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, 2005.

o 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 of incorporation or organization)	(I.R.S. Employer 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     X          NO           

At July 29, 2005, the Company had outstanding 14,044,106 shares of common stock, $.01 par value per share.

CNS, Inc.
FORM 10-Q
For the Period Ended June 30, 2005
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. Unregistered Sales of Equity Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits

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,
	2005		2004
Net sales	$	23,539	$	16,531
Cost of goods sold		6,968		5,394
Gross profit		16,571		11,137
Operating expenses:
Advertising and promotion		6,326		5,148
Selling, general and administrative		4,340		3,578
Total operating expenses		10,666		8,726
Operating income		5,905		2,411
Investment Income		321		214
Income before income taxes		6,226		2,625
Income tax expense		2,181		952
Net income	$	4,045	$	1,673
Basic net income per share	$	0.28	$	0.12
Diluted net income per share	$	0.27	$	0.11
Weighted average number of common shares outstanding		14,240		13,831
Weighted average number of common and potential common shares outstanding		15,079		14,570

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, 2005			March 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	3,536		$	4,814
Marketable securities		56,430			55,936
Accounts receivable, net		11,256			15,030
Inventories		6,181			4,531
Deferred income taxes		1,929			1,968
Prepaid expenses and other current assets		863			1,435
Total current assets		80,195			83,714
Property and equipment, net		1,019			1,118
Product rights, net		1,387			1,360
Deferred income taxes		899			1,023
	$	83,500		$	87,215
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	14,731		$	16,064
Total current liabilities		14,731			16,064
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 14,079 shares at June 30, 2005 and           14,246 shares at March 31, 2005		193			193
Additional paid-in capital		61,811			61,693
Treasury shares - at cost; 5,216 at June 30, 2005 and 5,049 at March 31, 2005		(29,534	)		(23,779	)
Retained earnings		36,471			33,284
Accumulated other comprehensive income		(172	)		(240	)
Total stockholders’ equity		68,769			71,151
	$	83,500		$	87,215

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,
	2005			2004
Operating activities:
Net income	$	4,045		$	1,673
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization		203			200
Deferred income taxes		125			(132	)
Changes in operating assets and liabilities:
Accounts receivable		3,774			3,042
Inventories		(1,650	)		138
Prepaid expenses and other current assets		571			799
Accounts payable and accrued expenses		(1,332	)		(4,332	)
Net cash from operating activities		5,736			1,388
Investing activities:
Purchases of marketable securities		(12,003	)		(8,857	)
Sales of marketable securities		11,615			8,859
Payments for purchases of property and equipment		(22	)		(6	)
Payments for product rights		(109	)		(65	)
Net cash from investing activities		(519	)		(69	)
Financing activities:
Proceeds from issuance of common stock under stock plans		696			840
Purchase of treasury shares		(6,333	)		(473	)
Payment of cash dividends		(858	)		(689	)
Net cash from financing activities		(6,495	)		(322	)
Net change in cash and cash equivalents		(1,278	)		997
Cash and cash equivalents:
Beginning of period		4,814			8,871
End of period	$	3,536		$	9,868

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, 2005.

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, 2005. 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,
	2005		2004
Net income, as reported	$	4,045	$	1,673
Deduct: Total stock-based compensation expense determined
under the fair value based method for all awards, net of tax		229		165
Proforma net income	$	3,816	$	1,508
Earnings per share:
Basic - as reported	$	0.28	$	0.12
Basic - proforma	$	0.27	$	0.11
Diluted - as reported	$	0.27	$	0.11
Diluted - proforma	$	0.25	$	0.10

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, 2005		March 31, 2005
Finished goods	$	4,955	$	3,547
Raw materials and component parts		1,226		984
Total inventories	$	6,181	$	4,531

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

	Three Months Ended June 30,
	2005		2004
Domestic - Breathe Right	$	14,736	$	12,033
Domestic - FiberChoice		5,157		2,494
Domestic - Other		26		58
Total Domestic		19,919		14,585
International - Breathe Right		3,620		1,946
Total net sales	$	23,539	$	16,531

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

	Three Months Ended June 30,
	2005		2004
Net income	$	4,045	$	1,673
Unrealized gain(loss) on marketable
securities, net of income tax effects		68		(225	)
Total comprehensive income	$	4,113	$	1,448

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,
	2005		2004
Average common shares outstanding		14,240		13,831
Potential common shares		839		739
Average common and potential common shares		15,079		14,570

For the three months ended June 30, 2005 all outstanding stock options were included in the calculation of potential common shares because the exercise price of all options were lower than the average market price for the three month period. For the three month period ended June 30, 2004 there were 336,320 options with a weighted average exercise price of $11.33 which were excluded from the calculation of potential shares due to the exercise price of the options being higher than the average market price for the three month period.

Note 8 – Dividends
The Company declared a $.06 per share cash dividend on April 26, 2005 for shareholders of record as of May 20, 2005. The amount of dividend, paid on June 3, 2005, was $858,000. The Company paid dividends of $689,000 during the three months ended June 30, 2004.

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, 2005, 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.

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 Quarterly 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, 2005.

Overview
We are in the business of developing and marketing consumer health care products, including Breathe Right® branded products focused on better breathing, and FiberChoice® branded products focused on digestive health. We operate in niche categories of the large over-the-counter health care market with unique product offerings that are supported by strong advertising and promotion programs. Our competitive strengths include our brands and patented technologies, well-established distribution networks domestically and internationally, a flexible and low-cost operating model and an experienced management team.

Our principal product, the Breathe Right nasal strip, improves breathing by dilating the nasal passages. Nasal strips provide temporary relief from nasal congestion and stuffiness resulting from a variety of health conditions, and also reduce or eliminate snoring. Breathe Right nasal strips, and the entire Breathe Right product line, provide consumers “drug free” better breathing solutions. Breathe Right nasal strips are sold in the United States and 26 markets internationally.

The Breathe Right brand has been further extended by the launch of new products such as Breathe Right Snore Relief throat spray in fiscal 2003 and the launch of Breathe Right Vapor Shot!™ personal vaporizer in fiscal 2004.

We entered the bulk fiber category in March 2000 with the launch of the FiberChoice® brand. The original FiberChoice product is an orange flavored chewable fiber tablet that offers consumers an effective, convenient and good-tasting way to supplement their daily intake of dietary fiber. In March 2005, CNS extended the FiberChoice line to include sugar-free chewable fiber tablets in assorted fruit flavors and a low-sugar, hard candy fiber drop.

In addition to further organic development and expansion of the Breathe Right® and FiberChoice brands, we are exploring opportunities to acquire established consumer health care brands, product lines and new technologies that complement our better breathing and digestive health platforms.

Results of Operations
For the quarter ended June 30, 2005, net sales were $23.5 million, an increase of 42.4% versus net sales of $16.5 million for the quarter ended June 30, 2004.

Domestic net sales for the quarter ended June 30, 2005 of $19.9 million increased by $5.3 million or 36.6% compared to the quarter ended June 30, 2004. Net sales of Breathe Right brand products increased by 22.5% to $14.7 million relating to continued strong consumer demand resulting from effective consumer marketing. Net sales of FiberChoice brand products of $5.2 million increased by 106.8% compared to the quarter ended June 30, 2004. Sales of FiberChoice brand products were positively impacted by increased advertising and promotion support and sales of the two new products launched in February 2005.

Breathe Right international net sales for the quarter ended June 30, 2005 were $3.6 million compared to $1.9 million for the quarter ended June 30, 2004. The increase in international net sales for the three months ended June 30, 2005 is the result of resuming product shipments to our distributor in Japan along with continued strong growth in Canada and Europe.

We believe the percentage relationship between net sales and major expense lines in the statement of operations and the percentage in the dollar amounts of each of the items presented below is important in evaluating the performance of our business operations.

	Percentage of Sales For three months Ended June 30,				% Inc. in Dollar Amounts
	2005		2004		2005 vs. 2004
Sales		100.0%		100.0%		42.4%
Gross profit		70.4%		67.4%		48.8%
Operating expenses:
Advertising and Promotion		26.9%		31.1%		22.9%
Selling, general and administrative		18.4%		21.6%		21.3%
Total operating expenses		45.3%		52.8%		22.2%
Operating income		25.1%		14.6%		144.9%

Gross profit was $16.6 million for the June quarter of 2005 compared to $11.1 million for the quarter ended June 30, 2004. Gross profit as a percentage of sales for the quarter ended June 30, 2005 increased to 70.4% compared to 67.4% for the three months ended June 30, 2004. The improved gross profit percentage in the June quarter of 2005 was the result of lower product cost and increased operational efficiencies.

Advertising and promotion expense for the June quarter of 2005 was $6.3 million compared to $5.1 million for the same period of 2004, an increase of 22.9%. The $1.2 million increase in advertising and promotion expense is partly the result of geographic expansion of FiberChoice advertising, as well as support for the launch of new products. Advertising and promotion expense as a percent of sales decreased from 31.1% for the quarter ended June 30, 2004 to 26.9% for the June 2005 quarter.

Selling, general and administrative expenses were $4.3 million for the June quarter of 2005 compared to $3.6 million for the same quarter of 2004. The increase is primarily the result of increased investment in product development and research. Selling, general and administrative expense as a percent of sales decreased from 21.6% for the quarter ended June 30, 2004 to 18.4% for the June 2005 quarter.

Operating income for the June quarter of 2005 increased by 144.9% to $5.9 million compared to $2.4 million for the same quarter of 2004. Operating income as a percentage of net sales increased to 25.1% for the quarter ended June 30, 2005 from 14.6% for the quarter ended June 30, 2004. The increase in operating profit was caused by the strong growth in sales volumes, the improvement in gross profit margin explained above, as well as the improved efficiencies in operating expenses.

Investment income was $321,000 for the June quarter of 2005 compared to $214,000 for the same quarter of 2004. The increase in market interest rates compared to the prior year quarter and an increase of $9.8 million in cash and marketable securities produced the increase in investment income. We continue to increase the percentage of marketable securities invested in tax-exempt investments that provide higher after-tax returns.

Net income for the quarter ended June 30, 2005 was $4.0 million compared to $1.7 million for the same quarter of 2004. Income tax expense was $2.2 million or 35.0% of income before taxes for the June quarter of 2005 compared to $952,000 or 36.3% of income before taxes for the same quarter of 2004. The reduction in the effective income tax rate reflects a shift from taxable investments to tax-exempt securities and utilization of foreign export incentives.

Our financial position continues to be strong, with cash and marketable securities of $60.0 million and no debt as of June 30, 2005.

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 the 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
As of June 30, 2005, we had cash and marketable securities of $60.0 million and no debt on our balance sheet. The existing cash and marketable securities may be used to acquire complementary consumer healthcare businesses, pay dividends to our shareholders and/or buy back additional shares of CNS common stock.

Cash generated from operating activities for the quarter ended June 30, 2005 was $5.7 million, compared to $1.4 million in the prior year period. The increase was driven by the growth in net income as well as improvements in net operating assets and liabilities.

Purchases of marketable securities exceeded sales and maturities by $494,000 for the first quarter of fiscal 2006.

There were 148,478 shares of common stock issued for $696,000 during the three months ended June 2005 under our Employee Stock Purchase Plan and shareholder approved equity compensation plans.

We repurchased 315,105 shares of common stock for $6.3 million during the three months ended June 2005 at average prices of $20.10 per share. We have authority to repurchase up to 110,400 additional shares of our common stock in connection with the stock repurchase program that was authorized by the board of directors.

Subsequent to the quarter end, the Company announced that its board of directors authorized the repurchase of up to 1,000,000 additional shares of the Company’s common stock under the Company’s stock repurchase program.

The board of directors declared a $.06 per share cash dividend on April 26, 2005 for shareholders of record as of May 20, 2005. The amount of this dividend payment, paid on June 3, 2005, was $858,000. Dividends of $689,000 were paid during the three months ended June 30, 2004.

We believe that our 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, we must make decisions that 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, we apply judgment based on our 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, 2005. 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 depends on sales of Breathe Right nasal strips for the majority of its revenue; (ii) the Company’s business is subject to seasonality, with sales typically higher in the fiscal third and fourth quarters of each year due to 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 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 competition in its market; (vi) the Company relies on third-party manufacturers for the production of all of its products; and (vii) as of August 1, 2005, the Company relies on a single third-party manufacturer for the production of its Breathe Right nasal strip products, with the raw materials being supplied by a sole source and other factors and risks, including those set forth in the Company’s reports filed with the Securities and Exchange Commission, including those risks identified in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended March 31, 2005. These forward-looking statements are made as of the date of this report and the Company assumes no obligation to update such forward-looking statements, or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.

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, 2005. See Item 7A of the Company’s Annual Report on Form 10-K for the year ended March 31, 2005.

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 evaluation, they have concluded that as of that date, the Company’s disclosure controls and procedures are effective.

(b)  Changes in Internal Control Over Financial Reporting.

There have been no 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. Unregistered Sales of Equity Securities and Use of Proceeds

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, 2005	55,105	$16.63	55,105	370,400
May 1 - May 31, 2005	35,000	$19.31	35,000	335,400
June 1 - June 30, 2005	225,000	$21.07	225,000	110,400
Total	315,105	$20.10	315,105	110,400

(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.

On August 2, 2005, the board of directors authorized the Company to repurchased an additional 1,000,000 shares of the Company’s common stock under the previous program that was authorized as of February 2002.

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

The following exhibits are filed as part of this Report:

10.1 Amended and Restated Supply Agreement dated as of August 1, 2005 between CNS, Inc. and Webtec Converting, LLC.**

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).

** Certain portions of this Exhibit have been deleted and filed separately with the Commission pursuant to a request for confidential treatment under Rule 24b-2. Spaces corresponding to the deleted portions are represented by brackets with asterisks.

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.
Date:	August 5, 2005	By:	/s/ Marti Morfit
		Marti Morfitt President & Chief Executive Officer
Date:	August 5, 2005	By:	/s/ Samuel E. Reinkensmeyer
		Samuel E. Reinkensmeyer Vice President of Finance, Chief Financial Officer and Treasurer

EX-10.1

CERTAIN INFORMATION INDICATED BY [* * *] HAS BEEN DELETED FROM THIS EXHIBIT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2.

Exhibit 10.1

AMENDED AND RESTATED SUPPLY AGREEMENT
WEBTEC CONVERTING, LLC

        The parties to this Agreement are CNS, Inc., (“CNS”), a Delaware Corporation, headquartered in Eden Prairie, MN and WEBTEC CONVERTING, LLC, (“WEBTEC”) a Tennessee limited liability company, with its headquarters in Knoxville, TN. The parties have in the past concluded a supply agreement for the Breathe Right® nasal strips marketed and sold by CNS (the “Product” or “Products,” as the case may be, as further defined below). The parties later amended and extended that agreement; on the basis of the promises set forth below, and intending to be legally bound, the parties hereby enter into this Agreement to amend and restate in its entirety such previous agreement, including its amendment.

1. Term.

The term of this Agreement begins on the date the last party signs this Agreement (the “Effective Date”) and will continue for five (5) years. This Agreement supersedes any prior agreements. Both parties, at the end of the five (5) years, agree to act in good faith to renegotiate pricing and extend the Agreement for two more years. If agreement on pricing cannot be reached then the Agreement will terminate at the end of the initial five (5) year term.

2. Exclusivity.

WEBTEC will not supply finished external nasal dilators or components for use in the manufacture of external nasal dilators to any third party(s) other than CNS or its designee for the duration of this Agreement and for a period of three (3) years thereafter. This exclusivity is deemed necessary by the parties to protect CNS’s confidential information and other proprietary rights.

3. Products; Specifications and Related Price Changes.

3.1. Products. The products covered by this Agreement (the “Products”) are (a) those being manufactured by WEBTEC at the time this Agreement is executed by the parties, including any changes to those items required or requested by CNS as provided herein; and (b) any other products or items that the parties add to this Agreement by explicit written amendment or agreement signed by both parties.

3.2. Revision of Specifications. CNS has the right to revise Product specifications at any time and provide such amended specifications to WEBTEC. After only a commercially reasonable period for implementing changes, WEBTEC will manufacture Products to the most current revision level of the specifications provided by CNS and accepted by WEBTEC, which acceptance shall not be unreasonably withheld. A certificate of conformance shall accompany each shipment, confirming that the Product was produced to the most current revision level. Price changes will occur at the time of implementation of the changes.

3.3. Planned Price Reductions Separate. Price changes according to this Section 3 are separate from and will have no effect on price changes provided for elsewhere in this agreement. WEBTEC in its notice to CNS of cost increases or decreases will also notify CNS of the time required to make the change, and upon CNS’s request the parties will confer on possible methods of shortening the required time.

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3.4. WEBTEC-Initiated Changes That Terminate This Agreement. If WEBTEC brings to CNS a change of design, concept, or material, or other proposed modification of the Products that is substantially different (as determined in the sole discretion of CNS) from the attributes of the Products at the time when WEBTEC presents the modification, CNS will give WEBTEC a right of first refusal to manufacture the Products as changed, at prices at least as favorable to CNS as other suppliers’ prices. If WEBTEC cannot, or does not, accept the right of first refusal within a reasonable time period not to exceed one (1) month from when CNS first gives notice of the right of first refusal, CNS may find an alternative manufacturer of the Product(s) as changed and will give WEBTEC twelve (12) months’ notice of termination of its manufacture of the Product(s) as previously configured. CNS and WEBTEC will negotiate in good faith a fair and equitable agreement of licensing, royalty, or other compensation with respect to the proposed product. If WEBTEC can manufacture the proposed product then no such agreement will be implemented.

3.5. Non-WEBTEC Initiated Changes that Terminate this Agreement. If CNS or a third party originates a change of design, concept, or material, or other proposed modification of the Products that is substantially different (as determined in the sole discretion of CNS) from the attributes of the Products at the time when CNS presents the modification, CNS will give WEBTEC a right of first refusal to manufacture the Products as changed, at prices at least as favorable to CNS as other suppliers’ prices. If WEBTEC cannot, or does not, accept the right of first refusal within a reasonable time period not to exceed one (1) month from when CNS first gives notice of the right of first refusal, CNS may find an alternative manufacturer of the Product(s) as changed and will give WEBTEC twelve (12) months’ notice of termination of its manufacture of the Product(s) as previously configured. In addition to the twelve (12) months notice CNS will also pay to WEBTEC four (4) months of profit margin for every year left on the contract. The profit margin will be based on the average profit margin of the first year of this contract. For example, if at the end of the first year CNS implements this option; CNS will give WEBTEC the twelve (12) months notice per the aforementioned duration and will pay the average profit margin from year one of the contract for twelve (12) additional months. If this clause is executed after year two CNS’s obligation will be for the twelve (12) month notice and pay the average profit margin from year one of this contract for an additional 8 months.

4. Quality; WEBTEC Inspections.

After a date to be agreed by the parties, but no later than six months after the Effective Date, WEBTEC will conduct sample inspections in and after the production process and will send to CNS prior to the shipment arriving a copy of the certificate of conformance to ensure that the Products shipped to CNS comply with the agreed specifications, with the goal of ultimately eliminating the need for CNS’s incoming inspections. In the event that CNS identifies Product that is not within specifications, WEBTEC will upon notice replace or refund the purchase price of any Product that is shown not to conform to specifications. In addition, WEBTEC will incur the cost of return freight and is responsible for the disposal of goods in a safe manner. WEBTEC will pay reasonable costs for such disposal.

5. CNS Duty to Inspect; Returns.

5.1 Inspections. CNS will direct its distribution center to promptly inspect, on a selective or sample basis, any shipment of finished Product received from WEBTEC, but not necessarily all shipments, and to notify WEBTEC promptly in writing of any defects. The notice must specify the defects in detail.

5.2 Acceptance and Returns. Any goods not rejected within thirty (30) days of delivery are deemed accepted, but CNS may inspect and return Products under warranty for credit at any time up to twenty-four (24) months after CNS receives them from WEBTEC or at any time upon their return from distribution channels or consumers for reasons of defects.

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6. Liability.

6.1 WEBTEC shall be liable to CNS for any and all claims, causes of action, suits, proceedings, damages, demands, fees, expenses, fines, penalties and costs (including without limitation, attorney’s fees, costs and disbursements), collectively “Adverse Consequences,” arising from any injury or alleged injury to any person or business for property damage, personal injury or incidental, special or consequential damages made against CNS or WEBTEC for liability arising from or caused by the use of Products as a result of negligence by WEBTEC in the production, handling or distribution of Products prior to receipt by CNS or its customers. However, WEBTEC shall not be liable to CNS under the proceeding sentence unless CNS shall have tendered to WEBTEC the defense of any claim, cause of action, suit or proceeding encompassed within the preceding sentence, promptly upon CNS’s awareness of the same; and in no event shall WEBTEC be liable under the preceding sentence for Adverse Consequences attributable to defective design or flaw in the specifications of Products.

6.2 Insurance. Webtec shall at all times maintain insurance to cover the liability provided in this Section 6.2, in the amount of at least one million dollars per event and three million dollars in the aggregate for any series of related events, and shall supply to CNS on an annual basis a copy of their certificate of insurance.

7. Pricing/Quantity.

7.1 Price Sheets. WEBTEC is obligated to the pricing per Exhibit A and CNS agrees its purchases of Products will be at the prices supplied on the price sheet provided by WEBTEC, attached as Exhibit A, for the duration of the Agreement. The parties may agree to add additional items to the price list. Prior to addition to the price list, both parties must agree on the pricing for new items. The new price sheet shall become effective only when representatives from CNS and WEBTEC sign and date the new price sheet.

7.2 Production and Volume. CNS will strive to smooth production such that downtime will be minimized at WEBTEC and to the best of CNS’s ability production will occur in every month subject to market and competitive conditions. The quantities to be purchased from WEBTEC by CNS will be reviewed annually and will be based on market conditions.

8. Cost Reductions.

8.1 Committed Initial and Annual Reductions. WEBTEC commits to regular reduction of its prices to CNS. At a minimum, WEBTEC has agreed to reduce the prices [ * * * ] upon completion of the transition of CNS’s business from another of CNS’s suppliers to WEBTEC as described under XIV, and thereafter an additional [ * * * ] per year, effective on anniversaries of the Effective Date. The parties recognize that half [ * * * ] of this agreed reduction for the transition has already occurred. The remaining reduction will occur when the transition is completed but no later than October 1, 2005.

8.2 Increases for Inflation. However, in the unlikely event that inflation-driven cost increases by WEBTEC’s suppliers, after reasonable resistance by WEBTEC, unavoidably increase WEBTEC’s costs, WEBTEC has the right to renegotiate the price, in an amount never to exceed demonstrable increases in its overall cost due to such increases from suppliers, and always subject to reduction or offset according to the provisions on cost reduction in Section 8.3 and elsewhere in this Agreement.

8.3 Continuing Cost Reductions. In addition to the above-referenced price reductions, WEBTEC agrees to aggressively continue its efforts to reduce its costs by for example improving efficiencies, automating equipment, and controlling the cost of raw materials etc. CNS agrees to assist WEBTEC in areas of cost reductions that are external to WEBTEC, including but not limited to printing, packaging, corrugate and alternative material. CNS will assist at its sole expense in evaluating these potential areas by participating in creation and evaluation of cost-saving ideas through membership on a team of individuals from the respective companies. It is expected that the cost reduction efforts will yield, available to CNS [ * * * ], beginning on the first anniversary of the Effective Date and [ * * * ] on the second, third, and fourth anniversaries. The operation team, consisting of [ * * * ], will review the

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actual savings on an annual basis. In the event that the actual targeted cost reductions are not met WEBTEC will not be responsible to pass on the targeted reductions for that year. If actual savings achieved exceed the targeted savings then WEBTEC retains any amount in excess of the targeted savings. Any reductions in materials costs (other than changes in formulation or specification provided for above) will be [ * * * ] on a quarterly basis by further reductions of prices to CNS, based on the above-mentioned quarterly reports, and any initial costs required for implementation of those efficiencies (including but not limited to consumer “HUT” testing) will also be [ * * * ].

9. Termination for Cause.

Upon default by either party in the performance of any material obligation in this Agreement, either party may give notice in writing by certified mail, to the other party and the defaulting party shall have thirty (30) days from the date the notice is received to cure the default. In the event the default is not cured within this thirty (30) day time period, the non-defaulting party may terminate this Agreement by providing notice of termination, which shall take effect no earlier than ten (10) days from the date of such notice. Termination under provisions of this Section 9 shall not relieve either party of an obligation existing upon the date of termination or relieve either party from liability for breach of this Agreement subject to the terms of this Agreement.

10. Forecast/Planning.

10.1 Annual Forecast. CNS will provide to WEBTEC an annual forecast to be used by WEBTEC to assist in capacity planning. This annual forecast is not a binding forecast and WEBTEC will not hold CNS to this forecast.

10.2 Three-Month Forecast; Termination Coverage. CNS will also provide to WEBTEC production requirements for a 3-month time period on a monthly basis. WEBTEC will use this production requirement to plan production and to plan their material requirements. In the event CNS cancels any orders, CNS will be responsible for reimbursing WEBTEC for the cost of material in WEBTEC’s inventory or material that has been placed on order for production requirements that fall within the 3-month timeframe so long as WEBTEC has not begun production with respect to such materials. In the event that WEBTEC has begun production on any order that is canceled by CNS that falls within the 3-month requirements, CNS will be responsible for purchasing such strips at the prices indicated on Exhibit A. CNS will not be responsible for material purchases or production that exceeds production requirements for the 3-month timeframe, unless members of the CNS operations group authorized such material purchases in writing. CNS will only be liable for reimbursing WEBTEC for its material and labor costs as provided above but will in no event be liable for any consequential, incidental or other damages for cancellation. CNS will provide, on an ongoing basis, purchase orders for production requirements for the aforementioned three-month period. These purchase orders are to be used by WEBTEC as a finite scheduling format to plan production and material needs to meet the required dates as mutually agreed to as outlined in Section 15.

10.3 Capacity Information. WEBTEC will provide CNS’s planning department with detailed information concerning WEBTEC’s manufacturing capacity for its converting machines for each strip type and for each cartoning machine for each strip configuration. Each month, WEBTEC will supply to CNS’s planning department a summary of actual production. WEBTEC will mark any written information concerning capacities and production, which it intends to keep confidential as “CONFIDENTIAL.” CNS will maintain the confidentiality except as disclosure is required by law, process of law or to fulfill this Agreement.

11. Forecast Planning Assumed by WEBTEC.

Before the second anniversary of the Effective Date, the forecasting of ongoing work load and production levels will be transferred for efficiency from CNS to WEBTEC. CNS will make its relevant market information available to WEBTEC, and WEBTEC will plan accordingly its own levels of materials and labor supply and output of Product.

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12. Use of Name and Trademarks; Confidentiality.

12.1 Neither party will make any use whatsoever of the other party’s name without its written permission. The decision to grant such permission is within the sole discretion of the non-requesting party. Neither party will use or reproduce any of the other party’s trademark or logos in any manner without prior written approval. To request this approval, the requesting party must forward to the other party a complete and accurate specimen copy of the proposed use. Each party agrees that, upon receiving such a request, it will reply to the requesting party within ten (10) business days of receipt of such proposed use. Any permitted use extends only to specifically authorized materials.

12.2 WEBTEC agrees to keep prices, forecast volumes, marketing plans, materials, quantity of purchases and other material information related to this Agreement confidential during the Term of this Agreement and for a period of three (3) years thereafter.

13. Events of Excused Performance.

Neither WEBTEC or CNS shall be considered in default or be liable to the other for any delay beyond the reasonable control of such party, including, but not limited to, acts of God, explosion, earthquake, fire, flood, war whether declared or not, accident, strikes, labor disturbances, inability to procure from a third party supplier, sabotage, or order or decrees of any court or action of a government authority. If such a delay continues for a period of more than ten (10) consecutive days, CNS is relieved of its obligation to purchase from WEBTEC for the period of WEBTEC’s inability to supply and such longer period as may be reasonably necessary to secure a supply of similar products from a third party. WEBTEC agrees to use reasonable efforts to help CNS identify such a supplier.

14. Recovery Plan.

WEBTEC will create and maintain a catastrophic recovery plan for resumption or continuation of full performance and supply under this Agreement if a disastrous event occurs that interrupts or for some period prevents WEBTEC’s performance and supply under this Agreement. WEBTEC shall present the plan promptly to CNS for approval. WEBTEC will be obligated to keep the catastrophic recovery plan up to date based on changes at WEBTEC, this includes but not limited to, equipment changes, location changes or process changes. In addition, WEBTEC will provide to CNS on each anniversary date of this agreement an up to date copy of the plan and will review said plan at that time. in an attempt to minimize as much as possible the interruption in supply of Products as a result of such an event.

15. Delivery; Safety Stock.

15.1 Delivery; Purchase Orders. CNS will provide to WEBTEC Purchase Orders for production requirements as outlined in Section 12. WEBTEC shall, within forty-eight (48) business hours, acknowledge the purchase orders for pricing, quantity and delivery. Upon acceptance of CNS’ purchase order, WEBTEC will deliver Products as acknowledged as to pricing, quantity and delivery. Pricing is as provided in Section 7. The purchase order date will reflect the month in which production requirements are needed. Individual dates will be mutually agreed upon by item/purchase order on a routine basis based on market fluctuations and resulting orders by CNS. WEBTEC’s failure to meet a mutually agreed upon date will be considered a material breach of this Agreement. WEBTEC will be responsible to CNS for any additional costs incurred by CNS as a result of WEBTEC’s late delivery. These costs may include but are not limited to expedited costs either from WEBTEC or to CNS’ customers, late charges assessed by CNS’ customers, and overtime costs. No terms or conditions on any purchase orders or acknowledgements or similar sales documents shall be effective to add terms to or vary the terms of this agreement.

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15.2 Safety Stock. To avoid any delay from production problems or unexpected volume requirements, WEBTEC will maintain on hand at all times a “safety stock” (raw material components) equivalent to three weeks of production under this Agreement. The parties will meet on a quarterly basis to adjust the level of required safety stock based on actual orders by CNS since the previous meeting for this purpose.

16. Account Representation; Transition of Business from Another Supplier to WEBTEC.

WEBTEC agrees during the term of this Agreement to designate an individual as an Account Representative to represent WEBTEC and be a primary contact person to CNS. The Account Representative’s responsibilities may include, but are not limited to, development of new business opportunities, production requirement submissions, material lead-time planning, delivery issues, quality issues, and quantity issues. In connection with the transition of part of CNS’s production requirements from another manufacturer to WEBTEC, the parties have agreed in Exhibit B to further details of planning and cooperation, beginning before the Effective Date, hereby formalized on the Effective Date, and in effect throughout the period described in Exhibit B. Provisions of Exhibit B supersede and control any conflicting provisions elsewhere in this Agreement, except such provisions as may be added by amendment after the Effective Date.

17. Financial Health.

WEBTEC will make periodic proposals for and will standardize in a measurable way its ongoing efforts to control its costs and revenues so as to achieve and maintain financial health and stability, to the end of providing a reliable source of products for CNS. WEBTEC’s first steps toward such standardization will be a presentation of summary financial information, establishment of reasonable financial goals and progress toward achievement of those goals, and WEBTEC will make additional proposals of substantive nature semi-annually, supplying reports to CNS at the same interval summarizing WEBTEC’s financial stability and efforts to improve or stabilize its financial position. CNS will have the right from time to time, on reasonable notice, to review the financial aspects of WEBTEC’s business related to production of the Breathe Right® nasal strip.

18. Business Continuity, Company Stability.

18.1 Notice of Interruption. WEBTEC must notify CNS promptly upon receiving knowledge of the likelihood of occurrence (or if not previously recognized, the actual occurrence) of any event that would normally be expected to have a significant negative impact on WEBTEC as an ongoing entity or on its ability to perform the Contract, whether or not such occurrence is a disaster under provisions of Section 14 above.

18.2 Continuity Planning for WEBTEC’s Business. Before July 31 (the “Confirmation Date”), WEBTEC will provide CNS with a plan for continuing the operation of the business of WEBTEC and full performance under this Agreement despite any unavailability, incapacity, death, or removal of one or more of the Principals of WEBTEC (defined as the owners of WEBTEC on the Effective Date), including also without limitation the sale or transfer of all or a part of the interest in WEBTEC, whether assets, shares, or otherwise, on the part of any such Principal(s) or WEBTEC itself, whether

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through voluntary or involuntary action. To the extent that WEBTEC is owned by another entity rather than individuals, the foregoing provision concerning Principals refers to owners of such entity on the Effective Date. Before the Confirmation Date WEBTEC will supply to CNS agreements and other required documentation (such as but not limited to information on corporate structures and ownership) to guarantee performance of the foregoing provisions of this Section 18.2 and to provide to CNS a right of first refusal to acquire the shares of any Principal that are to be sold or transferred as described above, such right to apply to acquisition by CNS on terms at least as favorable as those on which transfer is proposed in a bona fide transaction. In the event of transfer, or a conversion from joint tenancy to other ownership, following death of a Principal, the right of first refusal will be at an appraised value. Failure to supply the required information and documentation under this Section is a material breach of this agreement.

18.3 In the event of a proposed change in ownership of WEBTEC or CNS, the affected company will give the other at least nine (9) months’ notice (or as long a notice period as possible, if the acquired company itself has less notice than nine (9) months or if, in the case of CNS, legal advisors indicate a shorter period is required by the securities laws and regulations), and WEBTEC hereby guarantees that any new owner(s) will observe and perform the Agreement. In addition to the documentation required by Section 18.2 above, in the event of such a proposed change in ownership WEBTEC will upon request provide adequate personal assurances of the current shareholders that any such new owners will so observe and perform this Agreement. If during the term of the Agreement CNS is acquired by another party, CNS will either continue to perform its obligations under this Agreement or give WEBTEC twelve (12) months’ notice of termination hereof. CNS may terminate during such period, however, for breach by WEBTEC. Because CNS is publicly held, a “change of ownership” of CNS under provisions of this Section means acquisition by one party of more than fifty percent (50%) of CNS’s common stock.

19. New Equipment.

If WEBTEC finds from time to time that a significant investment in new equipment is required or advisable for continued or more efficient performance of this Agreement, WEBTEC may discuss the matter with CNS on a case-by-case basis to ascertain whether CNS in its sole discretion considers that a sharing of the cost would be appropriate. In the event major equipment changes are determined to be appropriate by both companies that require WEBTEC to outlay substantial capital, then CNS and WEBTEC will agree on how to deal with the costs in a separate document to be completed prior to the purchase of equipment. Generally, however, the cost of manufacturing will be borne by WEBTEC.

20. Notice.

To be effective, any notice permitted or required under the terms of this Agreement must be in writing, addressed to the party to be notified at the address shown in this Section 20, and hand delivered, delivered by United States mail, or delivered by nationally recognized commercial courier service such as but not limited to FedEx or UPS. Their parties may update their respective addresses below from time to time by notice pursuant to this Section 20, specifying in each case a bona fide new address for purposes of notice hereunder. Notices are effective upon receipt by the party that is to be notified, except that notices of changes of address are effective five (5) days after receipt.

Addresses for notices are:

If to WEBTEC:
WEBTEC Converting, LLC
5900 Middle View Way
Knoxville TN 37909
Attention: Richard Perry
Facsimile: 865-584-8216 If to CNS:
CNS, Inc.
7615 Smetana Lane
Eden Prairie MN 55344
Attention: Purchasing Manager
Facsimile: (952) 229-1700

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21. No assignment or delegation.

Neither this Agreement nor any of the rights and obligations of a party hereunder shall be assigned, delegated, sold, transferred, sublicensed or otherwise, to any third party without the prior written consent of the other party not to be unreasonably withheld; provided, however, that CNS may, without such consent, assign this Agreement and its rights and obligations hereunder in connection with the sale or disposition by merger or consolidation of all or substantially all of its assets related to the sale of nasal dilators.

22. Entire Agreement.

This Agreement constitutes the entire agreement between parties. All other previous and contemporaneous agreements, proposals, negotiations, and understandings are void and superseded by this Agreement. No other agreement not expressed in this Agreement shall have any force or effect, and no modification, amendment or change of any kind to this Agreement shall be effective unless it is in writing and signed by each of the parties to this Agreement.

23. Governing Law/Arbitration.

This Agreement shall be governed by Minnesota law. Any controversy or claim arising out of or relating to this Agreement, its formation or the breach thereof shall be settled by arbitration before a single arbitrator in Minneapolis, Minnesota. The arbitration shall be administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.

Marti Morfitt President and CEO, CNS Inc	Randel B. Holmes President and CEO, WEBTEC Converting LLC
Larry Muma VP Operations, CNS Inc	Richard H. Perry, CPA Chief Financial Officer, WEBTEC Converting LLC
Erik P. Switzer Purchasing Manager, CNS Inc

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Exhibit A
To
WEBTEC Supply Agreement

	Guaranteed Price Reduction	Continuing Cost Reduction Section 8.3	Raw Materials Savings
Year 1	[ * * * ]	[ * * * ]	[ * * * ]
Year 2	[ * * * ]	[ * * * ]	[ * * * ]
Year 3	[ * * * ]	[ * * * ]	[ * * * ]
Year 4	[ * * * ]	[ * * * ]	[ * * * ]
Year 5	[ * * * ]	[ * * * ]	[ * * * ]

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Exhibit B
To
WEBTEC Supply Agreement

With respect to the transition of a major portion of manufacture of the Products from another supplier to WEBTEC, the parties have agreed as follows, with respect to their relationship and the agreement of which this Exhibit is a part (the “Agreement”):

1. Project Managers. Recognizing that approximately half of CNS’s requirements of nasal strips are currently supplied by a third-party company and that WEBTEC is to assume full responsibility for that company’s volume after a transition period of approximately one year, the Parties hereby appoint specific employees to be managers of the project of transition of manufacturing from the third party to WEBTEC.

A. The employees appointed to manage the transition project (the “Managers”) are [ * * * ] for WEBTEC and [ * * * ] for CNS, who shall cooperate on behalf of their respective employers in order to manage the transition efficiently. At the end of the transition [ * * * ] and [ * * * ] will be responsible for managing projects as agreed to between the companies.

B. The parties declare that the Managers bear delegated authority to make the necessary business decisions to carry the transition through to completion.

C. WEBTEC will retain [ * * * ] in its employ as a Manager through the second year of the initial five-year term of the Agreement. During the period of transition WEBTEC will assign [ * * * ] primarily to the task of transition of the manufacturing, assigning other work from her position to others temporarily or from time to time as needed. During the remaining term of this Agreement during which she is employed by WEBTEC, [ * * * ] shall be assigned primarily to the CNS-WEBTEC relationship, with similar assignment of other work as needed.

2. Steering Committee. WEBTEC and CNS have by joint consent established a joint committee (the “Steering Committee”) consisting of two (2) members from WEBTEC and one (1) from CNS, as well as a third party individual, to enhance coordination and communication between the Parties with respect to the administration of the Agreement and achievement of agreed objectives. The following will apply to the Steering Committee:

A. Third Party Individual. The third party individual member of the Steering Committee will be Libby Trader, and the cost of her services will be split evenly between WEBTEC and CNS, with each paying invoices promptly upon arrival.

B. Replacement. If [ * * * ] resigns or is recognized by the Parties as being unable to participate meaningfully in the Steering Committee, the Parties jointly will promptly select another third party to take her place in the Steering Committee or will decide that she is not to be replaced.

C. Meetings and Actions. The Steering Committee will meet at least quarterly, but more often if reasonably requested by a member from each Party. Meetings may be in person or by pre-arranged phone or web conference. The Parties shall work out reasonable agendas and procedures by joint agreement, and decisions of the Steering Committee will be made by

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consensus whenever possible. When a decision is subjected to a vote, the decision will be effective if passed by a majority of each Party’s delegates to the Steering Committee. In the event of an ongoing deadlock on a subject reasonably considered by a majority of at least one Party’s members on the Steering Committee to be a vital issue, the Parties will refer the matter to their respective vice presidents in charge of the Agreement for discussion and settlement.

D. Tasks and Authorities. The responsibility of the Steering Committee is to confer on opportunities and solve problems that arise from time to time during the process of transitioning manufacture from the third-party manufacturer to WEBTEC. The Steering Committee’s assigned tasks are to examine, refine, detail, and supplement the long-term goals as specified in this Exhibit B and as indicated by agreement of the Parties from time to time to plan for achievement of the goals, monitor progress toward that achievement, and ensure ongoing compliance with applicable regulations and with the Agreement.

E. Objectives. Initial objectives for the Steering Committee are the following, and others will be added from time to time by the parties or at the Steering Committee’s own initiative. Initial details for these items that are incorporated into the body of the Agreement may be modified by written agreement of the parties as a result of work of the Steering Committee.

(i) Cost: cost containment, automation, and manufacturing efficiencies.

(ii) Quality: specification compliance, incoming inspection performance, and consumer complaints.

(iii) Service: case fill, capacity (meeting the finite schedule), raw material handling and accounting, and invoice accuracy.

(iv) Audit: examination and oversight of WEBTEC’s financial health and stability as provided in Sections 17 and 18 of the Agreement. This subject is to be an agenda item addressed by the Steering Committee at least quarterly. CNS reserves the right to audit WEBTEC annually.

3. Key Personnel; Succession. The employees of WEBTEC listed below are considered vital to the ongoing relationship of the Parties and continuation of the Agreement, and WEBTEC must notify CNS promptly when it becomes known to WEBTEC that any such person is likely to leave the company.

[ * * * ]

In the case of top-level managers listed above, WEBTEC will notify CNS immediately when WEBTEC considers it definite or likely that their duties are to change or that the individuals are to be replaced, and WEBTEC will provide to CNS a plan no later than ten (10) days before the expected change (or before their replacement, should they be replaced) a complete and reasonably acceptable plan of succession to be implemented in the event of their ceasing to act as executives for WEBTEC for any reason whatsoever. WEBTEC must submit such a plan to CNS also for any successor of a top-level manager, at or before the time of hiring that successor.

Agreed by the parties (initialed)

WEBTEC____________ CNS___________________

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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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

(d) 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, 2005

/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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

(d) 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, 2005

/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, 2005, 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, 2005

/s/ Marti Morfitt

Marti Morfitt, President & Chief Executive Officer

Date: August 5, 2005

/s/ Samuel E. Reinkensmeyer

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