10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

(Mark One)

     [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the Period Ended June 30, 2004

     [     ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 .

Commission File Number: 0 - 16612

CNS, INC.
(Exact name of registrant as specified in its charter)

Delaware	41-1580270
(State or other jurisdiction o	(I.R.S. Employer
incorporation or organization)	Identification No.)

7615 Smetana Lane
Eden Prairie, MN 55344
(Address of principal executive offices including zip code)

(952) 229-1500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ___X___      NO _______

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES _______      NO ___X___

At July 30, 2004, the Company had outstanding 13,954,224 shares of common stock, $.01 par value per share.

CNS, Inc.
FORM 10-Q
For the Period Ended June 30, 2004
Index

PART I.     FINANCIAL INFORMATION

     Item 1.     Financial Statements

     Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Item 3.     Quantitative and Qualitative Disclosures about Market Risk

     Item 4.     Controls and Procedures

PART II.     OTHER INFORMATION

     Item 1.     Legal Proceedings

     Item 2.     Change in Securities and Use of Proceeds

     Item 3.     Defaults Upon Senior Securities

     Item 4.     Submission of Matters to a Vote of Securities Holders

     Item 5.     Other Information

     Item 6.     Exhibits and Reports on Form 8-K

SIGNATURES

PART I – FINANCIAL INFORMATION

Item 1.   Financial Statements

CNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)

	Three Months Ended June 30,
	2004		2003
Net sales	$	16,531	$	17,497
Cost of goods sold		5,394		5,470
Gross profit		11,137		12,027
Operating expenses:
Advertising and promotion		5,148		4,465
Selling, general and administrative		3,578		3,341
Total operating expenses		8,726		7,806
Operating income		2,411		4,221
Interest income		214		194
Income before income taxes		2,625		4,415
Income tax expense		952		1,634
Net income	$	1,673	$	2,781
Basic net income per share	$	0.12	$	0.21
Diluted net income per share	$	0.11	$	0.20
Weighted average number of common
shares outstanding		13,831		13,357
Weighted average number of common and
potential common shares outstanding		14,570		14,238

The accompanying notes are an integral part
of the condensed consolidated financial statements.

CNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except per share amounts)

	June 30, 2004			March 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	9,868		$	8,871
Marketable securities		40,324			40,550
Accounts receivable, net		8,353			11,394
Inventories		3,994			4,132
Deferred income taxes		2,140			2,008
Prepaid expenses and other current assets		2,036			2,835
Total current assets		66,715			69,790
Property and equipment, net		1,439			1,562
Product rights, net		1,099			1,107
Deferred income taxes		1,075			1,075
	$	70,328		$	73,534
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	10,557		$	14,890
Total current liabilities		10,557			14,890
Stockholders' equity:
Preferred stock – authorized 8,484 shares;
none issued or outstanding		—			—
Common stock – $.01 par value; authorized 50,000 shares;
issued 19,295 shares; outstanding 13,954 shares at
June 30, 2004 and 13,783 shares at March 31, 2004		193			193
Additional paid-in capital		59,764			59,835
Treasury shares – at cost; 5,341 at June 30, 2004 and
5,512 at March 31, 2004		(23,439	)		(23,878	)
Retained earnings		23,363			22,379
Accumulated other comprehensive income		(110	)		115
Total stockholders' equity		59,771			58,644
	$	70,328		$	73,534

The accompanying notes are an integral part
of the condensed consolidated financial statements.

CNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

	Three Months Ended June 30,
	2004			2003
Operating activities:
Net income	$	1,673		$	2,781
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization		200			240
Deferred income taxes		(132	)		1,634
Changes in operating assets and liabilities:
Accounts receivable		3,042			1,373
Inventories		138			(1,606	)
Prepaid expenses and other current assets		799			312
Accounts payable and accrued expenses		(4,332	)		(5,636	)
Net cash from operating activities		1,388			(902	)
Investing activities:
Purchases of marketable securities		(8,857	)		(14,204	)
Sales of marketable securities		8,859			13,958
Payments for purchases of property and equipment		(6	)		(4	)
Payments for product rights		(65	)		(15	)
Net cash from investing activities		(69	)		(265	)
Financing activities:
Proceeds from issuance of common stock
under stock plans		840			451
Purchase of treasury shares		(473	)		—
Payment of cash dividends		(689	)		—
Net cash from financing activities		(322	)		451
Net change in cash and cash equivalents		997			(716	)
Cash and cash equivalents:
Beginning of period		8,871			16,554
End of period	$	9,868		$	15,838

The accompanying notes are an integral part
of the condensed consolidated financial statements.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal, recurring accruals, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Actual results and outcomes may differ from management’s estimates and assumptions.

The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2004.

Note 1 – Accounting Principles
The accounting principles followed in the preparation of the financial information contained herein are the same as those described in the Company’s Annual Report on Form 10-K for the year ended March 31, 2004. Refer to the Annual Report on Form 10-K for detailed information on accounting policies.

Note 2 – Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and complies with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation”. Under APB No. 25, compensation cost is determined based on the difference, if any, on the grant date between the fair value of the Company’s stock and the amount an employee must pay to acquire the stock. Accordingly, no compensation expense associated with the intrinsic value of stock option grants or shares sold to employees under the Employee Stock Purchase Plan has been recognized in the Company’s financial statements.

Had compensation cost for the Company’s stock option plan been determined based on the fair value of options at the grant date, net earnings and earnings per share would have been as follows (in thousands, except per share information):

	Three Months Ended June 30,
	2004		2003
Net income, as reported	$	1,673	$	2,781
Deduct:   Total stock-based compensation expense
determined under the fair value based method for all awards,
net of tax		165		98
Proforma net income	$	1,508	$	2,683
Earnings per share:
Basic – as reported	$	0.12	$	0.21
Basic – proforma	$	0.11	$	0.20
Diluted – as reported	$	0.11	$	0.20
Diluted – proforma	$	0.10	$	0.19

Note 3 – Marketable Securities
The Company classifies its marketable debt securities as available-for-sale and records these securities at fair market value. Net realized and unrealized gains and losses are determined on the specific identification cost basis. Any unrealized gains and losses, net of deferred income taxes, are included in stockholders’ equity as a separate component of other comprehensive income. A decline in the market value of any available-for-sale security below cost that is deemed other than temporary, results in a charge to operations resulting in the establishment of a new cost basis for the security. Realized securities gains or losses are included in investment income in the consolidated statements of operations.

Note 4 – Inventories
Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or market. Inventory reserves have been established for potential product obsolescence. The components of inventories are as follows (in thousands):

	June 30, 2004		March 31, 2004
Finished goods	$	2,873	$	3,014
Raw materials and component parts		1,121		1,118
Total inventories	$	3,994	$	4,132

Note 5 – Net sales
Net sales by brand and geographic area are as follows (in thousands):

	Three Months Ended June 30,
	2004		2003
Domestic – Breathe Right	$	12,033	$	12,469
Domestic – FiberChoice		2,494		2,015
Domestic – Other		58		70
Total Domestic		14,585		14,554
International		1,946		2,943
Total net sales	$	16,531	$	17,497

Note 6 – Comprehensive Income
A reconciliation of total comprehensive income is as follows (in thousands):

	Three Months Ended June 30,
	2004			2003
Net income	$	1,673		$	2,781
Unrealized gain(loss) on marketable
securities, net of income tax		(225	)		0
Total comprehensive income	$	1,448		$	2,781

Note 7 — Earnings Per Share
A reconciliation of weighted average common and potential common shares outstanding is as follows (in thousands):

	Three Months Ended June 30,
	2004		2003
Average common shares outstanding		13,831		13,357
Potential common shares		739		881
Average common and potential common shares		14,570		14,238

For the three months ended June 30, 2004 and 2003 there were 336,320 options with a weighted average exercise price of $11.33 and 0 options, respectively, that were not included in the calculation of potential common shares due to the exercise price of the option being higher than the average market price for the three month period.

Note 8 – Dividends
The Company declared a $.05 per share cash dividend on April 26, 2004 for shareholders of record as of May 21, 2004. The amount of dividend, paid on June 4, 2004, was $689,000. There were no dividends paid during the three months ended June 30, 2003.

Note 9 – Income Taxes
As part of the process of preparing financial statements, the Company is required to estimate income taxes, both state and federal. This process involves management estimating the actual current tax exposure together with assessing temporary differences resulting from different treatment for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. Management must then assess the likelihood that deferred tax assets will be utilized to offset future taxable income during the periods in which these temporary differences are deductible. Management believes that as of June 30, 2004, based on the level of historical taxable income and projections of future taxable income for the periods in which the deferred tax assets are deductible, that it is more likely than not the Company will realize the benefits of these deductible differences.

Note 10 – Contingent Gain
The Company has received notice of a favorable court decision relating to an import duty appeal that may result in the refund of previously paid European Community import duties on Breathe Right nasal strips. The estimated amount of the potential refund, payable in Euros, is approximately $1.0 million. Assuming satisfactory completion of audit procedures performed by Dutch customs, the Company expects to receive the refund during the current fiscal year and will recognize the refund at the time of receipt.

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed under “Forward-Looking Statements” and elsewhere in this report.

This Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended March 31, 2004.

The Company’s revenues are derived primarily from the sale of the Breathe Right® nasal strip, which is a nonprescription, disposable device designed to improve nasal breathing and temporarily relieve nasal congestion, and to reduce or eliminate snoring and breathing difficulties due to nasal congestion resulting from colds, allergies, sinusitis, and deviated nasal septum. Breathe Right nasal strips are sold in the United States and 25 markets internationally.

The Company expanded the Breathe Right brand in March of 2002 by marketing Breathe Right Snore Relief™ throat spray. Snore Relief spray lubricates and soothes dry throats, while a natural astringent firms loose tissue to reduce the vibrations that cause snoring.

The Company introduced Breathe Right Vapor Shot! personal vaporizer in March of 2003 further expanding the Breathe Right product line. Vapor Shot! is packaged with a reusable cup, vapor concentrating lid and 8 effervescent tablets and provides instant drug free relief from nasal congestion due to colds and allergies.

In March of 2000, the Company entered into the bulk fiber category by launching FiberChoice® chewable fiber tablets. FiberChoice is an orange flavored chewable tablet that offers consumers an effective, convenient, good-tasting way to supplement their daily intake of dietary fiber. FiberChoice tablets can be taken without water and have been clinically proven to be as effective as powder alternatives.

Results of Operations

Net sales for the quarter ended June 30, 2004 were $16.5 million, a decrease of 5.5% versus net sales of $17.5 million for the quarter ended June 30, 2003. Net sales for the quarters ending June 30, 2004 and 2003 were favorably impacted by $103,000 and $485,000, respectively, primarily relating to a reduction of estimated promotional spending liabilities.

Domestic net sales for the quarter ended June 30, 2004 of $14.6 million were flat compared to the same quarter of 2003. Net sales of FiberChoice brand products of $2.5 million increased by $479,000 compared to the quarter ended June 30, 2003, as the result of continuing adverting support and an on-shelf bonus pack promotion. Net sales for the Breathe Right brand decreased by $436,000 to $12.0 million as customers worked through higher retail inventory levels caused by an abrupt end to last year’s cold/flu season.

International net sales for the quarter ended June 30, 2004 were $1.9 million compared to $2.9 million for the quarter ended June 30, 2003. The decrease in international net sales for the three months ended June 30, 2004 is primarily the result of no product shipments to Japan in the first quarter. The Company’s distributor in Japan is working through high inventory levels associated with an unusually mild allergy season in February and March 2004.

Gross profit was $11.1 million for the June quarter of 2004 compared to $12.0 million for the same quarter of 2003. Gross profit as a percentage of net sales of 67.4% decreased from 68.7% for the three months ended June 30, 2003. The reduction in gross profit percentage in the first quarter of 2004 was the result of higher trade promotion activity and increased product cost relating to the FiberChoice on shelf bonus pack promotion.

The Company has received notice of a favorable court decision relating to an import duty appeal that may result in the refund of previously paid European Community import duties on Breathe Right nasal strips. The estimated amount of the potential refund, payable in Euros is approximately $1.0 million. Assuming satisfactory completion of audit procedures performed by Dutch customs, the Company expects to receive the refund during the current fiscal year and will recognize the refund at the time of receipt.

Advertising and promotion expense for the June quarter of 2004 was $5.1 million compared to $4.5 million for the same period of 2003, an increase of 15.3%. The Company increased advertising and promotion expense for allergy and snoring advertising in the United Kingdom and Japan during the first quarter. Domestic advertising and promotion expense was flat versus the prior year.

Selling, general and administrative expenses were $3.6 million for the June quarter of 2004 compared to $3.3 million for the same quarter of 2003. The increase is primarily from a slight increase in staff cost as well as incremental legal costs for trademarks and intellectual property work.

Operating income for the June quarter of 2004 was $2.4 million compared to $4.2 million for the same quarter of 2003. Operating income as a percentage of net sales decreased to 14.6% for the quarter ended June 30, 2004 from 24.1% for the quarter ended June 30, 2003. The decline in operating profit as a percentage of sales was caused by the reduction in gross profit margin explained above, as well as the increases in advertising and promotion expense and selling, general and administration expense.

Investment income was $214,000 for the June quarter of 2004 compared to $194,000 for the same quarter of 2003. The slight decrease in market interest rates compared to the prior year quarter was offset by an increase of $9.0 million in cash and marketable securities. The Company continues to increase the percentage of the portfolio invested in tax-exempt investments that provide higher after-tax returns.

Net income for the quarter ended June 30, 2004 was $1.7 million compared to $2.8 million for the same quarter of 2003. Income tax expense was $952,000 or 36.3% of income before taxes for the June quarter of 2004 compared to $1.6 million or 37.0% of income before taxes for the same quarter of 2003. The reduction in the effective income tax rate reflects a shift from taxable investments to tax-exempt securities and utilization of foreign export incentives.

Seasonality

The Company has experienced in the past, and expects that it will continue to experience in the future, quarterly fluctuations in both domestic and international sales and earnings. These fluctuations are due in part to advertising levels and seasonality of sales, as well as increases and decreases in purchases by distributors and retailers in anticipation of future demand by consumers. The Company believes that significant portions of Breathe Right® product line are used for the temporary relief of nasal congestion and congestion-related snoring. Sales of nasal congestion remedies are higher during the fall and winter seasons, corresponding with the Company’s third and fourth quarters.

Liquidity and Capital Resources

At June 30, 2004, the Company had cash, cash equivalents and marketable securities of $50.2 million, an increase of $800,000 during the current quarter. The Company’s working capital increased by $1.3 million during the quarter ended June 30, 2004 to $56.2 million.

	Three Months Ended June 30,
	2004			2003
Operating activities:
Net income	$	1,673		$	2,781
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization		200			240
Deferred income taxes		(132	)		1,634
Changes in operating assets and liabilities:
Accounts receivable		3,042			1,373
Inventories		138			(1,606	)
Prepaid expenses and other current assets		799			312
Accounts payable and accrued expenses		(4,332	)		(5,636	)
Net cash from operating activities	$	1,388		$	(902	)

The Company generated cash from operating activities of $1.4 million during the first quarter of fiscal 2005, compared to a use of cash from operating activities of $900,000 during the first quarter of fiscal 2004. Net income for the quarter declined by $1.1 million as explained above.

Deferred income taxes generated $1.6 million of cash flow in the fiscal 2004 first quarter due to the utilization of net operating loss carryforwards. A reduction in accounts receivable generated $3.0 million of cash flow in the fiscal 2005 first quarter and $1.4 million in the fiscal 2004 first quarter. The reduction in accounts receivable during the first quarter reflects the seasonal nature of the Company’s business, where sales are higher during the cold/flu season and lower during the first half of the fiscal year. The reduction in accounts receivable was larger during the first quarter of fiscal 2005 due to the timing of sales in the fourth quarter of fiscal 2004, as well as the lower sales recorded in the first quarter of fiscal 2005. Inventory used $1.6 million of cash during the first quarter of fiscal 2004 as the Company prepared for the introduction of Vapor Shot! during fiscal 2004. Accounts payable used $4.3 million of cash in the first quarter of fiscal 2005 and $5.6 million in the first quarter of fiscal 2004 also reflecting the seasonal nature of the Company’s business and the heavier levels of advertising and promotion expense during the cold/flu season. The larger usage of cash in the first quarter of 2004 reflects the exact timing of payments related to promotions and product purchases.

There was no material net change in the value of marketable securities during the current period. Purchases of marketable securities exceeded sales and maturities by $246,000 for the first quarter of fiscal 2004.

The Company issued 171,721 shares of common stock for $668,000 during the three months ended June 2004 under its Employee Stock Purchase Plan and shareholder approved equity compensation plans. The Company also issued 50,000 shares of common stock for $172,000 pursuant to the exercise of outstanding warrants.

The Company repurchased 50,000 shares of common stock for $473,000 during the three months ended June 2004. The Company has authority to repurchase up to 481,600 additional shares of its common stock in connection with the repurchase program that has been authorized by the board of directors.

The Company declared a $.05 per share regular cash dividend on April 26, 2004 for shareholders of record as of May 21, 2004. The amount of this dividend payment, paid on June 4, 2004, was $689,000. No dividends were paid during the three months ended June 30, 2003.

The Company believes that its existing funds and funds generated from operations will be sufficient to support its planned operations for the foreseeable future.

Accounting Policies and Recent Accounting Pronouncements

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States, management must make decisions which impact the reported amounts and related disclosures. Such decisions include the selection of the appropriate principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, management applies judgment based on its understanding and analysis of the relevant circumstances.

The accounting principles followed in the preparation of the financial information contained on Form 10-Q are the same as those described in the Company’s Annual Report on Form 10-K for the year ended March 31, 2004. Refer to the Annual Report on Form 10-K for detailed information on accounting policies.

Forward-Looking Statements

Certain statements contained in this Report on Form 10-Q and other written and oral statements made from time to time by the Company do not relate strictly to historical or current facts but provide current expectations or forecasts of future events. As such, they are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from those presently anticipated or projected. Such forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expect,” “plan,” “intend,” “anticipate,” “estimate,” or “continue” or similar words or expressions. It is not possible to foresee or identify all factors affecting the Company’s forward-looking statements and investors therefore should not consider any list of factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to, the following factors: (i) the Company’s revenue and profitability is reliant on sales of Breathe Right nasal strips; (ii) the Company currently has a seasonal pattern of sales that is typically higher in the fiscal third and fourth quarters of each year due to increased nasal strip usage during the cold/flu season and its revenues and earnings may be impacted by the relative severity of such season; (iii) the Company’s success and future growth will depend significantly on its ability to effectively market Breathe Right nasal strips and upon its ability to develop and achieve markets for additional products; (iv) the Company’s competitive position will, to some extent, be dependent on the enforceability and comprehensiveness of the patents on its Breathe Right nasal strip technology which have been, and in the future may be, the subject of litigation and could be narrowed as a result of the outcome of the reexamination of one such patent by the United States Patent and Trademark Office; (v) the Company has faced and will continue to face challenges in successfully developing and introducing new products; (vi) the Company operates in competitive markets where recent and potential entrants into the nasal dilator segment pose competitive challenges; (vii) the Company is dependent upon contract manufacturers for the production of substantially all of its products; and (viii) the Company currently purchases most of its major components for its nasal strip products from different contract manufacturers that obtain the raw materials from a single supplier.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

The Company’s market risk exposure is primarily interest rate risk related to its cash, cash equivalents and investments in marketable securities. The Company’s risk to interest rate fluctuations has not materially changed since March 31, 2004. See Item 7A of the Company’s Annual Report on Form 10-K for the year ended March 31, 2004.

Item 4.   Controls and Procedures

(a)   Evaluation of Disclosure Controls and Procedures.

The Company’s Chief Executive Officer, Marti Morfitt, and Chief Financial Officer, Samuel E. Reinkensmeyer, have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that review, they have concluded that these controls and procedures are effective in ensuring that material information related to the Company is made known to them by others within the Company.

(b)   Changes in Internal Control Over Financial Reporting.

There have been no significant changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.   Legal Proceedings

        Not Applicable

Item 2.   Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

        The following table provides certain information regarding purchases made by CNS, Inc. of its common stock in the quarter covered by this report:

Issuer Purchases Of Equity Securities

Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plan or Program	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(1)
April 1 – April 30, 2004	—	—	—	531,600
May 1 – May 31, 2004	—	—	—	531,600
June 1 – June 30, 2004	50,000	$ 9.46	50,000	481,600
Total	50,000	$ 9.46	50,000	481,600

(1) On February 11, 2002, the Company announced that its board of directors had approved a stock repurchase program authorizing the
Company to repurchase up to 1,000,000 shares of the Company’s common stock from time to time in open market transactions or in
privately negotiated transactions.

Item 3.   Defaults Upon Senior Securities

        Not Applicable

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

        Not Applicable

Item 5.   Other Information

        Not Applicable

Item 6.   Exhibits and Reports on Form 8-K

        The following exhibits are filed as part of this Report:

10.31 Executive Employment Agreement between the Company and Marti Morfitt effective as of July 20, 2004.*

31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act).

31.2 Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act).

32 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350).

*Indicates Compensatory Agreement

       (b)     Reports on Form 8-K

During the quarter covered by this report, the Company furnished a Current Report on Form 8-K dated April 28, 2004 reporting, under Item 5, a quarterly dividend and reporting under Item 12, the disclosure of information regarding its results of operations for its quarter ended March 31, 2004, and attaching as exhibits, under Item 7, a press release relating to the dividend and a press release relating to the results of operations.

SIGNATURES

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

	CNS, INC.
Dated:          August 5, 2004	By:		/s/   Marti Morfitt
		President & Chief Executive Officer
Dated:          August 5, 2004	By:		/s/   Samuel E. Reinkensmeyer
		Samuel E. Reinkensmeyer Vice President of Finance, Chief Financial Officer and Treasurer

EX-10.31

Exhibit 10.31

EXECUTIVE EMPLOYMENT AGREEMENT

This Agreement is made as of July 20, 2004 (the “Effective Date”) between CNS, Inc. a Delaware corporation (“CNS”) and  Marti Morfitt (“Employee”).

WHEREAS, CNS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CNS and its shareholders; and

WHEREAS, Employee has made and is expected to continue to make, due to Employee’s experience and knowledge, a significant contribution to the profitability, growth and financial strength of CNS; and

WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of a change in control may exist and that such possibility and the uncertainty and questions which it may raise among management may result in the departure of Employee or distraction to the performance of Employee’s duties to the detriment of CNS and its shareholders; and

WHEREAS, Employee is willing to continue Employee’s employment with CNS upon the understanding that CNS will provide income security if Employee’s employment is terminated under certain terms and conditions;

WHEREAS, it is in the best interests of CNS and its stockholders to employ Employee and to reinforce and encourage Employee’s continued attention and dedication to Employee’s assigned duties without distraction and to ensure Employee’s continued availability to CNS in the event of a Change in Control; and

WHEREAS, it is further in CNS’s best interests to receive certain assurances from Employee regarding CNS’s confidentiality, competition and other proprietary business concerns;

THEREFORE, in consideration of the foregoing and of this agreement, certain change in control protection, continued employment and other benefits hereunder, as well as other mutual covenants and obligations hereinafter set forth, CNS and Employee agree as follows:

1.

Employment.  CNS agrees to continue to employ Employee as its President and Chief Executive Officer (CEO) under the terms, conditions and benefits set forth herein and Employee accepts continued employment with CNS on said terms, conditions and benefits.

2.

Term.  The term of Employee’s employment shall continue until terminated pursuant to paragraph 6, 7, or 8 herein.

3.

Duties.  In Employee’s position as President and CEO, Employee will continue to faithfully and diligently perform such executive management responsibilities as may be assigned to Employee from time to time by the Board of Directors of CNS (the “Board”); devote Employee’s full time, energy and skill to CNS’s business, as is reasonably

necessary to execute fully Employee’s duties hereunder, except for vacations, absences made necessary because of illness, and service on other corporate, civic, or charitable boards or committees not significantly interfering with Employee’s duties hereunder; and promote CNS’s best interests.  The principal place of employment and the location of Employee’s principal office and normal place of work shall be in the Minneapolis, Minnesota metropolitan area.  Employee will be expected to travel to other locations, as necessary, in the performance of Employee’s duties during the term of this Agreement.  Employee shall notify the Chair of the Governance Committee of the Board of Directors of any other paid position which Employee is considering accepting, including but not limited to a board of directors position, a position as an employee or an independent consultant, or any position, whether or not for pay, which could constitute a conflict of interest with CNS.  The Employee agrees not to accept any such position without such Chair’s prior approval.

4.

Compensation.  For all services rendered by Employee, CNS shall pay Employee the annualized base salary (“Annual Base Salary”) described in Exhibit A, payable at such times as salaried employees of CNS are customarily paid.  The Board shall, from time to time during Employee’s employment, review Employee’s Annual Base Salary in connection with possible increases, giving consideration to inflation factors, performance of Employee and CNS, salaries paid for positions of similar responsibility for other companies, and other relevant factors, and shall provide for such increases when deemed appropriate.  Employee shall in addition be eligible to participate in the annual management incentive bonus program, as approved by the Board of Directors, the initial amount, as a percentage of Annual Base Salary, is described in Exhibit A.

5.

Benefits.  Employee shall be entitled to Paid Time Off consistent with CNS policy and such insurance, 401(k) program and other benefits available to all salaried employees of CNS, subject to any limitations on such benefits to officers, directors or highly paid employees in order that such benefit programs qualify under federal or state law for favored tax or other treatment.  Such benefit programs may be changed from time to time by the Board.  Employee shall also be entitled to reimbursement of Employee’s reasonable and necessary expenses incurred in connection with the performance of Employee’s duties hereunder.

6.

Resignation by Employee.  Employee may resign Employee’s employment with CNS effective upon 30 days’ advance written notice to the Chair of the Governance Committee of the Board of Directors.  If Employee resigns under this paragraph, the Board retains the right to terminate Employee’s employment, effective upon written notice to Employee, at any time during the 30-day notice period, provided, however, that Annual Base Salary and the employer portion of Employee’s health insurance premiums will continue to be paid by CNS for the duration of the 30-day notice period.  In connection with Employee’s termination, Employee will receive any accrued unused Paid Time Off to which Employee is entitled.

7.

Termination of Employment.  Employee’s employment with CNS may be terminated in any of the following ways:

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a.

CNS may, by written notice to Employee, terminate Employee’s employment without Good Cause (as defined in paragraph 7.b.), in which event CNS shall:

i.

pay Employee her Annual Base Salary up to the date of termination;

ii.

pay Employee the Target Bonus in effect for the bonus period in which Employee’s Date of Termination (as defined in paragraph 8.d.) occurs multiplied by a fraction, the numerator of which is the number of days worked by Employee in the bonus period to the Date of Termination, and the denominator of which is the number of days in the bonus period, less any amount of the Target Bonus that has been paid.  For purposes of this Agreement, “Target Bonus” shall mean the amount payable in cash under all annual incentive compensation plans of CNS in which Employee participates, waiving any condition precedent to the payment to Employee and assuming that the performance goals for the period were achieved at the 100% level;

iii.

pay the Employee Salary Continuation for two (2) years from Employee’s termination date.  For purposes of this Agreement, “Salary Continuation” shall mean a total payment by CNS of two times (2X) the Employee’s Annual Base Salary as of Employee’s Date of Termination, the total amount to be payable to Employee over the two (2) year period on the same schedule and in the same amount as the payment of Annual Base Salary prior to termination of Employee’s employment, until such time as the full Salary Continuation obligation shall be discharged, as provided in this paragraph 7.a.;

iv.

continue to pay the employer’s portion of the premium cost for any group health, dental and life insurance benefit during the Salary Continuation period or the applicable continuation period required by law, whichever is shorter, provided, however, that Employee shall be responsible to pay the employee’s portion of cost of any such benefits and the continuation period required under applicable law will not be extended as a result of CNS’s payment provided for in this clause;

v.

pay to Employee any accrued unused Paid Time Off to which Employee is entitled; and

vi.

provide qualified out-placement services to Employee through an entity selected by CNS for a period of up to six months, at the sole cost of CNS.  

As a condition of receiving the Salary Continuation and other benefits provided in this paragraph 7.a., Employee shall be required to sign a standard release agreement in the form of Exhibit B with CNS in which Employee agrees to release any and all claims and causes of action which Employee might have against CNS and its releasees, in which Employee affirms and acknowledges Employee’s obligations under paragraphs 9, 10, 11 and 12 of this Agreement, and

3

which includes an obligation not to speak negatively about or harm CNS, confidentiality with regard to the termination process and cooperation with the transition of responsibilities.  Payments under paragraph 7.a. shall begin after all rescission periods provided in the standard release agreement have run or have been waived.  

b.

CNS, by written notice to Employee, may terminate Employee’s employment for Good Cause, as defined below.  In the event of termination under this paragraph 7.b., CNS shall continue to pay Employee’s Annual Base Salary up to the Date of Termination.  For purposes of this Agreement, “Good Cause” shall mean one or more of the following:

i.

willful and premeditated failure or refusal of Employee to render services to CNS in accordance with Employee’s obligations under paragraph 3;

ii.

the commission by Employee of a willful breach of fiduciary duty to CNS or an intentional and knowing fraud against CNS or any customer, supplier, client, agent or employee thereof;

iii.

the engaging by Employee in intentional or willful misconduct that violates a material provision of any written policy, code of conduct or directive of the Board or that could result in an enforcement action or sanctions against the Company or Employee by any state or federal agency or department or any foreign government or agency having jurisdiction over the Company or Employee (it being understood that mere negligence in performance of duties is not Good Cause under this Agreement);

iv.

the breach by Employee of any provision of this Agreement;

v.

the commission of a felony by Employee; or

vi.

prior to a Change in Control, Employee’s unsatisfactory performance after specific notice by CNS of Employee’s performance deficiencies, description of expectations and a 60-day opportunity to cure.

c.

CNS, by written notice to Employee, may terminate Employee’s employment under this Agreement if Employee becomes physically or mentally disabled (as determined under the Americans with Disabilities Act) during the term so that Employee has not been able to substantially perform, for a period of 120 consecutive days, with reasonable accommodation, the usual duties assigned to Employee hereunder (“Disability”).  Upon such determination by CNS of Employee’s Disability, CNS shall pay to Employee the benefits provided in subparagraphs i, ii, iii, iv and v of paragraph 7.a.  As a condition of receiving such benefits, Employee or Employee’s authorized representative shall be required to sign a standard release agreement with CNS in the form of Exhibit B.  The payments provided in this paragraph 7.c. shall not limit or prohibit Employee’s right to receive payments or other benefits under any disability plan at such time

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as those payments or benefits would become payable according to the terms of the disability plan(s).  

d.

This Agreement shall terminate upon the Employee’s death during its term, except that CNS shall pay to the legal representative of Employee’s estate Employee’s Annual Base Salary due Employee up to the date of Employee’s death.

e.

Employee, by written notice to the Chair of the Governance Committee of the Board of Directors, may terminate Employee’s employment for Good Reason, as defined below.  In the event of termination under this paragraph 7.e., CNS shall pay to Employee the benefits provided in subparagraphs i, ii, iii, iv, v and vi of paragraph 7.a.  As a condition of receiving such benefits, Employee shall be required to sign a standard release agreement with CNS in the form of Exhibit B.  Payments required under this paragraph 7.e. shall begin after all rescission periods provided in the standard release agreement have run or have been waived. For purposes of this paragraph 7.e., Good Reason shall have the meaning given such term in subparagraph 8.b.i. except that Employee shall provide written notice to the Chair of the Governance Committee of the Board of Directors of any event which Employee deems to constitute Good Reason and CNS shall have a 60-day opportunity to cure and, with respect to items (C) or (D) of the definitions of Good Reason, and reduction in pay or benefits shall not be Good Reason if such reductions applies generally to all executives.

8.

Termination Following a Change in Control.

a.

For purposes of this Agreement, “Change in Control” shall mean the occurrence of one of the following events:  

i.

Acquisition of 25% of Stock of CNS.  Any “person” [as such term is used in Section 13(d) and 4(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)], is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities representing 25% or more of the combined voting power of CNS’s then outstanding securities, but shall not include CNS, any direct or indirect subsidiary of CNS or any employee benefit plan of CNS or of any subsidiary of CNS or any entity holding shares of common stock of the Company organized, appointed or established for, or pursuant to the terms of, any such plan;

ii.

Change in Board of Directors.  During any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of CNS, and any new director [other than a director designated by a person who has entered into agreement with CNS to effect a transaction permitted by Section 8.a.i., 8.a.ii. or 8.a.iv.] whose election by the Board of Directors of CNS or nomination for election by CNS’s

5

stockholders was approved by vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (“Continuing Directors”), cease for any reason to constitute at least a majority of the Board of Directors of CNS;

iii.

Merger or Consolidation.  Consummation of a merger or consolidation of CNS with any other corporation, other than (A) a merger or consolidation (1) which would result in the voting securities of CNS outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the merged or consolidated entity) 50% or more of the combined voting power of the voting securities of CNS or such merged or consolidated entity outstanding immediately after such merger or consolidation and (2) after which at least a majority of the members of the board of directors of the resulting entity were Continuing Directors at the time of the action of the Board of Directors of CNS approving the merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of CNS or similar transaction in which no person (as defined in subparagraph 8.a.i.) acquires more than 25% of the combined voting power of CNS’s then outstanding securities;

iv.

Liquidation or Sale of Assets.  Consummation of (A) a plan of complete liquidation or (B) a sale or disposition by CNS of all or substantially all of CNS’s assets.  “The sale or disposition by CNS of all or substantially all of CNS’s assets” shall mean a sale or other disposition transaction or series of related transactions involving assets of CNS or of any direct or indirect subsidiary of CNS (including the stock of any direct or indirect subsidiary of CNS) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of CNS determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than 75% of the fair market value of CNS.  For purposes of the preceding sentence, the “fair market value of CNS” shall be the aggregate market value of CNS’s outstanding common stock (on a fully diluted basis) plus the aggregate market value of CNS’s other outstanding equity securities.  The aggregate market value of CNS’s common stock shall be determined by multiplying the number of shares of CNS common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement (“Transaction Date”) with respect to the sale or disposition by CNS of all or substantially all of CNS’s assets by the average closing price for CNS’s common stock for the ten trading days immediately preceding the Transaction Date.  The aggregate market value of any other equity securities of CNS shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of CNS’s common stock or by such other method as the Board of Directors of CNS

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shall determine is appropriate; and Employee agrees that, subject to the terms and conditions of this Agreement, in the event of a Change in Control of CNS occurring after the date hereof, Employee will remain in the employ of CNS for a period of 30 days from the occurrence of such Change in Control.

b.

Applicability.  In the event of a Change in Control, the terms of this paragraph 8.b shall be effective for a period of 24 months following the Change in Control.  At the expiration of such 24-month period, this Agreement in its entirety shall be terminated and be of no further effect.  If the parties do not enter into a new agreement defining Employee’s relationship with CNS on or prior to the expiration of such 24-month period, CNS shall pay Employee Salary Continuation for two (2) years from the date which is 24 months following the Change in Control.  For purposes of this paragraph 8.b., “Salary Continuation” shall mean a total payment by CNS of two times (2X) the Employee’s Annual Base Salary as of the date which is 24 months following the Change in Control, the total amount to be payable to Employee over the two (2) year period on the same schedule and the same amount as the payment of Annual Base Salary prior to the expiration of the 24 month period following the Change in Control, until such time as the full Salary Continuation obligation shall be discharged, as provided in this paragraph 8.b.  If the parties do not enter into a new agreement on or prior to the expiration of such 24-month period, CNS shall also continue to pay the employer’s portion of the premium costs for any group health, dental, and life insurance benefits during the Salary Continuation period of this paragraph 8.b., or the applicable continuation period required by law, whichever is shorter, provided however, that the Employee shall be responsible to pay the employee portion of cost of any such benefits and the continuation period required under applicable law will not be extended as a result of CNS’s payment provided for in this paragraph 8.b.  As a condition to receiving such benefits, Employee shall be required to sign a standard release agreement with CNS in the form of Exhibit B.  Payments required under this paragraph 8.b shall begin after all rescission periods provided in the standard release agreement have run or have been waived.  Employee shall be entitled to receive the benefits set forth in paragraph 8.f if, within 24 months of such Change in Control, Employee’s employment is terminated by CNS or its successor without Good Cause (as defined in paragraph 7.a above), or as a result of Employee’s Disability (as determined by CNS) or by Employee for Good Reason (as defined in subparagraph 8.b.i. below).

i.

Termination for Good Reason shall be effective immediately upon written notice from the Employee to the Chair of the Governance Committee of the Board of Directors.  For purposes of this Agreement, “Good Reason” shall exist if: (A) CNS has materially breached any of the terms of this Agreement; (B) Employee is assigned duties which are materially inconsistent with Employee’s position, duties, responsibilities and status as President and CEO; (C) Employee’s Annual Base Salary, or Target Bonus (as defined below), or the face value of annual equity grants, is reduced below the amount in effect immediately prior to the Change in

7

Control; (D) the aggregate monetary value of Employee’s participation in, or payment or benefit under all benefit plans, arrangements and perquisites, is materially reduced from the aggregate monetary value of those plans, arrangements or perquisites that were in effect immediately prior to the Change in Control; or (E) relocation of CNS would require Employee to relocate Employee’s principal residence outside reasonable commuting distance of the Twin Cities Metropolitan area.

ii.

Termination without Good Cause shall be effective upon 30 days’ advance notice by CNS to the Employee.  For purposes of this paragraph 8, Good Cause shall be defined as in paragraph 7.b.

c.

Notice of Termination.  Any purported termination of employment under this paragraph 8 and also under paragraphs 6 and 7 shall be communicated by written Notice of Termination to the other party hereto in accordance with paragraph 22 hereunder.  For purposes of this Agreement, a “Notice of Termination” shall mean a notice that indicates the specific termination provision in this Agreement relied upon and which sets forth the facts and circumstances claimed to provide a basis for termination of Employee’s employment.

d.

Date of Termination.  For purposes of this paragraph 8 and also paragraphs 6 and 7 of this Agreement, “Date of Termination” shall mean:

i.

if Employee’s employment is terminated for Disability, as defined in paragraph 7.c. hereunder, 30 days after Notice of Termination is given (provided that Employee shall not have returned to the full-time performance of Employee’s duties during such 30 day period); and

ii.

if Employee’s employment is terminated pursuant to a provision contained in paragraph 6, 7 or 8 herein or for any other reason (other than Disability), the date specified in the Notice of Termination, consistent with the provisions in said paragraphs.

e.

Dispute of Termination.  If, within ten days after any Notice of Termination is given under this paragraph 8, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or as provided in paragraph 16, (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence.  Notwithstanding the pendency of any such dispute, CNS shall continue to pay Employee full compensation in effect when the notice giving rise to the

8

dispute was given (including, but not limited to, Annual Base Salary) and continue Employee as a participant in all compensation, benefit and insurance plans in which Employee was participating when the notice giving rise to the dispute was given, to the extent permissible under the terms of the applicable group plans and state and federal law, until the dispute is finally resolved in accordance with this subparagraph.  Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement.

f.

Compensation Upon Termination.  Following a Change in Control, as defined in paragraph 8.a. above, to the extent provided in paragraph 8.b. above, and subject to the limitation under paragraph 8.j., CNS shall pay or provide Employee the following benefits in lieu of any benefits which would otherwise be available to Employee upon termination under paragraphs 6 or 7 hereunder:

i.

pay Employee through the Date of Termination Employee’s Annual Base Salary at the rate in effect at the time the Notice of Termination is given.

ii.

pay Employee the Target Bonus in effect for the bonus period in which Employee’s Date of Termination occurs multiplied by a fraction, the numerator of which is the number of days worked by Employee in the bonus period prior to the Date of Termination, and the denominator of which is the number of days in the bonus period, less any amount of the Target Bonus that has been paid;

iii.

pay Employee a severance payment payable in cash in a single sum within 60 days of the Date of Termination, equal to 300% of the sum of the Annual Base Salary and the Target Bonus in effect as of the Date of Termination (without regard to any reduction in the Annual Base Salary or Target Bonus that is in breach of this Agreement); provided in the event such termination results from Employee’s Disability, such payment shall not limit or prohibit Employee’s right to receive payments or other benefits under any disability plan at such time as those payments or benefits would become payable according to the terms of the disability plan(s);  

iv.

continue to pay the employer’s portion of the premium cost for any group health, dental and life insurance benefit during the applicable continuation period required by law, provided, however, that Employee shall be responsible to pay the employee’s portion of cost of any such benefits and the continuation period required under applicable law will not be extended as a result of CNS’s payment provided for in this clause;

v.

pay to Employee all legal fees and expenses incurred by Employee as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this paragraph), provided Employee is the prevailing party on substantially all of the contested issues;

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vi.

pay to Employee all benefits payable to Employee under the CNS, Inc. Profit Sharing Plan and Trust or any successor of such Plan and Trust and any other plan or agreement relating to retirement benefits, and, in addition, if Employee is not fully vested in Employee’s account balance under such Plan, a single lump sum payment in cash from CNS representing the nonvested portion of Employee’s account, which shall be in addition to, and not reduced by, any other amounts payable to Employee under this paragraph 8.f.; and

vii.

provide qualified out-placement services to Employee through an entity selected by CNS for a period of up to six months, at the sole cost of CNS.  

g.

Employee shall not be required to mitigate the amount of any payment provided for in paragraph 8.b or 8.f. by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in paragraph 8.b. or 8.f. be reduced by any compensation earned by Employee as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise except as specifically provided in paragraph 8.f.

h.

In order to assure the performance of CNS or its successor of its obligations under this paragraph, CNS may deposit in trust an amount equal to the maximum payment that will be due Employee under the terms hereof.  Under a written trust instrument, the Trustee shall be instructed to pay to Employee (or Employee’s legal representative, as the case may be) the amount to which Employee shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to CNS.  If CNS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control.  If and to the extent there are not amounts in trust sufficient to pay Employee under this Agreement, CNS shall remain liable for any and all payments due to Employee.  In accordance with the terms of such trust, at all times during the term of this Agreement, Employee shall have no rights, other than as an unsecured general creditor of CNS, to any amounts held in trust and all trust assets shall be general assets of CNS and subject to the claims of creditors of CNS.  Failure of CNS to establish or fully fund such trust shall not be deemed a revocation or termination of this Agreement by CNS.

i.

As a condition of receiving the Severance Payment and other benefits provided in paragraph 8.f., Employee shall be required to sign a standard release agreement in the form of Exhibit B with CNS in which Employee agrees to release any and all claims and causes of action which Employee might have against CNS and its releasees, in which Employee affirms and acknowledges Employee’s obligations under paragraphs 9, 10, 11 and 12 of this Agreement, and includes an obligation not to speak negatively about or harm CNS, confidentiality with regard to the termination process and cooperation with the transition of responsibilities.  Payments under paragraph 8.f. shall begin after all rescission periods provided in the standard release agreement have run or have been waived.  

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j.

Immediately prior to a Change in Control, Employee shall vest in all stock options which have been granted to Employee and Employee shall be entitled to exercise all rights to receive all benefits accruing to Employee under any and all CNS stock purchase and stock option plans and programs.  Approval of this Agreement by the Compensation Committee shall be deemed approval of the vesting of options as provided in the immediately preceding sentence for all purposes under CNS stock purchase and stock option plans and programs.  In the event that the vesting of the options, together with all other payments and the value of any benefit received or to be received by Employee would result in all or a portion of such payment being subject to excise tax under Section 4999 of the Code, then Employee’s payment shall be either (A) the full payment or (B) such lesser amount that would result in no portion of the payment being subject to excise tax under Section 4999 of the Code (the "Excise Tax"), whichever of the foregoing amounts, taking into account the applicable Federal, state, and local employment taxes, income taxes, and the Excise Tax, results in the receipt by Employee, on an after-tax basis, of the greatest amount of the payment notwithstanding that all or some portion of the payment may be taxable under 4999 of the Code. All determinations required to be made under this paragraph 8.j. be made by a nationally recognized accounting firm which is CNS's outside auditor immediately prior to the event triggering the payments that are subject to the Excise Tax, which firm must be reasonably acceptable to Employee (the "Accounting Firm"). CNS shall cause the Accounting Firm to provide detailed supporting calculations of its determinations to CNS and Employee.  Notice must be given to the Accounting Firm within fifteen (15) business days after an event entitling Employee to a payment under this paragraph 8. All fees and expenses of the Accounting Firm shall be borne solely by CNS. The Accounting Firm's determinations must be made with substantial authority (within the meaning of Section 6662 of the Code).

9.

Confidential Information.  All knowledge and information not already available to the public which Employee may acquire or has acquired with respect to product development, improvements, modifications, discoveries, designs, methods, systems, computer software, programs, codes and documentation, research, designs, formulas, instructions, methods, inventions, trade secrets, services or other private or confidential matters of CNS (such as those concerning sales, costs, profits, organizations, customer lists, pricing methods, etc.), or of any third party which CNS is obligated to keep confidential, shall be regarded by Employee as strictly confidential and shall not be used by Employee directly or indirectly or disclosed to any persons, corporations or firms. All of the foregoing knowledge and information are collectively termed “Confidential Information” herein.  Employee’s obligations under this paragraph will not apply to any information which (a) is or becomes known to the general public under circumstances involving no breach by Employee of the terms of this paragraph, (b) is generally disclosed to third parties by CNS as a continuing practice without restriction on such third parties, (c) is approved for release by written authorization of CNS’s Board, or (d) Employee is obligated by law to disclose.

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10.

Disclosure and Transfer of Product Developments, etc.

a.

Employee will make full and prompt disclosure to CNS or all product developments, improvements, modifications, discoveries, computer software, programs, codes and documentation, research, designs, formulas, configurations, instructions, methods and inventions (all of which are collectively termed “Developments” herein), whether patentable or not, made, discovered, conceived or first reduced to practice by Employee or under Employee’s direction during Employee’s employment, alone or with others, whether or not made or conceived during normal working hours or on the premises of CNS which relate in any material way to the business or to research or development work of CNS.  Employee confirms by Employee’s acceptance of this Agreement that CNS owns and shall own all of the Developments.

b.

Employee also agrees on behalf of himself and Employee’s heirs and legal representatives that Employee will promptly communicate, disclose and transfer to CNS, free of encumbrances and restrictions, all of Employee’s right, title and interest in the Developments covered by paragraph 10.a. and any patents or patent applications covering such Developments and to execute and deliver such assignments, patents and applications, and any other documents as CNS may direct, and to cooperate fully with CNS to enable it to secure any patents or otherwise protect such Developments in any and all countries.  Employee shall assign to CNS any and all copyrights and reproduction rights to all material prepared by Employee in connection with Employee’s employment.

c.

Notwithstanding paragraphs 10.a. and b., however, this paragraph 10 shall not apply to Developments for which no equipment, supplies, facility or trade secret information of CNS was used and which was developed entirely on the Employee’s own time, and (A) which do not relate (1) directly to the business of CNS or (2) to CNS’s actual or demonstrably anticipated research or development, or (B) which does not result from any work performed by Employee for CNS.  

This will confirm that Employee’s obligations to CNS under paragraphs 9, 10 11 and 12 will continue after the termination of Employee’s employment.

11.

Non-competition.  During the term of Employee’s employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly engage in, enter into or participate in the business of CNS or in any business or commercial activity which does or is reasonably likely to compete with or adversely affect the Business (as defined below) or products of CNS, either as an individual for Employee’s own account, as a partner or a joint venturer, or as an officer, director, consultant or holder of more than five percent (5%) of the entity interest in, any other person, firm, partnership or corporation, or an employee, agent or salesman for any person.  In addition, during such period Employee shall not:  avail himself of any advantages or acquaintances Employee has made with any person who has, within the twelve (12) month period ended on the Employee’s Date of Termination, been a customer of CNS or its affiliates, and which would, directly or indirectly, materially divert business from or materially and adversely

12

affect the Business of CNS; interfere with the contractual relations between CNS and any of its employees.  For purposes of this Agreement, the “Business of CNS” or “Business” means and includes the business of the manufacture, production, sale, marketing and distribution of the Breathe Right strip and any other products currently offered or currently under development by CNS or offered or currently under development by CNS during one (l) year prior to the Employee’s Date of Termination.

Employee acknowledges that CNS directly, or indirectly through its affiliates, currently is engaged in business on a worldwide basis.  Consequently, Employee agrees that the obligations under this Section 11 shall apply in any market, foreign or domestic, in which (a) CNS or, as applicable, a CNS affiliate(s), operates during the one (1) year period prior to the Employee’s Date of Termination, and (b) CNS or, as applicable, a CNS affiliate(s), has plans to enter on the Employee’s Date of Termination.

12.

Non-Solicitation.  During the term of Employee’s employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly solicit any current or prospective CNS customer, broker, vendor or distributor for the purpose of providing products or services for or on behalf of said customer, broker, vendor or distributor which are competitive with the products or services being provided by CNS, which are in the development stages of being competitive with the products or services being provided by CNS, or which would in any way cause said customer, broker, vendor or distributor to discontinue or reduce its business relationship with CNS.  Current CNS customers, brokers, vendors or distributors include those customer, brokers, vendors or distributors with whom CNS has had a business relationship at any time within one (1) year immediately preceding Employee’s Date of Termination.  Prospective CNS customers, brokers, vendors and distributors include those with whom (a) a CNS representative has been in direct personal contact and (b) CNS has a reasonable opportunity of entering into a business relationship within six (6) months following Employee’s Date of Termination.  Employee also agrees that during Employee’s employment and in the one (1) year period following Employee’s employment, Employee will not directly or indirectly solicit any CNS employees to terminate his or her employment with CNS.  This Employee non-solicitation obligation applies to employees of CNS during Employee’s employment and as of Employee’s Date of Termination.

13.

Remedies.  Employee acknowledges that the restrictions set forth in paragraphs 9, 10, 11 and 12 hereof are reasonably necessary to protect legitimate business interests of CNS.  It is understood that if Employee violates Employee’s obligations under any of these paragraphs, CNS would suffer irreparable harm for which a recovery of money damages would be an incomplete and inadequate remedy.  It is therefore agreed that CNS, in addition to any remedies at law, shall be entitled, as a matter of right, in any court of competent jurisdiction, to a mandatory injunction restraining Employee pending litigation, as well as upon final determination thereof, from violating this Agreement.  In addition, CNS will discontinue payment to Employee of any Severance Payment or Salary Continuation, benefits or bonus which Employee may be entitled to receive or is receiving under paragraphs 6, 7 or 8 hereunder or otherwise, in the event of Employee’s violation of any of Employee’s obligations under this Agreement.  In the event of cessation of payments and benefits, Employee’s release of Employee’s claims against

13

CNS shall remain valid and fully enforceable in consideration of the benefits that Employee received prior to said breach.

14.

Severability.  The parties intend that the covenants and agreements contained herein shall be deemed to be a series of separate covenants and agreements, one for each and every state of the United States and political subdivision outside the United States where the business described is conducted.  If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in such action, then such unenforceable covenants shall be deemed eliminated from the provisions of this Agreement for the purpose of such proceeding to the extent necessary to permit the remaining covenants to be enforced in such proceeding.  Further, in the event that any provision is held to be overbroad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and enforced as amended.

15.

Cooperation.  For a reasonable period after termination of employment, Employee agrees to be available to, cooperate with and assist CNS as it may reasonably request in connection with any litigation or other legal proceeding, claims or potential claims or any internal or governmental investigation with respect to matters about which Employee has or may have knowledge as a result of Employee’s employment with CNS. Employee also agrees to promptly inform CNS if Employee is asked to assist in any investigation of CNS (or its actions) that may relate to services performed by Employee for CNS, regardless of whether a lawsuit has then been filed against CNS with respect to such investigation. In the event CNS requests Employee’s assistance in any litigation or regulatory matter after Employee’s employment termination, CNS will pay or reimburse Employee for any out-of-pocket costs and for any time Employee spends on such matter as requested by CNS, at a daily rate based on Employee’s Annual Base Salary at the time of termination.

16.

Dispute Resolution Procedure.

a.

CNS and Employee desire to establish a reasonable and confidential means of resolving any dispute, question or interpretation arising out of or relating to:

i.

this Agreement or the alleged breach or threatened breach of it;

ii.

the making of this Agreement, including claims of fraud in the inducement;

iii.

Employee’s employment by CNS pursuant to this Agreement, including claims of wrongful termination or discrimination; or

iv.

any activities by Employee following the cessation of employment with CNS (each such dispute to be referred to herein as a “Dispute”).

b.

In furtherance of the parties’ mutual desire, CNS and Employee agree that if either party believes a Dispute exists, that party shall provide the other with written notice of the claimed Dispute.  Upon receipt of that written notice, except

14

as provided in paragraph 13, the following procedure shall be the exclusive means of fully and finally resolving the Dispute.  First, within ten (10) days of the other party receiving that notice, Employee and appropriate representatives of CNS and/or Board will meet to attempt to resolve amicably the Dispute.  Second, if a mutually agreeable resolution is not reached within ten (10) days following the parties’ first meeting, the parties will engage in mediation with a neutral mediator mutually agreeable to the parties, said mediation to be held within thirty (30) days of the final meeting between Employee and representatives of CNS and/or Board.  Third, if the Dispute is not resolved through mediation within ten (10) days of such mediation, the Dispute shall be resolved exclusively by final and binding arbitration held in accordance with the provisions of this Agreement and the American Arbitration Association (“AAA”) National Rules for the Resolution of Employment Disputes then in effect, unless such rules are inconsistent with the provisions of this Agreement.  In connection with such arbitration:

i.

any such arbitration shall be conducted: (A) by a neutral arbitrator appointed by mutual agreement of the parties; or (B) failing such agreement, by a neutral arbitrator appointed in accordance with said AAA rules;

ii.

CNS shall pay the fees and expenses of the arbitrator;

iii.

the parties shall be permitted reasonable discovery in accordance with the provisions of the Minnesota Rules of Civil Procedure, including the production of relevant documents by the other party, the exchange of witness lists, and a limited number of depositions, including depositions of any expert who will testify at the arbitration;

iv.

the summary judgment procedure applicable under Rule 56 of the Minnesota Rules of Civil Procedure shall be available and apply to any arbitration conducted pursuant to this Agreement;

v.

the arbitrator’s award shall include findings of fact and conclusions of law showing the legal and factual bases for the arbitrator’s decision;

vi.

the arbitrator shall have the authority to award to the prevailing party any remedy or relief that a United States District Court or court of the State of Minnesota could order or grant if the dispute had first been brought in that judicial forum, including costs (other than the arbitrator’s fees and expenses) and attorneys’ fees;

vii.

the arbitrator’s award may be entered by any court of competent jurisdiction; and

viii.

unless otherwise agreed by the parties, the place of any arbitration proceeding shall be Minneapolis, Minnesota.

15

c.

Except as the parties shall agree in writing, upon court order, or as required by law, neither CNS nor Employee will disclose to any third party, except for their counsel, retained experts and other persons directly serving counsel or retained experts, any fact or information in any way pertaining to the process of resolving a Dispute under this paragraph 16, or to the fact of or any term that is part of a resolution or settlement of any Dispute.  This prohibition on disclosure specifically includes, without limitation, any disclosure of an oral statement or of a written document made or provided by either Employee or CNS, or by any of CNS’s or Employee’s representatives, counsel or retained experts, or other persons directly serving any representatives, counsel or retained experts.

17.

Binding Effect.

a.

CNS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of CNS (as defined in paragraph 8.a.) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that CNS would be required to perform it if no such succession had taken place, in which case, the term “CNS” as used in this Agreement shall instead refer to CNS’ successor; provided, however, that the provisions of paragraph 8.b. shall apply and this Agreement in its entirety shall terminate and be of no further effect at the end of the 24 month period following a Change in Control.  Failure of CNS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from CNS in the same amount and on the same terms as Employee would be entitled hereunder if Employee terminated Employee’s employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination.

b.

This Agreement shall inure to the benefit of and be enforceable by Employee’s personal or legal representatives, successors, heirs, and designated beneficiaries.  If Employee should die while any amount would still be payable to Employee hereunder if Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee’s designated beneficiaries, or, if there is no such designated beneficiary, to Employee’s estate.

18.

Entire Agreement.  From and after the date of this Agreement the terms and provisions of this Agreement constitute the entire agreement between the parties and this Agreement supersedes any previous oral or written communications, representations, or agreements with respect to any subject, including the subject matter of compensation, bonus, participation and profit sharing and termination compensation, including but not limited to, the prior executive employment agreement dated as of February 12, 1999.

19.

Waiver and Interpretation.  The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any

16

subsequent breach by the breaching party.  No waiver shall be valid unless in writing and signed by the party providing such waiver.  If any provision of this Agreement is held by any court to be unenforceable, then such provision shall be deemed to be eliminated from the Agreement to permit enforceability of the remaining provisions.  If any provision is held to be overbroad, such provision shall be amended to narrow its application to the extent necessary for enforceability.  For purposes of the release agreement which Employee shall be required to execute as a condition of receiving any payments and benefits hereunder, “CNS”, as referred to in this Agreement, shall include CNS and all its affiliates, shareholders, officers, directors, employees, agents, attorneys, insurers and indemnitors.

20.

Applicable Law.  All questions pertaining to the validity, construction, execution and performance of this Agreement shall be construed and governed in accordance with the laws of the State of Minnesota.  The parties consent to the personal jurisdiction of the State of Minnesota, waive any argument that such a forum is not convenient, and agree that any litigation relating to this Agreement shall be venued in Minneapolis, Minnesota.

21.

Tax Withholding.  CNS may withhold from any payment of benefits under this Agreement (and forward to the appropriate taxing authority) any taxes required to be withheld under applicable law.

22.

Notice.  Any notice required or desired to be given under this Agreement shall be deemed given if in writing sent by certified mail to Employee’s residence in the case of Employee, or to its principal office in the case of CNS.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above.

CNS, INC.

By

/s/  Daniel E. Cohen

Its Chairman

EMPLOYEE

/s/  Marti Morfitt

Marti Morfitt

17

Exhibit 10.31

EXECUTIVE EMPLOYMENT AGREEMENT

EXHIBIT A

Name:  Marti Morfitt

Position:  President and Chief Executive Officer

Annual Base Salary:  $440,000

Management Incentive Plan Level:

25% at Threshold

50% at Plan

100% at Maximum

RELEASE AGREEMENT

EXHIBIT B

In consideration of the benefits to be afforded to the undersigned under that certain Executive Employment Agreement dated July 20, 2004 between CNS, Inc., a Delaware corporation (“CNS”) and the undersigned (the “Employment Agreement”), the undersigned agrees to do the following things:  

1.

The undersigned hereby releases CNS, its past and present affiliates, and its and their past and present officers, directors, agents, shareholders, employees, attorneys, insurers and indemnitors (collectively, the “Releasees”) from any and all claims and causes of action, known or unknown, which the undersigned may have against any and all of them.  Through this release, the undersigned extinguishes all causes of action against the Releasees occurring up to the date on which the undersigned signs this release agreement, including but not limited to any contract, compensation or benefit claims; intentional infliction of emotional distress, defamation or any other tort claims; and all claims arising from any federal, state or municipal law or ordinance, including the Employee Retirement Income Security Act and the Family and Medical Leave Act.  This release extinguishes any potential claims of employment discrimination arising from the undersigned’s employment with and termination of employment with or resignation from CNS, including specifically any claims under the Minnesota Human Rights Act, the Americans With Disabilities Act, Title VII of the Civil Rights Act of 1964, the Older Workers Benefit Protection Act, and the Age Discrimination in Employment Act.  This release does not extinguish any claims: (i) that arise against CNS after the undersigned signs this release agreement; (ii) arising under this release agreement; (iii) to any benefits to which the undersigned is otherwise entitled under any CNS benefit plan as of the date of this release agreement; (iv) related to workers’ compensation; (v) arising under unemployment compensation law; or (vi) to the right to indemnification under CNS bylaws or insurance.  The undersigned certifies that she (a) has not filed any claims, complaints or other actions against any Releasee; and (b) is hereby waiving any right to recover from any Releasee under any lawsuit or charge filed by the undersigned or any federal, state or local agency on the undersigned’s behalf based upon any event occurring up to the date on which the undersigned signs this release agreement.  The undersigned acknowledges that she has been advised by CNS to review her rights and responsibilities under this release agreement with her own lawyer.

The undersigned has 21 days to review and consider this release agreement.  If the undersigned signs this release agreement before 21 days have elapsed from the date on which the undersigned first receives it, then the undersigned will be voluntarily waiving her right to the full 21-day review period.  The undersigned also has the right to rescind this release agreement within 15 calendar days of the date upon which the undersigned signs it.  The undersigned understands that if the undersigned desires to rescind this release agreement, the undersigned must put the rescission in writing and deliver it to Michelle Beuning, CNS, Inc., 7615 Smetana Lane, P.O. Box 39802, Minneapolis, MN

55439-0802 by hand or by mail within 15 calendar days of the date on which the undersigned signs this release agreement.  If the undersigned delivers the rescission by mail, it must be postmarked within 15 calendar days of the date on which the undersigned signs this release agreement and sent by certified mail, return receipt requested.  If the undersigned rescinds this release agreement, all of CNS’s obligations to the undersigned under the Employment Agreement, other than payment of accrued unused paid time off, will immediately cease and CNS will owe the undersigned nothing under the Employment Agreement.

2.

At CNS’s specific request and at mutually convenient times while the undersigned is receiving payments under the Employment Agreement, the undersigned agrees to consult with CNS without additional compensation with respect to a limited amount of transitional CNS business matters.  The undersigned also agrees to cooperate with CNS in any current or future claims or lawsuits involving CNS where the undersigned has knowledge of the underlying facts, and CNS will pay or reimburse the undersigned for any pre-approved travel or similar expenses related to any such litigation and for such other expenses as agreed to by CNS.  In addition, the undersigned agrees that she will not voluntarily aid, assist, or cooperate with any claimants or plaintiffs or their attorneys or agents in any claims or lawsuits commenced in the future against CNS, provided, however, that nothing in this release agreement will be construed to prevent the undersigned from testifying truthfully as required by valid legal or administrative process.  

3.

The undersigned agrees that she will continue to speak positively and with respect towards CNS as she has in the past.  

4.

The undersigned agrees to maintain the confidentiality of the terms of this release agreement and the terms of the Employment Agreement related hereto, to the extent not publicly disclosed by CNS, and agrees not to disclose such terms to anyone other than her family members, tax and legal advisors or as otherwise required by law.  

5.

The undersigned affirms and acknowledges her obligations under paragraphs 9, 10, 11 and 12 of the Employment Agreement.  

This release agreement shall not in any way be construed as an admission of liability by CNS or as an admission that CNS has acted wrongfully with respect to the undersigned.  CNS specifically denies and disclaims any such liability or wrongful acts.  

The undersigned understands that if she violates any obligation that she has to CNS under this release agreement or the Employment Agreement, all payments and benefits to her hereunder will immediately cease.  In such event, the undersigned’s release of her claims shall remain fully in effect in consideration of the payments and benefits that the undersigned received prior to any such breach.

The undersigned hereby declares that she has entered into this release agreement voluntarily, without coercion, duress, or reliance on any representations by any CNS employee, agent or lawyer.  

Acknowledged and agreed to, with declarations confirmed, this _____ day of ___________, 200_.

___________________________________

Marti Morfitt

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Marti Morfitt, certify that:

1. I have reviewed this Form 10-Q of CNS, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)      Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 5, 2004

/s/   Marti Morfitt

Marti Morfitt, President & Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Samuel E. Reinkensmeyer, certify that:

1. I have reviewed this Form 10-Q of CNS, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 5, 2004

/s/   Samuel E. Reinkensmeyer

Samuel E. Reinkensmeyer
Vice President of Finance, Chief Financial Officer and Treasurer

EX-32

Exhibit 32

CERTIFICATION

The undersigned certify pursuant to 18 U.S.C. § 1350, that:

(1)    The accompanying Quarterly Report on Form 10-Q for the period ended June 30, 2004, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)    The information contained in the accompanying Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 5, 2004

/s/   Marti Morfitt

Marti Morfitt, President & Chief Executive Officer

Date: August 5, 2004

/s/   Samuel E. Reinkensmeyer

Samuel E. Reinkensmeyer
Vice President of Finance, Chief Financial Officer and Treasurer