|FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549


(Mark One)
(X)       
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934


For the quarterly
period ended June 30, 2005


OR


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


For the transition period  to


Commission file number
1-11394


MEDTOX SCIENTIFIC, INC. (Exact name of registrant as specified in its charter)
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Delaware                        | 95-3863205         
|------------------------------- | -------------------
|(State or other jurisdiction of | (I.R.S. Employer   
|incorporated or organization)   | Identification No.)

|402 West County Road D, St. Paul, Minnesota | 55112     
|------------------------------------------- | ----------
|(Address of principal executive offices)    | (Zip Code)

|Registrant's telephone number including area code:                    (651) 636-7466
|------------------------------------------------------------------------------------

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


Yes X  No


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


Yes  No X


The number of shares
of Common Stock, $0.15 par value per share, outstanding as of August 5, 2005, was 7,957,095.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|MEDTOX SCIENTIFIC, INC.


INDEX
|-------------------------------

|                                                                     | Page
|-------------------------------------------------------------------- | ----
|Part I        Financial Information:                                 |     
|                                                                    
|Item 1:  Financial Statements (Unaudited)                           
|                                                                    
|Consolidated Statements of Operations - Three and Six               
|Months Ended June 30, 2005 and 2004                                  | 3   
|                                                                    
|Consolidated Balance Sheets - June 30, 2005                         
|and December 31, 2004                                                | 4   
|                                                                    
|Consolidated Statements of Cash Flows - Six                         
|Months Ended June 30, 2005 and 2004                                  | 5   
|                                                                    
|Notes to Consolidated Financial Statements                           | 6   
|                                                                    
|Item 2:                                                             
|                                                                    
|Management's Discussion and Analysis of                             
|Financial Condition and Results of Operations                        | 11  
|                                                                    
|Item 3:                                                             
|                                                                    
|Quantitative and Qualitative Disclosure                             
|About Market Risk                                                    | 25  
|                                                                    
|Item 4:                                                             
|                                                                    
|Controls and Procedures                                              | 25  
|                                                                    
|Part II       Other Information                                      | 26  
|                                                                    
|Item 1:  Legal Proceedings                                           | 26  
|Item 2:  Unregistered Sales of Equity Securities and Use of
Proceeds | 26  
|Item 3:  Defaults Upon Senior Securities                             | 26  
|Item 4:  Submission of Matters to a Vote of Securities Holders       | 26  
|Item 5:  Other Information                                           | 27  
|Item 6:  Exhibits                                                    | 27  
|                                                                    
|Signatures                                                           | 28  
|Exhibit Index                                                        | 29  

|2
|-

|PART I    FINANCIAL
INFORMATION


Item 1:     FINANCIAL
STATEMENTS (UNAUDITED)


MEDTOX SCIENTIFIC, INC. 
CONSOLIDATED STATEMENTS OF OPERATIONS 
(In thousands, except share and per share data) 
(Unaudited)
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                               | Three Months Ended | Six Months Ended
|---------------------------------------------- | ------------------ | ----------------
|                                               | June 30, 2005      | June 30, 2004   
|REVENUES:                                      |                    |                 
|Laboratory services                            |                    |                 
|Product sales                                  |                    |                 
|                                               |                    |                 
|                                               |                    |                 
|COST OF REVENUES:                              |                    |                 
|Cost of services                               |                    |                 
|Cost of sales                                  |                    |                 
|                                               |                    |                 
|                                               |                    |                 
|                                               |                    |                 
|GROSS PROFIT                                   |                    |                 
|                                               |                    |                 
|OPERATING EXPENSES:                            |                    |                 
|Selling, general and administrative            |                    |                 
|Research and development                       |                    |                 
|                                               |                    |                 
|                                               |                    |                 
|                                               |                    |                 
|INCOME FROM OPERATIONS                         |                    |                 
|                                               |                    |                 
|OTHER INCOME (EXPENSE):                        |                    |                 
|Interest expense                               |                    |                 
|Other expense, net                             |                    |                 
|                                               |                    |                 
|                                               |                    |                 
|                                               |                    |                 
|INCOME BEFORE INCOME TAX EXPENSE               |                    |                 
|                                               |                    |                 
|INCOME TAX EXPENSE                             |                    |                 
|                                               |                    |                 
|NET INCOME                                     |                    |                 
|                                               |                    |                 
|BASIC EARNINGS PER COMMON SHARE (1)            |                    |                 
|                                               |                    |                 
|DILUTED EARNINGS PER COMMON SHARE (1)          |                    |                 
|                                               |                    |                 
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: |                    |                 
|Basic (1)                                      |                    |                 
|Diluted (1)                                    |                    |                 

|(1) 
          Share and per share amounts for the three and six months ended June 30, 2004
          have been restated for the three-for-two stock split effected on August 20,
          2004.


See Notes to Consolidated
Financial Statements (Unaudited).


3
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|MEDTOX SCIENTIFIC, INC. 
CONSOLIDATED BALANCE SHEETS 
(In thousands, except share and per share data) 
(Unaudited)
|------------------------------------------------------------------------------------------------------------------

|                                                                               | June 30,
2005 | December 31,
2004
|------------------------------------------------------------------------------ | ------------- | -----------------
|ASSETS                                                                         |               |                  
|CURRENT ASSETS:                                                                |               |                  
|Cash and cash equivalents                                                      |               |                  
|Accounts receivable:                                                           |               |                  
|Trade, less allowance for doubtful accounts ($481 in 2005 and $734 in 2004)    |               |                  
|Other                                                                          |               |                  
|                                                                               |               |                  
|Total accounts receivable                                                      |               |                  
|Inventories                                                                    |               |                  
|Prepaid expenses and other                                                     |               |                  
|Deferred income taxes                                                          |               |                  
|                                                                               |               |                  
|Total current assets                                                           |               |                  
|BUILDING, EQUIPMENT AND IMPROVEMENTS, net                                      |               |                  
|GOODWILL                                                                       |               |                  
|OTHER INTANGIBLE ASSETS, net                                                   |               |                  
|DEFERRED INCOME TAXES, net                                                     |               |                  
|OTHER ASSETS                                                                   |               |                  
|                                                                               |               |                  
|TOTAL ASSETS                                                                   |               |                  
|                                                                               |               |                  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                           |               |                  
|CURRENT LIABILITIES:                                                           |               |                  
|Line of credit                                                                 |               |                  
|Accounts payable                                                               |               |                  
|Accrued expenses                                                               |               |                  
|Current portion of long-term debt                                              |               |                  
|Current portion of capital leases                                              |               |                  
|                                                                               |               |                  
|Total current liabilities                                                      |               |                  
|LONG-TERM DEBT, net of current portion                                         |               |                  
|OTHER LONG-TERM LIABILITIES                                                    |               |                  
|LONG-TERM PORTION OF CAPITAL LEASES, net of current portion                    |               |                  
|COMMITMENTS AND CONTINGENCIES                                                  |               |                  
|STOCKHOLDERS' EQUITY:                                                          |               |                  
|Preferred stock, $1.00 par value per share; authorized shares, 50,000; none    |               |                  
|issued and outstanding                                                         |               |                  
|Common stock, $0.15 par value per share; authorized shares, 28,000,000; issued |               |                  
|and outstanding shares, 7,550,226 in 2005 and 7,534,842 in 2004                |               |                  
|Additional paid-in capital                                                     |               |                  
|Deferred stock-based compensation                                              |               |                  
|Accumulated deficit                                                            |               |                  
|Common stock held in trust                                                     |               |                  
|Treasury stock                                                                 |               |                  
|                                                                               |               |                  
|Total stockholders' equity                                                     |               |                  
|                                                                               |               |                  
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                     |               |                  
|                                                                               |               |                  

|See Notes to Consolidated
Financial Statements (Unaudited).


4
|---------------------------------------------------------------

|MEDTOX SCIENTIFIC, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
(In thousands) 
(Unaudited)
|-------------------------------------------------------------------------------------------

|                                                                      | Six Months Ended
|--------------------------------------------------------------------- | ----------------
|                                                                      | June 30,
2005   
|CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:                          |                 
|Net income                                                            |                 
|Adjustments to reconcile net income to net cash provided by operating |                 
|activities:                                                           |                 
|Depreciation and amortization                                         |                 
|Provision for losses on accounts receivable                           |                 
|Loss on sale of equipment                                             |                 
|Deferred compensation                                                 |                 
|Deferred income taxes                                                 |                 
|Changes in operating assets and liabilities:                          |                 
|Accounts receivable                                                   |                 
|Inventories                                                           |                 
|Prepaid expenses and other current assets                             |                 
|Other assets                                                          |                 
|Accounts payable and accrued expenses                                 |                 
|                                                                      |                 
|Net cash provided by operating activities                             |                 
|                                                                      |                 
|CASH FLOWS USED IN INVESTING ACTIVITIES:                              |                 
|Capital expenditures                                                  |                 
|Purchase of customer list                                             |                 
|Proceeds from sale of equipment                                       |                 
|                                                                      |                 
|Net cash used in investing activities                                 |                 
|                                                                      |                 
|CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:                |                 
|Net proceeds on revolving credit facility                             |                 
|Proceeds from long-term debt                                          |                 
|Principal payments on long-term debt                                  |                 
|Principal payments on capital leases                                  |                 
|Purchase of common stock                                              |                 
|Net proceeds from sale of common stock                                |                 
|Payment of taxes from traded shares                                   |                 
|                                                                      |                 
|Net cash provided by (used in) financing activities                   |                 
|                                                                      |                 
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                      |                 
|                                                                      |                 
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                      |                 
|                                                                      |                 
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                            |                 
|                                                                      |                 
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                    |                 
|Cash paid for:                                                        |                 
|Interest                                                              |                 
|Taxes                                                                 |                 

|See Notes to Consolidated
Financial Statements (Unaudited).


5
|---------------------------------------------------------------

|MEDTOX SCIENTIFIC, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 
June 30, 2005


     1.    
          BASIS OF PRESENTATION


The accompanying
unaudited consolidated financial statements of MEDTOX Scientific, Inc. (the Company) have
been prepared in accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of financial condition and results of operations have
been included. Operating results for the three and six-month periods ended June 30, 2005
are not necessarily indicative of the results that may be attained for the entire year.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2004.


Stock-Based
Compensation  Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, requires companies to measure
employee stock compensation plans and non-employee stock-based compensation based on the
fair value method of accounting. However, for stock compensation granted to employees,
SFAS No. 123 allows the continued use of Accounting Principles Board Opinion (APBO) No.
25, Accounting for Stock Issued to Employees, with pro forma disclosure of net
income and earnings per share determined as if the fair value method had been applied in
measuring compensation cost. The Company has elected the continued use of APBO No. 25.


Had the Company
determined compensation expense for its stock options under SFAS No. 123, (as amended by
SFAS No. 148), the Companys net income and earnings per share would have been
changed to the pro forma amounts indicated below:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(In thousands, except per share data)             | Three Months Ended
June 30, | Six Months Ended
June 30,
|------------------------------------------------- | --------------------------- | -------------------------
|2005                                              | 2004                        | 2005                     
|Net income ...................................... |                             |                          
|Less:  Total stock-based compensation             |                             |                          
|expense, net of related tax effect                |                             |                          
|                                                  |                             |                          
|                                                  |                             |                          
|                                                 
|Basic earnings per share...............           |                             |                          
|                                                  |                             |                          
|                                                 
|Diluted earnings per share............            |                             |                          
|                                                  |                             |                          

|6
|-

|New Accounting
Standards  In May 2005, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.
SFAS No. 154 requires retrospective application to prior periods financial
statements for changes in accounting principle, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change. SFAS No. 154
also requires that retrospective application of a change in accounting principle be
limited to the direct effects of the change. Indirect effects of a change in accounting
principle, such as a change in non-discretionary profit-sharing payments resulting from an
accounting change, should be recognized in the period of the accounting change. SFAS No.
154 also requires that a change in depreciation, amortization, or depletion method for
long-lived, non-financial assets be accounted for as a change in accounting estimate
effected by a change in accounting principle. SFAS No. 154 will be effective for the
Company on January 1, 2006.


In December 2004, the
FASB issued SFAS No. 123(R), Share-Based Payment that will require
compensation costs related to share-based payment transactions to be recognized in the
Companys statement of operations. With limited exceptions, the amount of
compensation cost will be measured based on the grant-date fair value of the equity or
liability instruments issued. In addition, liability awards will be re-measured each
reporting period. Compensation cost will be recognized over the period that an employee
provides service in exchange for the award. SFAS No. 123(R) replaces SFAS No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS No. 123(R) will be effective
for the Company on January 1, 2006. The Company is currently in the process of evaluating
the impact of the adoption of SFAS No. 123(R).


In November 2004, the
FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter
4. SFAS No. 151 requires that abnormal amounts of idle capacity and spoilage costs
should be excluded from the cost of inventory and expensed when incurred. SFAS No. 151
will be effective for the Company on July 1, 2005. The Company does not expect the
adoption of this statement to have a material impact on its results of operations or
financial position.




2.    SEGMENTS


The Company has two
reportable segments: Laboratory Services and Product Sales. The Laboratory Services
segment consists of MEDTOX Laboratories, Inc. and New Brighton Business Center, LLC.
Services provided include forensic toxicology (primarily workplace drugs-of-abuse testing)
and Specialty Laboratory Services, which include clinical toxicology, clinical testing for
the pharmaceutical industry, pediatric lead testing, heavy metals analyses and courier
delivery, and medical surveillance. The Product Sales segment consists of MEDTOX
Diagnostics, Inc., which includes point-of-collection (POC) disposable diagnostics
devices. Products manufactured include easy to use, inexpensive, on-site drug tests such
as PROFILE®-II, PROFILE®-II A, PROFILE-II
ER®, and VERDICT®-II, in addition to a variety of
agricultural testing products. MEDTOX Diagnostics, Inc. also provides contract
manufacturing services in its Food and Drug Administration/Good Manufacturing Practices
(FDA/GMP) facility.


The Companys
reportable segments are strategic business units that offer different products and
services. They are managed separately, as each business requires different products,
services and marketing strategies.


7
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In evaluating
financial performance, management focuses on income from operations as a segments
measure of profit or loss.
|---------------------------------------------------------------------------------------------------------------------------

|(In thousands)                          | Three Months Ended
June 30, | Six Months Ended
June 30,
|--------------------------------------- | --------------------------- | -------------------------
|                                        | 2005                        | 2004                     
|Laboratory Services:                    |                             |                          
|                                        |                             |                          
|Revenues                                |                             |                          
|Depreciation and amortization           |                             |                          
|Income from operations                  |                             |                          
|Segment assets                          |                             |                          
|Capital expenditures for segment assets |                             |                          
|                                        |                             |                          
|Product Sales:                          |                             |                          
|                                        |                             |                          
|Revenues                                |                             |                          
|Depreciation and amortization           |                             |                          
|Income from operations                  |                             |                          
|Segment assets                          |                             |                          
|Capital expenditures for segment assets |                             |                          
|                                        |                             |                          
|Corporate (unallocated):                |                             |                          
|                                        |                             |                          
|Other expense                           |                             |                          
|Deferred tax assets, net                |                             |                          
|                                        |                             |                          
|Company:                                |                             |                          
|                                        |                             |                          
|Revenues                                |                             |                          
|Depreciation and amortization           |                             |                          
|Income from operations                  |                             |                          
|Other expense                           |                             |                          
|Income before income tax expense        |                             |                          
|Total assets                            |                             |                          
|Capital expenditures for assets         |                             |                          

|The following is a
summary of revenues from external customers for each group of services provided within the
Laboratory Services segment:
|------------------------------------------------------------------------------------------------------------------------------------------

|(In thousands)                      | Three Months Ended
June 30, | Six Months Ended
June 30,
|----------------------------------- | --------------------------- | -------------------------
|                                    | 2005                        | 2004                     
|Workplace drugs-of-abuse            |                             |                          
|Other specialty laboratory services |                             |                          
|                                    |                             |                          
|                                    |                             |                          
|                                    |                             |                          

|8
|-

|The following is a
summary of revenues from external customers for each group of products and services
provided within the Product Sales segment:
|-------------------------------------------------------------------------------------------------------------------------------------------------

|(In thousands)                  | Three Months Ended
June 30, | Six Months Ended
June 30,
|------------------------------- | --------------------------- | -------------------------
|                                | 2005                        | 2004                     
|POC on site testing products    |                             |                          
|Contract manufacturing services |                             |                          
|Other diagnostic products       |                             |                          
|                                |                             |                          
|                                |                             |                          
|                                |                             |                          

|3.    INVENTORIES 
Inventories consisted of the following:
|----------------------------------------------------------

|(In thousands)                         | June 30,
2005 | December 31,
2004
|-------------------------------------- | ------------- | -----------------
|Raw materials                          |               |                  
|Work in process                        |               |                  
|Finished goods                         |               |                  
|Supplies, including off-site inventory |               |                  
|                                       |               |                  
|                                       |               |                  
|                                       |               |                  

|4.    
          EARNINGS PER SHARE 
The following table sets forth the computation of basic and diluted earnings per common share:
|-----------------------------------------------------------------------------------------------------------------------------------

|(In thousands, except share and
per share data) | Three Months Ended
June 30, | Six Months Ended
June 30,
|----------------------------------------------- | --------------------------- | -------------------------
|                                                | 2005                        | 2004                     
|Net income (A)                                  |                             |                          
|                                                |                             |                          
|Weighted average number of basic                |                             |                          
|common shares outstanding (B)                   |                             |                          
|Dilutive effect of stock options and            |                             |                          
|warrants computed based on the                  |                             |                          
|treasury stock method using average             |                             |                          
|market price                                    |                             |                          
|                                                |                             |                          
|Weighted average number of diluted              |                             |                          
|common shares outstanding (C)                   |                             |                          
|                                                |                             |                          
|Basic earnings per common share (A/B)           |                             |                          
|                                                |                             |                          
|Diluted earnings per common share (A/C)         |                             |                          
|                                                |                             |                          

|Options and warrants
to purchase 1,224,755, 8,589, 1,337,972 and 1,421,519 shares of common stock were
outstanding during the three and six months ended June 30, 2005 and 2004, respectively,
but were not included in the computation of diluted earnings per share as their exercise
prices were greater than the average market price of the common shares.


9
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5.    
          INCOME TAXES


At December 31, 2004,
the Company had federal and state net operating loss carryforwards (NOLs) of approximately
$26.1 million and $28.2 million, respectively, which are available to offset future
taxable income.  The Companys federal and state NOLs expire in varying amounts
each year from 2005 through 2023 in accordance with applicable federal and state tax
regulations and the timing of when the NOLs were incurred.  For financial reporting
purposes, a valuation allowance has been recorded to offset deferred tax assets that, more
likely than not, will not be realized based on the Companys projected future taxable
income, the timing of expiring NOLs, and the Companys tax planning strategies. 
Section 382 of the Internal Revenue Code restricts the annual utilization of certain NOLs
incurred prior to a change in ownership.  However, such limitation is not expected to
impair the realization of these NOLs.  In the future, subsequent revisions to the
estimated net realizable value of these deferred tax assets could cause the provision for
income taxes to vary significantly from period to period, although the Companys cash
payments would remain unaffected until the benefit of the NOLs is completely utilized or
expires unused. At June 30, 2005, the Company had a valuation allowance on deferred tax
assets of $0.9 million, which represents the portion of its NOL carryforwards that will
more likely than not expire unused in 2006 and future years.


     6.    
          CONTINGENCIES


Leases The Company leases offices and facilities and office equipment under certain operating
leases, which expire on various dates through March 2016. Under the terms of the facility
leases, a pro rata share of operating expenses and real estate taxes are charged as
additional rent.


Legal 
The Company is party to various legal proceedings arising in the normal course of business
activities, none of which, in the opinion of management, are expected to have a material
adverse impact on the Companys consolidated financial position or results of
operations.


     7.    
          SUBSEQUENT EVENTS


In July and August
2000, the Company completed private placements of an aggregate 1,018,520 shares of common
stock and warrants to purchase an additional 1,120,439 shares of common stock. The offer
and sale of these securities was limited to accredited investors. The warrants are
exercisable for a five-year period from the time of issuance at an exercise price of $6.75
per share. As of June 30, 2005, warrants to acquire 18,520 common shares had been
exercised. In July 2005, warrants to acquire 405,514 common shares were exercised
resulting in proceeds of approximately $2.7 million. 497,581 warrants expired without
being exercised on July 31, 2005. The remaining 198,824 warrants will expire on August 31,
2005 if not exercised.


In August 2005, the
Company purchased from an officer of the Company 35,874 shares of common stock at the
closing market price on the American Stock Exchange on August 4, 2005. The acquired stock
will be contributed to the Companys Long-Term Incentive Plan.


10
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 2:  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


This Form 10-Q
contains certain 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, which are
intended to be covered by the safe harbors created by such acts. For this purpose, any
statements that are not statements of historical fact may be deemed to be forward looking
statements, including the statements under Managements Discussion and Analysis
of Financial Condition and Results of Operations regarding our strategy, future
operations, future expectations and future estimates, future financial position or results
and future plans and objectives of management. Those statements in this Form 10-Q
containing the words believes, anticipates, plans,
expects and similar expressions constitute forward looking statements,
although not all forward looking statements contain such identifying words.


The forward looking
statements contained in this Form 10-Q are based on our current expectations, assumptions,
estimates and projections about our Company and its businesses. All such forward looking
statements involve significant risks and uncertainties, including those risks identified
in the next paragraph, many of which are beyond our control. Although we believe that the
assumptions underlying our forward looking statements are reasonable, any of the
assumptions could prove inaccurate. Actual results may differ materially from those
indicated by the forward looking statements included in this Form 10-Q. In light of the
significant uncertainties inherent in the forward looking statements included in this Form
10-Q, you should not consider the inclusion of such information as a representation by us
or anyone else that we will achieve such results. Moreover, we assume no obligation to
update these forward looking statements to reflect actual results or changes in
assumptions, expectations or projections. In addition, our financial and performance
outlook concerning future revenues, margins, earnings, earnings per share and other
operating or performance results does not include the impact of any future acquisitions,
future acquisition-related expenses or accruals, or any future restructuring or other
charges that may occur from time to time due to management decisions and changing business
circumstances and conditions.


The following is a
bullet point listing of some of the important factors that could cause actual results to
differ materially from those indicated by the forward looking statements contained in this
Form 10-Q:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | increased
competition, including price competition
| | - | --------------------------------------------------

| | o | general economic and business conditions, both nationally and internationally, which
influences the level of job growth and, in turn, the level of pre-employment drug
screening activity
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | changes
in business strategy or development plans
| | - | -------------------------------------------------

| | o | technological,
evolving industry standards, or other problems that could delay the sale of our products
| | - | -------------------------------------------------------------------------------------------------------

| | o | risks
and uncertainties with respect to our patents and proprietary rights including:
| | - | -------------------------------------------------------------------------------------

|11
|--

| |  | o | lack
ofmeaningful protection from claims of any patents issued to the Company
| |  | - | -----------------------------------------------------------------------------

| |  | o | other
companies challenging our patents
| |  | - | ---------------------------------------

| |  | o | patents
issued to other companies that may harm our ability to do business
| |  | - | --------------------------------------------------------------------------

| |  | o | other
companies designing around technologies we have developed
| |  | - | ---------------------------------------------------------------

| |  | o | our
inability to obtain appropriate licenses from third parties
| |  | - | ---------------------------------------------------------------

| |  | o | our
inability to protect our trade secrets
| |  | - | ------------------------------------------

| |  | o | risk
of infringement upon the proprietary rights of others
| |  | - | ----------------------------------------------------------

| |  | o | our
inability to prevent others from infringing on our proprietary rights
| |  | - | -------------------------------------------------------------------------

| | o | our
inability to obtain sufficient financing to continue to expand operations
| | - | -----------------------------------------------------------------------------

| | o | changes
in demand for our products and services by our customers
| | - | ----------------------------------------------------------------

| | o | our
failure to obtain and retain new customers and alliance partners,  or a reduction in
tests ordered or specimens  submitted          by existing customers
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | adverse
results in litigation matters
| | - | -------------------------------------

| | o | our
ability to attract and retain experienced and qualified personnel
| | - | ---------------------------------------------------------------------

| | o | losses
due to bad debt
| | - | ----------------------

|The above listing
should not be construed as exhaustive; we cannot predict all the factors that could cause
results to differ materially from those indicated by the forward looking statements.


Executive Overview


We are engaged
primarily in distinct, but very much related, businesses, which for financial reporting
purposes, are divided into two reportable segments: Laboratory Services and Product Sales.
For financial information relating to our segments, see Note 2 of Notes to the
Consolidated Financial Statements.


Laboratory Services


Our Laboratory
Services business segment includes the activities of our wholly-owned subsidiary,
MEDTOX Laboratories, Inc. MEDTOX Laboratories principally engages in forensic toxicology
(primarily laboratory testing for identification of drugs-of-abuse), providing these
services to private and public companies, drug treatment counseling centers, occupational
health clinics and hospitals, as well as third party administrators.


Our Specialty
Laboratory Services operations consist of clinical toxicology, clinical testing for
the pharmaceutical industry (e.g., central laboratory services, bioanalytical and
pharmacokinetic testing), and analysis of heavy and trace metals. We provide these
services to hospitals, clinics, HMOs and small to mid-sized biotech and pharmaceutical
companies and other laboratories.


Testing is conducted
using methodologies that include various immunoassays, gas liquid chromatography, gas
chromatography/mass spectrometry and high performance liquid chromatography with tandem
mass spectrometry.


12
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The Laboratory
Services segment also includes New Brighton Business Center, LLC, a wholly-owned limited
liability company formed for the sole purpose of acquiring the facilities in St. Paul,
Minnesota, where our Laboratory Services segments administrative offices and
laboratory operations are located. These facilities include other commercial tenants that
have individual leases with terms of up to ten years.


Product Sales


Our Product
Sales business segment consists of our wholly-owned subsidiary, MEDTOX Diagnostics,
Inc. MEDTOX Diagnostics is engaged in the development and distribution of a variety of
point-of-collection (POC) diagnostic drug screening devices, such as our PROFILE®-II,
PROFILE®-II A, PROFILE-II ER®, and
VERDICT®-II products, in addition to a variety of agricultural testing
products. MEDTOX Diagnostics also provides contract manufacturing services, such as
coagulation market controls. The operations of the Product Sales segment are located in
Burlington, North Carolina, where we maintain the offices, research and development
laboratories, production operations and warehouse for MEDTOX Diagnostics.


Key Trends Influencing
Our Operating Results


Our management
believes that there are several notable trends that are currently influencing, and are
expected in the foreseeable future to continue to influence, our operating results. These
include:


Consolidation in the
Laboratory Services, Drugs-of-Abuse Business


The laboratory
services, drugs-of-abuse industry is consolidating, with the consolidation being driven by
customers desires to minimize the number of laboratories they work with, the need
for operating efficiencies in the form of critical mass (testing volumes), required
investment levels and government regulation. Given the competitive environment, we are
increasingly seeking to differentiate ourselves through our technology and value-added
services, such as data management, collection site management, training, and technical
support and expertise.


Increased POC
Diagnostic Device Test Competition


We have experienced
increased competition with respect to our POC Diagnostic tests from systems and products
developed by others, many of whom compete solely on price. As the number of firms
marketing diagnostic tests has grown, we have experienced increased price competition for
certain diagnostic testing devices.


Our Strategy


We believe that the
combined operations of our Laboratory Services business and on-site test kits manufactured
by the Product Sales segment have created synergy in the marketing of comprehensive,
on-site and laboratory testing programs to a common customer base. Our management has
positioned us to offer a full line of products and services for the substance abuse
testing and occupational medicine marketplace, including on-site tests for the detection
of substance of abuse drugs, Substance Abuse Mental Health Services Administration
(SAMHSA) certified laboratory testing (screening and confirmation), biological monitoring
of occupational toxins, consultation, and logistic, data management and program management
services.


13
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Our strategy is to
build market share by offering the highest quality products and services, delivered
rapidly, priced competitively and supported by value-added services for customers. These
services include data management, collection site management, training, technical support
and expertise, as well as policy review. In the data management area, we have a new
service in developmente-Chain®, the first multi-purpose electronic
chain-of-custody system in the market. Also in development are Sure-Screen®, a
cup-based POC device with significantly lower detection levels for eight
drugs-of-abuse, as well as MEDTOXScan, an electronic reader for our devices for use
in hospital laboratories and emergency rooms.


We have committed to
improve productivity and quality in our organization through the LEAN and Six-Sigma
processes. Our LEAN initiatives are designed to improve quality and productivity, cut
costs and increase throughput. The LEAN process has already been implemented in our
forensic laboratory and Product Sales segment, with measurable improvements in
streamlining work flow. We are currently in the process of implementing LEAN initiatives
in our Specialty Labs and Sales organization. Six-Sigma is a highly disciplined process
that helps us focus on reducing waste and eliminating unnecessary steps in our business
processes. We have implemented Six-Sigma across the organization addressing quality and
variability in processes issues.


Critical Accounting
Policies


We have identified
the policies outlined below as critical to understanding our business and results of
operations. The listing is not intended to be a comprehensive list of all accounting
policies. In many cases, the accounting treatment of a particular transaction is
specifically dictated by accounting principles generally accepted in the United States of
America, with no need for managements judgment in their application. The impact and
any associated risks related to these policies on our business operations is discussed
throughout Managements Discussion and Analysis of Financial Condition and Results of
Operations where such policies affect reported and expected financial results. For a
detailed discussion on the application of these and other accounting policies, see Note 1
in the Notes to the Consolidated Financial Statements in Item 15 on Form 10-K for the year
ended December 31, 2004. Note that the preparation of this Form 10-Q requires management
to make estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our financial
statements, and the reported amounts of revenue and expenses during the reporting period.
There can be no assurance that actual results will not differ from those estimates.


Our critical
accounting policies are as follows:


Accounts Receivable:
We perform ongoing
credit evaluations of our customers and adjust credit limits based upon payment history
and the customers current credit worthiness, as determined by managements
review of their current credit information. We continuously monitor collections and
payments from our customers and maintain a provision for estimated credit losses based
upon our historical experience and any specific customer collection issues that have been
identified. While such credit losses have generally been within our historical
expectations and the provisions established, we cannot guarantee that we will continue to
experience the same credit loss rates that have occurred in the past. Our consolidated
trade accounts receivable balance as of June 30, 2005 was $10.8 million, net of allowance
for doubtful accounts of $0.5 million.


14
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Some of our
Laboratory Services revenues for certain types of tests are billed to third-party payors
including insurance companies, state Medicaid and Medicare agencies. These payors pay for
such services at established amounts, which are typically lower than gross amounts billed
by us. However, the tests are sometimes billed directly to patients or other parties and
paid at the gross amount billed for these tests. In addition, billings for the tests are
occasionally re-billed to alternative payors in situations where incorrect billing
information was submitted to us by the customer. We estimate a discount on the billings
for these tests, and recognize revenue and related accounts receivable at a net amount,
after discount, in order to state revenue and accounts receivable at the amount expected
to be paid. While we believe that estimated discounts and the related net revenue and net
accounts receivable from these testing services are materially correct, there can be
differences in amounts ultimately paid compared to estimated amounts. These differences
are recorded upon payment and may affect previously recorded amounts. We consider
historical discounts when estimating future discounts on a monthly basis.


Off-Site Supplies
Inventory:
Off-site supplies
represent collection kits and forms located at collections sites throughout the United
States used by Laboratory Services customers to submit specimens for testing
services. At June 30, 2005, off-site inventory was $0.9 million. The process for valuing
off-site inventory involves significant assumptions regarding the average time that a
collection site uses the inventory, as well as the amount of inventory expected to be
scrapped.


Goodwill and Other
Intangible Assets:
In accordance with
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets, goodwill and indefinite-lived intangible assets are no longer
amortized, but are instead reviewed for impairment at least annually and between annual
test dates in certain circumstances. We perform our annual impairment test for goodwill
and other intangible assets in the fourth quarter of each year. In assessing the
recoverability of goodwill and other intangible assets, projections regarding estimated
future cash flows and other factors are made to determine the fair value of the respective
assets. If these estimates or related projections change in the future, we may be required
to record impairment charges for these assets in future periods.


Accounting for Income
Taxes:
As part of the
process of preparing the consolidated financial statements, we are required to estimate
income taxes in each of the jurisdictions in which we operate. This process involves
estimating actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities. We must then assess the
likelihood that deferred tax assets will be recovered from future taxable income and tax
planning strategies, and to the extent management believes that recovery is not likely, we
must establish a valuation allowance. To the extent we increase or decrease the valuation
allowance in a period, we must include an expense or benefit within the tax provision in
the consolidated statement of operations.


Significant
management judgment is required in determining the provision for income taxes, deferred
tax assets and liabilities, and any valuation allowance recorded against net deferred tax
assets. Our deferred tax assets primarily consist of certain net operating losses (NOLs)
carried forward. At June 30, 2005, we had a valuation allowance on deferred tax assets of
$0.9 million, which represents the portion of our NOL carryforwards that will more likely
than not expire unused in 2006 and future years. The valuation allowance is based on
managements estimate of future taxable income, the period over which NOLs will be
recoverable, and tax planning strategies. In the future, subsequent revisions to the
estimated net realizable value of these deferred tax assets could cause the provision for
income taxes to vary significantly from period to period, although our cash payments would
remain unaffected until the benefit of the NOLs is completely utilized or expires unused.


15
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Results of Operations


In evaluating our
financial performance, our management has primarily focused on three objectives:
maximizing operating income, increasing our cash flows and improving our balance sheet.
The first of these objectives is discussed in this section. The other two are addressed
under Liquidity and Capital Resources.


To maximize our
operating income, we have sought revenue growth, improved gross margins and reduced
selling, general and administrative (SG&A) expense. As discussed below, during the
second quarter of 2005 and the first six months of this year, we have made positive
strides on all three fronts.


Three Months Ended June
30, 2005 Compared to Three Months Ended June 30, 2004


Revenues
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                    | Three Months Ended | Quarter over Quarter
|------------------- | ------------------ | --------------------
|                    | June 30,
2005      | % of Total
Revenues 
|Revenues:           |                    |                     
|                    |                    |                     
|Laboratory Services |                    |                     
|                    |                    |                     
|Product Sales       |                    |                     
|                    |                    |                     
|Total Revenues      |                    |                     
|                    |                    |                     

|Total revenues
increased by 12% for the three months ended June 30, 2005 compared to the corresponding
period of the prior year. Our Laboratory Services revenues were $12.9 million,
approximately 77% of total revenues in the quarter (a slight increase compared to the
second quarter of 2004).


In the Laboratory
Services segment, revenues from workplace drugs-of-abuse testing increased 18% in the
second quarter of 2005 compared to the corresponding period of the prior year due to
increased sample volume and stable pricing for our testing services. The increased sample
volume was from both new and existing customers across a broad customer base and resulted
from the execution of our business strategy. Revenues from our Specialty Laboratory
Services increased 2% in the quarter with an increase in sample volume largely offset by a
lower average price due to changing test mix. Our test mix was impacted by a reduced
demand from hospitals and other laboratories for therapeutic drug monitoring services as these
groups are bringing certain types of this testing in-house.  We anticipate that our test mix may continue to be impacted by
this factor.


16
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In the Product Sales
segment, sales of POC on-site testing products, which consists of the
PROFILE®-II, PROFILE-II ER®, PROFILE®-II A
and VERDICT®-II on-site test kits and other ancillary products for the
detection of abused substances, increased 11% to $3.3 million in the second quarter of
2005. This growth reflected strong sales of PROFILE®-II products, which
grew 14% from the prior year period. Sales within the VERDICT®-II product
line to government clients for probation, parole and rehabilitation were flat with the
prior year period, but continued to show improvement from previous quarters. During the
quarter, we also began selling our new lower detection POC testing device
(Sure-Screen®) into the forensic market.


Sales of contract
manufacturing services, microbiological and associated products increased 3% to $0.5
million in the quarter. Product sales from agricultural diagnostic products were up
$25,000, or 34%, due to increased purchases by the U.S. Department of Agriculture (USDA).
The USDAs need for our products varies from year-to-year and sales to the USDA are
expected to fluctuate accordingly.


Gross Profit
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                       | Three Months Ended | Quarter over Quarter
|---------------------- | ------------------ | --------------------
|                       | June 30,
2005      | % of Total
Revenues 
|Cost of Revenues:      |                    |                     
|                       |                    |                     
|Cost of Services       |                    |                     
|                       |                    |                     
|Cost of Sales          |                    |                     
|                       |                    |                     
|Total Cost of Revenues |                    |                     
|                       |                    |                     

|Consolidated gross
margin increased to 44.4% of revenues for the three months ended June 30, 2005, compared
to 43.9% of revenues for the same period in 2004. The increase was driven by improvement
in Laboratory Services gross margin, partially offset by a decline in Product
Sales gross margin.


Laboratory Services
gross margin was 40.0% for the three months ended June 30, 2005, up from 38.7% for the
same period in 2004. The margin improvement was attributable to increased revenues from
additional testing volume through the current infrastructure. We also continued the
implementation of LEAN initiatives within our Specialty Laboratory Services.


Gross margin from
Product Sales declined to 59.0% for the three months ended June 30, 2005, from 60.8% in
the comparable period of 2004, largely due to the continued impact of costs associated
with the transition to a new and improved product format for our
PROFILE®-II product line. The new product began shipping late in the first
quarter of 2005. We also continued the implementation of LEAN initiatives in our
manufacturing processes of our diagnostics operation.


17
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Operating Expenses
|------------------

|                         | Three Months Ended | Quarter over Quarter
|------------------------ | ------------------ | --------------------
|                         | June 30,
2005      | % of Total
Revenues 
|Operating Expenses:      |                    |                     
|                         |                    |                     
|Selling, general and     |                    |                     
|administrative           |                    |                     
|                         |                    |                     
|Research and development |                    |                     
|                         |                    |                     
|Total Operating Expenses |                    |                     
|                         |                    |                     

|Operating expenses
increased in the second quarter of 2005, but were down as a percentage of revenues. The
increase reflected a continued increased investment in sales and marketing, information
technology and research and development activities.


Selling,
General and Administrative Expenses. Selling, general and administrative
expenses were $4.9 million, or 29.1% of revenues in the second quarter of 2005, compared
to $4.6 million, or 30.9% of revenues in the second quarter of 2004. The lower percentage
reflects the increase in revenue on marginally higher quarter-over-quarter expenses. The
slight increase in spending reflects the continued increased investment in sales and
marketing and information technology.


Research
and Development Expenses. Research and development expenses increased $0.2
million, or 50%, to $0.6 million in the second quarter of 2005 primarily due to continued
spending for significant development projects in our Product Sales segment. During the
quarter, we continued to make substantial progress on development of an electronic reader
(MEDTOXScan) to be utilized with our devices in the hospital laboratory and
emergency room market.


Other Expense


Other income and
expense consists primarily of interest expense and the net expenses associated with our
building rental activities. These expenses decreased 14% to $0.3 million in the second
quarter of 2005. The decrease was primarily due to lower interest expense, reflecting a
reduction in average debt levels, as well as improved net operating results from our
building rental activities.


Income Taxes


We recorded a tax
provision for the three months ended June 30, 2005 and June 30, 2004 based upon an
effective tax rate of 38%. At June 30, 2005, we had a valuation allowance on deferred tax
assets of $0.9 million, which represents the portion of our net operating loss (NOL)
carryforwards that will more likely than not expire unused in 2006 and future years.
Should operating results for the remainder of 2005 and future years differ from
expectations, the valuation allowance against the NOL carryforwards and the related
deferred tax asset may require adjustment in future periods.


18
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Six Months Ended June 30,
2005 Compared to Six Months Ended June 30, 2004


Revenues
|------------------------------------------------------------------------------------

|                    | Six Months Ended | Year over Year     
|------------------- | ---------------- | -------------------
|                    | June 30,
2005    | % of Total
Revenues
|Revenues:           |                  |                    
|                    |                  |                    
|Laboratory Services |                  |                    
|                    |                  |                    
|Product Sales       |                  |                    
|                    |                  |                    
|Total Revenues      |                  |                    
|                    |                  |                    

|Total revenues
increased 10% to $31.5 million for the six months ended June 30, 2005 compared to the
corresponding period of the prior year.


In the Laboratory
Services segment, revenues from workplace drugs-of-abuse testing increased 16% in the
first six months of 2005 compared to the corresponding period of the prior year due to
increased sample volume and stable pricing for our testing services. The increased sample
volume was from both new and existing customers across a broad customer base and resulted
from the execution of our business strategy. Client and prospect interest in our
development of our eChain® system for enhanced electronic results reporting
and sample and donor tracking remains strong and significant progress on the development
of eChain®was made during the first six months of the year. In addition,
during the first quarter of 2005, we entered into contracts for collection and testing
services with two of the largest national third-party administrators. Revenues from our
Specialty Laboratory Services increased 2% with an increase in sample volume largely
offset by a lower average price due to changing test mix. Our test mix was impacted by a
reduced demand from hospitals and other laboratories for therapeutic drug monitoring
services as these groups are bringing certain types of this testing  in-house.  We anticipate
that our test mix may continue to be impacted by this factor.


In the Product Sales
segment, sales of POC on-site testing products, which consists of the
PROFILE®-II, PROFILE-II ER®, PROFILE®-II A
and VERDICT®-II on-site test kits and other ancillary products for the
detection of abused substances, increased 9% to $6.3 million during the first six months
of 2005. This growth reflected strong sales of PROFILE®-II products, which
grew 14% from the prior year period. Sales within the VERDICT®-II product
line to government clients for probation, parole and rehabilitation were down 2% from the
prior year period, but showed improvement during the second quarter. During the second
quarter, we also began selling our new lower detection POC testing device
(Sure-Screen®) into the forensic market.


Sales of contract
manufacturing services, microbiological and associated products increased 8% to $1.1
million in the first six months of 2005 and were positively impacted by the timing of the
placement of orders from our two existing clients for these services. Product sales from
agricultural diagnostic products were down $49,000, or 30%, due to decreased purchases by
the U.S. Department of Agriculture (USDA). The USDAs need for our products varies
from year-to-year and sales to the USDA are expected to fluctuate accordingly.


19
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Gross Profit
|------------

|                       | Six Months Ended | Year over Year     
|---------------------- | ---------------- | -------------------
|                       | June 30,
2005    | % of Total
Revenues
|Cost of Revenues:      |                  |                    
|                       |                  |                    
|Cost of Services       |                  |                    
|                       |                  |                    
|Cost of Sales          |                  |                    
|                       |                  |                    
|Total Cost of Revenues |                  |                    
|                       |                  |                    

|Consolidated gross
margin decreased to 42.6% of revenues for the six months ended June 30, 2005, compared to
43.1% of revenues for the same period in 2004. The decrease was due to a decline in
Product Sales gross margin, partially offset by a slight improvement in Laboratory
Services gross margin.


Laboratory Services
gross margin was 37.8% for the six months ended June 30, 2005, up from 37.4% for the same
period in 2004. The margin improvement was attributable to increased revenues from
additional testing volume through the current infrastructure. We also continued the
implementation of LEAN initiatives within our Specialty Laboratory Services.


Gross margin from
Product Sales declined to 58.3% for the six months ended June 30, 2005, from 60.9% in the
comparable period of 2004, largely due to the continued impact of costs associated with
the transition to a new and improved product format for our PROFILE®-II
product line. The new product began shipping late in the first quarter of 2005. We also
continued the implementation of LEAN initiatives in our manufacturing processes of our
diagnostics operation.


Operating Expenses
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         | Six Months Ended | Year over Year     
|------------------------ | ---------------- | -------------------
|                         | June 30,
2005    | % of Total
Revenues
|Operating Expenses:      |                  |                    
|                         |                  |                    
|Selling, general and     |                  |                    
|administrative           |                  |                    
|                         |                  |                    
|Research and development |                  |                    
|                         |                  |                    
|Total Operating Expenses |                  |                    
|                         |                  |                    

|Operating expenses
increased in the first six months of 2005, but were down as a percentage of revenues. The
increase reflected a continued increased investment in sales and marketing, information
technology and research and development activities.


20
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Selling,
General and Administrative Expenses.Selling, general and administrative
expenses were $9.2 million, or 29.3% of revenues in the first six months of 2005, compared
to $8.9 million, or 31.1% of revenues in same period of 2004. The lower percentage
reflects the increase in revenue on marginally higher year-over-year expenses. The slight
increase in spending reflects the continued increased investment in sales and marketing
and information technology.


Research
and Development Expenses.Research and development expenses increased $0.4
million, or 48%, to $1.2 million in the first six months of 2005 primarily due to
continued spending for significant development projects in our Product Sales segment.
During the year, we completed enhancements to PROFILE®-II,
PROFILE®-II A, and PROFILE-II ER® products that shorten run
times, darken line intensity, improve readability and extend the positive result hold
time; filed a 510(k) application with the FDA for Sure-Screen®, which is a POC test
intended to provide significantly lower detection levels for eight commonly abused drugs,
initially targeted at the probation, parole and rehabilitation markets; and made
substantial progress on development of an electronic reader (MEDTOXScan) to be
utilized with our devices in the hospital laboratory and emergency room market.


Other Expense


Other income and
expense consists primarily of interest expense and the net expenses associated with our
building rental activities. These expenses decreased 15% to $0.6 million in the first six
months of 2005. The decrease was primarily due to lower interest expense, reflecting a
reduction in average debt levels, as well as improved net operating results from our
building rental activities.


Income Taxes


We recorded a tax
provision for the six months ended June 30, 2005 and June 30, 2004 based upon an effective
tax rate of 38%. At June 30, 2005, we had a valuation allowance on deferred tax assets of
$0.9 million, which represents the portion of our net operating loss (NOL) carryforwards
that will more likely than not expire unused in 2006 and future years. Should operating
results for the remainder of 2005 and future years differ from expectations, the valuation
allowance against the NOL carryforwards and the related deferred tax asset may require
adjustment in future periods.




Liquidity and Capital
Resources


Our working capital
requirements have been funded primarily by various combinations of profitable operations,
cash received from debt financing, and the sale of equity securities. Cash and cash
equivalents at June 30, 2005 were $1.0 million, compared to $0.3 million at December 31,
2004.


Net cash provided by
operating activities was $1.9 million for the six months ended June 30, 2005 compared to
$3.8 million for the same period of 2004. The decrease was primarily due to a significant
increase in accounts receivable from December 31, 2004 to June 30, 2005 due to strong May
and June, 2005 sales.


Net cash used in
investing activities, consisting primarily of capital expenditures, was $2.0 million for
the six months ended June 30, 2005 compared to $2.7 million in the same period of 2004.
The increased spending in 2004 reflects equipment purchased and costs incurred in
redesigning the laboratory operations to improve operating efficiencies.


21
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Net cash provided by
financing activities was $0.9 million for the six months ended June 30, 2005, compared to
net cash used in financing activities of $1.5 million in the prior year period. The change
was primarily due to increased use of the revolving credit facility and $0.3 million in
new financing activity for the purchase of capital equipment in 2005. We made payments on
long-term debt of $0.8 million and $1.1 million during the six months ended June 30, 2005
and 2004, respectively.


We are party to a
credit security agreement (the Wells Fargo Credit Agreement) with Wells Fargo Business
Credit, Inc. (Wells Fargo). The Wells Fargo Credit Agreement, as amended, consists of (i)
a revolving line of credit, payable on demand, of not more than $8.0 million or 85% of our
eligible trade accounts receivable bearing interest at prime + 1%; and (ii) a capex note
of up to $1.5 million for the purchase of capital equipment bearing interest at prime +
0.75%. According to the terms of the agreement, the capex note may be amended,
supplemented or restated from time to time and is generally done so on an annual basis.


The Wells Fargo
Credit Agreement requires us to comply with certain financial covenants, including a
minimum annual debt service coverage ratio and minimum quarterly pre-tax net income
levels. It also sets a maximum quarterly level for capital expenditures, as well as a
limitation on the year-over-year increase in compensation of any director, shareholder or
consultant. At June 30, 2005, we were in compliance with the financial covenants of the
Wells Fargo Credit Agreement.


We are relying on
expected positive cash flow from operations and our line of credit to fund our future
working capital and asset purchases. The amount available on the revolving line of credit
is based primarily on the receivables of the Company and, as such, varies with accounts
receivable. As of June 30, 2005, we had total borrowing capacity of $8.0 million on our
line of credit, of which $6.1 million was borrowed, leaving a net availability of $1.9
million.


In the short term, we
believe that the aforementioned capital will be sufficient to fund our planned operations
through the remainder of 2005. While there can be no assurance that the available capital
will be sufficient to fund our future operations beyond 2005, we believe that future
profitable operations, as well as access to additional capital through debt or equity
financings, will be the primary means for funding our operations for the long term.


In connection with
our private placements in July and August 2000, we issued warrants, exercisable for an
aggregate of 1,120,439 shares of our common stock for a five-year period from the time of
issuance at an exercise price of $6.75. At June 30, 2005, we had 1,101,919 warrants
outstanding. In July 2005, warrants to acquire 405,514 common shares were exercised,
resulting in proceeds of approximately $2.7 million. 497,581 warrants expired without
being exercised on July 31, 2005. The remaining 198,824 warrants will expire on August 31,
2005 if not exercised. We would receive aggregate proceeds of approximately $1.3 million in the event of
the exercise of all remaining outstanding warrants.


We continue to follow
a plan which includes (i) aggressively monitoring and controlling costs, (ii) increasing
revenue from sales of our existing products and services (iii) developing new products and
services, as well as (iv) continuing to selectively pursue synergistic acquisitions to
increase our critical mass. However, there can be no assurance that costs can be
controlled, revenues can be increased, financing may be obtained, acquisitions
successfully consummated, or that we will be profitable.


22
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Disclosures about
Contractual Obligations and Commercial Commitments


The following table
aggregates all contractual commitments and commercial obligations that affect our
financial condition and liquidity position as of June 30, 2005:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  | Payments Due by Period
|--------------------------------- | ----------------------
|(In thousands)                    | Total                 
|Long-term debt (1)                |                       
|Capital lease obligations (1)     |                       
|Operating leases                  |                       
|Deferred compensation obligations |                       
|                                  |                       
|Total contractual obligations     |                       
|                                  |                       

|(1)    
          Amounts include interest payments based upon contractual or prevailing interest
          rates.


Off-Balance Sheet
Transactions


We do not maintain
any off-balance sheet transactions, arrangements, obligations or other relationships with
unconsolidated entities or others that are reasonably likely to have a material current or
future effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital resources.


Impact of Inflation and
Changing Prices


The impact of
inflation and changing prices has been primarily limited to salary, laboratory and
operating supplies and rent increases and has historically not been material to our
operations. In the future, we may not be able to increase the prices of laboratory testing
by an amount sufficient to cover the cost of inflation, although we are responding to
these concerns by refocusing the laboratory operations towards higher margin testing
(including clinical and pharmaceutical trials) as well as emphasizing the marketing, sales
and operations of the Product Sales business.


Seasonality


We believe that the
laboratory testing business is subject to seasonal fluctuations in pre-employment
screening. These seasonal fluctuations include reduced volume in the summer months,
year-end holiday periods, and other major holidays. In addition, inclement weather may
have a negative impact on volume thereby reducing net revenues and cash flow.


23
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Impact of New Accounting
Standards


In May 2005, the
Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 154, Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective
application to prior periods financial statements for changes in accounting
principle, unless it is impracticable to determine either the period-specific effects or
the cumulative effect of the change. SFAS No. 154 also requires that retrospective
application of a change in accounting principle be limited to the direct effects of the
change. Indirect effects of a change in accounting principle, such as a change in
non-discretionary profit-sharing payments resulting from an accounting change, should be
recognized in the period of the accounting change. SFAS No. 154 also requires that a
change in depreciation, amortization, or depletion method for long-lived, non-financial
assets be accounted for as a change in accounting estimate effected by a change in
accounting principle. SFAS No. 154 will be effective for us on January 1, 2006.


In December 2004, the
FASB issued SFAS No. 123(R), Share-Based Payment that will require
compensation costs related to share-based payment transactions to be recognized in our
statement of operations. With limited exceptions, the amount of compensation cost will be
measured based on the grant-date fair value of the equity or liability instruments issued.
In addition, liability awards will be re-measured each reporting period. Compensation cost
will be recognized over the period that an employee provides service in exchange for the
award. SFAS No. 123(R) replaces SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees. SFAS No. 123(R) will be effective for us on January 1, 2006. We are
currently in the process of evaluating the impact of the adoption of SFAS No. 123(R).


In November 2004, the
FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter
4. SFAS No. 151 requires that abnormal amounts of idle capacity and spoilage costs
should be excluded from the cost of inventory and expensed when incurred. SFAS No. 151
will be effective for us on July 1, 2005. We do not expect the adoption of this statement
to have a material impact on our results of operations or financial position.


24
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 3:  QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.


There have been no
material changes in our market risk during the quarter ended June 30, 2005. For additional
information refer to Item 7A of our Annual Report on Form 10-K for the year ended December
31, 2004.




Item 4:  CONTROLS AND
PROCEDURES.


Evaluation of Disclosure
Controls Procedures


As of the end of the
period covered by this report, we conducted an evaluation under the supervision
and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934 (the Exchange
Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective
to ensure that information that is required to be disclosed by us in reports that
we file under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the Securities Exchange Commissions rules and forms.


Changes in Internal
Controls


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


25
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART II    OTHER INFORMATION


ITEM 1      LEGAL PROCEEDINGS.  Inapplicable


ITEM 2      UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.


Issuer Purchases of
Equity Securities
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Period           | Total Number
of Shares
Purchased (a) | Average
Price Paid
per Share | Total Number of
Shares Purchased as
part of Publicly
Announced Plans or
Programs | Maximum Number 
of Shares that May 
Yet Be Purchased 
Under the Plans 
or Programs
|---------------- | ------------------------------------ | ---------------------------- | -------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------
|April 1-30, 2005 |                                      |                              |                                                                                  | -                                                                                 
|May 1-31, 2005   |                                      |                              |                                                                                  | -                                                                                 
|June 1-30, 2005  |                                      |                              |                                                                                  | 13,500                                                                            
|                 |                                      |                              |                                                                                  |                                                                                   
|Total            |                                      |                              |                                                                                  | 13,500                                                                            
|                 |                                      |                              |                                                                                  |                                                                                   

|(a)  
          Represents shares of common stock acquired in the open market and contributed to
          the Companys Long-Term Incentive Plan.


ITEM 3      DEFAULTS UPON SENIOR SECURITIES.  Inapplicable


ITEM 4      SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Set
forth below is information concerning each matter submitted to a vote at the Annual
Meeting of Stockholders of the Company on April 28, 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------

| | Proposal
No. 1: The stockholders elected each of the following persons to serve on the Board of
Directors of the Company for three year terms or until their respective successors are
duly elected and qualified.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |                 
| |  |  | ----------------
| |  |  | Director's Name 
| |  |  | Richard J. Braun

| | Proposal
No. 2: The stockholders approved the amendment to Article FOURTH of the Companys
Certificate of Incorporation to increase its number of authorized shares of Common Stock
from 14,400,000 to 28,000,000 shares, with the following votes:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 
| |  | 
| |  | 

| | During
the second quarter of 2005, no other matters were submitted to a vote of the securities
holders of the Company.
| | ----------------------------------------------------------------------------------------------------------------------

|26
|--

|ITEM 5      OTHER INFORMATION.    Inapplicable


ITEM 6      EXHIBITS.    See Exhibit Index on page following signature page


27
|---------------------------------------------------------------------------------------------------------------------------------

|SIGNATURES


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

|Signature            | Title                                      | Date          
|-------------------- | ------------------------------------------ | --------------
|/s/ Richard J. Braun | President, Chief Executive Officer, and    | August 9, 2005
|Richard J. Braun     | Chairman of the Board of Directors        
|                     | (Principal Executive Officer)             
|                    
|/s/ Kevin J. Wiersma | Vice President and Chief Financial Officer | August 9, 2005
|Kevin J. Wiersma     | (Principal Financial Officer)             
|                    
|/s/ Angela M. Lacis  | Controller                                 | August 9, 2005
|Angela M. Lacis      | (Principal Accounting Officer)            

|28
|--

|EXHIBIT INDEX


MEDTOX SCIENTIFIC, INC.


FORM 10-Q FOR QUARTER
ENDED JUNE 30, 2005
|-----------------------------------------------------------------------------------

|Exhibit number | Description                                                                                     
|-------------- | ------------------------------------------------------------------------------------------------
|               |                                                                                                 
|31.1           | Section 302 Certification of Chief Executive Officer pursuant to the Sarbanes-Oxley Act of 2002.
|               |                                                                                                 
|31.2           | Section 302 Certification of Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002.
|               |                                                                                                 
|32.1           | Section 906 Certification of Chief Executive Officer pursuant to the Sarbanes-Oxley Act of 2002.
|               |                                                                                                 
|32.2           | Section 906 Certification of Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002.

|29
|--