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, 2007  OR  (  )
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period
        to
  Commission file number1-11394  MEDTOX SCIENTIFIC, INC. (Exact name of registrant as specified in its charter)   Delaware
        95-3863205(State or other jurisdiction of
        (I.R.S. Employerincorporation 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. Large accelerated filer [
        ]
        Accelerated filer  [
        ]
        Non-accelerated filer  [ X ]
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [
        ]
        No [ X ]
  Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:  Class
        
        Outstanding at July 16, 2007Common Stock, $0.15 par value per share
        
        8,342,544
     MEDTOX SCIENTIFIC, INC.  INDEX Page
 Part I
        Financial Information:
  Item 1:
        Financial Statements (Unaudited)
  Consolidated Statements of Income  Three and Six Months Ended June 30, 2007 and 2006
        3
  Consolidated Balance Sheets  June 30, 2007 and December 31, 2006
        4
  Consolidated Statements of Cash Flows  Six Months Ended June 30, 2007 and 2006
        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 Disclosures
 About Market Risk
        25
  Item 4:  Controls and Procedures
        25
  Part II
        Other Information
        26
  Item 1:
        Legal Proceedings
        26
 Item 1A:
        Risk Factors
        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
        27
 Item 5:
        Other Information
        27
 Item 6:
        Exhibits
        27
  Signatures
        28
 Exhibit Index
        29
  2
     PART IFINANCIAL INFORMATION  Item 1:
        FINANCIAL STATEMENTS (UNAUDITED)
  MEDTOX SCIENTIFIC, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share and per share data) (Unaudited)  Three Months Ended
        
        Six Months EndedJune 30, 2007
        
        June 30, 2006
        
        June 30, 2007
        
        June 30, 2006REVENUES:Laboratory services
        $ 15,815
        
        $ 13,413
        
        $ 30,776
        
        $ 25,815Product sales
        4,961
        
        3,986
        
        9,026
        
        7,93420,776
        
        17,399
        
        39,802
        
        33,749COST OF REVENUES:Cost of services
        9,317
        
        8,175
        
        18,109
        
        15,809Cost of sales
        1,882
        
        1,488
        
        3,374
        
        3,06011,199
        
        9,663
        
        21,483
        
        18,869GROSS PROFIT
        9,577
        
        7,736
        
        18,319
        
        14,880OPERATING EXPENSES:Selling, general and administrative
        6,149
        
        4,880
        
        11,874
        
        10,014Research and development
        768
        
        531
        
        1,365
        
        9916,917
        
        5,411
        
        13,239
        
        11,005INCOME FROM OPERATIONS
        2,660
        
        2,325
        
        5,080
        
        3,875OTHER INCOME (EXPENSE):Interest expense
        (40
        )
        (119
        )
        (97
        )
        (273)Other expense, net
        (7
        )
        (118
        )
        (144
        )
        (286)(47
        )
        (237
        )
        (241
        )
        (559)INCOME BEFORE INCOME TAX EXPENSE
        2,613
        
        2,088
        
        4,839
        
        3,316INCOME TAX EXPENSE
        (852
        )
        (806
        )
        (1,523
        )
        (1,280)NET INCOME
        $ 1,761
        
        $ 1,282
        
        $ 3,316
        
        $ 2,036BASIC EARNINGS PER COMMON SHARE
        $ 0.21
        
        $ 0.16
        
        $ 0.40
        
        $ 0.25DILUTED EARNINGS PER COMMON SHARE
        $ 0.20
        
        $ 0.15
        
        $ 0.37
        
        $ 0.23WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:Basic
        8,280,876
        
        8,183,455
        
        8,281,392
        
        8,169,106Diluted
        8,994,846
        
        8,839,176
        
        8,949,092
        
        8,786,645
 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,
2007
        
        December 31,
2006ASSETSCURRENT ASSETS:Cash and cash equivalents
        $
        1,336
        
        $
        1,261Accounts receivable:Trade, less allowance for doubtful accounts ($278 in 2007 and $280 in 2006)
        
        14,598
        
        
        10,797Other
        
        528
        
        
        270Total accounts receivable
        
        15,126
        
        
        11,067Inventories
        
        3,562
        
        
        3,538Prepaid expenses and other
        
        850
        
        
        1,314Deferred income taxes
        
        1,527
        
        
        1,527Total current assets
        
        22,401
        
        
        18,707BUILDING, EQUIPMENT AND IMPROVEMENTS, net
        
        23,236
        
        
        19,572GOODWILL
        
        15,967
        
        
        15,967OTHER INTANGIBLE ASSETS, net
        
        728
        
        
        873DEFERRED INCOME TAXES, net
        
        2,828
        
        
        4,351OTHER ASSETS
        
        636
        
        
        404TOTAL ASSETS
        $
        65,796
        
        $
        59,874LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Line of credit
        $
        930
        
        $
        -Accounts payable
        
        5,097
        
        
        2,164Accrued expenses
        
        6,058
        
        
        6,037Current portion of long-term debt
        
        677
        
        
        677Current portion of capital leases
        
        9
        
        
        14Total current liabilities
        
        12,771
        
        
        8,892LONG-TERM DEBT, net of current portion
        
        1,317
        
        
        2,055OTHER LONG-TERM LIABILITIES
        
        1,456
        
        
        981LONG-TERM PORTION OF CAPITAL LEASES, net of current portion
        
        -
        
        
        2STOCKHOLDERS' EQUITY:Preferred stock, $1.00 par value; authorized shares, 50,000; none issued and outstanding
        
        -
        
        
        -Common stock, $0.15 par value; authorized shares, 28,000,000; issued shares, 8,443,866 in 2007 and 
       8,213,842 in 2006
        
        1,266
        
        
        1,232Additional paid-in capital
        
        85,765
        
        
        85,683Accumulated deficit
        
        (33,168
        )
        
        (36,484
        )Common stock held in trust, at cost, 244,127 shares in 2007 and 177,424 shares in 2006
        
        (2,611
        )
        
        (1,487
        )Treasury stock, at cost, 103,431 shares in 2007 and 2006
        
        (1,000
        )
        
        (1,000
        )Total stockholders' equity
        
        50,252
        
        
        47,944TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
        $
        65,796
        
        $
        59,874
 See Notes to Consolidated Financial Statements (Unaudited).  4
    MEDTOX SCIENTIFIC, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six Months EndedJune 30, 2007
        
        June 30, 2006CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:Net income
        $
        3,316
        
        $
        2,036Adjustments to reconcile net income to net cash provided byoperating activities:Depreciation and amortization
        
        1,933
        
        
        1,683Provision for losses on accounts receivable
        
        107
        
        
        160Loss on sale of equipment
        
        40
        
        
        37Deferred and stock-based compensation
        
        510
        
        
        458Deferred income taxes
        
        1,523
        
        
        1,266Changes in operating assets and liabilities:Accounts receivable
        
        (4,166
        )
        
        (1,962
        )Inventories
        
        (24
        )
        
        20Prepaid expenses and other current assets
        
        464
        
        
        249Other assets
        
        (232
        )
        
        27Accounts payable and accrued expenses
        
        1,257
        
        
        (654
        )Net cash provided by operating activities
        
        4,728
        
        
        3,320CASH FLOWS USED IN INVESTING ACTIVITIES:Purchase of building, equipment and improvements
        
        (3,795
        )
        
        (1,641
        )Proceeds from sale of equipment
        
        -
        
        
        16Purchase of customer list
        
        -
        
        
        (11
        )Net cash used in investing activities
        
        (3,795
        )
        
        (1,636
        )CASH FLOWS USED IN FINANCING ACTIVITIES:Net proceeds on revolving credit facility
        
        930
        
        
        1,500Proceeds from long-term debt
        
        -
        
        
        3,383Principal payments on long-term debt
        
        (738
        )
        
        (5,905
        )Principal payments on capital leases
        
        (7
        )
        
        (9
        )Purchase of common stock for incentive plan
        
        (1,124
        )
        
        (799
        )Purchase of treasury stock
        
        -
        
        
        (331
        )Net proceeds from sale of common stock
        
        307
        
        
        204Payment of taxes from traded shares
        
        (226
        )
        
        (192
        )Net cash provided used in financing activities
        
        (858
        )
        
        (2,149
        )INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
        
        75
        
        
        (465
        )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
        
        1,261
        
        
        1,312CASH AND CASH EQUIVALENTS AT END OF PERIOD
        $
        1,336
        
        $
        847SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for:Interest
        $
        100
        
        $
        241Income taxes, net of refunds received
        
        272
        
        
        67Supplemental noncash activities:Asset additions and related obligations
        
        1,697
        
        
        681
 See Notes to Consolidated Financial Statements (Unaudited).  5
    MEDTOX SCIENTIFIC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2007  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, 2007 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, 2006.  New Accounting Standards:  In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159).  SFAS No. 159 permits entities to choose, at specified election dates, to measure eligible financial instruments at fair value that are not currently required to be measured at fair value. SFAS No. 159 is effective for the Company as of January 1, 2008.  The Company has not yet evaluated the impact of adopting SFAS No. 159 on its financial position or results of operations. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements regarding fair value measurement.  Where applicable, SFAS No. 157 simplifies and codifies fair value related guidance previously issued within generally accepted accounting principles.  Although this Statement does not require any new fair value measurements, its application may, for some entities, change current practice.  SFAS No. 157 is effective for the Company as of January 1, 2008.  The Company is currently in the process of evaluating the impact of the adoption of SFAS No. 157.   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, courier delivery, and specimen collection services.  The Product Sales segment, which includes POCT (point-of-collection testing) disposable diagnostic devices, consists of MEDTOX Diagnostics, Inc.  Products manufactured include easy to use, inexpensive, on-site drug tests such as PROFILE®-II, PROFILE®-II A, PROFILE®-III, PROFILE-II ER®, PROFILE®-III ER, MEDTOXScan®, VERDICT®-II and SURE-SCREEN®, in addition to a variety of
agricultural testing products and other diagnostic tests for the detection of alcohol.  MEDTOX Diagnostics, Inc. also provides contract manufacturing services in its Food and Drug Administration (FDA) registered/ISO 13845 certified facility.  6
    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.  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 30,2007
        
        2006
        
        2007
        
        2006Laboratory Services:Revenues
        $
        15,815
        
        $
        13,413
        
        $
        30,776
        
        $
        25,815Depreciation and amortization
        
        848
        
        
        723
        
        
        1,658
        
        
        1,425Income from operations
        
        1,848
        
        
        1,691
        
        
        3,626
        
        
        2,799Segment assets
        
        53,540
        
        
        45,532
        
        
        53,540
        
        
        45,532Capital expenditures for segment assets
        
        2,779
        
        
        981
        
        
        3,405
        
        
        1,516Product Sales:Revenues
        $
        4,961
        
        $
        3,986
        
        $
        9,026
        
        $
        7,934Depreciation and amortization
        
        144
        
        
        130
        
        
        275
        
        
        258Income from operations
        
        812
        
        
        634
        
        
        1,454
        
        
        1,076Segment assets
        
        7,901
        
        
        7,387
        
        
        7,901
        
        
        7,387Capital expenditures for segment assets
        
        218
        
        
        91
        
        
        390
        
        
        125Corporate (unallocated):Other expense
        $
        (47)
        
        $
        (237)
        
        $
        (241)
        
        $
        (559)Deferred tax assets, net
        
        4,355
        
        
        6,845
        
        
        4,355
        
        
        6,845Company:Revenues
        $
        20,776
        
        $
        17,399
        
        $
        39,802
        
        $
        33,749Depreciation and amortization
        
        992
        
        
        853
        
        
        1,933
        
        
        1,683Income from operations
        
        2,660
        
        
        2,325
        
        
        5,080
        
        
        3,875Other expense
        
        (47)
        
        
        (237)
        
        
        (241)
        
        
        (559)Income before income tax expense
        
        2,613
        
        
        2,088
        
        
        4,839
        
        
        3,316Total assets
        
        65,796
        
        
        59,762
        
        
        65,796
        
        
        59,762Capital expenditures for assets
        
        2,997
        
        
        1,072
        
        
        3,795
        
        
        1,641
   7
    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 30,2007
        
        2006
        
        2007
        
        2006Workplace drugs-of-abuse
        $
        10,513
        
        $
        8,899
        
        $
        19,970
        
        $
        16,942Specialty Laboratory Services
        
        5,302
        
        
        4,514
        
        
        10,806
        
        
        8,873$
        15,815
        
        $
        13,413
        
        $
        30,776
        
        $
        25,815
  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 30,2007
        
        2006
        
        2007
        
        2006POC on site testing products
        $
        4,184
        
        $
        3,395
        
        $
        7,845
        
        $
        6,598Contract manufacturing services
        
        542
        
        
        381
        
        
        757
        
        
        1,023Other diagnostic products
        
        235
        
        
        210
        
        
        424
        
        
        313$
        4,961
        
        $
        3,986
        
        $
        9,026
        
        $
        7,934
  3.
        INVENTORIES
  Inventories consisted of the following:  (In thousands)
        June 30, 2007
        
        December 31, 2006Raw materials
        $
        761
        
        $
        871Work in process
        
        348
        
        
        270Finished goods
        
        445
        
        
        539Supplies, including off-site inventory
        
        2,008
        
        
        1,858$
        3,562
        
        $
        3,538
   8
    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 30,2007
        
        2006
        
        2007
        
        2006Net income (A)
        $
        1,761
        
        $
        1,282
        
        $
        3,316
        
        $
        2,036Weighted average number of basic common shares outstanding (B)
        
        8,280,876
        
        
        8,183,455
        
        
        8,281,392
        
        
        8,169,106Dilutive effect of stock options  computed based on the treasury stock method
        
        713,970
        
        
        655,721
        
        
        667,700
        
        
        617,539Weighted average number of diluted common shares outstanding (C)
        
        8,994,846
        
        
        8,839,176
        
        
        8,949,092
        
        
        8,786,645Basic earnings per common share (A/B)
        $
        0.21
        
        $
        0.16
        
        $
        0.40
        
        $
        0.25Diluted earnings per common share (A/C)
        $
        0.20
        
        $
        0.15
        
        $
        0.37
        
        $
        0.23
   5.  INCOME TAXES  In the second quarter of 2007, the Company recorded a $110,000 tax benefit due to a permanent book to tax difference related to the disqualifying disposition upon the exercise of incentive stock options.  In the first quarter of 2007, the Company recorded a $141,000 tax benefit from additional net operating loss carryforwards determined to be available to the Company.  In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109, (FIN 48) which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position.  The Company adopted FIN 48 effective January 1, 2007.  The cumulative effect of applying this Interpretation did not result in any adjustment to retained earnings as of January 1, 2007.   At June 30, 2007 and January 1, 2007, the Company had $331,000 of unrecognized tax benefits, all of which would affect the effective tax rate if recognized.  It is not possible to reasonably estimate any possible change in the unrecognized tax benefits within the next 12
months.  The tax years 2001-2006 remain open to examination by the major taxing jurisdictions to which the Company is subject.  In conjunction with the adoption of FIN 48, the Company began recording income tax related interest expense and interest income in income tax expense in its Consolidated Statements of Income.  In prior periods, such interest expense or income was recorded in interest expense or interest income.  Penalties, if any, will be recorded as a component of income tax expense.  At June 30, 2007 and January 1, 2007, the Company had approximately $66,000 and $53,000, respectively, of accrued interest related to uncertain tax positions included in the Consolidated Balance Sheets.  9
    At December 31, 2006, the Company had federal and state net operating loss carryforwards (NOLs) of approximately $16.1 million and $15.7 million, respectively, which are available to offset future taxable income.  The Company's federal and state NOLs expire in varying amounts each year from 2007 through 2025 in accordance with applicable federal and state tax regulations and the timing of when the NOLs were incurred.  For financial reporting purposes, a state valuation allowance has been recorded to offset deferred tax assets that, more likely than not, will not be realized based on the Companys filing status in certain states.  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.  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.  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 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:  
        increased competition, including price competition
  
        changes in demand for our services and products by our customers
  
        changes in general economic and business conditions, both nationally and internationally, which can influence the level of job growth and, in turn, the level of pre-employment drug screening activity
  
        technological or regulatory developments, evolving industry standards, that could affect or delay the sale of our products
  
        our ability to attract and retain experienced and qualified personnel
  
        risks and uncertainties with respect to our patents and proprietary rights, including:
 o
        other companies challenging our patents
  11
    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
  
        our inability to obtain sufficient financing to continue to sustain or expand our operations
  
        adverse results in litigation matters
  
        our inability to continue to develop innovative products and services
  
        an unforeseen decrease in the acceptance of current new products and services
  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  Our Business
  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, Inc. 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.  We also provide services in the areas of logistics management, data management and program management.  These services support our underlying business of laboratory analysis and provide added value to our clients.  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 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, Inc. is engaged in the development, manufacturing, and distribution of a variety of point-of-collection testing (POCT) diagnostic drug screening devices, such as our PROFILE®-II, PROFILE®-II A, PROFILE®-III, PROFILE-II ER®, PROFILE®-III ER, MEDTOXScan® Reader, VERDICT®-II, and SURE-SCREEN® products, in addition to a variety of agricultural testing products and other diagnostic tests for the detection of alcohol.  MEDTOX Diagnostics, Inc. 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/distribution facilities.  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:  Economic Uncertainties Causing Variability in Testing Volumes in the Laboratory Services, Drugs-of-Abuse Business  In the past, we have experienced a decrease in testing volume from our existing workplace drugs-of-abuse clients, which we primarily attributed to lower new job creation and reduced employee turnover caused by economic uncertainties.  In the first six months of 2007, testing volume from our existing workplace drugs-of-abuse clients was slightly higher than the prior year period.  However, we feel economic uncertainties may continue to cause variability in our workplace drugs-of-abuse testing volume in the foreseeable future.  Increased POCT Diagnostic Device Test Competition
  We have experienced increased competition with respect to our POCT 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, particularly in the probation, parole and rehabilitation market.  Our Strategy  Our strategy is to drive profitable growth by building market share, leveraging our existing infrastructure and technical expertise, and driving innovation.  We maintain a disciplined culture, focused on the successful execution of our strategy and plans.  13
    Building Market Share  We have solid niche positions in large markets that allow us to build market share by offering high quality products and services that are delivered rapidly, priced competitively, and supported by excellent customer service and value-added services.  Our value added services include data management, collection site management, training, technical support and expertise, as well as review of drug testing policies for clients.  Our success in penetrating new accounts has represented a significant component of our growth in market share.  In 2006, we expanded our number of sales representatives from 19 to 35.  The increase in sales representatives has increased our business from new accounts and helps offset risks from uncertain economic conditions that may result in lower activity from existing workplace drugs-of-abuse clients.  Leveraging Existing Infrastructure and Technical Expertise  We leverage our existing infrastructure and technical expertise to facilitate top line growth and improve operating margins.  Our LEAN and Six-Sigma initiatives support this effort by improving quality and productivity, cutting costs, and increasing throughput.  LEAN is a highly disciplined process that helps us focus on reducing waste and eliminating unnecessary steps in our business processes.  Our Six-Sigma initiatives address quality and variability within processes. While all key departments in the Laboratory Services and Product Sales segments have now been through initial LEAN processes, as an organization we recognize that LEAN is an ongoing philosophy, not a project to be finished.  Driving Innovation  We have introduced a number of innovative products and services.  In 2006, we developed and introduced MEDTOXScan®, an electronic reader, which we provide to hospitals for use with our PROFILE-II ER® and PROFILE®-III ER POCT devices in hospital laboratories and emergency rooms.  We currently have approximately 300 readers that have been placed with clients in the hospital market, of which 100 were placed in the second quarter of 2007.  Response from our distributor, Cardinal Health, and end-using customers has been very good.  In 2005, we developed and introduced eChain®, our web-based electronic chain-of-custody and donor tracking system.  We currently have over 1,100 clinics and collection sites utilizing eChain® throughout the country.  These sites serve as the basis for our marketing campaign offering eChain® to national clients.  In 2005, we also introduced SURE-SCREEN®, our lower detection level POCT device targeted for the government and rehabilitation markets and our PROFILE®-III device, an integrated cup and testing device for sale to the workplace drug testing market.  Both devices are gaining acceptance and have been increasing in sales month over month.  ClearCourse, another innovative solution we offer, is a comprehensive drug testing program that combines four essential components: Drug Abuse Recognition System (DARS) training, SURE-SCREEN® on-site drug screening devices, laboratory based confirmation testing and WEBTOX® online data management.  14
    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, 2006.   Note
that the preparation of the interim, unaudited consolidated financial statements included in 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 revenues 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 creditworthiness, 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 at June 30, 2007 was $14.6 million, net of allowance for doubtful accounts of $0.3 million.  Revenue Recognition: Revenues from Laboratory Services are recognized as earned when we have performed the applicable laboratory testing services and the results have been sent to our customers or posted to our secure website.  Some of our Laboratory Services revenues for certain types of tests are billed to third-party payers including insurance companies, state Medicaid and Medicare agencies.  These payers 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 payers in situations where incorrect billing information was submitted to us by the customer.  Historically, the amounts of such incorrect billings have not been material.  We estimate a discount on the billings for these tests and recognize revenues and related accounts receivable at a net amount, after discount, in order to state revenues and accounts receivable at the amount expected to be paid. While we believe
that estimated discounts and the related net revenues 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 contracted rates with payers and historical discounts when estimating future discounts on a monthly basis.    15
    Revenues from Product Sales are recognized FOB shipping point net of an allowance for estimated returns.  When shipment occurs, the sales price is fixed and determinable, and collection of the resulting receivable is reasonably assured.  Off-Site Supplies Inventory: Off-site supplies represent collection kits and forms located at collection sites throughout the United States used by Laboratory Services customers to submit specimens for testing services.  These inventories are recorded at the lower of historical cost or market.  At June 30, 2007, off-site inventory was $1.2 million.  The process for valuing off-site inventory involves making 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: Goodwill and indefinite-lived intangible assets are 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 unaudited consolidated interim 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 December 31, 2006, we had a state valuation allowance on deferred tax assets of approximately $57,000, which represents the portion of certain state NOL carryforwards that will more likely than not expire unused in future years.  The valuation allowance is based on managements estimate of future taxable income and the period over which NOLs will be recoverable.  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.  We account for uncertain tax positions in accordance with FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (FIN 48) an interpretation of FASB Statement No. 109 (SFAS 109).  The application of income tax law is inherently complex.  Laws and regulations in this area are voluminous and are often ambiguous.  As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures.  Interpretations of and guidance surrounding income tax laws and regulations change over time.  As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income.  See Note 5 of Notes to the Consolidated Financial Statements for additional detail on our uncertain tax positions.  16
     Results of Operations  In evaluating our financial performance, our management has primarily focused on three objectives: maximizing operating income, increasing our cash flows and strengthening 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 a percentage of revenues. As discussed below, during the second quarter of 2007 and the first six months of this year, we were able to achieve solid revenue growth and improved gross margins on a consolidated basis.  Revenues  Three Months Ended
        
        Six Months EndedJune 30,
2007
        June 30,
2006
        $ Change
        % Change
        
        June 30,
2007
        June 30,
2006
        $ Change
        % ChangeRevenues:Laboratory Services
        $ 15,815
        $ 13,413
        $  2,402
        18%
        
        $ 30,776
        $ 25,815
        $  4,961
        19%Product Sales
        4,961
        3,986
        975
        24%
        
        9,026
        7,934
        1,092
        14%$ 20,776
        $ 17,399
        $  3,377
        19%
        
        $ 39,802
        $ 33,749
        $  6,053
        18%
  Our Laboratory Services segment includes revenues from workplace drugs-of-abuse testing and revenues from Specialty Laboratory Services.  Our revenues from workplace drugs-of-abuse testing grew 18% for both the three and six month periods ended June 30, 2007 due to an increase in sample volume, primarily from new client relationships.  Our pricing structure remained relatively stable in the three months ended June 30, 2007.  In the six months ended June 30, 2007, we experienced a slight decrease in the average price per testing specimen.  Pricing for our workplace drugs-of-abuse testing services tends to be stable overall; however, the average price per testing specimen can vary slightly from quarter-to-quarter.  Test price can vary by client based on the percentage of samples that test positive for drugs-of-abuse and the average number of samples per shipment.  Revenues from our Specialty Laboratory Services for the three and six months ended June 30, 2007 increased 18% to $5.3 million and 22% to $10.8 million, respectively, due to strong growth in testing for our clinical trial services business and a higher average revenue per test.  While we continue to add new clients in clinical trial services, we are also experiencing significant repeat business from existing clients.  We also recently entered into a strategic relationship with a European laboratory which gives us access to strategically located laboratories throughout Europe, Asia, India, South America, South Africa and Australia, thus enabling us to provide laboratory clinical trial services for international trials.  This relationship is non-exclusive and does not include any specified testing volumes or commitments.  Although our clinical trials services business is growing, revenues from these services
can fluctuate from quarter-to-quarter depending on the actual timing of clinical trials.  17
    In the Product Sales segment, sales of POCT products, which consists of the PROFILE®-II, PROFILE-II ER®, PROFILE®-III ER, PROFILE®-II A, PROFILE®-III, VERDICT®-II and SURE-SCREEN®on-site test kits and other ancillary products for the detection of abused substances, increased 23% to $4.1 million and 19% to $7.8 million for the three and six months ended June 30, 2007, respectively.  This growth primarily reflected strong sales of PROFILE®-III ER, PROFILE®-III, and SURE-SCREEN®devices.  Overall, pricing for our POCT devices was stable during these periods.  We are also continuing our introduction of our MEDTOXScan®reader for use with our PROFILE-II ER®and PROFILE®-III ERdevices in the hospital market.
We currently have approximately 300 readers that have been placed with clients in the hospital market.  Additionally, in the Product Sales segment, sales of contract manufacturing services increased 42%, or $0.2 million, to $0.5 million in the three months ended June 30, 2007.  For the six months ended June 30, 2007, sales of contract manufacturing services decreased 26%, or $0.3 million, to $0.8 million.  During the first quarter of 2007, our largest client experienced a product recall, unrelated to the component that we provide them.  The recall has caused them to experience a loss of market share and consequently lower demand for our services.  After an analysis of this product category, we have concluded that it has diminishing opportunities for us, and we will exit the contract manufacturing services business over the next 18 to 24 months.  The increase in revenues in the three months ended June 30, 2007 was largely a result of our clients ordering product from us in anticipation of us exiting this
business.  Based on the expected increased sales of higher-margin POCT products, we do not anticipate a significant impact on our results of operations from exiting this business.  Gross Profit  Three Months Ended
        
        Quarter-over-QuarterJune 30,
2007
        % of Revenues
        June 30,
2006
        % of Revenues
        
        $ Change
        %
ChangeCost of Revenues:Cost of Services
        $    9,317
        58.9%*
        $    8,175
        60.9%*
        
        $  1,142
        14%Cost of Sales
        1,882
        37.9%**
        1,488
        37.3%**
        
        394
        26%$  11,199
        53.9%
        $    9,663
        55.5%
        
        $  1,536
        16%
  Six Months Ended
        
        Year-over-YearJune 30,
2007
        % of Revenues
        June 30,
2006
        % of Revenues
        
        $ Change
        %
ChangeCost of Revenues:Cost of Services
        $    18,109
        58.8%*
        $    15,809
        61.2%*
        
        $  2,300
        15%Cost of Sales
        3,374
        37.4%**
        3,060
        38.6%**
        
        314
        10%$    21,483
        54.0%
        $    18,869
        55.9%
        
        $  2,614
        14%
  *
        Cost of services as a percentage of Laboratory Services revenues
 **
        Cost of sales as a percentage of Product Sales revenues
   18
    Consolidated gross margin was 46.1% and 46.0% of revenues for the three and six months ended June 30, 2007, respectively, compared to 44.5% and 44.1% of revenues for the same periods in 2006.  Laboratory Services gross margin was 41.1% and 41.2% for the three and six months ended June 30, 2007, respectively, up from 39.1% and 38.8% in the same periods of 2006.  The margin improvement was primarily attributable to increased revenues from additional testing volume through our existing infrastructure, as well as an increase in higher margin testing relating to clinical trials.  Gross margin from Product Sales was 62.1% for the three months ended June 30, 2007, down slightly from 62.7% in the same period of 2006.  For the six months ended June 30, 2007, gross margin from Product Sales increased to 62.6%, up from 61.4% in the prior year period.  For the six months ended June 30, 2007, margins were positively impacted by a shift in sales mix towards the higher-margin POCT devices and away from lower-margin contract manufacturing services, which occurred during the first quarter of 2007.  Operating Expenses  Three Months Ended
        
        Quarter-over-QuarterJune 30, 2007
        % of Revenues
        June 30, 2006
        % of Revenues
        
        $ Change
        % ChangeOperating Expenses:Selling, general and
administrative
        $   6,149
        29.6%
        $   4,880
        28.1%
        
        $      1,269
        26%Research and
development
        768
        3.7%
        531
        3.0%
        
        237
        45%$   6,917
        33.3%
        $   5,411
        31.1%
        
        $     1,506
        28%
  Six Months Ended
        
        Year-over-YearJune 30, 2007
        % of Revenues
        June 30, 2006
        % of Revenues
        
        $ Change
        % ChangeOperating Expenses:Selling, general and
administrative
        $   11,874
        29.8%
        $    10,014
        29.7%
        
        $      1,860
        19%Research and
development
        1,365
        3.4%
        991
        2.9%
        
        374
        38%$   13,239
        33.3%
        $    11,005
        32.6%
        
        $      2,234
        20%
  Selling, General and Administrative Expenses.  Selling, general and administrative (SG&A) expenses increased to $6.1 million, or 29.6% of revenues for the three months ended June 30, 2007, compared to $4.9 million, or 28.1% for the same period in 2006.  For the six months ended June 30, 2007, SG&A expenses increased to $11.9 million, or 29.8% of revenues, compared to $10.0 million, or 29.7% of revenues for the same period in 2006.  The increased spending reflects an increase in sales and marketing, incentive based compensation and information technology expense.  19
    Research and Development Expenses.  Research and development expenses increased 45% and 38%, respectively, to $0.8 million and $1.4 million for the three and six months ended June 30, 2007 from $0.5 million and $1.0 million, respectively, for the same periods in 2006.  The increase was primarily due to increased laboratory assay development expense in support of testing for clinical trials in our Laboratory Services segment.  The increase was also driven by increased product development expense related to the introduction of the MEDTOXScan®reader and other peripheral materials related to the reader, as well as continuing software development upgrades in our Product Sales segment.  Other Expense  Other income and expense consists primarily of interest expense and the operating results associated with our building rental activities.  These expenses decreased 80% and 57%, respectively, to $47,000 and $241,000 for the three and six months ended June 30, 2007 from $237,000 and $559,000, respectively, for the same periods in 2006.  The improvement resulted primarily from the resolution of a previously reserved rent receivable at the New Brighton Business Center, as well as lower interest expense related to a reduction in average debt levels.  Income Taxes  We recorded a tax provision for the three and six months ended June 30, 2007 based upon an effective tax rate of 32.6% and 31.5%, respectively, compared to an effective tax rate of 38.6% for the comparable periods in 2006.  The lower rate in the three and six months ended June 30, 2007 resulted from a permanent book to tax difference related to the disqualifying disposition upon the exercise of incentive stock options.  The lower rate in the six months ended June 30, 2007 was also due to a $141,000 tax benefit from additional net operating loss carryforwards determined to be available to the Company.  At June 30, 2007, we had a valuation allowance on deferred tax assets of approximately $57,000, which represents the portion of certain state net operating loss (NOL) carryforwards that will more likely than not expire unused in future years.  Should operating results in 2007 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 and cash received from debt financing.  Cash and cash equivalents at both June 30, 2007 and December 31, 2006 were $1.3 million.  Net cash provided by operating activities was $4.7 million for the six months ended June 30, 2007 compared to $3.3 million for the same period of 2006.  This increase was primarily due to an improvement in our operating results with no corresponding cash payment of income taxes.  We experienced an increase in accounts payable and accrued expenses, primarily due to the timing of scheduled payments, which was offset by a larger increase in our trade receivables from December 31, 2006 to June 30, 2007 compared to December 31, 2005 to June 30, 2006.  The significant increase in accounts receivable at June 30, 2007 was primarily due to strong May and June, 2007 sales and the timing of cash receipts.   20
    Net cash used in investing activities, consisting primarily of capital expenditures, was $3.8 million for the six months ended June 30, 2007 compared to $1.6 million for the same period of 2006. These expenditures consisted of equipment purchased and costs incurred to continue to improve efficiencies and reduce operating costs within our Laboratory Services and Product Sales businesses.  In addition, in the first six months of 2007, we invested in instrumentation and capacity in our clinical trials services business.  Net cash used in financing activities was $0.9 million for the six months ended June 30, 2007, compared to $2.1 million in the prior year period.   The change was primarily due to the refinancing of a portion of our mortgage loan in March 2006 (see below).  In the first six months of 2007, we repurchased 32,929 shares of our common stock in the open market and 33,774 shares of our common stock from an officer and director of our Company for a combined total cost of $1.1 million.  The shares repurchased were used to fund our Long-Term Incentive Plan.  In the first six months of 2006, we repurchased a total of 115,463 shares at a cost of $1.1 million.  Of the total shares repurchased, 82,550 shares were acquired in the open market at a cost of $0.8 million and contributed to our Long-Term Incentive Plan.  The remaining 32,913 shares were repurchased in the open market at a cost of $0.3 million and are being held in treasury.  In March of 2006, we refinanced a portion of our mortgage loan.  On March 16, 2006, we entered into a Term Note (the "Note") with the Wells Fargo Bank, National Association (the "Bank") to refinance, on March 31, 2006, a portion of the outstanding balance of $5.4 million on our mortgage loan with Principal Life Insurance Company ("Principal").  We financed the March 2001 purchase of the building complex, where our Laboratory Services segment and other commercial tenants are located, with the mortgage loan from Principal.  The mortgage loan had a term of ten years and was being repaid based on a 20 year amortization schedule at a fixed interest rate of 7.23% for the first five years.  In accordance with the provisions of the mortgage loan, Principal had the option to adjust the interest rate, effective March 1, 2006, or to call the loan due on March 31, 2006.  We elected not to accept the interest rate
adjustment and refinanced $3.4 million with the Bank over a five year term in monthly installments of approximately $56,000 plus interest, commencing May 1, 2006.  Interest is calculated at either (i) a variable rate of 0.5% below the prime rate or (ii) a fixed rate of 1.9% above LIBOR in effect on the first day of the applicable fixed rate term.  We paid the remaining outstanding mortgage loan balance of approximately $2.0 million using approximately $1.8 million of our Line of Credit and $0.2 million of cash.  We are party to a credit security agreement (the "Wells Fargo Credit Agreement") with the Bank. The Wells Fargo Credit Agreement, as amended, consists of:  (i) a revolving line of credit ("Line of Credit"), payable on demand, of up to $8.0 million bearing interestat either a fluctuating rate of 0.5% below the Banks prime rate or at a fixed rate of 1.9% above LIBOR, as defined and calculated by the Bank, in effect on the first day of the applicable fixed rate term; and  (ii) a note or notes aggregating up to $2.0 million (loan limit) for the purchase of capital equipment bearing interest at either a rate of 0.25% below the Banks prime rate or at a fixed rate for a period of one, two, three, or four years at a rate of 2.25% in excess of the then current yield on U.S. Treasury Securities, adjusted to a constant maturity equal to such fixed rate period.    21
    Subject to certain conditions, the Wells Fargo Credit Agreement also provides for the issuance of letters of credit which, if drawn upon, would be deemed advances under the Line of Credit.  We are required to pay a fee equal to 0.125% per annum on the average daily unused amount of the Line of Credit.  We have granted the Bank a first priority security interest in all of the Companys accounts receivable, other rights to payment, general intangibles, inventory, and equipment to secure all indebtedness of the Company to the Bank.  Extensions of credit under the Wells Fargo Credit Agreement are subject to certain conditions.  The Wells Fargo Agreement also requires us to comply with certain financial covenants, including maintaining, on a consolidated basis:  
        A Current Ratio not less than 1.3 to 1.0 at any time, with Current Ratio defined as total current assets divided by total current liabilities.
  
        Tangible Net Worth not less than $22,500,000 at any time, with Tangible Net Worth defined as the aggregate of total stockholders equity plus subordinated debt less any intangible assets.
  
        Total Liabilities divided by Tangible Net Worth not greater than 1.75 to 1.0 at any time, with Total Liabilities defined as the aggregate of current liabilities and non-current liabilities less subordinated debt, and with Tangible Net Worth as defined above.
  
        A Debt Service Coverage Ratio not less than 1.5 to 1.0 as of each fiscal quarter end, determined on a rolling four-quarter basis, with Debt Service Coverage Ratio defined as the aggregate of net income before non-cash tax expense plus depreciation expense and amortization expense, divided by the aggregate of the current maturity of long-term debt for the previous four fiscal quarters plus current capital lease obligations for the previous four fiscal quarters.
  On July 31, 2007, we entered into the Second Amendment to the Credit Agreement with the Bank,  which modifies certain terms and conditions of the Wells Fargo Credit Agreement and removes the financial covenant limiting capital expenditures to $5.0 million in any fiscal year.  We are relying on expected positive cash flows from operations and our Line of Credit to fund our future working capital and asset purchases.  At June 30, 2007, we had total borrowing capacity of $8.0 million on our line of credit, of which $0.9 million was borrowed, leaving a net availability of $7.1 million.  In the short term, we believe that the aforementioned resources will be sufficient to fund our planned operations through 2007.  While there can be no assurance that the available capital will be sufficient to fund our future operations beyond 2007, 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.  We continue to follow a plan which includes (i) aggressively monitoring and controlling costs, (ii) increasing revenues from sales of the our existing products and services, (iii) developing new products and services, as well as (iv) selectively pursuing 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 the Companys financial condition and liquidity position as of June 30, 2007:  Payments Due by Period(In thousands)
        Total
        
        Less than 1 year
        
        1-3 years
        
        4-5 years
        
        More than 5 yearsLong-term debt (1)
        $  2,228
        
        $       807
        
        $    1,421
        
        $             -
        
        $            -Capital lease obligations (1)
        10
        
        10
        
        -
        
        -
        
        -Operating leases
        4,015
        
        562
        
        1,437
        
        848
        
        1,168Total contractual obligations
        $  6,253
        
        $    1,379
        
        $    2,858
        
        $        848
        
        $    1,168
  (1)
        Amounts include interest payments based upon contractual or prevailing interest rates.
  Off-Balance Sheet Transactions  The Company does 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 the Companys 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 on the Company has been primarily limited to salary, laboratory and operating supplies and rent increases and has historically not been material to the Companys operations.  In the future, the Company may not be able to increase the prices of laboratory testing by an amount sufficient to cover the cost of inflation, although the Company is 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  The Company believes that the laboratory testing business is subject to seasonal fluctuations in pre-employment screening.  These seasonal fluctuations include reduced volume in the 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 flows.  23
    Impact of New Accounting Standards  In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159).  SFAS No. 159 permits entities to choose, at specified election dates, to measure eligible financial instruments at fair value that are not currently required to be measured at fair value. SFAS No. 159 is effective for us as of January 1, 2008.  We have not yet evaluated the impact of adopting SFAS No. 159 on our financial position or results of operations.  In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements regarding fair value measurement.  Where applicable, SFAS No. 157 simplifies and codifies fair value related guidance previously issued within generally accepted accounting principles.  Although this Statement does not require any new fair value measurements, its application may, for some entities, change current practice.  SFAS No. 157 is effective for us as of January 1, 2008.  We are currently in the process of evaluating the impact of the adoption of SFAS No. 157.        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, 2007.  For additional information refer to Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2006.  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 IIOTHER INFORMATION  ITEM 1
        LEGAL PROCEEDINGS.
        Inapplicable
  ITEM 1ARISK FACTORS.There have been no material changes to our risk factors during the three and six months ended June 30, 2007.  For additional information refer to Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006.  ITEM 2
        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  Issuer Purchases of Equity Securities  Period
        
        Total Number of Shares Purchased
        
        Average Price Paid per Share
        
        Total Number of Shares Purchased as part of Publicly Announced Plans or Programs (b)
        
        Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (c)April 1-30, 2007
        
        31,504
        
        19.56
        
        31,504
        
        -May 1-31, 2007
        
        -
        
        -
        
        -
        
        -June 1-30, 2007
        
        1,254(a)
        
        -
        
        -
        
        -Total
        
        32,758
        
        19.56
        
        31,504
  (a)  Represents shares withheld from employees to satisfy tax withholding obligations that arose upon the vesting of restricted stock.  These purchases are not part of a publicly announced plan or program.  (b)  Represents the number of shares repurchased as part of the Companys publicly announced plan to repurchase $1.1 million of shares of the Companys common stock.  The shares repurchased will be used to fund the Companys Long-Term Incentive Plan (LTIP).  Repurchases of shares may be made through open market or privately negotiated transactions at times and in such amounts as management deems appropriate.  (c)  In March 2007, the Company announced that the Board of Directors had authorized the repurchase of shares of the Companys common stock to fund the Companys LTIP.  The announcement did not indicate the maximum number of shares to be repurchased under the program.  ITEM 3
        DEFAULTS UPON SENIOR SECURITIES.  Inapplicable
  26
     ITEM 4
        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  Set forth below is information concerning each matter submitted to a vote at the Annual Meeting of Stockholders of the Company on May 23, 2007.  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
        Votes For
        Votes Withheld
 Brian P. Johnson
        7,139,949
        739,098
 Robert J. Marzec
        7,138,357
        740,690
  Proposal No. 2:  The stockholders approved the ratification of Deloitte & Touche LLP as the Companys independent registered public accounting firm for the fiscal year ending December 31, 2007, with the following votes:  For
        Against
        Abstentions
        Broker Non-Votes
 7,826,615
        51,210
        1,220
        NA
  Proposal No. 3:  The stockholders approved the MEDTOX Executive Incentive Compensation Plan with the following votes:  For
        Against
        Abstentions
        Broker Non-Votes
 4,778,062
        430,397
        21,373
        2,688,046
  During the second quarter of 2007, no other matters were submitted to a vote of the securities holders of the Company.  ITEM 5
        OTHER INFORMATION.
  On July 31, 2007, MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. entered into the Second Amendment to the Credit Agreement with Wells Fargo Bank, National Association.  The Second Amendment modifies certain terms and conditions of the Wells Fargo Credit Agreement and removes the financial covenant limiting capital expenditures to $5 million in any fiscal year.  The foregoing description of the Second Amendment is qualified by the provisions of the Second Amendment, which is filed herewith as Exhibit 10.29 and incorporated herein by reference.  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
        July 31, 2007Richard J. Braun
        Chairman of the Board of Directors (Principal Executive Officer)/s/ Kevin J. Wiersma
        Vice President and Chief Financial Officer
        July 31, 2007Kevin J. Wiersma
        (Principal Financial Officer)/s/ Steven J. Schmidt
        Vice President, Finance
        July 31, 2007Steven J. Schmidt
        (Principal Accounting Officer)
     28
     EXHIBIT INDEX MEDTOX SCIENTIFIC, INC. FORM 10-Q FOR QUARTER ENDED JUNE 30, 2007  Exhibit
 Number
        Description
  3.1
        Bylaws of the Registrant, as amended. (Incorporated by reference to exhibit 3.1 filed with the Registrants Report on Form 10-K dated December 31, 2005).
  3.2
        Restated Certificate of Incorporation, as amended. (Incorporated by reference to exhibit 3.2 filed with the Registrants Report on Form 10-K dated December 31, 2005).
  3.3
        Amended Certificate of Designations of Preferred Stock (Series A Convertible Preferred Stock) of the Registrant, filed with the Delaware Secretary of State on January 29, 1996 (incorporated by reference to Exhibit 3.1 filed with the Registrants report on Form 8-K dated January 30, 1996).
  4.1
        Rights Agreement dated September 18, 1998 between the Registrant and American Stock Transfer & Trust Company (incorporated by reference to Exhibit 4.1 filed with the Registrants Report on Form 8-K dated September 21, 1998).
  10.1
        Second Amendment dated December 31, 1986 to Exclusive License Agreement amending and restating exclusive license granted by the Registrant to Disease Detection International, Inc. (incorporated by reference to Exhibit 10.25 filed with the Registration Statement on Form S-1 dated August 26, 1987, Commission File No. 33-15543).
  10.2
        Agreement regarding rights to MEDTOX name dated as of January 30, 1996 between the Registrant and Harry G. McCoy.  (Incorporated by reference to Exhibit 10.38 filed with the Registrants Report on Form 10-K for the fiscal year ended December 31, 1995.)**
  10.3
        Registrants Restated Equity Compensation Plan dated May 10, 2000.  (Incorporated by reference to exhibit 10.46 filed with the Registrants Report on Form 10-K for the fiscal year ended December 31, 2000.)**
  10.4
        Purchase and Sale Agreement dated July 27, 2000 by and between the Registrant and NMRO, Inc.  (Incorporated by reference to exhibit 10.48 filed with the Registrants Report on Form 10-K for the fiscal year ended December 31, 2000).
  10.5
        Registration Rights Agreement dated July 31, 2000 among the Registrant, certain investors, and Miller, Johnson, & Kuehn, Inc. (MJK).  (Incorporated by reference to exhibit 10.50 filed with the Registrants Report on Form 10-K for the fiscal year ended December 31, 2000).**
  10.6
        Purchase and Sale Agreement dated December 29, 2000 by and between MEDTOX Laboratories, Inc. and PHL-OPCO, LP.  (Incorporated by reference to exhibit 10.52 filed with the Registrants Report on Form 10-K for the fiscal year ended December 31, 2000).
  10.7
        Employment Agreement dated January 1, 2003, between the Registrant and Richard J. Braun. (Incorporated by reference to exhibit 10.59 filed with the Registrants Report on Form 10-K for the fiscal year ended December 31, 2002).**
   29
    10.8
        Amended and Restated Nova Building Lease dated November 1, 2003 by and between Powell Enterprises and MEDTOX Diagnostics, Inc. (Incorporated by reference to exhibit 10.23 filed with the Registrants Report on Form 10-K for the fiscal year ended December 31, 2003).
  10.9
        Purchase and Sale Agreement dated July 1, 2003 by and between MEDTOX Laboratories, Inc. and CoxHealth. (Incorporated by reference to exhibit 10.26 filed with the Registrants Report on Form 10-K for the fiscal year ended December 31, 2003).
  10.10
        Registrants Supplemental Executive Retirement Plan dated December 21, 2004.  (Incorporated by reference to exhibit 10.2 filed with the Registrants Report on Form 8-K dated December 22, 2004).**
  10.11
        Registrants Long-Term Incentive Plan as Amended dated July 27, 2005.  (Incorporated by reference to exhibit 10.1 filed with the Registrants Report on Form 8-K dated July 28, 2005).**
  10.12
        Credit Agreement between MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. and Wells Fargo Bank dated December 1, 2005.  (Incorporated by reference to exhibit 10.1 filed with the Registrants Report on Form 8-K dated December 6, 2005).
  10.13
        Revolving Line of Credit Note between MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. and Wells Fargo Bank dated December 1, 2005.  (Incorporated by reference to exhibit 10.2 filed with the Registrants Report on Form 8-K dated December 6, 2005).
  10.14
        Security Agreement:  Equipment between MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. and Wells Fargo Bank dated December 1, 2005.  (Incorporated by reference to exhibit 10.3 filed with the Registrants Report on Form 8-K dated December 6, 2005).
  10.15
        Continuing Security Agreement:  Rights to Payment and Inventory between MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. and Wells Fargo Bank dated December 1, 2005.  (Incorporated by reference to exhibit 10.4 filed with the Registrants Report on Form 8-K dated December 6, 2005).
  10.16
        Term Note between MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. and Wells Fargo Bank dated December 1, 2005.  (Incorporated by reference to exhibit 10.5 filed with the Registrants Report on Form 8-K dated December 6, 2005).
  10.17
        Agreement and Acknowledgment of Security Interest between Wells Fargo Bank, MEDTOX Diagnostics, Inc., and Powell Enterprises, Inc. dated December 1, 2005.  (Incorporated by reference to exhibit 10.6 filed with the Registrants Report on Form 8-K dated December 6, 2005).
  10.18
        Term Note between MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. and Wells Fargo Bank dated March 16, 2006. (Incorporated by reference to exhibit 10.23 filed with the Registrants Report on Form 10-K for the fiscal year ended December 31, 2005).
   30
     10.19
        Continuing Guaranty between New Brighton Business Center, LLC and Wells Fargo Bank dated March 16, 2006. (Incorporated by reference to exhibit 10.24 filed with the Registrants Report on Form 10-K for the fiscal year ended December 31, 2005).
  10.20
        First Amendment to Credit Agreement between MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. and Wells Fargo Bank dated March 16, 2006.  (Incorporated by reference to exhibit 10.25 filed with the Registrants Report on Form 10-K for the fiscal year ended December 31, 2005).
  10.21
        Negative Pledge Agreement between New Brighton Business Center, LLC and Wells Fargo Bank dated March 16, 2006.  (Incorporated by reference to exhibit 10.26 filed with the Registrants Report on Form 10-K for the fiscal year ended December 31, 2005).
  10.22
        Employment Agreement dated December 27, 2006, between the Registrant and B. Mitchell Owens. (Incorporated by reference to exhibit 10.1 filed with the Registrants Report on Form 8-K dated January 4, 2007).**
  10.23
        Employment Agreement dated December 27, 2006, between the Registrant and Susan E. Puskas. (Incorporated by reference to exhibit 10.2 filed with the Registrants Report on Form 8-K dated January 4, 2007).**
  10.24
        Employment Agreement dated December 27, 2006, between the Registrant and James A. Schoonover. (Incorporated by reference to exhibit 10.3 filed with the Registrants Report on Form 8-K dated January 4, 2007).**
  10.25
        Employment Agreement dated December 27, 2006, between the Registrant and Kevin J. Wiersma. (Incorporated by reference to exhibit 10.4 filed with the Registrants Report on Form 8-K dated January 4, 2007).**
  10.26
        Registrants Executive Incentive Compensation Plan dated December 27, 2006. (Incorporated by reference to exhibit 10.5 filed with the Registrants Report on Form 8-K dated January 4, 2007).**
  10.27
        Commercial Lease between MEDTOX Laboratories, Inc. and St. Paul Properties, Inc. dated July 28, 2000.  (Incorporated by reference to exhibit 10.2 filed with the Registrants Report on Form 8-K dated May 30, 2007).
  10.28
        Amendment to Lease between MEDTOX Laboratories, Inc. and St. Paul Properties, Inc. dated May 25, 2007.  (Incorporated by reference to exhibit 10.1 filed with the Registrants Report on Form 8-K dated May 30, 2007).
  10.29
        Second Amendment to Credit Agreement between MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. and Wells Fargo Bank dated July 31, 2007.*
  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.*
  31
    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.*
  *
        Filed herewith
 **
        Denotes a management contract or compensatory plan or arrangement
   32