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

FORM 10-K

For the fiscal year ended March 31, 2005

OR

For the Transition period from _________ to __________

COMMISSION FILE NUMBER: 0-16612

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

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

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

Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:

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 if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

As of March 31, 2005, the aggregate market value of the Company’s Common Stock held by non-affiliates is $144,835,691 computed by reference to the closing sales price of the Company’s Common Stock of $11.00 on September 30, 2004, the last business day of the Company’s most recently completed second fiscal quarter.

Indicated by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2):   Yes     X      No         

As of June 3, 2005, the Company had outstanding 14,289,874 shares of Common Stock of $.01 par value per share.

Documents Incorporated by Reference: Portions of the Company’s Proxy Statement for its Annual Meeting of Stockholders to be held on August 30, 2005, are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

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PART I

Item 1.   BUSINESS

Overview

        We are in the business of developing and marketing consumer health care products, including Breathe Right® branded products that focus on better breathing, and FiberChoice® branded products that focus 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. 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.

History

        CNS was founded in 1982. From 1982 until 1995, the Company designed, manufactured and marketed computer-based diagnostic devices for sleep disorders. In 1992, CNS obtained the exclusive license to manufacture and sell nasal strips, and in 1993, received FDA clearance to market the nasal strip as a product that improves nasal breathing. In 1994, CNS launched the Breathe Right nasal strip in the United States and in 1995 divested itself of the assets related to its sleep disorders business in order to focus on further developing the Breathe Right® nasal strip product. In 1998, CNS strengthened its management team to add consumer healthcare products experience, and since that time continued to develop the Breathe Right brand both domestically and internationally. In 2000, CNS added its second branded product line with the launch of FiberChoice chewable fiber supplements.

Competitive Strengths

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Growth Strategies

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Products & Markets

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Manufacturing and Operations

        We outsource all manufacturing to outside suppliers. Each supplier manufactures a portion of our product line to our detailed specifications using raw materials specified by CNS. All suppliers have entered into confidentiality agreements with CNS to protect our intellectual property rights. Our quality control and operations personnel regularly inspect these manufacturers to observe processes and procedures to ensure compliance with FDA Good Manufacturing Practice Standards. Finished goods are also inspected to ensure that they meet quality requirements. We work closely with raw material vendors and our manufacturers to reduce scrap and waste, improve efficiency and improve yields to reduce the manufacturing costs of the product. We have received certification that CNS has established and maintains a quality system which meets the requirements of ISO 9001:2000/EN 46001.

        All of our manufacturing supply agreements are documented by contracts, with terms ranging from 2 to 5 years. Prices under these agreements are generally established annually and subject to periodic adjustments for changes in actual raw material costs. All of our products are ordered as-needed on a purchase order basis. We are not obligated to buy any particular quantity of product or use any manufacturer exclusively.

        To ensure consistent quality and supply, we have multi-year contracts with the suppliers that provide most of the major components for nasal strips. In 2001, we entered into a multi-year contract with 3M that provides for consistent supply, adherence to specifications and pricing. Although similar materials are currently available from other suppliers, we have historically utilized 3M components for manufacturing nasal strips. Although we believe that this relationship will not be disrupted, the inability to obtain sufficient quantities of these components or the need to develop alternative sources in a timely and cost-effective manner could adversely affect our operations until new sources of these components become available.

        We consolidate all finished goods inventories into our leased warehouse adjacent to our offices in Eden Prairie, MN. We retain control of all aspects of customer service, including arranging logistics for shipment of our product to domestic customers and to international distributors.

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Government Regulation

        As a manufacturer and marketer of medical devices, we are subject to regulation by governmental agencies including the FDA and the corresponding agencies of the states and foreign countries in which we sell our products. We must comply with a variety of regulations, relating to the manufacture, marketing and sale of our products as well as our recordkeeping and other general business practices, including the FDA’s Good Manufacturing Practice regulations. We are subject to periodic inspections by the FDA and applicable state and foreign agencies. If the FDA believes that there is a violation of its regulations, it may implement extensive enforcement powers, including the ability to ban products from the market, prohibit the operation of manufacturing facilities and effect recalls of products from customer locations. We believe that CNS is currently in compliance with applicable FDA regulations.

        FDA regulations classify medical devices into three categories that determine the degree of regulatory control to which the manufacturer of the device is subject. In general, Class I devices involve compliance with labeling and record keeping requirements and are subject to other general controls. Class II devices are subject to performance standards in addition to general controls. Class III devices are those devices, usually invasive, for which pre-market approval (as distinct from pre-market notification) is required before commercial marketing to assure product safety and effectiveness. Nasal dilators, such as our Breathe Right strips, have been classified by the FDA as Class I devices.

        Before a new medical device can be introduced into the market, the manufacturer generally must obtain FDA clearance through either a 510(k) pre-market notification or a pre-market approval application (“PMA”). A 510(k) clearance will be granted if the submitted data establish that the proposed device is “substantially equivalent” to a legally marketed Class I or II medical device, or to a Class III medical device for which the FDA has not called for PMAs. The PMA process can be expensive, uncertain and lengthy, frequently requiring from one to several years for approval from the date the PMA is accepted. In addition to requiring clearance for new products, FDA rules may require a filing and waiting period prior to marketing modifications of existing products. We have received 510(k) pre-market notification approvals to market the Breathe Right nasal strip as a device that can (i) temporarily relieve the symptoms of nasal congestion and stuffy nose, (ii) eliminate or reduce snoring, (iii) improve nasal breathing by reducing nasal airflow resistance, and (iv) temporarily relieve breathing difficulties due to a deviated nasal septum.

        Our FiberChoice product is considered to be a dietary supplement and is regulated under the Federal Food, Drug, and Cosmetic Act as amended by the Dietary Supplement Health and Education Act of 1994 (DSHEA), and under the Fair Packaging and Labeling Act. There is generally no requirement that a company obtain a license or approval from FDA before marketing dietary supplements in the United States. The FDA is currently developing regulations for certain provisions of the DSHEA that may affect the regulation of our FiberChoice product line. However, at this time, the impact of any proposed regulation on our product lines is not certain.

        Sales of our products outside the United States are subject to regulatory requirements that vary widely from country to country. We have selected a third party to act as an “authorized representative” in the European Union. We believe that we have the necessary documentation to support affixing the “CE” mark, an international symbol of quality and compliance with applicable European medical device directives, to our Breathe Right® nasal strips in Europe. We will pursue additional approvals in other jurisdictions as needed.

        No assurance can be given that the FDA or state or foreign regulatory agencies will give approvals or clearances for additional applications for the Breathe Right nasal strip or for any of our other products. Moreover, after clearance is given, we are required to advise the FDA and these other regulatory agencies of modifications to our products. These agencies have the power to withdraw the clearance or require us to change the device or its manufacturing process or labeling, to supply additional proof of its safety and effectiveness or to recall, repair, replace or refund the cost of the medical device if it is shown to be hazardous or defective. The process of obtaining clearance to market products is costly and time-consuming and can delay the marketing and sale of our products. Furthermore, federal, state and foreign regulations regarding the manufacture and sale of medical devices and other products are subject to future change. We cannot predict what impact, if any, such changes might have on our business.

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        We are also subject to substantial federal, state and local regulation regarding occupational health and safety, environmental protection, hazardous substance control, waste management and disposal, among others.

Patents, Trademarks and Proprietary Rights

        We have registered trademarks, own several patents and pending patent applications, and have a number of patents through licenses which are used in connection with our business. Some of these patents and licenses cover significant product formulations, methods and designs for our current and possible future products. We believe our trademarks are important as protection for CNS’ image in the marketplace. Our success is and will continue to be dependent upon the existence of and ability to protect our patents, trademarks and those under our licenses and we intend to take such steps as are necessary to protect our intellectual property rights.

        There can be no assurance that our technology and proprietary rights will not be challenged on the grounds that our products infringe on patents, copyrights or other proprietary information owned or claimed by others, or that others will not successfully utilize part or all of our technology without compensation to CNS. Nor can there be any assurance that others will not attempt to challenge the validity or enforceability of our patents and licensed patents on the basis of prior art or introduce competitive products. In addition to seeking patent protection for our products, we also intend to protect our proprietary technologies and proprietary information as trade secrets.

        Through license agreements CNS has acquired the exclusive worldwide rights to manufacture and sell nasal strips and chewable inulin based fiber tablets. Specifically, we have the exclusive right pursuant to those license agreements to manufacture, sell and otherwise practice any invention claimed in the licensors’ patents issued in any country, including those that issue on pending applications. We are obligated to pay royalties to the licensors based on sales of the products typically including certain minimum royalty amounts in order to maintain our exclusive rights.

        The original licensor of nasal strip technology has filed patent applications with the U.S. Patent and Trademark Office seeking patent protection for different aspects of the nasal strip technology. Seven of these patent applications have resulted in issued patents in the United States, including one with claims that cover the single-body construction of the nasal strip. The licensor of nasal strip technology also has one patent application which is currently pending. In addition, that licensor has obtained patent protection on the nasal strip in several foreign countries and has various applications pending which seek further patent protection in these and a number of additional countries. The licensor of the mentholated vapor strip technology has filed several patent applications with the U.S. Patent and Trademark Office as well as international patent offices resulting in both issued and pending applications. In addition to the patents and patent applications pending in the U.S. mentioned above, we have filed corresponding patent applications seeking protection in several foreign countries to protect certain rights to nasal dilation technology that have been acquired.

        The licensor of the chewable fiber tablet has one issued U.S. Patent and other issued and pending international patents seeking patent protection for different aspects of this product.

        Although we believe that our owned and licensed patents will limit the ability of others to introduce competitive products in the United States, there can be no assurance that the patents on the Breathe Right nasal strip and FiberChoice chewable fiber tablets will effectively foreclose the development of competitive products or that we will have sufficient resources to pursue enforcement of any patents issued. We do, however, intend to aggressively enforce our patents. In order to enforce any patents issued, we may have to engage in litigation which may result in substantial expense and counterclaims against CNS. Any adverse outcome of such litigation could have a negative impact on our business.

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        We have engaged in litigation to enforce our patent rights relating to the Breathe Right nasal strip. In 1999, CNS brought a suit in federal district court to enforce one of the licensed nasal strip patents containing the broadest claims and providing the most comprehensive protection, U.S. Patent No. 5,533,499 (“ ‘499 Patent”). In the course of this suit, the defendant requested reexamination in the U.S. Patent and Trademark Office (the “Patent Office”) of the ‘499 Patent. On September 29, 2000, the Patent Office issued an Office Action in Reexamination and rejected certain of the claims. Other claims that were not subject to reexamination remain in effect. We have joined the licensor, Creative Integration & Design, Inc., in the exercise of our rights to contest the action of the Patent Office and have provided reasons that we believe establish that the claims should not have been rejected. CNS and its licensor are also seeking to amend certain claims to provide us with additional protection under the patent. On January 21, 2005, we received a determination from the Patent Office that the ‘499 Patent has significant allowable claims. With some formal amendments, we expect the Patent Office will confirm these claims as allowable. As the date of filing of this Annual Report on Form 10-K for the year ended March 31, 2005, we have not received final notice from the Patent Office of the claims of the ‘499 Patent it has confirmed as allowable.

        On February 18, 2004, CNS, together with Creative Integration & Design, Inc., sued Silver Eagle Labs, Inc. (“Silver Eagle”) in the United States District Court for the District of Minnesota for infringement of two nasal dilator patents owned by Creative Integration & Design, Inc. and exclusively licensed to CNS. The two patents at issue are U.S. Patent No. 6,318,362 (the “ ‘362 Patent”) and U.S. Patent No. 3,533,503 (the “ ‘503 Patent”). The suit seeks injunctive relief, damages, enhanced damages for willful infringement, attorneys’ fees and costs. Silver Eagle has counterclaimed for a declaration that the ‘362 Patent and ‘503 Patent are invalid and not infringed and asks for its attorneys’ fees and costs.

        On November 24, 2004, we announced that the Patent Office will reexamine the ‘362 Patent and the ‘503 Patent. In response to this action by the Patent Office, on November 29, 2004, the Court issued an order staying our suit against Silver Eagle pending the reexamination. We believe that when the ‘362 and ‘503 Patents emerge from reexamination, we will maintain significant patent protection under those patents and will recommence enforcement of those patents in the litigation described above. As of the date of filing of this Annual Report on Form 10-K for the year ended March 31, 2005, we have not received information that the Patent Office has acted on the reexamination of the ‘362 and ‘503 Patents.

        The final outcome of the reexamination of the ‘499, ‘362 and ‘503 Patents by the Patent Office is therefore uncertain. Although an adverse ruling from the Patent Office would narrow the protection available for nasal dilators and limit the breadth of the our patent protection, we believe that our current portfolio of both pending patent applications and newly issued patents will enable CNS to maintain significant patent protection for our nasal strip products. See Item 3. Legal Proceedings.

        CNS has registered its Breathe Right and FiberChoice trademarks in the United States and in several foreign countries and is seeking further registration of those trademarks and other trademarks.

Employees

        At May 31, 2005, we had 56 full-time employees and 7 part-time employees, of whom 16 were engaged in operations, 22 in general administration, and 25 in marketing and sales. There are no unions representing CNS’ employees. Relations with our employees are believed to be positive and there are no pending or threatened labor employment disputes or work interruptions.

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EXECUTIVE OFFICERS OF THE COMPANY

        The following table sets forth the names and ages of the Company’s current Executive Officers together with all positions and offices held with the Company by such executive officers. Officers are appointed to serve until their successors have been elected and have qualified.

        Daniel E. Cohen has served as the Company’s Chairman of the Board since 1993 and has served as a director of the Company since its formation in 1982. Mr. Cohen also served as the Company’s Chief Executive Officer from 1989 to June 2001 and as Treasurer from 1982 to March 1999. Mr. Cohen, a founder of the Company, is a medical doctor and board-certified neurologist.

        Marti Morfitt has served as the Company’s President and Chief Executive Officer since June 2001 and its President and Chief Operating Officer from March 1998 to June 2001. Ms. Morfitt has served as a director of the Company since 1998. From September 1982 to February 1998, Ms. Morfitt served in a series of positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, most recently serving from May 1997 to February 1998 as Vice-President, Meals, and from February 1994 to May 1997 as Vice-President, Green Giant Brands. She also serves as a director of Graco, Inc., a Minneapolis-based manufacturer of fluid handling systems, and as a director of Intrawest Corporation, a Vancouver-based developer and operator of ski and golf resorts.

        Samuel Reinkensmeyer has served as the Company’s Chief Financial Officer since October 2003. From March 2000 until joining the Company, Mr. Reinkensmeyer was employed by ValueVision Media Inc., a television and Internet retailer which owns and operates ShopNBC and ShopNBC.com serving most recently as its Senior Vice President of Finance and Investor Relations. From August 1988 to February 2000, he served in various financial positions at The Pillsbury Company, most recently as Finance Director, Pillsbury North America. Previously, Mr. Reinkensmeyer worked for Citicorp and PriceWaterhouse.

        John J. Keppeler has served as the Company’s Vice President of Worldwide Sales since August of 1999 and has served as the Company’s Vice President of Sales from 1998 to 1999. From November of 1986 to June of 1998, Mr. Keppeler served in a series of sales and customer marketing positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, most recently serving as Director of Category & Customer Development for the Green Giant and Progresso businesses.

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        Linda Kollofski has served as the Company’s Vice President of Domestic Marketing since February of 2004 and as Vice President of New Business Development from November of 2002 to January of 2004. Prior to joining the Company in 2002, Ms. Kollofski was principal of Linda K. Consulting, Inc. from October of 1994 to October of 2002. Ms. Kollofski provided marketing expertise to various businesses including Haagen-Daz, Totino’s and Green Giant as well as to Telex Communications, Hazeldon Foundation publishing business and the Company’s FiberChoice brand. Previously, Ms. Kollofski served in senior marketing and new business development positions with the Hazelden Foundation, Dow Brands, Pillsbury and Munsingwear.

        Larry R. Muma has served as the Company’s Vice President of Operations since January of 2001. From May of 2000 to December of 2000, Mr. Muma served as Director of Supply Chain for Novartis, Inc., a worldwide manufacturer and distributor of health care and pharmaceutical products. From February of 1992 to April of 2000, Mr. Muma served in various operations positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, serving from February 1994 to April of 1999 as Vice President of Operations for Pillsbury North America and most recently from April of 1999 to April of 2000 as Vice President of Operations Frozen Division. Mr. Muma worked for PepsiCo from 1976 to 1992, serving most recently as its Vice President of International Technical Services.

        Susan Horvath has served as the Company’s Vice President of International since April of 2005. From September 1999 to April 2005, Ms. Horvath has served in a variety of roles with the Company, including Director of Financial Planning and Analysis from September 2002 to April 2005. Prior to joining CNS in 1999, Ms. Horvath was the senior finance manager for the advertising and sales promotion department of The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products. Previously Ms. Horvath worked for Coopers and Lybrand.

        Nicole Strait has served as the Company’s Vice President of Human Resources since March of 2005. Prior to joining the Company, from November 2002 to March 2005, Ms. Strait was with The J.M Smucker Company/International Multifoods Corporation, a Minneapolis-based manufacture and distributor of food products, most recently employed as its Director, Human Resources. From May 2000 to October 2002, Ms. Strait held various human resources positions with SimonDelivers.com, Inc., a Minneapolis-based online grocery shopping and grocery delivery company.

Item 2.   PROPERTIES

        The Company leases approximately 73,000 square feet of office and warehouse space in Eden Prairie, Minnesota. The lease expires in November of 2010 and contains a renewal option. Monthly payments on the lease are $61,766.

Item 3.   LEGAL PROCEEDINGS

        On February 18, 2004, CNS, Inc., together with Creative Integration & Design, Inc., sued Silver Eagle Labs, Inc. (“Silver Eagle”) in the United States District Court for the District of Minnesota for infringement of two nasal dilator patents owned by Creative Integration & Design, Inc. and exclusively licensed to CNS. The two patents at issue are U.S. Patent No. 6,318,362 (the ” ‘362 Patent”) and U.S. Patent No. 3,533,503 (the ” ‘503 Patent”). The suit seeks injunctive relief, damages, enhanced damages for willful infringement, attorneys’ fees and costs. Silver Eagle has counterclaimed for a declaration that the ‘362 Patent and ‘503 Patent are invalid and therefore not infringed and asks for its attorneys’ fees and costs.

        On November 24, 2004, we announced that the U.S. Patent and Trademark Office will reexamine the ‘362 Patent and the ‘503 Patent. In response to this action by the U.S. Patent and Trademark Office, on November 29, 2004, the Court issued an order staying our suit against Silver Eagle pending the reexamination. We believe that when the ‘362 and ‘503 Patents emerge from reexamination, we will maintain significant patent protection under those patents and will recommence enforcement of those patents in the litigation described above. We maintain patent protection for our nasal dilator products under other United States and foreign patents and will continue to vigorously enforce all of our intellectual property.

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        As of the date of filing of this Annual Report on Form 10-K for the year ended March 31, 2005, we have not received information that the U.S. Patent and Trademark Office has acted on the reexamination of the ‘362 and ‘503 Patents.

        Another of our patents covering our nasal strip technology, U.S. Patent No. 5,533,499 (the “ ‘499 Patent”), is also subject to reexamination by the U.S. Patent and Trademark Office. On January 21, 2005, we received a determination from the U.S. Patent and Trademark Office that the ‘499 Patent has significant allowable claims. With some formal amendments, we expect the U.S. Patent and Trademark Office will confirm these claims as allowable. As of the date of filing of this Annual Report on Form 10-K for the year ended March 31, 2005, we have not received final notice from the U.S. Patent and Trademark Office of the claims of the ‘499 Patent it has confirmed as allowable.

Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

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PART II

Market Information

        Our common stock has been traded on The Nasdaq Stock Market under the symbol “CNXS” since April 8, 1994. The following table sets forth the high and low last sale prices of our common stock for the period indicated which cover our fiscal years ending March 31, 2005 and 2004.

        On June 3, 2005, the last sale price of the common stock was $20.76 per share.

Shareholders

        As of June 3, 2005, there were approximately 600 owners of record of our common stock.

Dividends

        We paid four quarterly dividends of $.05 per share of common stock during fiscal 2005. We paid three quarterly dividends of $.04 per share of common stock during fiscal 2004. The payment of future dividends, if any, will be at the discretion of our Board of Directors and will depend upon, among other things, future earnings, capital requirements, restrictions in future financing agreements, our general financial condition and general business considerations.

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Issuer Purchases of Equity Securities

        The following table provides certain information regarding purchases made by us of our common stock in the quarter ended March 31, 2005:

Issuer Purchases of Equity Securities

Information Regarding Equity Compensation Plans

        The following table sets forth information regarding our equity compensation plans in effect as of March 31, 2005. Each of our equity compensation plans is an “employee benefit plan” as defined by Rule 405 of Regulation C of the Securities Act of 1933.

Securities Authorized for Issuance under Equity Compensation Plans

        The equity compensation plans approved by our shareholders are the 2000 Amended Stock Option Plan, the 1994 Amended Stock Plan, the 1990 Stock Plan and the 1987 Employee Incentive Stock Option Plan. No shares remain available for future awards under the 1994, 1990 or 1987 Plans.

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        We also maintain a 1989 Employee Stock Purchase Plan, participation in which is available to substantially all of our employees. Participating employees may purchase our common stock at the end of each participation period at a purchase price equal to 85% of the lower of the fair market value of the stock at the beginning or end of the participation period. The six-month participation period runs from January 1 to June 30 and from July 1 to December 31 each year. Employees may contribute up to 10% of their base compensation to the plan subject to certain IRS limits on stock purchases through the plan. This plan has been approved by our shareholders.

Item 6.   SELECTED FINANCIAL DATA

        The following selected financial data should be read in conjunction with our Consolidated Financial Statements and Notes thereto together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all of which are included elsewhere in this Report. The Consolidated Statements of Operations and Balance Sheet data presented below as of and for the years ended December 31, 2000 through March 31, 2005 have been derived from our Consolidated Financial Statements included elsewhere in this Annual Report or previously filed with the Securities and Exchange Commission on Form 10-K, which have been audited by KPMG LLP, independent certified public accountants.

FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts)

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Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion of the financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto appearing elsewhere in this Annual Report. In this discussion, our three fiscal years ended March 31, 2005, 2004 and 2003 are referred to as fiscal years 2005, 2004 and 2003, respectively.

Growth Strategy and Financial Focus

        We are in the business of developing and marketing consumer health care products, including Breathe Right® branded products that focus on better breathing, and FiberChoice® branded products that focus 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, patented technologies, established domestic and international distribution networks, a flexible and low-cost operating model and an experienced management team.

        Our financial goals are to achieve sustainable long-term growth in consumer demand for our products, which should leverage our efficient operating model to generate further growth in operating profit and operating cash flow:

Critical Accounting Policies and Estimates

        Our consolidated financial statements are prepared in accordance with generally accepted accounting principles (GAAP) in the United Sates of America. In connection with the preparation of the consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time the consolidated financial statements are prepared. On a quarterly basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

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        Our significant accounting policies are discussed in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8.  Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Management believes that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult and subjective judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting policies and estimates with our independent auditor and the Audit Committee of our Board of Directors.

Selected Consolidated Statements of Earnings Data and Executive Summary

For the fiscal year ended March 31, 2005 (“fiscal 2005”), we reported net sales of $93.7 million, up 7.8% versus the prior year. Revenues declined in the first half of fiscal 2005 due to the early and abrupt end to the domestic cold and flu season, a weak allergy season in Japan and related high levels of inventories in that market, and the lack of a new product launch. Revenues strengthened significantly during the second half of fiscal 2005 due to strong demand for domestic nasal strips, driven by the successful relaunch of clear nasal strips including a new advertising message, and the benefit of a longer cold and flu season compared to the prior year; continued strong demand for FiberChoice products and the launch of two new FiberChoice items in March 2005; and the resumption of shipments to our distributor in Japan, where we experienced a strong spring allergy season.

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Operating income for fiscal 2005 was $20.1 million, up 57.3% versus the prior year. Growth in operating income was driven by 7.8% revenue growth, strong improvements in advertising and promotion efficiencies and a one-time reduction in cost of goods sold of $1.1 million, related to the refund of import duties paid in prior fiscal years.

Our financial position remains strong, with cash and marketable securities of $60.8 million and no debt on our balance sheet as of March 31, 2005.

We believe the percentage relationship between net sales and major expense lines in the statement of operations and the percentage change in the dollar amounts of each of the items presented below is important in evaluating the performance of our business operations. We operate as one business segment and believe the information presented in our Management’s Discussion and Analysis of Results of Operations and Financial Condition provides an understanding of our business, operations and financial condition.

Net sales

        The following is a breakdown of net sales by brand and geographic area:

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Operating Results

        CNS achieved consolidated net sales growth of 7.8% in fiscal 2005 and 10.0% in fiscal 2004. Domestic sales of Breathe Right® branded products grew by 6.7% in fiscal 2005 and 10.8% in fiscal 2004 due primarily to stronger consumer demand for nasal strips. Breathe Right domestic sales for the first half of fiscal 2005 were negatively impacted by the early and abrupt end to last year’s cold and flu season and the lack of a new product launch, but sales strengthened markedly in the second half of the year based on the successful relaunch of clear nasal strips, combined with a successful new advertising message and a longer cold and flu season. FiberChoice® sales grew by 31.8% in fiscal 2005 and 31.1% in fiscal 2004. Growth in FiberChoice sales results from continued strong development of consumer demand, resulting from its unique product benefits, strong levels of advertising and promotion supporting its “fiber for health” consumer positioning, and the launch of two new FiberChoice items during the March 2005 quarter.

        International sales declined in both fiscal 2005 and 2004 by 0.8% and 6.1%, respectively. Lower international revenue resulted primarily from lower shipments to our distributor in Japan, caused by high distributor inventory levels in that market, exacerbated by last year’s very weak spring allergy season. Growing revenues in Europe, Canada and the fiscal 2005 launch of Breathe Right nasal strips in Mexico partly offset the declines in sales to Japan. As of March 31, 2005, inventories have been normalized to approximately three months of sales in the Japanese market, which will allow for future revenues to more closely match consumer demand for nasal strips in Japan.

        During fiscal 2004, we decided to exit our line of Flair equine products which are included in “other” on the net sales breakdown, shown on the prior page. Effective April 30, 2004, we terminated our agreements with our distributor of Flair products and the licensor of technology related to this business. Net sales of Flair products totaled $375,000 for fiscal 2004 and $268,000 for fiscal 2003.

Gross profit rate

        Our gross profit rate is dependent on a number of factors and may fluctuate from quarter to quarter as well as year to year. These factors include the mix of products sold, the level at which on-package promotional programs are executed, and the cost of materials and manufacturing. The gross profit rate for fiscal 2005 was 71.5%, including a one-time reduction to cost of goods sold related to receipt of an import duty refund of $1.1 million, which was recorded during the December 2004 quarter. The refunded duties had been properly paid and expensed during fiscal years 2000 to 2004. Excluding this one-time item, the fiscal 2005 gross margin rate was 70.3% up 1.2 percentage points versus the fiscal 2004 gross margin rate, which was up 2.0 percentage points versus fiscal 2003. The improving gross margin rates in 2005 and 2004 resulted primarily from lower costs of goods sold including increasing efficiency in procuring and distributing our product lines.

Advertising and promotion expense

        Advertising and promotion expense expressed as a percentage of revenue declined to 32.6% in fiscal 2005, down 5.5 percentage points compared to fiscal 2004, which was down 1.0 percentage point compared to fiscal 2003. Lower advertising and promotion expense in fiscal 2005 was partly related to the lack of a new product launch, compared to the prior two years that included advertising and promotion investments related to new products. In addition, this reduction in expense as a percentage of net sales is the result of economies of scale driven by growth of our brands, as well as continuing efforts by our marketing team to develop more efficient and effective methods of stimulating consumer demand.

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Selling, general and administrative expense

        Selling, general and administrative expenses were $16.5 million for 2005, up 15.7% compared to the prior year. Selling, general and administrative expense increased in fiscal 2005 due to higher levels of new product development expense for both the Breathe Right and FiberChoice brands, as well as increased legal expenses associated with defending our intellectual property assets and increased cost of regulatory compliance. Selling, general and administrative expense increased 13.7% in fiscal 2004 due to severance and recruitment costs associated with several changes on our management team.

Investment income

        Investment income was $935,000 for 2005 compared to $725,000 for 2004. The benefit of higher levels of marketable securities and an increase in market interest rates for municipal obligations more than offset declines in market interest rates for corporate bonds and U.S. government obligations. The following table compares the average bond equivalent yield of various marketable securities held as of March 31, 2005 and 2004 (in thousands):

        The average remaining days to effective maturity of our portfolio of marketable securities has decreased to 303 days as of March 31, 2005 compared to 403 days as of March 31, 2004.

Income Tax Expense

        Income tax expense was $7.3 million for 2005 compared to $4.9 million for 2004. The effective tax rate for 2005 was 34.7% compared to an effective tax rate in 2004 of 36.6%. The change in the effective tax rate is the result of utilizing foreign export incentives, a change in investment strategy from taxable corporate and U.S. Government obligations to tax exempt municipal obligations and the resolution of outstanding refund claims. The following table reconciles the various tax rates to our effective tax rate:

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Operating Income

        Increases in sales, as well as improved gross profit rates, partly related to the fiscal 2005 one-time reduction to cost of goods sold related to receipt of an import duty refund of $1.1 million, as well as lower advertising and promotion expense relating to new products introductions and continued improvement in the efficiency of advertising and promotions provided significant improvement in operating income. Operating income for fiscal 2005 was $20.1 million, up 57.3% compared to fiscal 2004 operating income, which was up 32.3% compared to fiscal 2003.

Seasonality

        CNS has experienced in the past, and we expect that we will continue to experience in the future, quarterly fluctuations in both domestic and international sales and earnings. These fluctuations are due in part to the timing of advertising and promotion campaigns and seasonality of sales, as well as increases and decreases in purchases by distributors and retailers in anticipation of future demand by consumers. Significant portions of the Breathe Right® product line are used for the temporary relief of nasal congestion and congestion-related snoring. Sales of these items are higher during the fall and winter seasons, corresponding with our third and fourth quarters.

Liquidity and Capital Resources

        As of March 31, 2005, we have cash and marketable securities of $60.8 million and no debt on our balance sheet. In addition, we have generated strong and improving cash from operations in the past three fiscal years, and barring an unforeseen decline in our revenues or operating margins, we expect future cash flows from operations to continue to be strong and growing. 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. In summary, we believe that our existing funds will be sufficient to support our planned operations for the foreseeable future.

        Operating Activities.   We generated cash from operating activities of $14.7 million during fiscal 2005 compared to $8.6 million during fiscal 2004, primarily due to the increases in operating income described above. The changes in operating assets and liabilities in the aggregate had only a minor impact on cash flow for fiscal 2005. For fiscal 2004, cash from operating activities was driven by net income of $8.5 million, utilization of deferred tax assets of $2.5 million and a use of cash related to changes in operating assets and liabilities of $3.5 million.

        Investing Activities.   During fiscal 2005, we continued to invest excess cash in short term marketable securities in order to improve our investment return. Purchase of marketable securities exceeded sales and maturities by $15.9 million and $15.6 million in 2005 and 2004, respectively. For 2005, marketable securities purchased consisted primarily of tax exempt municipal securities which provide a higher after tax yield.

        We purchased $557,000, $310,000 and $510,000 of product rights during fiscal 2005, 2004 and 2003, respectively.

        Financing Activities.   We paid cash dividends during fiscal 2005 of $2.8 million and $1.6 million during fiscal 2004. No dividends had been paid during fiscal 2003 or prior periods. In making the decision to initiate a cash dividend, our Board of Directors considered, among other things, the recent revisions to the U.S. income tax code that provides for favorable tax treatment of corporate dividends.

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        We purchased 106,000 shares of our common stock for $1.4 million during fiscal 2005. We did not repurchase any shares of our common stock in 2004. These treasury shares will be used to meet future obligations under our employee stock purchase plan and stock option plans, and for possible future acquisitions. We are authorized to repurchase an additional 425,000 shares of our common stock as of March 31, 2005.

        CNS received $1.9 million and $1.8 million during fiscal 2005 and 2004 from the exercise of stock options and issuance of stock under the employee stock purchase plan.

        Significant Agreements and Lease Obligations.   We have entered into certain agreements and operating leases in order to secure product rights and office space. The following is a summary of significant agreements and lease obligations (in thousands):

        We have agreements that exclusively license intellectual property rights for certain products. Royalties due under these agreements are based on various percentages of net sales of related product lines. The licensing agreements are valid for the lives of the related patents, however, they may be terminated earlier under certain conditions. Total minimum royalties are not determinable since royalties continue for the life of current and potential future patents related to the licensed intellectual property.

        We have entered into operating leases for office space and office equipment. Leases expire at various dates beginning in 2007 through 2010.

        Management is not aware of any significant agreements or obligations that would have a material negative impact upon our short-term or long-term liquidity.

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Recent Accounting Pronouncements

        In November 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) 151, “Inventory Costs: an amendment to Accounting Research Bulletin (“ARB”)” 43, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. The provisions of the interpretation are effective for our financial statements for periods beginning April 1, 2006. We do not anticipate a material impact from the adoption of this accounting standard.

        In December 2004, the FASB issued SFAS 123R, “Share-Based Payment: an amendment of FASB Statements No. 123 and 95", which requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees. The provisions of the interpretation are effective for our financial statements for periods beginning April 1, 2006.

Forward-Looking Statements

        We make written and oral statements from time to time regarding our business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, and written or oral presentations made by our authorized officers or other representatives. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

        Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement made by or on behalf of us speaks only as of the date on which such statement is made. We do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement which may be made by or on behalf of us.

        In addition to other matters identified or described by us from time to time in filings with the Securities and Exchange Commission, there are several important factors that could cause our future results to differ materially from historical results that are reflected from time to time in any forward-looking statement that may be made by or on behalf of us. Some of these important factors include the following:

We depend upon sales of our Breathe Right nasal strip for the majority of our revenues.

        Sales from our Breathe Right nasal strips accounted for 79.7%, 77.0% and 79.9% of our revenues during the fiscal years ended March 31, 2005, 2004 and 2003, respectively. As a result, our success is substantially dependent upon the success of our Breathe Right nasal strip products. If we are unable to successfully create sustained demand for our Breathe Right nasal strip products and introduce new Breathe Right nasal strip products to generate additional sales, our business, financial condition and results of operations will be materially and adversely affected. Effective marketing and advertising drive sales of Breathe Right nasal strips and therefore, our success will also depend significantly on our ability to effectively market our Breathe Right nasal strips to consumers. Further, higher than expected manufacturing, marketing and distribution costs, mild cold and flu seasons, lower than expected customer acceptance of new products and competitive forces may require us to alter our pricing or marketing structure in a manner that could have a material and adverse effect on us or otherwise adversely affect our sales of Breathe Right nasal strip products.

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Our business is subject to seasonality that may cause our quarterly operating results to fluctuate materially and cause the market price of our common stock to decline.

        Sales of our Breathe Right products are seasonal in nature with consumer demand generally higher during the cold and flu season and dependent upon the severity of the cold/flu season. The cold and flu season corresponds with the third and fourth quarters of each of our fiscal years. Therefore, we will typically experience periods of increased revenues during the third and fourth quarter. Additionally, because consumer demand for our Breathe Right nasal strip is tied to the severity of the cold/flu season, our revenues from sales of our Breathe Right products will be adversely affected by a mild cold/flu season. However, because the length and severity of the season is difficult to anticipate, we cannot estimate the fluctuation of our sales from quarter to quarter in a fiscal year or the impact of the cold/flu season year to year. If our operating results are below financial analysts’ or investors’ expectations due to seasonality factors, the market price of our common stock may decline.

Our future growth will depend in part upon our ability to develop and achieve sales of new products.

        One element of our growth strategy is focused on successful development of new products, including new products under the Breathe Right and Fiber Choice brand names. We may develop new products internally or through acquisition of products or product rights from other companies. We cannot assure you that we will successfully develop any new products. Further, in developing new products, we will incur additional research and development and marketing expenses and, if acquired from another company, additional expense associated with acquisition and integration of these products into our existing business. Our success in this area will depend upon cost effective development of new products. Revenues, if any, that we generate from new products may not be sufficient to recoup the expenses we will incur in the development of new products. Consumers may be slow to accept our new products, if at all, and therefore, we cannot assure you that we will generate sales from any new products we develop. If we cannot successfully develop new products and achieve sales of our new products, our financial performance and results of operations will be adversely affected.

If our domestic or international intellectual property rights are not adequately protected, others may offer products similar to ours which could depress our product selling prices and gross profit margins or result in loss of market share.

        We believe that protecting our proprietary technology is important to our success and competitive positioning. In addition to common law intellectual property rights, we rely on patents, trade secrets, trademarks, copyrights, know-how, license agreements and contractual provisions to establish and protect our intellectual property rights. However, these legal means afford us only limited protection and may not adequately protect our rights to keep any advantages we may have over our competitors.

        We cannot assure you that others may not independently develop the same or similar technologies incorporated into our products, including technologies relating to external nasal dilator products, even if these technologies are the subject of our patents, patent applications or licenses. We have a license to the exclusive worldwide rights to manufacture and sell nasal strips in its various versions and chewable fiber supplements. Although we believe that our owned and licensed patents will limit the ability of others to introduce competitive products in the United States, there can be no assurance that the patents on the nasal strip or the chewable fiber supplements, or any additional patents on these or other products that may be issued in the future, if any, will effectively foreclose the development or sale of competitive products or that we will have sufficient resources to pursue enforcement of any patents issued.

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        Additionally, we have engaged in litigation to enforce our patent rights relating to our nasal strip technologies. In 1999, we brought suit in federal district court to enforce our rights under U.S. Patent No.5,533,499 (the ” ‘499 Patent”), one of the licensed nasal strip patents containing the broadest claims relating to the nasal strip. In the course of this suit, the defendant requested reexamination in the U.S. Patent and Trademark Office (the “Patent Office”) of the claims of the ‘499 Patent and on January 21, 2005, we received a determination from the Patent Office that the ‘499 Patent has significant allowable claims. We are seeking, with the licensor of the ‘499 Patent, to amend certain claims of the ‘499 Patent to provide us with additional protection under the ‘499 Patent. We believe that the allowable claims of the ‘499 Patent, if and when reissued, will enable us to maintain significant patent protection for our nasal strip products.

        In February 2004, we, together with Creative Integration & Design, Inc., sued Silver Eagle Labs, Inc. (“Silver Eagle”) in the United States District Court for the District of Minnesota for infringement of two nasal dilator patents owned by Creative Integration & Design, Inc. and exclusively licensed to us. The two patents at issue are U.S. Patent No. 6,318,362 (the ” ‘362 Patent”) and U.S. Patent No. 3,533,503 (the ” ‘503 Patent”). The suit seeks injunctive relief, damages, enhanced damages for willful infringement, attorneys’ fees and costs. Silver Eagle has counterclaimed for a declaration that the ‘362 Patent and ‘503 Patent are invalid and not infringed and asks for its attorneys’ fees and costs. In the course of this suit, Silver Eagle requested reexamination of the ‘362 Patent and the ‘503 Patent. In response to the reexamination by the Patent Office, on November 29, 2004, the Court issued an order staying our suit against Silver Eagle pending the reexamination. We have not yet received information that the Patent Office has acted on the reexamination of the ‘362 Patent and ‘503 Patents. The final outcome of the reexamination by the Patent Office of the ‘362 Patent and ‘503 Patent is uncertain. An adverse ruling from the Patent Office would narrow the protection available for nasal dilators, limit the breadth of our patent protection and may increase the likelihood that competitors will introduce competitive external nasal dilator products.

        Further, our competitors, many of which have substantial resources and may make substantial investments in competing technologies, may apply for and obtain patents that will prevent, limit, or interfere with our ability to manufacture or market our products. While we do not believe that any of our products or processes interfere with the rights of others, third parties may nonetheless assert patent infringement claims against us in the future.

        Additional costly litigation may be necessary to enforce patents issued to us, to protect trade secrets or “know-how” we own, to defend us against claimed infringement of the rights of others or to determine the ownership, scope, or validity of our proprietary rights and the rights of others. Any claim of infringement against us may involve significant liabilities to third parties, could require us to seek licenses from third parties, and could prevent us from manufacturing, selling, or using our products. The occurrence of this litigation, or the effect of an adverse determination in any of this type of litigation, could have a material adverse effect on our business, financial condition and results of operations. Further, the laws of some of the countries in which our products are or may be sold may not protect our products and intellectual property to the same extent as the United States or at all. Our failure to protect or enforce our intellectual property rights could have a material adverse effect on our business, results of operations and financial condition.

Our market is highly competitive and many of our competitors have substantial resources. Competition may result in price reductions, lower gross profits and loss of market share.

        We face significant competition in developing and selling our nasal decongestant products and dietary fiber supplement products in both the U.S. and in foreign markets. Our Breathe Right nasal strip, Breathe Right VaporShot! personal vaporizer and Breathe Right Snore Relief throat spray compete in the consumer market with decongestant products and other cold, allergy and sinus relief products consisting primarily of pharmaceutical products sold over the counter, other nasal sprays and external nasal dilators, throat sprays, herbs, supplements and homeopathic remedies. Additionally, we will compete with prescription nasal decongestants. We compete with these other products on the basis of numerous factors including brand recognition, product quality, efficacy, price and product availability at the retail store. If consumers perceive any product that competes with ours as more effective, more reliable, less expensive or having other advantages, the demand for our products could decrease.

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        Although we are currently the leading manufacturer of external nasal dilation products, Schering Plough Corp. entered the market in September 1998 with an external nasal dilation device. In May 2003, Aso Corp. announced it was acquiring the marketing, sales and distribution of Schering Plough’s nasal strip device effective June 3, 2003. Other companies have also entered the nasal dilation market with private label products. Our FiberChoice product competes with Metamucil® manufactured by Proctor and Gamble, Citrucel® manufactured by GlaxoSmithKline, Benefiber manufactured by Novartis and FiberCon® manufactured by Wyeth.

        We cannot assure you that we will be able to compete successfully against our current or future competitors. Many of our competitors are significantly larger than we are and have greater financial, technical, research, marketing, sales, distribution and other resources than we do. Additionally, large, well-known, well-financed companies may enter into our markets. Increased competition from other companies may force us to reduce the prices of our products, decrease our gross profit margins, increase discounts to distributors and result in loss of our market share and could require increased spending by us on research and development and sales and marketing.

We rely on third-party manufacturers for our product with the raw materials for our Breathe Right nasal strip being supplied by a single-source supplier. Any failure of these parties to deliver our products or raw materials would cause delays, increase our costs or prevent us from completing customer orders.

        Our Breathe Right nasal strips are manufactured for us by a limited number of manufacturers using raw materials supplied by a single supplier, 3M Company. Our other Breathe Right brand products and our FiberChoice products are manufactured for us by a limited number of manufacturers using raw materials supplied by multiple suppliers. If 3M Company is unable to ship the critical raw materials for our Breathe Right nasal strip, our manufacturers would be unable to manufacture our products, and therefore CNS would be unable to ship products to our customers and distributors. If the price of raw materials increases for any reason, or if our suppliers are unable or unwilling to deliver raw materials, we may have to find an alternative source, which could result in interruptions, increased costs, delays, loss of sales and quality control problems. Further, if our manufacturers were unable to manufacture our products for any reason, our customers and distributors would experience delays in receipt of orders of our product. The termination or interruption of any of these relationships, or the failure of these manufacturers or suppliers to supply products or materials consistent with our requirements as to quality, quantity and timeliness, likely would cause shortages of our products, delays in fulfilling orders for our products and harm our reputation and our business by causing delays, loss of sales, increases in costs and lower gross profit margin.

Our sales will decline and our business will be materially harmed if there is any loss of any significant retailer or any reduction, delay or cancellation of orders from any significant retailer.

        Our retail customers include national chains of mass merchants, drug stores and grocery stores, warehouse clubs and regional and independent stores in the retail channels. In the years ended March 31, 2005, 2004 and 2003, Wal-Mart accounted for approximately 31%, 32% and 29% of our sales, respectively. The loss of this customer or any other large retailer would have a negative impact on our operating results. While we would attempt to replace the lost sales through other retail outlets, we cannot assure you that we would be able to replace any lost sales. Because we typically do not enter into long-term contracts with our customers but rather fulfill demand for our products upon individual sales orders, our customers could cease buying our products from us at any time and for any reason. The loss of any major retailer would disrupt distribution of our products and result in a loss of revenue. If a significant number of our customers cease purchasing products from us, our business would be materially and adversely harmed. Further, any significant reduction or delay in the historical level of orders from our customers, cancellation of orders from any significant retailer or any significant decrease in our retail display space in any of these customers’ stores would have a negative impact on our operating results.

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We sell a significant portion of our products internationally, which exposes us to risks associated with foreign operations.

        We sell a significant amount of our products to customers outside the United States, particularly in Europe and Asia. International sales accounted for 14%, 15%, and 17% of our revenue for the years ended March 31, 2005, 2004 and 2003, respectively. We expect that shipments to international customers, including customers in Europe and Asia, will continue to account for a significant portion of our net sales. Sales outside the United States involve the following risks, among others:

        While most of our sales are made in U.S. dollars, some are conducted in the local currencies of foreign countries. These foreign currencies are translated into U.S. dollars for the balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the fiscal year. Gains and losses resulting from transactions denominated in foreign currencies are included in our consolidated statements of operations. Currency fluctuations may adversely affect our financial performance and also may increase the relative price of our product in foreign markets and thereby could also cause our products to become less affordable or less price competitive than those of foreign manufacturers. These risks associated with foreign operations may have a material adverse effect on our revenue from, or costs associated with, international sales.

Our business and our products are subject to governmental regulation, which could have a significant negative effect upon our business.

        Nasal dilators, such as our Breathe Right nasal strips, have been classified by the Food and Drug Administration (“FDA”) as Class I medical devices. Our Breathe Right nasal strip products are subject to extensive regulation regarding manufacturing, packaging, labeling, distribution, importation, sale and storage by various federal agencies, including the FDA, the Federal Trade Commission (the “FTC”), the Consumer Product Safety Commission, the Environmental Protection Agency and by various agencies of the states, localities and foreign countries in which our products are manufactured, distributed and sold.

        Our FiberChoice dietary fiber supplement is in a category of products commonly referred to for regulatory purposes as “dietary supplements.” Under the Dietary Supplement Health and Education Act (“DSHEA”), dietary supplements are not subject to pre-market approval by the FDA. However, the manufacturing, packaging, labeling, advertising, distribution and sale of dietary supplement products is subject to regulation by federal, state and local governmental agencies, including the FDA and the FTC. Among other matters, regulation by the FDA and FTC is concerned with product safety and claims made with respect to a product’s ability to provide health-related benefits.

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        Our third-party manufacturers are also subject to governmental regulation in the manufacture of our products, including compliance with rules regarding packaging, labeling and manufacturing practices and equivalent state and foreign regulations. Our manufacturers are subject to periodic inspection to determine if they are complying with the rules regarding packaging, labeling and manufacturing.

        Furthermore, we also are subject to a variety of other regulations in various foreign markets, including regulations pertaining to import/export regulations. To the extent we decide to commence or expand operations in additional countries, government regulations in those countries may prevent or delay entry into or expansion of operations in those markets. In addition, our ability to sustain satisfactory levels of sales in our markets is dependent in significant part on our ability to introduce additional products into the markets. However, government regulations in both our domestic and international markets can delay or prevent the introduction, or require the reformulation or withdrawal, of some of our products.

        Our failure or the failure of our manufacturers to comply with local, state, federal or foreign regulations could lead to the imposition of significant civil and criminal fines, product recalls, detentions, seizures, injunctions and criminal prosecutions, suspension of product sales or manufacturing, change product design or formulation, or changes product labeling, packaging or advertising or require us to take other corrective action, any of which would materially adversely affect our business. Further, violation of these regulations or the assertion of a violation of these regulations could have a material adverse effect on our reputation and the reputation of our products, which could materially damage our business.

        Further, the regulatory environment in which we operate is continually changing. Future changes in regulations or enforcement policies could impose more stringent requirements on us, compliance with which could adversely affect our business. These changes could also prove beneficial to our competitors and thus, adversely affect our business. In addition, regulations of the FDA and state and foreign laws and regulations depend heavily on administrative interpretations. We cannot assure you that future interpretations made by the FDA, or other regulatory authorities, with possible retroactive effect, will not adversely affect our business, financial condition and results of operations. It is not possible to assess the likelihood that the laws affecting our products and business will change, or to predict whether such changes, if they occur, will have a material effect on us.

Our business of the manufacturing, marketing, and sale of our products involves the risk of liability claims and such claims could seriously harm our business, particularly if our insurance coverage is inadequate.

        Our business exposes us to potential product liability claims that are inherent in the testing, production, marketing and sale of our products. Like other participants in these markets, we may from time to time be involved in lawsuits, claims and proceedings alleging product liability and related claims such as negligence. If product liability claims become substantial, our reputation could be damaged significantly, thereby harming our business. We may be required to pay substantial damage awards as a result of any successful product liability claims. Any product liability claim against us, whether with or without merit, could result in costly litigation, and divert the time, attention, and resources of our management.

        As a result of our exposure to product liability claims, we currently carry product liability insurance covering our products with policy limits per occurrence and in the aggregate that we have deemed to be sufficient. We cannot predict, however, whether this insurance is sufficient, or if not, whether we will be able to obtain sufficient insurance to cover the risks associated with our business or whether such insurance will be available at premiums that are commercially reasonable. In addition, these insurance policies must be renewed annually. Although we have been able to obtain product liability insurance, such insurance may not be available in the future on acceptable terms, if at all. A successful claim against us or settlement by us in excess of our insurance coverage or our inability to maintain insurance in the future could have a material adverse effect on our business, results of operations, liquidity and financial condition.

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If we are required to, or voluntarily, recall our products, our reputation and our business could be materially harmed.  

        The U.S. Food and Drug Administration and similar governmental authorities in other countries in which our products are sold, have the authority to request and, in some cases, require the recall of our products in the event of material deficiencies or defects in design or manufacture. A government-mandated or voluntary recall by us could occur as a result of product functionality, manufacturing errors or design defects. Any recall of product would divert managerial and financial resources, harm our reputation with our customers and damage our business.

Fluctuations in our future operating results may negatively affect the market price of our common stock.  

        We have experienced fluctuations in our quarterly operating results and we expect those fluctuations to continue due to a variety of factors. Some of the factors that influence our quarterly operating results include:

        Because of these factors, our quarterly operating results are difficult to predict and are likely to vary in the future. If our operating results are below financial analysts’ or investors’ expectations, the market price of our common stock may fall abruptly and significantly.

We are dependent on key personnel.

        Our future success depends, in significant part, upon the continued service and performance of our senior management and other key personnel, in particular Marti Morfitt, our Chief Executive Officer. The loss of Ms. Morfitt’s services could impair our ability to effectively manage our company and to carry out our business plan.  We have an employment agreement with Ms. Morfitt that provides that Ms. Morfitt will serve as our Chief Executive Officer and that either party may terminate Ms. Morfitt’s employment at any time with or without cause. However, if we terminate Ms. Morfitt’s employment without cause, we would be required to make specified payments to her as described in her employment agreement. The other members of our management team also have significant experience in our industry and the loss of any other member of our other senior management could likewise impair our ability to effectively manage our company and carry out our business plan.  We do not carry key person life insurance on any of our executive officers.  In addition, competition for skilled employees in our industry is intense. Our future success also depends on our continuing ability to attract, retain and motivate highly qualified managerial, technical and sales personnel. Our inability to retain or attract qualified personnel could have a significant negative effect and materially harm our business and financial condition.

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Our stock price may be volatile and a stockholder’s investment could decline in value.

        Our stock price has fluctuated in the past and may continue to fluctuate significantly, making it difficult for an investor to resell shares or to resell shares at an attractive price. The market prices for securities of companies with relatively small capitalization, like us, have historically been highly volatile. Future events concerning us or our competitors could cause such volatility, including:

        In addition, the stock market is subject to price and volume fluctuations that affect the market prices for companies in general, and small-capitalization, high-technology companies in particular, which are often unrelated to the operating performance of these companies. In addition to fluctuations unrelated to our financial performance, our failure to meet expectations of financial analysts and investors will likely cause a decline in the price of our common stock.

Future sales of shares of our common stock in the public market may negatively affect our stock price.

Future sales of our common stock, or the perception that these sales could occur, could have a significant negative effect on the market price of our common stock. In addition, upon exercise of outstanding options and warrants, the number of shares outstanding of our common stock could increase substantially. This increase, in turn, could dilute future earnings per share, if any, and could depress the market value of our common stock. Dilution and potential dilution, the availability of a large amount of shares for sale, and the possibility of additional issuances and sales of our common stock may negatively affect both the trading price of our common stock and the liquidity of our common stock. These sales also might make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that we would deem appropriate.

Provisions of Delaware law, our bylaws and other agreements may deter a change of control of us and may have a possible negative effect on our stock price.

        Certain provisions of Delaware law, our bylaws and other agreements may make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of us, including:

        These measures could discourage or prevent a takeover of us or changes in our management, even if an acquisition or such changes would be beneficial to our stockholders. This may have a negative effect on the price of our common stock.

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Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk exposure is primarily interest rate risk related to our cash and cash equivalents and investments in marketable securities. We have an investment policy that limits the types of securities in which we may invest as well as the length of maturities. No investment may exceed 36 months in maturity and the weighted average life of the portfolio may not exceed 18 months. The average life of the investment portfolio as of March 31, 2005 was 303 days.

        The table below provides information about our cash and cash equivalents and marketable securities as of March 31, 2005:

Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The Consolidated Balance Sheets of the Company as of March 31, 2005 and 2004, and the related Consolidated Statements of Operations, Stockholders’ Equity and Comprehensive Income, and Cash Flows for each of the years ended March 31, 2005, 2004 and 2003, the Notes to the Consolidated Financial Statements and the Reports of Independent Registered Public Accounting Firm, are listed under Item 15. Exhibits and Financial Statement Schedules of this Report.

Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

Item 9A.   CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

        The Company’s Chief Executive Officer, Marti Morfitt, and Chief Financial Officer, Samuel 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 such date, the Company’s disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

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

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Item 9B.   OTHER INFORMATION

        We entered into a letter agreement with Nicole C. Strait dated January 31, 2005 in connection with her appointment as our Vice President of Human Resources, which letter agreement is attached to this form 10-K as Exhibit 10.19. This letter agreement contains provisions regarding, among other things, termination of employement and change in control.

        Additionally, in connection with our appointment of Susan Horvath as Vice President, International, we entered into a memorandum agreement with her dated June 1, 2005, which memorandum agreement is attached to this Form 10-K as Exhibit 10.20. This memorandum agreement contains provisions regarding, among other things, termination of employement and change in control.

        Effective June 7, 2005, we entered into an Amended and Restated Employment Agreement with Daniel E. Cohen, our Chairman, attached to this Annual Report on Form 10-K as Exhibit 10.21. The Amended and Restated Employment Agreement contains the same terms as our prior employment agreements with Mr. Cohen, as amended, but extends the term of his employment an additional year to June 30, 2006.

PART III

Item 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors

        The following sets forth certain information with respect to our directors. Please see Item 1. Business – Executive Officers of the Company for biographical information for Daniel E. Cohen, our Chairman and a director and Marti Morfitt, our Chief Executive Officer and a director:

        Karen T. Beckwith, 45, has served as our director since October 1, 2003. Since January 2003, Ms. Beckwith has served as the President and Chief Executive Officer of Gelco Information Network, a leading provider of expense and trade management solutions. From 1999 to January 2003, Ms. Beckwith served in various executive positions of Gelco Information Network, most recently as its President and Chief Executive Officer of the Trade Management Group division. Prior to that, she held a number of finance positions at Ceridian Corporation from 1995 to 1999, including Senior Vice President of Finance and Business Development and Integration.

        Patrick Delaney, 62, has served as our director since 1983 and as our Secretary since 1995. A practicing attorney since 1967, Mr. Delaney retired as a partner in the Minneapolis-based law firm of Lindquist & Vennum P.L.L.P., counsel to the Company in December 2002. Mr. Delaney is an author and serves on the board of a number of privately-held companies.

        Andrew J. Greenshields, 68, has served as our director since 1986. Mr. Greenshields has been President of Pathfinder Ventures, Inc., Minneapolis, Minnesota, since 1980. He is also a general partner of Pathfinder Venture Capital Fund III and a general partner of Spell Capital Partners, LP, both of which are Minneapolis-based financial limited partnerships. Mr. Greenshields is also a director of Aetrium, Inc., a manufacturer of semi-conductor handling equipment.

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        H. Robert Hawthorne, 61, has served as our director since 1999. Mr. Hawthorne was Chief Executive Officer of Ocean Spray Cranberries, Inc., a Boston-based food and beverage company, from February 2000 to November 2002. From 1997 to 1999, Mr. Hawthorne served as a director, President and Chief Executive Officer of Select Comfort Corporation, a Minneapolis-based company that manufactures air beds and sleep related products. From 1986 to 1997, Mr. Hawthorne served in a series of positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, most recently serving from February 1992 to December 1997 as President of The Pillsbury Brands Group, a subsidiary of The Pillsbury Company.

        Richard W. Perkins, 75, has been our director since 1993. Mr. Perkins has been President, Chief Executive Officer and a director of Perkins Capital Management, Inc., a Minneapolis-based investment management company, since 1985. He is also a general partner of Spell Capital Partners, LP, a Minneapolis-based venture capital limited partnership. He is also a director of the following publicly-held companies: Synovis Life Technologies, Inc., a manufacturer of medical products; PW Eagle, Inc., a manufacturer of plastic pipe; Lifecore Biomedical, Inc., a medical device company; Nortech Systems, Inc., a contract manufacturer for the electronics industry; Vital Images, Inc., a medical diagnostic software company; Teledigital, Inc., a provider of software to the cellular phone industry; and Two Way TV (U.S.), Inc., a provider of software to the television game industry.

        Morris J. Siegel, 56, has served as our director since April 18, 2003. Mr. Siegel is the founder and retired chairman of Celestial Seasonings, Inc., a manufacturer and marketer of specialty herb teas. In 2000, Celestial Seasonings merged with The Hain Food Group, a natural, specialty, organic and snack food company. Mr. Siegel then served as vice chairman of the merged company, The Hain Celestial Group, Inc. and was Chief Executive Officer of Celestial Seasonings until September 2002. In 1987, Mr. Siegel founded Earth Wise, Inc., a marketer of environmentally friendly cleaning products and recycled trash bags. Mr. Siegel currently serves as a director of Whole Foods Market, Inc., a North American natural foods grocer. Mr. Siegel is also a director Annie’s HomeGrown Foods, Inc., which manufactures, markets and sells premium all natural and organic foods, and is a subsidiary of Solera Capital LLC; a director of Camelbak Corp., an outdoor sporting goods company; and Avid Health Corp., a manufacturer of vitamins.

_________________

        Certain other information required under this Item with respect to directors is contained in the Section “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the Annual Meeting of Stockholders to be held on August 30, 2005 (the “2005 Proxy Statement”), a definitive copy of which will be filed with the Commission within 120 days of the close of the last fiscal year, and is incorporated herein by reference.

Executive Officers

        Information concerning executive officers is set forth in the Section entitled “Executive Officers of the Company” in Part I of this Form 10-K pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation S-K.

Item 11.   EXECUTIVE COMPENSATION

        Information required under this item is contained in the section entitled “Executive Compensation” in our 2005 Proxy Statement and is incorporated herein by reference.

34

Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        Information required under this item is contained in the section entitled “Security Ownership of Principal Stockholders and Management” in our 2005 Proxy Statement and is incorporated herein by reference.

Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Information required under this item is contained in the section entitled “Certain Relationships and Related Transactions” in our 2005 Proxy Statement and is incorporated herein by reference.

Item 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

        Information required under this item is contained in the section entitled “Relationship with Independent Accountants” in our 2005 Proxy Statement and is incorporated herein by reference.

PART IV

Item 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

35

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) 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.

        Each person whose signature appears below constitutes and appoints DANIEL E. COHEN and MARTI MORFITT as his or her true and lawful attorneys-in-fact and agents, each acting alone, with the full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on June 10, 2005 on behalf of the Registrant in the capacities indicated.

/s/   Marti Morfitt

/s/   Samuel Reinkensmeyer

/s/   Karen T. Beckwith

/s/   Daniel E. Cohen

36

/s/   Patrick Delaney

/s/   H. Robert Hawthorne

/s/   Andrew J. Greenshields

/s/   Richard W. Perkins

/s/   Morris J. Siegel

37

CNS, INC.
EXHIBIT INDEX

38

_________________

*Indicates Compensatory Agreement

**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.

39

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE

The Board of Directors and Stockholders
CNS, Inc.

Under date of June 3, 2005, we reported on the consolidated balance sheets of CNS, Inc. as of March 31, 2005 and, 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the fiscal years in the three-year period ended March 31, 2005, as contained in the 2005 Annual Report on Form 10-K to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 2004. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

/s/   KPMG LLP

Minneapolis, Minnesota
June 3, 2005

40

CNS, INC.
Schedule II – Valuation and Qualifying Accounts
(in thousands)

41

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that:

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of March 31, 2005.

        Our management’s assessment of the effectiveness of our internal control over financial reporting as of March 31, 2005, has been audited by KPMG LLP, the independent registered public accounting firm that audited the consolidated financial statements in this Form10-K, as stated in their report, which is included herein.

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
CNS, Inc.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting that CNS, Inc. maintained effective internal control over financial reporting as of March 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). CNS, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that CNS, Inc. maintained effective internal control over financial reporting as of March 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, CNS, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CNS, Inc. and subsidiaries as of March 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2005, and our report dated June 3, 2005 expressed an unqualified opinion on those consolidated financial statements.

/s/   KPMG LLP               

Minneapolis, Minnesota
June 3, 2005

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
CNS, Inc.:

We have audited the accompanying consolidated balance sheets of CNS, Inc. and subsidiaries as of March 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CNS, Inc. and subsidiaries as of March 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of CNS, Inc.’s internal control over financial reporting as of March 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 3, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.  

/s/  KPMG LLP                 

Minneapolis, Minnesota
June 3, 2005

F-3

CNS, INC.
Consolidated Statements of Operations
(in thousands, except per share amounts)

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

F-4

CNS, INC.
Consolidated Balance Sheets
(in thousands, except per share amounts)

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

F-5

CNS, INC.
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
(in thousands)