot part of the warning letter, but several safety issues were mentioned in the warning letter . "

64

with FDA reared its head, causing the value of the Company's shares to plunge over 40 percent,

losing S9 .59 from the previous closing price of 523 .95 on August 11, 2004, to close on August 12 ,

2004 at $14.36, on heavy volume of over 27 million shares .

1I06. On August 20, 2004, Advanced Neuromodulation Systems Inc . ("ANSI"), announce d

that it had purchased a 14.9% stake in the Company at the "reduced prices" arising from the debacle

in the stock on August 12 and 13, 2004, with the stated intention of proposing a "busines s

combination." On August 20, 2004, defendants also issued a press release entitled, "CYBERONIC S

ACKNOWLEDGES ANSI PURCHASE OF 3 .5 MILLION SHARES AND EXPRESSES NO

INTEREST IN ANY MERGER OR COMBINATION ." The press release stated in part:

HOUSTON, Texas, August 20, 2004 -- Cyberonics, Inc. (NASDAQ:CYBX)today announced that it was notified by the President and Chief Executive Officer ofAdvanced Neuromodulation Systems Inc . (NASDAQ:ANSI) that ANSI hadpurchased approximately 3 .5 million shares or 1.4 .8% of Cyberonics' common stockon the open market .

"ANSI's actions are evidence that yet another knowledgeable device marketleader, in this case with highly relevant FDA experience, has recognized the value ofCyberonics' VNS TherapyTM franchise, intellectual property, demand creationorganization and model, profitable epilepsy business, and depression and other newindications opportunities," commented Robert P. ("Ski.p") Cummins, Cyberonics'Chairman and Chief Executive Officer . "Cyberonics is not interested in anycombination or merger and remains f ocused on growing its epilepsy business andgaining clarity and certainty in a revised depression regulatory timeline. In the fewdays since learning of FDA's decision , we are making good progress towards thoseobjectives. We will provide more information on that progress on the conference callscheduled for Wednesday August 25, 2004 . "

AUGUST 25, 2004 CONFERENCE CALL AND WEBCAST ACCESSINFORMATION

To listen. to the August 25, 2004 conference call live by telephone dial 877-451-8943 (if dialing from within the U .S.) or 706-679-3062 (if dialing from outsidethe U .S.) . The conference ID is 9510401 ; the leader is Pam Westbrook .

107 . The press release of August 20, 2004 was false and misleading for the followin g

reason s . First, defendant Cummings knew that the FDA inspection of Cyberonics facilities, in

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connection with its manufacture of the VNS device was ongoing, FDA inspectors continued in their

collection of information regarding serious and potentially life-threatening product safety issues

associated with the highly deficient, defective and substantially flawed nature of defendants'

manufaLrurinc operations, quality systems and medical adverse event reporting . Despite this ,

defendant Cummings pointed to the "good progress" made with FDA towards a regulatory timeline

for approval of the VNS device and the "value" of the Cyberonics depression opportunity recognized

by ANSI. These statements served to artificially inflate the value of the stock, by attempting to

mislead investors about the dimensions of the FDA rejection letter for the VNS device. Aware of the

Company's favorable comments regarding the ability of ANSI to reverse "inexplicable" FDA

decisions,37 and the implication that the stock was undervalued, and absent any knowledge of the

inspection that was not supposed to occur, investors responded positively to the news, causing the

Company's stock to post a substantial gain of $4 .63 or 30 .9%, closing on August 20, 2004 at $19 .58,

on heavy volume of 19.4 million shares.

108. On September 15, 2004, before the close of the markets, defendants issued a press

release entitled, "CYBERONICS REITERATES NO INTEREST IN ANY MERGER OR

COMBINATION WITH ADVANCED NEUROMODULATION SYSTEMS - Conference call at

4:30 PM EDT today, September I5 ." The press release stated in part :

HOUSTON, Texas, September 15, 2004 -- Cyberonics, Inc .(NASDAQ.CYBX) today announced that its Board of Directors, after consultingwith its financial advisor, Merrill Lynch & Co ., has unanimously rejected AdvancedNeuromodulation Systems Inc .'s (NASDAQ:ANSI) invitation to "meet to discuss abusiness combination." The Company reconfirms its previously stated position in itspress release dated August 20, 2004, that it is not interested in any combination ormerger and remains focused on strengthening its epilepsy business and gaininclarity and c stain. y in a revised depression regulatory plan and timeline .

Regarding the abilities of ANSI to reverse "inexplicable" decisk ns, see defendants' conferencecall remarks of August 12, 2004, at 98 . Notably, : \ SI did not receive any yarning letters inconnection with its IPG program .

66

CONFERENCE CALL ACCESS INFORMATIO N

A conference call to discuss this press release will be held at 4:30 PM EDTtoday. Wednesday, September 15, 2004 . To listen to the conference call live bytelephone dial 877-451-8943 (if dialing from within the U .S.) or 706-679-3062 (ifdialing from outside the U .S.). The conference ID is 210644 ; the leader is PamWestbrook .

1109 . Following the press release, defendants conducted a conference call . Defendants

stated in part :

Skip Cummins - Cyberonics, Inc. - Chairman, President, CEO, Director

Thanks, Pam. Yes, indeed, I am in a remote location again. It happens to bethe same location -- actually, the same hotel room where I was when we last spoke,and that happens to be in Washington , D. C. The first topic I will discuss is ourprogress in gaining clarity and certainty on our US depression regulatory process,and that's what brings me to Washington .

We are now about five weeks out from the very surprising, out-of-the-blueFDA not-approvable letter for our expedited review depression PMA supplement .And in those five weeks, we have had numerous meetings, conversations andcommunications, in writing and verbally, with senior management of CDRH,including Dr. Dan Shultz, who is the Director, and Dr . Donna Bea Tillman, who isthe Acting Director of the Office of Device Evaluation . One of those meetings didoccur today . What was discussed at that meeting was the Treatment IDE submission,and also we discussed the additional information that might be available for us tosubmit to FDA from the existing studies to address the effectiveness concernsexpressed by FDA in their not-approvable letter.

So that's the update on FDA. Obviously, we are making very good progresstowards gaining clarity and certainty on the revised depression regulatory timeline

and, probably most importantly, we're making very good progress towards theaccomplishment of our mission to improve the lives of people touched by

treatment-resistant depression, who today desperately need an informatively

labeled, FDA-approved, safe and effective long-term treatment for their lifelongand life-threatening illness.

Okay, let's move onto the second subject I'll cover before we take questions,and that is that, as you also saw in the other release we issued today, as following ourreceipt of a letter from ANSI, is that we are formally reiterating the fact that we haveno interest in any merger or combination . And, as we announced in the pressrelease, our Board ofDirectors, afterconsulting with our financialadvisor, MerrillLynch Company, has unanimously rejected Advanced Veuromodulation, Inc.'snot offer but invitation to "meet to discuss a big business combination . "Again, itwas not an offer; it was an invitation to meet to discuss a business combination .

67

Cyberonics reconfirms its previously-stated position in its press release datedAugust 20. -1004 that we are not interested in any combination or inc .rgC , and that weremain totally focused on strengthening our epilepsy business and our number-onepriority, and that is gaining clarity and certainty in a revised depression regulatoryplan and timeline .

I'll also note for you all that, clearly, we continue to make good progress onboth those fronts . So that's all I really have today, in terms of a formal presentation .Operator, we will now be available to take a few questions .

Brian Wong - First Albany - Analys t

My question actually is on the other end -- the ANSI merger. Is there anysituation that you could view a merger as a possibility with ANSI or any othercompany?

Skip Cummins - Cyberonics, Inc . - Chairman, President, CEO, Director

Well, it would be inappropriate for me to speculate on that . Obviously, ourBoard of Directors met and gave due consideration to the invitation to meet todiscuss a business combination that ANSI proposed, and so we have respondedappropriately to that, consistent with the Board's fiduciary duty- Speculating on whatmight happen in the future would be just that, speculation ; and I would really hesitateto do that .

S .T. Televergada Analys t

Its S .T . Televergada (ph) for Sam Sabot . Has your other major

shareholder, Boston Scientific, provided any feedback with respect to today's

announcement ?

Skip Cummins - Cyberonics, Inc. - Chairman, President, CEO, Directo r

Well, we communicated with Boston Scientific like we do with any of our

other shareholders. And it would be inappropriate for us to comment on that unless,

of course, they had done something definitive on their own, and obviously they,haven't .

S.T. Televergada Analys t

And also, is the Board's rejection to talk or entertain the idea of a meetingbased on sort of an outright lack of interest, given the FDA informal appealprocess underway, yr is it also based on any valuation analysis that yourlnancialadvisors did after being approached with this $22 proposed offer?

Skip Cummins - Cyberonics, Inc. - Chairman, President, CEO, Director

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Well, it's purely a reaction by our Board after due consideration withconsultation with Merrill Lynch, who has been our financial advisor not immediatelybut for several weeks now, after they considered exactly what was proposed, whichwas not a proposed merger at $22 a share but an invitation to "meet to discuss abusiness combination." The Board has unanimously determined we have no interestin such a meeting at this point in time .

Jim Sienkevicz Shareholde r

I'm wondering if you can shed a little bit more clarity as to why exactly yourefuse to discuss any possible transaction with Advanced Neuromodulation Systems .Surely, as a shareholder, I would think that there must be some price at which itwould be in Cyberonics shareholders' best interest to sell the Company .

Skip Cummins - Cyberonics, Inc . - Chairman, President, CEO, Directo r

Well, that, of course, is for our Board of Directors to determine, looking attheir fiduciary duty, which they take very seriously . But there's an old saying -- youcan't negotiate with yourself . And all we can do, our Board can do, is react when weget proposals .

Jim Sienkevicz Shareholder

Okay. But you yourself stressed earlier that this is not an offer ; it's justsimply are invitation to discuss a potential transaction . And I would think it would bein the best interests of Cyberonics shareholders, and the Board of Directors would beexercising its fiduciary duty best to engage in some kind of constructiveconversations with Advanced Neuromodulation Systems .

Skip Cummins - Cyberonics, Inc . - Chairman , President, CEO , Director

Well, four years ago, Medtronic offered $26 a share -- made an unsolicitedoffer of $26 a share, when our revenues were one-third what they are today and thedepression approval was about four years away . So, fundamentally, much haschanged at Cyberonics since then . We have become a 110 million annualneuromodulation market leader, annual sales neuromodulation market leader . Ourepilepsy business is profitable . We have internally funded all the development ofdepression, and then the other indications that we have in our pilot studies andparticularly, at this point, where clarity and certainty in the depression regulatorytimeline are probably within, worst-case, four to six months away, it would beinappropriate for me to speculate other than to say, obviously, much is going tohappen to Cyberonics and its shareholder value over the next four to six months .

Jim Sienkevicz Shareholder

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I think I definitely agree with you that the Company is in a better positionnow than it was four years ago, but that's not quite reflected in the Company's currentstock price . And so I would think, given that reality, it would behoove the Board totry to look for a way to improve shareholder value .

Skip Cummins - Cyberonics, Inc. - Chairman, President, CEO, Directo r

Well, our Board considered it and made their unanimous decision .

Aba Kanitkar Analyst

So, Skip, just two points that I'm contemplating here -- one, I believe BostonScientific accumulated their stock at around a $22 cost basis, their initial position inCyberonics . And, two, as you alluded to, Medtronics put their bid on the table fouryears ago at $26, and that was with much less depression data, and epilepsy was amuch smaller business back then .

Clearly, these are all -- Boston Scientific and ANSI are aware of the historyhere, what has transpired and how much progress has occurred. If there are motivatedacquirers out there, and they are intelligent enough to have studied up the history ofthis Company and the value of this franchise, then maybe it's only about price . And ifit is only about price, and they do substantially raise their bids to somethingreflecting closer to a fair value for the business, then would the position of yourselfand the Board be affected?

Skip Cummins - Cyberonics, Inc. - Chairman, President, CEO, Directo r

Well, again, it would be irresponsible for me to speculate on that . But I cansay that the Board, obviously, in their unanimous rejection today of ANSI's invitationto meet and discuss a business combination was with the careful consultation of ourfinancial advisor . And in essence, as you can see in that press release, our Boardbelieves the best way to maximize near-term and long-term shareholder value is tostay focused on improving our epilepsy business, and in gaining clarity and certaintyin the revised depression regulatory plan and timeline, in both of which we haveobviously made significant progress over the last several months .

The only sort of last comment that I would like to make about ANSI'sinvitation to meet to discuss a business combination -- it's interesting to note, and it'sjust a statement of fact, so I will let you all draw your own conclusions, but this is asituation where ANSI went successfully through the same process that we are nowgoing through approximately three years ago . It took them six months from start tofinish to go from a not-approvable decision to full approval of their product. Thatapproval was based not on comprehensive data and analyses from one year of 460patients with multiple controls, but based on the only literature controls forcompetitors' products . So, clearly, ANSI is in a unique position to evaluate ourprospects for success in our informal appeal process at FDA .

70

And secondly, I also just think it's interesting to note from a fact perspectivethat ANSI announced a share buyback pro a- of their own shares in June, andapparently, by buying our shares instead , they have determined that Cyberonics isbetter value than their stock.

Lavina Telectar Analyst

And then the final question is on the Board's decision to reject ANSI'sinvitation. I'm trying to figure out financially, with Merrill Lynch involved, whatthey are basing -- since it's just, as you said, the $22 isn't an outright offer . However,it's an invitation to kind of talk . So what is Merrill Lynch basing this -- advising theBoard of saying no? If its not an offer at 22, how are they figuring out if it makesfinancial sense or not, in other words ?

Skip Cummins - Cyberonics, Inc . - Chairman, President, CEO, Director

Well, Merrill Lynch, at the time they were hired, obviously did an analysis ofCyheronics' business prospects, its value and what it needs to do to enhances areholder value . And that's exactly what we're doing, and that input was, of course,all provided to the Board not only initially, when we did higher Merrill Lynch,which, as I say, was not in the last week, it was longer ago than that . And the Boardtook that into account and just unanimously declined the invitation to meet anddiscuss a business combination .

Lavina Telectar Analys t

But it's not based on any price in particular?

Skip Cummins - Cyberonics, Inc. - Chairman, President, CEO, Director

Well, I won't comment any more than what's in the press release, and youcan draw your own conclusions, rom that.

David Kim Analyst

If during this "informal process" the FDA reviews this new analysis you areproviding and determines that the evidence is still inadequate, do you still go througha "formal appeal process" with the PMA amendment`' Or at that point in time, do youinitiate a new randomized control trial ?

Skip Cummins - Cyberonics, Inc. - Chairman, President, CEO, Directo r

veil, basically we have the informal appeal pros-e` . which would lead to thesubmission of the PMA amendment . Once that goes in, now we are really not in. aninformal appeal . But that will basically be sort of it, in terms of additionalinformation that we have to submit . Now, if that's not good enough, then we go int o

71.

the formal appeal . We have formal appeal options which would include a disputerevenue resolution panel, an evidentiary hearing, et cetera, et cetera . So those wouldbe in addition to, if we have already exhausted this last of the additional informationoptions .

We anticipate that by the end of this calendar year, we will know whether ornot we have exhausted the additional information informal appeal and formal appealoptions, and at that point we are left ith nothing but the last resort, which would bea new pivotal trial .

David Kim Analyst

So the year-end timeframe also includes a so-called formal appeal process ?

Skip Cummins - Cyberonics, Inc. - Chairman, President, CEO, Director

Correct, although, depending how long the review time would take for aPMA amendment, it may be extended. But obviously, we will let you know at thetime .

Lavina Telectar Analyst

The additional information, the two-year data -- does that data specificallyanswer all the questions that were raised in the not-approvable letter ?

Skip Cummins - Cyberonics, Inc. - Chairman, President, CEO, Director

That, of course, is a matter of opinion. But if the opinion of the pre-eminentpsychiatric thought leaders that were involved in these studies, who were consideredthe worldwide experts in TRD and ECT, the answer to that question would be yes .And their opinion is what was already submitted addressed those potential andtheoretical concerns . So anything in addition to that, their answer would be yes, itdoes .

Lavina Telectar Analyst

And the FDA is only basing their decision on what was originallysubmitted, which lacks this two-year data ?

Skip Cummins - Cyberonics, Inc . - Chairman, President, CEO, Director

That's correct.

11.0. The press release of September 15, 2004 provided for the repetition of false and

misleading statements already made on August 20, 2004, affording defendants yet anothe r

72

opportunity to artificially inflate the value of the stock . Only this time, defendants knew and

continued to conceal all knowledge of their FDA inspection, including the fact that, on September

15, 2004, FDA closed out its inspection. In closing out its inspection, FDA inspectors presented the

Company with Form 483, listing numerous objectionable observations .38 Nevertheless, investors

remained in the dark about these events .

111 . Defendants' statements in their conference call of September 15, 2004, were false an d

misleading for the following reasons. First, the repeated denials of defendant Cummins regarding th e

$22 per share price ANSI had established was false . Although many of the analysts on the call

seemed to know that, to unsuspecting investors, the abrupt announcement and apparently deliberat e

lie appeared reasonably calculated to cause ANSI to increase its merger bid of $22 per share .

112. Moreover, defendant Cummins continued to lie about the steps the Company woul d

need to take in order to get out from under the non-approvable letter . Now that the FDA inspectio n

was complete and that there were an incredible number of objectionable observations, significan t

resources would have to be expended, against an uncertain regulatory timetable . Even as analysts

queried Cummins about that very same regulatory timetable, he continued to stare at the elephant i n

the corner and to mislead the investment community .

113 . Finally, on August 27, 2004, researchers involved with the Cyberonics clinical studies

included to the PMA-S had already submitted to the journal "Neuopsychobiology" a study o f

cerebral blood flow ("CBF') during vagus nerve stimulation in depressed patients .39 The study

`i8 For a good example of an FDA Form 483 documenting objectionable conditions noted during anFDA inspection of a medicaldevice facility, see the FDA Form 483 issued on September 1, 2W5 toR. Fr:'c 'r ;(* ' 1cCoy, Prc~,hlont (CRM), Guida .t Corp ., posted by the Office of Regulatory Affairs,at htt :HHN ,vw .fda.gov/or 'frectient/483. /212 215 uidantlguidant tFDA483 cfml .html . lastaccessed on November 1 6 , 2005 .

39 See Neu, P. "Cerbebral Blood Flow during Vagus Nerve Stimulation - a Trancranial DopplerStudy", Neuropsychobiology 2005 ;51 :265-268 . The authors claimed the superiority of ITCD over

73

sought to prove a mechanism of action through the measurement of changes in CBF . Even as

defendant Cummins continued to tell investors that the Company was "making very good progress "

to get an "informatively labeled, FDA-approved, safe and effective long-term treatment" approved ,

this important study stated in a single sentence the follow ing alarming conclusion :

Acute VNS does not have an influence on CBF velocity in depressedpatients.

114. In view of defendants' positive conference call statements regarding "good progress "

with FDA for salvaging the PMA-S application, investors responded positively to the Company' s

tactics, causing the price of the stock to post another substantial increase . On the news of September

15, 2004, the price of the Company's stock rose just above the proposed merger price, to gain

$4 .32, or 22.8%, closing on September 1 5 , 2004 at $23 .23, on volume of over 12 million shares.

115 . On September 16, 2004, defendant Totah, Vice President of Regulatory Affairs fo r

Cyberonics, sold 2,000 shares of Cyberonics stock, for proceeds of $25,5 IS .

116 . During its press release and conference call of September 15, 2004, defendants

continued to conceal the fact that FDA inspectors observed numerous violations, includin g

inadequate investigation of the reasons for thousands of device reimplants, numerous medica l

"adverse events" and unaddressed injury, death and malfunction reports arising from "unapproved

other neuroimagiiig techniques, including contradictory results involving the V NS, obtained usingsingle photon emission computed tomo raphy-, stating in part :

In contrast to this, neuroimaging techniques do not allow for continuous studyof changes in cerebral blood perfusion, In these methods, the duration of thenecessary scanning procedures normally ranges from several seconds to minutes . ByITCD, however, every CBF change after various stimuli can be registered. Wetherefore investigated CBF by ITCD in subjects with an implanted vacs nervestimulator.

74

use" of the device. 41 Although the Company talked about the pursuit of an appeals process to

reverse FDA's "inexplicable" decision, its representatives knew or were in conscious and reckles s

disregard of the fact that the first step wa s to deal in good faith with FDA inspectors regardin g

regulatory noncompliance issues. Worse, the Company's strategy was to adopt a recalcitrant

position towards corrective actions in its successive negotiations with the agency,4 ,having a direct,

negative impact on the prospects and timing of approval of the Company's PMA-S .

117 . Nevertheless, investors fully expected that Cyberonics would do its best to full y

investigate and dicker over any possibility to sell the Company. Defendant Cummins himsel f

continued to own 1 ,087,928 or 4.4% of all outstanding Cyberonics stock and enjoyed lucrative

";change in control" terms pursuant to his 2003 employment contract, as did the other defendants .

However, any merger bid would have required full disclosure of the attendant risks. Unbeknownst

to investors, these risk disclosure would have addressed the following :

(a) in connection with the Cyberonics PMA-S application, prior to FDA issuance

of its "not-approvable" letter on August 12, 2004, and contrary to a previous Cyberonics disclosure ,

an FDA inspection was the Company's facilities, systems and records was commenced ;

(b) that on September 15, 2004, the date of the close of the Company's two

month long FDA inspection, Cyberonics was issued FDA Form 483, documenting at least the

40 Neither FDA nor the Company can prevent off label use of medical devices . However, whilemany of the Company's "unaddressed" complaints of injuries and deaths arising from "unapproveduses" of the VNS System were the result of unapproved pediatric use, it is logical to infer that theCompany's failure to respond to others served to conceal depression-related use and serious safely-related concerns from FDA and may have been a contributing factor in the agency's non-approvable decision. See 124.

41 The Company failed to comply with FDA demands for resolution of its numerous violations onSeptember 17, 2004, October 7, 2004 and again on December 8, 2004, forcing the issuance of a"Warning Letter." See 1 124 .

75

inspectional observations discussed in the Company's FDA "Warning Letter" of December 22 ,

2004:

(c) that objectionable conditions noted by FDA inspectors during the Cyberonic s

inspection raised serious questions regarding regulatory compliance in a number of areas of the

Company, including manufacturing operations and clinical development, cutting across all of it s

commercial and product development programs ; and

(d) that "clarity and certainty" regarding the Company's operations in light of it s

regulatory noncompliance issues, including prospects for the approvability of the PMA-S would take

substantial resources and as long as "120-180 days or more" to achieve .

THE TRUTH IS REVEALED

118. The truth - though still incomplete -- of these complex matters was finally reveale d

on October 1, 2004, in a press release issued by ANSI, to formally withdraw its bid for a busines s

combination. In making the disclosure, Chris Chavez, President and Chief Executive Officer of

ANSI, explained the reasoning behind the withdrawal of ANSI's $22 per share bid for Cyberonics ,

citing a "lack of clarity and certainty " regarding the Company 's PMA-S application .42 The press

release stated in part :

ANS announced today that it has withdrawn its proposal to discuss acombination with Cyberonics, inc . in which ANS was prepared to offer $22.00 pershare for the Cyberonics stock that it does not already own . ANS acquired 3 .5million shares, or approximately 14.7%, of Cyberonics outstanding stock in mid-August .

"We are disappointed that the Cyberonics Board of Directors has chosen toreject our invitation to discuss a business combination . For the many reasons we

Sc : "Advanced Neuromodulation S , ; erns Withdraws $22.00 Per Share Cyberonics Proposal," athtt :/Iwww.ans-medical .corn/investors/ui ,-- wsandeve its/view° ressrelease,cfin`?object d 54E 1 . 7B-

031-A 133-99F] 955 754E2 , last accessed on November 16, 2005.

76

carefully outlined in our September 14 letter , we continue to think that the businesscase for a combination is compelling," said Chris Chavez, President and ChiefExecutive Officer of ANS .

"Since we made our proposal, however, Cyberonics has publicly stated that itintends to 'gain clarity and certainty in a revised depression regulatory plan andtimetable,' and has taken steps to try to persuade the FDA to reverse its decision inits 'non-approvable letter' by submitting additional data through a PMA-SAmendment. Cyberonics has said that it could take 120-180 days or more to obtainan FDA decision on the Amendment . Given the amount of time that could transpirebefore Cyberonics attains the clarity and certainty it seeks, its Board's decision not todiscuss a combination, and our judgment that it does not make good business senseto try to force the issue, we have decided to withdraw our proposal at this time," saidMr. Chavez .

Mr. Chavez concluded, "ANS has multiple opportunities for sustained growthindependent of a merger with Cyberonics . At this time, we will manage ourinvestment in Cyberonics as a shareholder, and we genuinely wish Cyberonics thebest as it works toward fulfilling its mission . "

119. On this news, the stock fell once more, losing 7.9% of its value, to $18.85, for a loss

of $1.61, on volume of 3 .6 million shares .

120. The almost 40 .0% decline in Cyberonics stock on August 1 .2, 2004, and the 7.9%

decline in Cyberonics' stock price on October 1, 2004, at the end of the Class Period were the direct

result of the unraveling of the nature and extent of defendants' fraud finally being revealed to

investors and the market . The timing and magnitude of Cyberonics stock price decline negate any

inference that the loss suffered by plaintiff and other Class members was caused by changed market

conditions, macroeconomic or industry factors or Company-specific facts unrelated to the

defendants' fraudulent conduct .

.121 . On the days in which Cyberonics stock price fell almost 40 .0% and 7 .9% as a resul t

of defendants' fraud being revealed, the Standard & Poor's 500 securities index was flat . The

economic kiss, i .e ., damages, suffered by plaintiff and other members of the Class was a direct result

of defendants' fraudulent scheme to artificially inflate Cyberonics stock price and the subsequen t

77

significant decline in the value of Cyberonics stock when defendants' prior misrepresentations an d

other fraudulent conduct was revealed.

122. During the Class Period, defendants concealed the facts that :

(a) the Company's sponsored research to justify the need and economic value o f

the VNS System as a therapy for TRD was untrue, false and misleading ;

(b) there were serious disagreements with FDA reviewers concerning the safety

and effectiveness of the VNS System as therapy for TRD, resulting from the Company's clinical

study approach and results ;

(c) the Company's clinical data and results suggested limited medica l

effectiveness ;

(d) the Company's clinical study approach and results actually diminished

prospects for reimbursement from medical insurers ;

(e) FDA inspectors would and, in fact, did inspect defendants' facilities ,

manufacturing operations and quality practices in connection with the VNS device ;

(0 the FDA inspection had a material adverse impact on the approvability of the

Company's PMA-S ;

(g) FDA inspectors observed unaddressed serious and alarming patient

complaints from off-label use of the VNS System that were not limited to juvenile use for epilepsy ;

(h) material information over and above that available to investors was provided

to ANSI as a result of its interest in a merger bid ;

(i) the Company lied about its knowledge of the 22 bid to analysts on

September 15, 2004 ;

0) the ANSI decision to terminate termination of the merger bid was made on th e

basis of concealed serious issues facing the Company ; and

78

(k) either out of a duty or in its own self-interest, ANSI could not disclose it s

possession of concealed adverse material information impacting the PNIA-S not known to th e

investment community .

POST-CLASS PERIOD REVELATIONS

123. On January 3, 2005, the Company revealed that it was in receipt of an FDA "Warnin g

Letter," dated December 22, 2004 . This letter provided confirmation of the shocking nature of

defendant's regulatory noncompliance during the Class Period, including issues related to the

approvability of the PIMA-S. The warning letter, including the reasons for the unexpected inspection

and all objectional observations, having a direct impact known to defendants during the Class

Period, on the Company's merger prospects with other medical device companies, including with

ANSI and BSX, stated in part :

Department of Health and Human Services Public Health ServiceFood and Drug Administration

Dallas District4040 North Central ExpresswayDallas, Texas 75204-314 5

December 22, 2004

Ref: 2005-DAL- L-7

WARNING LETTERCERTIFIED MAILRETURNED RECEIPT REQUESTED

Mr. Robert (Skip) P . Cummins, President and CEOCyberonics, Inc.100 Cyberonics Blvd .Houston, Texas 77058 - 201 7

Dear Mr. Cummins :

During an inspection of your firm's manufacturing operations located inHouston, Texas , on July 12 through September 15, 2004, United States Food and

79

Drug Administration (FDA) Investigator , Ellen J . Tave, determined that your firmmanufactures the Vagus Nerve Stimulator (YNS), an implanted generator that isindicated for use as an adjunctive therapy in reducing the frequency of seizures inadults and adolescents over 12 years of age with medically intractable partialseizures . The VNS system includes a pulse generator, programming wand,programming software . electrode leads, tunneling tool, and accessory pack . Thisproduct is a device as defined in Section 201(h) of the Federal Food, Drug, andCosmetic Act (the Act) .

The above-stated inspection revealed that these devices are adulterated withinthe meaning of Section 501(h) of the Act, in that the methods used in, or the facilitiesor controls used for their manufacturing, packing, storage, or installation are not inconformance with the Current Good Manufacturing Practice (CGMP) requirementsof the Quality System (QS) Regulation for medical devices, as specified in Title 21,Code of Federal Regulation (CFR) . Part 820.

Quality System Regulation

At the close of the inspection , your firm was issued a list of inspectionalobservations, Form FDA-483 (copy enclosed), which identified a number ofsignificant QS regulation violations including, but not limited to, the following :

1. Failure to completely investigate and evaluate the cause of each medicaladverse event as required by 21 CFR 803 .50(b)(2) and failure to maintain completedeliberation results as required by 21 CFR 803.18(b)(1)(i) [FDA -483, Item 1]. Forexample, your firm has not provided adequate documentation of deliberations tosupport your firm's decision making process for explaining why your firm could notreach a conclusion about the cause of (a) device migration reported in complaint file# 200306-0477 (reference MDR report # 2003-00402) ; and (b) high lead impedance,device migration, increase in seizures, and subsequent patient death reported incomplaint file # 200312-0567 (reference MDR report # 2004-00030) .

2. Failure to establish and maintain adequate procedures for validating thedevice design to ensure that the device conforms to user needs and intended uses andinclude design testing under actual or simulated use conditions as required by 21CFR 820.30(g) [FDA 483, item 2] . Evidence of your firm's design validation withregard to Model 102 is inadequate . For example :

a) Evidence of design validation lacked supporting documentation todemonstrate how your simulated testing of the generator and the lead connecting to a[redacted] load actually simulated use conditions . For example, in an [redacted(chamber [redacted] maintained at [redactedi evidence was not provided whichdemonstrated the equivalence to the a,,°i ual implanted generator and electrodeconnectin . ,La : h ' vagus nerve which r L1 i "d _ in a fluidal or wet condition ire the T i r ,cavity (actual implant environment); and

b) There was a lack of supporting documentation explaining why real timetesting is not needed to verify the actual device longevity and a lack of evidenc e

80

confirming the accuracy of your theoretical device life expectancy across patientprogramming ranges at the end of service voltage (actual use condition) .

c) The design validation does not appear to address the impact of possibleincrease in lead impedance of the electrode and vacs nerve interface during thecourse of patient therapy on battery life . Therefore, the accuracy of your theoreticalestimate of device longevity is called into question ; and

d) The theoretical calculation of battery hours of operation does not appear toinclude or discuss the effect of the total number of patient magnet wipes (activations)on actual device longevity at nominal conditions in clinical settings (actual usecondition) ; and

e) The design validation does not discuss or reference testing results of theERI (Elective Replacement Indicator) flag under the various fault diagnosticsconditions listed in the Physician's Manual (Section High Lead Impedance on aDiagnostic Test at Follow-up Visit) .

3 . Failure to investigate the cause of nonconformities relating to product,processes, and the quality system as required by 21 CFR 820 . 1 00(a)(2) [FDA-483,Items 3, 9, and 101 . For example :

a) Complaints of suspected end of service (EOS) were not considered as aproduct complaint, and there were no attempts to collect patient's programming data'to evaluate if the devices reached normal/expected EOS; and

b) Your firm has not documented the death data by age categories to supportdata analysis required in CAPA Investigation Report INV 01-0006, dated January 8,2002 and February 19, 2003. Your firm then concluded that there was norelationship seen in seizure changes among the 81 patients but reported that thepatients responses to the VNS therapy were unknown or there was no informationfor 28 of 81 patients. Your firm also had not collected programming history data toassess the relationship of the amount ofstimulation therapy at the time of death:and

c) CAPA investigation to verify a physician's observations that the devices

delivered less current therapy than what were programmed during the last 6 to 12months of device life had incomplete explanation of the results of Phase II and IIItesting; and

d) Product analysis (PA) of explanted generators did not show testing of thedevices using the patients programming history to confirm or duplicate the patientcomplaints or non-complaints . For example, PA #5243, 4935, and 5600 ; and

e) Incident # 200310-1077 reported that a pediatric patient was implanted onDecember 18, 2002 and explanted on October 8, 2003 due to suspected end ofservice (EOS). The generator was implanted for almost 1l0 months . Your firm has notexplained why the implanted generator did not set the ER! flag as it was approachingEOS. The user reported that the ERI flag did not set in spite of a high lead impedancereading. Your firm did not conduct duplicate testing of the explanted generator using

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the user's actual programming parameters to confirm the user's complaint of EOS .Your firm's product analysts documented that the explained generator met its

electrical specifications but did not explain (a) how your firm's electrical testingresults are related to the user's complaint, and (b) your firm's evaluation of the user

report of normal diagnostics test results of high lead impedance in your product

analysis report .

4. Failure to analyze processes, work operations, and other sources of qualitydata to identify existing and potential causes of non-conforming product as requiredby 21 CFR 820 .10O(a)(1) [FDA-483 . Item 4, 6, and 111 . For example :

a) Your firm has not documented, analyzed, and evaluated the reasons forboth implants/reimplants and product returns to identify existing and potential causesof non-conforming product . Your firm does not know or explain how manyreimplants were due to broken leads, suspected end ofservice (EOS), actual EOS,and high lead impedance; and

b) User reports (non-complaints) of suspected EOS and confirmed EOS, andcollected data on adverse events of asystole and bradycardia were omitted from[redacted] CAPA meetings; and

c) Your firm has not analyzed complaints of high lead impedance, leaddiscontinuity, confirmed EOS, and suspected EOS to identify how many complaintswere confirmed with an ERI (Elective Replacement Indicator) flag being set ; and

d) Your firm has not described the possible meaning of complaintconclusion code 40 in order to explain how complaints or adverse events wereresolved with this conclusion code . It was found that conclusion code 40 was oftenused when the adverse events were resolved by device explants and reimplants.Review ofcomplaint data queried by conclusion code 40 showed that your lrm hadclassified 1081 complaints and 524 MDR reports using this code; and

e) Your firm has neither collected nor analyzed patient programming historysince 1997 in order to provide a theoretical estimate of actual device longevity overthe entire implant population .

5 . Failure to implement and record changes in methods and proceduresneeded to prevent and correct identified quality problems as required by 21 CFR620.1 00(a)(5) .FDA-483, item 61 . For example, although your firm has listed severalpotential causes of high lead impedance, your firm has not implemented thenecessary solutions and verified their effectiveness in order to address numerouscomplaints of high lead impedance . A complaint log entitled "Lead Discontinuity,Suspected Lead Discontinuity, or High Lead Impedance Incoming Complaints withConclusions" for the period of January 1, 2002 through May 311, 2004 documentedthat 89 complaints were identified as a "design- issue .

6. Failure to establish and maintain procedures for implementing correctiveand preventive action as required by 21 CFR 820 . 1 00(a) [FDA-483 Items 7 and 1 .11 .For example, your firm (a) has not documented, analyzed , and evaluated the

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reasons for thousands of reimplants since 1997; (b) has not analyzed patientprogramming history data over the entire imp lant population; and (c) does notknow how many reimpiants were due to broken leads, suspected EOS, confirmedEOS, and high lead impedance, in order to validate input data used to calculate yourfirm's cumulative survival probability for the implanted generators . In addition, yourfirm has not explained how your device's survival probability curve matches theactual device longevity in clinical settings .

7 . Failure to establish and maintain procedures for receiving . reviewing, andevaluating complaints by a formally designated unit as required by 21 CFR820.198(a). For example, your firm has not defined how your firm differentiates usercomplaints of suspected EOS from complaints of confirmed EOS, or high leadimpedance .

Cyberonics' Response

We acknowledge receiving your letters with attachments, dated September17, October 7, and December 8, 2004, responding to the Form FDA-483,Inspectional Observations, issued try your, firm at the conclusion of our inspectionon September 15, 2004. We have completed our review and determined that yourresponse is incomplete . Your December 8th response was incomplete and did notprovide any supporting information or evidence relating to the longevity verification .Your responses have not satisfactorily addressed the underlying issues . For example :

I Your response did not clearly explain whether or not your firm considersuser reports of suspected end of service (EOS) as a product complaint to be treated inaccordance with 21 CFR 820.I98(a) . Your firm has not been able to determine thecauses associated with many user reports of suspected EOS or high lead impedanceor that your firm has not determined and documented how many reimplants were dueto normal/actual EOS, suspected EOS . or high lead impedance. See your firm'sinvestigation reports INV 02-0014, 02-0024, and 03-0016 . Your firm also has not (a)explained whether your firm will attempt to collect patient programming history toaid your f'irm's investigation of complaints of suspected EOS or high leadimpedance; and (b) established procedures to indicate how your firm differentiatesuser complaints of suspected EOS from user complaints of actual EOS or high leadimpedance to determine if in fact the devices were approaching or at their normal endof service based on the actual patient programming parameters . Your firm'sinvestigation report 02-0014 was initiated in October, 2002 which recommendedcorrective actions to address user reports of high lead impedance . However, thecompletion dates for the proposed corrective actions were still classified "T131)" (Tobe Determined) at the time of the inspection .

2 Your firm has not been able to determine or explain how many reimplantcases were due to hi i lead impedance or other potential quality problems . Althoughyou firm has identified e veral theoretical causes of high lead impedance complaints(user training, lead manufacturing defects, and design robustness), your firm has notcompleted the following proposed corrective actions . The effectiveness of theproposed corrective actions cannot be determined until you provide the results ofyour firm's monitoring of the high lead impedance complaints .

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(a) Corrective Action Plan CAR 03-0003 addressing user training a potentialcause of high lead impedance are in process without establishing an expectedcompletion date; and

(b) Your response reported that Corrective Action Plan CAR 03-0004addresses the handling of the Model 300 and Model 302 leads during manufacturingas a potential cause gh lead impedance was completed on July 16, 2004 duringour inspection- You indicated manufacturing defects related to coil damage was not asignificant cause of high lead impedance events. However, you have not explainedwhat types of lead defects you found, specific steps your firm has taken or will take(a) to reduce incidents of lead manufacturing, defects ; (b) establish complaintinvestigation methods to differentiate user complaints of high lead impedance causedby a lack of user training from user complaints of high lead impedance caused bymanufacturing lead defects ; and

(c) [redacted] design project (DHF 0044) was initiated in [redacted] and is notexpected to be completed until [redacted]

3. Your response implied that FDA's approval of your original PIA orsubsequent PMA supplements means that FDA approves your firm 's designcontrols. This is not true. Yourfirm's design control steps must be continuouslymaintained throughout the device design life cycle to ensure compliance with 21CFR 820.30. Your responsefurther stated that the investigator attempted to inspectthe safety and effectiveness of your devices. We disagree. The investigatorexplained that she did not inspect the safety and effectiveness of your devicesepilepsy indication but rather she questioned the adequacy of your firm 's designvalidation process concerning simulated testing ofactual device implant conditionsand device longevity ,

4. Regarding simulated testing of actual implant environment, as part of yourdevice failure investigation process, some of the explanted generators were actuallytested in a [redacted] solution in order to investigate the complaint issues ofsuspected end of service, high lead impedance, or generators not delivering enoughtherapeutic currents as programmed. See your investigation reports INV 03-0016 and02-0024. These two investigation reports documented that the explanted deviceswere placed in a [redacted) solution to simulate the actual implant environment . Yourfirm failed to explain how this type of testing is appropriately related to the originaldesign validation testing of Model 100 in 1997, 101, and 102 in 2002 .

5. Regarding real time testing to confirm device longevity, your responseexplained that performing the real time testing is inappropriate because it wouldrequire [redacted] to complete, and your mathematical equation for device longevitywas based on "proven laws of math ." First, your response has not explained why ittakes [redacted] to conduct real time testing across all programming parameters .Second, you have not explained if your firm has (a) trended and/or documented theactual implant times of the clinical patients enrolled in the prior EOI - E05 studiesusing Model 100, the patients enrolled in the current Dcpre< ion clinical study, orcurrent non-clinical patients implanted with model 101 and 102, in order to comparetheir projected (theoretical) implant times to their actual implant times . Third, in your

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firm's Table 20 [Nominal Longevity Estimates Begin of Life (BOL) to End ofService (EO )I Iisted in the electrical characterization report, your firm's longevity,equation calculated that the device longevity would last [redacted] at a heavystimulation setting of [redactedi and [redacted ]% duty cycle . Real time testing at thisrapid simulation setting would take about [redacted] not [redacted] to verify theaccuracy of your theoretical device longevity equation .

6. Magnet Activations by Patients, you responded that the occurrence ofmanual magnet activations by patients would not cause any significant reduction ofdevice longevity when compared to normal device stimulation . However, youacknowledged that your firm's extrapolation of energy consumption and rationaleswere not explained and documented in the design validation documents, e .g .,electrical characterization report .

7 . Your firm's current complaint handling procedure requires that a replyletter be sent to the complainant (physician) if your firm's complaint investigationresulted in "user error," and the user has not been notified of the error . The use of theVNS device for pediatric patients younger than 12 years of age is an unapproved use(off-label use), and therefore, adverse events related to this use are considered usererror. See 21 CFR 803 .3(d) . In this situation, your firm did not follow its complainthandling procedures in that your firm had not sent reply letters to the complainants tonotify them of user error concerning medical adverse events occurring in pediatricpatients younger than 12 years of age. Our inspection documented that your firmhad received 197 serious injury reports , 53 death reports, and 99 malfunctionreports that were coded 212 (unapproved use of device) from January 1, 2002through May 14, 2004. Many of these medical adverse events were associated withthe users using the VNS devices in pediatric patients younger than 12 years of age.We believe your f iron should send a reply to each complainant in order to preventfurther misuse, injury or other adverse situations from recurring. When theproblem was caused by misuse, it is very important to advise the user to help preventfurther misuse . If your firm, believes there may be cases where a reply is notnecessary, the record should state that no reply was made and the reason for notreplying. Finally, although not sending a reply letter to the complainant is not adeviation of 21 CFR 820.198(e)(8), when a reply is sent it must be kept as part of thecomplaint file.

In summary of our review, your firm should implement a comprehensive QSaction plan and provide FDA with . status update reports outlining specific stepsaddressing the specific FDA-483 observations and issues identified in this letter anda global approach to correct and prevent any potential systemic problems .

Responding to This Letter

This letter is not intended to be an all-inclusive list of deficiencies at yourfacility. It is your responsibility to ensure adherence to each requirement of the Actand the regulations . The specific violations noted in this letter and in the Form FDA-483 issued at the close of the inspection may be symptomatic of serious underlyingproblems in your firm's manufacturing and quality assurance systems . Federal

85

agencies are advised of the issuance of all Warning Letters about devices so that theymay take this information into account when considering the award of contracts .

You should take prompt action to correct these violations . Failure to promptlycorrect these violations may result in regulatory action being initiated by the Foodand Drug Administration without further notice . These actions include, but are notlimited to, seizure, injunction, and/or civil penalties .

Please notify this office in writing within 15 working days of receipt of thisletter of the specific steps you have taken, or will take to identify and correct thenoted violations, including (1) the time frames within which the corrections will becompleted, (2) any documentation indicating the corrections have been achieved, and(3) an explanation of each step being taken to identify and make corrections to anyunderlying systems problems necessary to ensure that similar violations will notrecur . It is recommended that after responding to this letter that you have a meetingconcurrently with both Dallas District Office and the Center for Devices andRadiological Health in order to facilitate appropriate technical discussionsurrounding this letter and the inspection .

Your reply should be directed to Thao Ta, Compliance Officer, at the addressindicated on the above letterhead.

Sincerely,

/s !

Michael A . Chappel l

Dallas District Director

124 . Following its response to the FDA Warning Letter, 43 on February 2, 2005, th e

Company reported that FDA had determined that the PMA-S was deemed a provable,` 4

4' See defendant's press release of January 21, 2005 entitled "CYBERONICS SUBMITSRESPONSE TO FDA WARNING LETTER REGARDING THE GOOD MANUFACTURINGPRACTICE REQUIREMENTS OF THE QUALITY SYSTEM REGULATION FORMEDICAL DEVICES." 4 httv://www..cyberonies,com/Press Release detail .as ?ID=D I1 9C75-DB60-4DDD- A1_ _'-,' Bf = F$4EC76 , last accessed on November 20, 2005 .44 See defendants' press r :-lease of February 2, 2005, entitled "FDA DEEMS CYBERON 1C ' VNSTHERAPYT M SYSTEM APPROVABLE FOR CHRONIC OR RECURRENT TREATMENT-RESISTANT DEPRESSION (TRD)" athttp://www.cvberonics .coriVPres,,Releas,--d--,-'t, ; L is `?ID=E"7C6113 -4364-437?-9B 6-C B7E33CC 95 , last accessed on Novemb .> 20, 2005 .

86

. .conditional on final labeling, final protocols for a post-approval dosing optimization study and

patient registry, satisfactory compliance with . Quality System Regulations (Q R) and satisfactory

resolution of any outstanding bioresearch monitoring issues ." Then, on July 15, -1005, following

defendant's resolution of issues and clearance in connection with the Warning Letter,35 defendant s

reported that FDA had approved their PMA-S application for TRD.16

125 . In August of 2005, the time had come for "payers" to explain the facts about

depression management in connection with the Company's "treatment option". Having had the

opportunity to review all of the data available to them in connection with the Company's PMA- S

application, the Technical Evaluation Center of Blue Cross Blue Shield Association issued its

assessment,47 pointing to the very issues of effectiveness concealed by defendants from a time prior

to the beginning of the Class Period. The assessment rejected the Company's data and results ,

finding no objective support far concluding any improvement of health outcomes, stating in part :

Vagus Nerve Stimulation for Treatment-Resistant Depressio n

Assessment Program

Volume 20, No . 8

August 2005

Executive Summary

45 See defendants' press release of April 7, 2005, entitled "FDA NOTIFIES CYBERONICS THA TITS WARNING LETTER RESPONSE IS COMPLETE AND ADEQUATE" athttp://www.eyberonics .com/PressRelease detail . asp`IID=AB BCIED2-B9F9- 60-BE2E-71CO AOB97D=I , last accessed on November 20 . 2005.

46 See defendant's press release of July 15, 2005 entitled "FDA APPROVES CYBERONICS ' VNS'HERAPYTM SYSTEM FOR TREATMENT-RESISTANT DEPRESSION (TRD)," at.ttp,// -w°w .evberonics .com/ essRelease detail . sp?lD=F5FBFBC8-1998-46D3-A 34-

53A96i0 53081 , last accessed on November 20, 2005 .

", See httlp:I/w w.bcbs .comn/tec/vul20/20 08 .htm , last accessed on November I8, 2005.

87

Depression is a serious psychiatric condition that sometimes does not respondto standard treatments such as medication and/or psychotherapy . Vagus nervestimulation (VNS) therapy is a type of treatment administered through an implantedpulse generator and bipolar lead that has been studied in patients with treatment-resistant depression, This Assessment will review the available evidence todetermine if VNS therapy is effective for treatment-resistant depression .

Based on the available evidence, the Blue Cross and Blue Shield AssociationMedical Advisory Panel made the following judgments about whether vagal nervestimulation for the indication of treatment-resistant depression meets the Blue Crossand Blue Shield Association Technology Evaluation Center (TEC) criteria .

1 . The technology must have final approval from the appropriategovernmental regulatory bodies .

The NeuroCybernetic Prosthesis System (NCP©, Cyberonics, Inc .) receivedapproval of its Premarket Application (PMA) to market from the C .Q .S. Food and DrugAdministration (FDA) on July 16, 1997, for treatment-refractory seizures . The devicewas approved for use in conjunction with drugs or surgery "as an adjunctivetreatment of adults and adolescents over 12 years of age with medically refractorypartial onset seizures . "

On July 15, 2005, the VNS Therapy System received final PMA approval bythe FDA for "adjunctive long-term treatment of chronic or recurrent depression forpatients 18 years of age or older who are experiencing a major depressive episodeand have not had an adequate response to 4 or more adequate antidepressanttreatments ."

2. The scientific evidence must permit conclusions concerning the effect ofthe technology on health outcomes .

The available evidence is not sufficient to permit conclusions of the effectofVNS therapy on health outcomes. The available evidence consists of a case seriesof 60 patients receiving VNS, a short-term (i .e., 3-month) randomized, sham-controlled clinical trial of 221 patients, and an observational study comparing 205patients on 'DNS therapy compared to 124 patients receiving ongoing treatment fordepression . Patients who responded to sham treatment in the short-term randomized,controlled trial (approximately 10%) were excluded from the long-term observationalstudy .

Patient selection was a concern for all studies . VNS is intended for treatment-refractory depression, but the entry criteria of failure of : drugs and a 6-week trial oftherapy may not be a strict enough definition of treatment resistance . Treatment-refractory depression should be defined by thorough. s' .aac . ; ;f-tt~c-art psychiatricevaluation and management .

The case series data show rates of improvement, as measured by a 50%improvement in depression score of 31% at 10 weeks to greater than 40% at 1 to 2years, but there are some losses to follow-up . Natural history, placebo effects, and

88

patient and provider expectations make it difficult to infer efficacy from case seriesdata .

The randomized study that compared VNS therapy to a sham control(implanted but inactivated VNS) showed a nonstatistically significant result for theprincipal outcome. Fifteen percent of VNS subjects responded, versus 10% of controlsubjects (p --0.31) . There was a statistically significant result for a secondaryoutcome .

An observational study comparing patients participating in the randomizedclinical trial and a separately recruited control group evaluated VIN therapy out to Iyear. This observational study showed a statistically significant difference in the rateof change of depression score. However, issues such as unmeasured differencesbetween patients and nonconcurrent controls, differences in sites of care betweenVNS therapy patients and controls, and differences on concomitant therapy changesraise concern about this observational study . Analyses performed on subsets ofpatients cared for in the same sites, and censoring observations after treatmentchanges, generally showed diminished differences in apparent treatmenteffectiveness of VNS and almost no statistically significant differences . Given theseconcerns about the quality of the observational data, these results do not providestrong evidence for the effectiveness of VNS therapy.

Adverse effects of VNS therapy include voice alteration, headache, neckpain, and cough, which are known from prior experience with VNS therapy forseizures . Regarding specific concerns for depressed patients such as mania,hypomania, suicide, and worsening depression, there does not appear to be a greaterrisk of these events during VNS therapy .

3. The technology must improve the net health outcome ; and

4. The technology must be as beneficial as any established alternatives .

The available evidence does not permit conclusions regarding the effect ofVNS therapy on health outcomes or compared with alternatives.

5 . The improvement must be attainable outside the investigational settings .

It has not et been demonstrated whether VNS them improves healthoutcomes in the investi ational setti n . Therefore, it cannot be demonstratedwhether improvement is attainable outside the investigational settings.

For the above reasons, VNS therapy for the indication of treatment-resistant depression does not meet the TEC criteria .

89

APPLICABILITY OF PRESUMPTION OF RELIANC E

FRAUD-4N-THE-MARKET DOCTRIN E

126. At all relevant times, the market for Cyberonics securities was an efficient market fo r

the following reasons, among others :

(a) Cyberonics's stock met the requirements for listing, and was listed and

actively traded on the NASDAQ, a highly efficient and automated market ;

(b) As a regulated issuer, Cyberonics filed periodic public reports with the SEC ;

and

(c) Cyberonics regularly communicated with public investors via establishe d

market communication mechanisms, including through regular disseminations of press releases o n

the national circuits of major newswire services and through other wide-ranging public disclosures ,

such as communications with the financial press and other similar reporting services .

127 . As a result of the foregoing, the market for Cyber©nics's securities promptly digested

current information regarding Cyberonics from all publicly available sources and reflected suc h

information in Cyberonics's stock price . Under these circumstances, all persons who purchased o r

acquired Cyberonics's securities during the Class Period suffered similar injury through thei r

purchase of the aforementioned securities at artificially inflated prices and a presumption of reliance

applies .

NO SAFE HARBOR

128. The statutory safe harbor provided for forward-looking statements under certai n

circumstances does not apply to any of the allegedly false statements pleaded in this complaint .

Many of the specific statements pleaded herein were not identified as "forward-looking statements"

when made . To the extent there were any forward-looking statements, there were no meaningfu l

cautionary statements identifying important factors that could cause actual results to differ materiall y

from those in the purportedly forward-looking statements . Alternatively, to the extent that the

90

statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants ar e

liable for those false forward-looking statements because at the time each of those forward-lookin g

statements was made, the particular speaker knew that the particular forward-looking statement wa s

false, and/or the forward-looking statement was authorized and/or approved by an executive office r

of Cyberonics who knew that those statements were false when made .

CLASS ACTION ALLEGATIONS

129. Plaintiffs bring this action as a class action under Federal Rule of Civil Procedure 23 ,

on behalf of all persons who purchased or acquired the securities of Cyberonics between June 15 ,

2004 and October 1, 2004 (the "Class Period") . Excluded from the Class are defendants, any entit y

in which a defendant has or had a controlling interest, and members of defendants' families .

130. The members of the Class are so numerous that joinder of all members i s

impracticable . The disposition of their claims in a class action will provide substantial benefits t o

the parties and the Court. During the Class Period, Cyheronics had more than 25 million shares o f

stock outstanding, owned by thousands of persons . Record owners and other class members maybe

identified from records maintained by Cyberonics and/or its transfer agents and may be notified o f

the pendency of the action by mail, using a form customarily used in securities class actions .

131 . There is a well-defined community of interest in the questions of law and fac t

involved in this case. There are no conflicts between plaintiffs and the Class, and plaintiffs' claim s

are typical of those of other Class members . The questions of law and fact common to the members

of the Class which predominate over questions which may affect individual Class members includ e

the follow ing :

(a) Whether §* i0(b) and 20(a) of the Exchange Act were violated by Cy°heronic s

and the Individual Defendants .

(b) Whether defendants misrepresented material facts ;

91

(c) Whether defendants' statements omitted material facts necessary to make th e

statements made, in light of the circumstances under which they were made, not misleading ;

(d) Whether the defendants knew or should have known that their statements wer e

false and misleading;

(e) Whether the prices of Cyberonics securities were artificially inflated during

the Class Period ; and

(f) The extent of damage sustained by Class members and the appropriate

measure of damages .

132 . A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all class members is impracticable . Furthermore,

the damages suffered by individual Class members may be relatively small, and the expense an d

burden of litigation make it impossible for members of the Class to individually redress the wrong s

done to them . There will be no difficulty in the management of this action as a class action .

Plaintiffs will fairly and adequately protect the interests of the Class and have retained counse l

competent and experienced in class and securities litigation .

COUNT 1For Violation of §10(b) of the Exchange Act an d

Rule lOb-S Against Cyberonics and the Individual Defendant s

133 . Plaintiffs incorporate III -133 by reference .

134. During the Class Period, defendants disseminated or approved the false statement s

peci ied above, which they knew or recklessly disregarded were materially false and misleading i n

that they contained material misrepresentations and failed to disclose material facts necessary i n

order to make the statements made, in light of the circumstances under which they were made, no t

misleading .

92

135, Defendants violated §10(b) of the Exchange Act and Rule 10b-5 in that they :

(a) Employed devices, schemes, and artifices to defraud ;

(b) Made untrue statements of material facts or omitted to state material fact s

necessary in order to make statements made, in light of the circumstances under which they were

made, not misleading ; or

(c) Engaged in acts, practices, and a course of business that operated as a fraud o r

deceit upon plaintiffs and others similarly situated in connection with their purchases or acquisition s

of Cyberonics securities during the Class Period .

136. Plaintiffs and the Class have suffered damages in that, in reliance on the integrity o f

the market, they paid artificially inflated prices for Cyberonics securities during the Class Period .

Plaintiffs and the Class would not have purchased, acquired or exchanged Cyberonics securities a t

the prices they paid, or at all, if they had been aware that the market prices had been artificially an d

falsely inflated by defendants' misleading statements .

137. As a direct and proximate result of defendants' wrongful conduct, plaintiffs and th e

other members of the Class suffered damages in connection with their purchases and acquisitions o f

Cyberonics securities during the Class Period .

COUNT I IFor Violation of §20(a) of the Exchange Act

Against Cyberonics and the Individual Defendants

138 . Plaintiffs incorporate TI-138 by reference.

139. The Individual Defendants prepared . or were responsible for preparing, the

Company's press releases and SEC filings . By reason of their positions as directors and/or officer s

of Cyberonics they had the power and authority to cause Cyberonics to engage in the wrongfu l

conduct complained of herein. Cyberonics controlled each of the Individual Defendants and all o f

93

its employees . By reason of such wrongful conduct, the Individual Defendants and Cyberonics ar e

liable pursuant to §20(a) of the Exchange Act .

PRAYER FOR RELIEF

140. WHEREFORE, plaintiffs on behalf of themselves and the Class, pray for

judgment as follows :

A. Declaring this action to be a class action properly maintained pursuant to Rul e

23 of the Federal Rules of Civil Procedure ;

B. Awarding plaintiffs and other members of the Class compensatory damages ;

C. Awarding plaintiffs and members of the Class pre-judgment and post-

judgment interest, as well as reasonable attorneys' fees, expert witness fees, and other costs an d

disbursements ;

D. Awarding extraordinary, equitable and/or injunctive relief as permitted by

law, equity and the federal statutory provisions sued hereunder, pursuant to Rules 64 and 65 and an y

appropriate state law remedies to assure that the Class has an effective remedy; and

E. Awarding plaintiffs and other members of the Class such other relief as thi s

Court may deem just and proper under the circumstances .

EMERSON POYNTER LLPDATED: November 30, 2005

ls! John G. EmersonJOHN G . EMERSON

JOHN G. EMERSONFederal I.D . No . 5309State Bar No . 06602600830 Apollo LaneHouston, TX 77058Telephone : 281/488-8854Facsimile : 281/488-8867

-and-SCOTT E. POYNTER.2228 Cottondale Lane, Suite 100Little Rock, AR 72202

94

Telephone : 501/907-2555Facsimile . 50V907-255 6

Local A ttorney for Plaintiff

SCOTT + SCOTT, LLCDAVID R . SCOTTNEIL ROTHSTEIN108 Norwich AvenueP.O . Box 192Colchester, CT 06415Telephone: 860/537-5 53 7Facsimile . 860/537/4432

-and-SCOTT + SCOTT, LLCARTHUR L. SHINGLER III600 B Street, Suite 1500San Diego, CA 92101Telephone: 619/233-4565Facsimile: 619/233-0508

FINKELSTEIN & KRINSK, LLPJEFFREY R. KRINSKMARK L. KNUTSON501 W. BroadwaySuite 1250San Diego, CA 92101Telephone: 619/238-1333Facsimile : 619/238-5425

Lead Counsel for Plaintiff

95

4

?LAwnP1 12I` AT

The undersigned ~ `Iaftdff ), dei €r , as-to the clam asserted, under the federal sacuritics laws, tit:

I . PI t tfff as rc iewa4 the co faint against Cybtrrzrr3'res; 1=, and certain other def i , and authorises itsfiling.

2 . Pl ntiff did not mire the security that 3s the subject ofth this action at the c ection ofplati f's counsel Or i ne rcier to participate in this private action or any other litigation under the rbderal se rides nears.

3. Plaintiff is willing to serve as a representative party on behalf of a ctnss„ includs'ig providing testin, any at deposition and trial, if z ztcs ry.

4 . [a ti represents and r artuats that the unde"igaod Is fully authorzz d . to enter into and execute this

5. ?htiiitiff will not accept any pn3mr x for serving as a rr pr4entative party on bebatf of she cl beyond thePI tintiffs pro rata share of any re vc y, except such reasonable costs and expenses (including lost waft)directly relating to the representation of the class as approved by the court.

6 . plaintiff has made no trawaction(s) during the Cass ?criod in the ocmthon shares of Cyberonics, Inc., cacccgcthose get forth below: (i£you need more jac pl s usf the a oft ais + t or at ch,.au additional paga. )

Tale(s) Number ,• ;of Shares

, , u ,

071 14 r . OC~ if~

1 0 -: 4009 too -9,961,49

:,, D a(s), .a ? ,.of Shares

Price

a~J»1 90 39!•7

-OW X';, t• :e . .Iii S Z ~- w

7 . During the'ehre , years prio tQ 40e d9tc of this . Certification, P]ainttff has not sought Ito serve or . served as a., Erepresentative party for a class €. an .4ction 1 ledunder t ie fed ecu flies laws. '

8. I rleclara under-pe sty of perjury, this 0°7 da of J-UL 2005 that,the info nuixion above arcuate.

¶you are sing ft Certitrat1 o t if O( A ecmp ry of car enly. plasm yac a ptirrit opine dtbe cwpai y of WAY abom. ycura#etum .

.Sp ONAL DRMATION

Address.

City. Slate and mss :

Phone Nnmhe ' ( }.•

Phone Number 15va

En aI , .G tr

3rca: Yes or No

Comer= Yes dr No '

REDACTED

Are you i foxier employm of C stn cs?

Amyx . a C Ioy of Cybercnics?

PLJ:y s CE .T ATEThe un ersigood ( P ,z iff"), do res, as to the claims aerted under the federsi securities ]ate, tha t

I- Plaintiff has revkwes the complaint against Cyb .: cs. Inc- and ecrtaan other defendants. sad authorizes, its

2 . Plaintiff did not acquire tl sccurity That is the subject of this action at the direction of plaintiffs counsel or itsorder to p icipate in this private action or any tt e lzyi Lion under the federal securities laws .

3 . Plaintiff is willing to serve as s representative party on behalf of a class, including providing testin'nony atdeposition and trial . if €n essary .

4. Ia1n z " r ro cut-, and wax nts that the undersigned Is frilly author cd to enter into and execute Thisceetif cO c ctn_

5 . J iaistiff will not accept any payt=t for serving as a rapresc tive patty on behalf of the class beyond the,Piaintltrs pro rata share of any recovery, except such rc om ble costs and expo cs' (including lost wages)directly relating to the represetatieu of the class as approved by the court.

6 . Plaintiff has race tie transaction(s) during the Class Period in the common shares of Cy eronics, Inc., cxcuptthose set forth below : (Ify ±r reed ntorc space plea use the bs of this for .er.st a setditfoust pa,~v;c, }

- _urcbasr ~}

Date(s) Numberof Shares

Price

1- 0

io i IIvry

i s

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

Date(} Number !Priceof S~.ares

- t .

7 . During the three y =s prior to the date of this ertificatiM Piaintif has not sought to some or screed as arepresentative party for a class in an actinu filed under the fb&nl securities laws .

8, 1 declare under penalty of pe~try< this d ,,,,f ZrU-Y , 2005 that the htiCS motion above accurate .

Print Name : *. CA TO 4&A

it You are sage ng this Ce uffoww•o bsk alf of a company or eThar ity, please aft 1 your name, and Tint the t aP Efye c nparay cr #~ yabo" your s l .

Address:

city, State and Z'ip:

?noffeNumber ( Day):REDACTED

.hone .Number(i i

Esrail Address:

Cfrcie_ Yes or go Are you a farmer eesrrploy of Cybemics?

Circle: Yes or `a . Areyou a current e epic yce ofCyberonks?

PL 1' T FF `ERT1iiC TE

The rdcrsi nc i ("Plaintiff"), d =fares, as to tho claims asserted under the federal securities laws, that ,

i . - Piaiw.W has rcvie ad the ccsr pia"u against Cybarori , inc ., and certain other defbndan'M and aurb or':z :tsfilicag.

2. '.1intif did not lire the security that is tha subject ht this action at the direction r F g]a ntift'°s cotnsci or inorder to partdcipaco in t: is privste action or any other litigation under the fed i securities laws.

3 . Plaintiff is willing to serve as a representative party can behalf of a clnAs, including p vidi g tcsrinrony atdeposition and trial, lit ess y.

4 . Pain€i_ • ropresent asact %taraants that the ur deei ned is fully aut prized to enter into and ..cute thiscertification .,

S . Plaittiff wi11 not 3cept any payment for sing as a representative party on behalf of the class bcyond theplaintiffs pro rats sham of any rccdvery, e nept such r sonabic wand expenses (including lost wages)

directly relating to the representation of the class as approved by the court.

6 . Plaintiff has made no trans*etion(s) during the Class Period in the corn man shares of Cybr nice, i0c„ ixc 4-prt o c set forth .bctow : (Lot ne rt ter . plem . hack j :es. 'uu++r-attact.-anaddit iow~, pajc. )

Date(s) Number Priceof Shares

0-7 109 20

Ollie(s) Numberof Shares

Price

Gl ilI ,~'ti•~ / Y4./ 61 so F f V 1Q

7, Diving the three years prior to the date of this Creation, Plaintiff has not sought tq ae ve or.served as arepresentative party for a class in an action filed under the federal, securities laws.

b. I declare under penalty of pedury, this tfttjr of {?l~+ '2005 that the i ormatio© above ccu ate .

Print Name: J F t L' P 'C J 1 Ca tJ

Signfariwe:if ycu are sinirsg Vs Cai5l ion en bshsif of a esmpai y or atser pity, pteasa s[gt . , nd t the l kt atp c rcg y

i~si at re_

Addrm:,

:City, State and Zip

RED CTED"Phobe Nuotb& { snita

Email A€ r

Circle. Yes or Nc Are You a foraib r employee of Cyberonics?

Circle= Yes Or Are you a euava' 'nployee e 'Cyborun.ics?

PLAINTIFF CERTIFICATIONPURSUANT TO FEDERAL S CUR IT ES LAWS,

(Pla ztiff declares , as to the ON= asserted under, thefetlcral ec- r{ties la. ,rs, that :

I . Plaintiff has reviewed the Complaint and retains Scott ~Scott, L LC, and such co-

ccuns l it deems appropriate to associate with, to pursue such action can a contingent feebasis.

2 . Plainti did notparchasethr, security that is the subj t ofthi action at the directionof Plaiatifi's counsel, or in order to participate in any action .

3, plaintiff is willing to serve as a re, resentat 'e p .ty on behalf of the class, includingproviding testimony at deposition and trial, if necessary.

4. Plaintiff s transaction(s) in the Cyberonies inc . ("CYl X") securi ty that is the subjectof this action during the Class Period is/are as tbllows :

n~ ga t Mh re aQCU ti s /Sel1 ate i' .ce, 'cr Shire

se- I1 1911+10"-

5 . During the three years prior to the date of this Certification, Plaintiff has not served,or sought to serve a class representative in a federal securities fazed owe, except asfollows :

~ . PL .intiff wild not accept a.ay payment for serving as a rr reserrtative party On behalf Ofthe class beyond Plaintiff s Pro rata s . are of any recOy ry, except such reasonable cosis andexpenses (including lost wages) directly relating to the representation of the class as orderedor approved by the Court.

I declare under penalty of per ury that the foregoing is true and correct . Executed this JLLday of 2005, at state),

PI1I ted -Name : 0 H 1

Mailing Addr s :(1>it tc ' ¢r "r)

Telephone : REDACTEDE- it Addrm: