|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 September 30, 2003


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, $.15 par value, outstanding as of October 31, 2003, was 4,983,970.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|MEDTOX SCIENTIFIC, INC.


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

|                                                               | Page
|-------------------------------------------------------------- | ----
|Part I        Financial Information:                           |     
|                                                              
|Item 1:  Financial Statements (Unaudited)                     
|                                                              
|Consolidated Statements of Operations - Three and Nine        
|Months Ended September 30, 2003 and 2002                       | 3   
|                                                              
|Consolidated Balance Sheets - September 30, 2003              
|and December 31, 2002                                          | 4   
|                                                              
|Consolidated Statements of Cash Flows - Nine                  
|Months Ended September 30, 2003 and 2002                       | 5   
|                                                              
|Notes to Consolidated Financial Statements                     | 6   
|                                                              
|Item 2:                                                       
|                                                              
|Management's Discussion and Analysis of                       
|Financial Condition and Results of Operations                  | 12  
|                                                              
|Item 3:                                                       
|                                                              
|Quantitative and Qualitative Disclosure                       
|About Market Risk                                              | 24  
|                                                              
|Item 4:                                                       
|                                                              
|Controls and Procedures                                        | 24  
|                                                              
|Part II       Other Information                                | 25  
|                                                              
|Item 1:  Legal Proceedings                                     | 25  
|Item 2:  Changes in Securities                                 | 25  
|Item 3:  Defaults Upon Senior Securities                       | 25  
|Item 4:  Submission of Matters to a Vote of Securities Holders | 25  
|Item 5:  Other Information                                     | 25  
|Item 6:  Exhibits and Reports on Form 8-K                      | 25  
|                                                              
|Signatures                                                     | 26  
|Exhibit Index                                                  | 27  

|2
|-

|PART I     FINANCIAL INFORMATIONItem 1:      FINANCIAL STATEMENTS (UNAUDITED)


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

|                                                  | Three Months Ended
September 30, | Nine Months Ended
September 30,
|------------------------------------------------- | -------------------------------- | -------------------------------
|
|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, net                             |                                  |                                
|Other expense, net                                |                                  |                                
|                                                  |                                  |                                
|                                                  |                                  |                                
|                                                  |                                  |                                
|INCOME (LOSS) BEFORE INCOME TAX (EXPENSE) BENEFIT |                                  |                                
|                                                  |                                  |                                
|INCOME TAX (EXPENSE) BENEFIT                      |                                  |                                
|                                                  |                                  |                                
|NET INCOME (LOSS)                                 |                                  |                                
|                                                  |                                  |                                
|BASIC EARNINGS (LOSS) PER COMMON SHARE            |                                  |                                
|                                                  |                                  |                                
|DILUTED EARNINGS (LOSS) PER COMMON SHARE          |                                  |                                
|                                                  |                                  |                                
|WEIGHTED AVERAGE NUMBER OF SHARES                 |                                  |                                
|OUTSTANDING:                                      |                                  |                                
|Basic                                             |                                  |                                
|Diluted                                           |                                  |                                

|See Notes to Consolidated
Financial Statements (Unaudited).


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

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

|                                                                              | September 30,
2003 | December 31,
2002
|----------------------------------------------------------------------------- | ------------------ | -----------------
|ASSETS                                                                        |                    |                  
|CURRENT ASSETS:                                                               |                    |                  
|Cash and cash equivalents                                                     |                    |                  
|Accounts receivable:                                                          |                    |                  
|Trade, less allowance for doubtful accounts ($571 in 2003 and $1,125 in 2002) |                    |                  
|Other                                                                         |                    |                  
|                                                                              |                    |                  
|Total accounts receivable                                                     |                    |                  
|Inventories                                                                   |                    |                  
|Deferred income taxes                                                         |                    |                  
|Prepaid expenses and other                                                    |                    |                  
|                                                                              |                    |                  
|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                                        |                    |                  
|LONG-TERM PORTION OF CAPITAL LEASES, net of current portion                   |                    |                  
|STOCKHOLDERS' EQUITY:                                                         |                    |                  
|Preferred stock, $1.00 par value; authorized shares, 50,000; none issued and  |                    |                  
|outstanding                                                                  
|Common stock, $0.15 par value; authorized shares, 14,400,000; issued and      |                    |                  
|outstanding shares, 4,985,502 in 2003 and 4,814,001 in 2002                   |                    |                  
|Additional paid-in capital                                                    |                    |                  
|Deferred stock-based compensation                                             |                    |                  
|Accumulated deficit                                                           |                    |                  
|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)
|----------------------------------------------------------------------------------------

|                                                                   | Nine Months Ended
September 30,
|------------------------------------------------------------------ | -------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                              |                                
|Net income (loss)                                                  |                                
|Adjustments to reconcile net income (loss) to net cash provided by |                                
|operating activities:                                              |                                
|Depreciation and amortization                                      |                                
|Provision for losses on accounts receivable                        |                                
|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 FROM INVESTING ACTIVITIES:                              |                                
|Capital expenditures                                               |                                
|                                                                   |                                
|CASH FLOWS FROM FINANCING ACTIVITIES:                              |                                
|Net proceeds from sale of common stock                             |                                
|Net proceeds on revolving credit facility                          |                                
|Proceeds from long-term debt                                       |                                
|Principal payments on long-term debt                               |                                
|Principal payments on capital leases                               |                                
|Proceeds from note receivable from related party                   |                                
|                                                                   |                                
|Net cash provided by financing activities                          |                                
|                                                                   |                                
|INCREASE 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                                                           |                                

|See Notes to Consolidated
Financial Statements (Unaudited).


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

|MEDTOX SCIENTIFIC, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2003


     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 nine-month period ended September 30, 2003 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, 2002.


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 alternative of 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 elected the continued
use of APBO No. 25.


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


(In thousands, except
per share data)
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                        |  | Three Months Ended
September 30, | Nine Months Ended
September 30,
|------------------------------------------------------- |  | -------------------------------- | -------------------------------
|
|Net income (loss)...................................... |  |                                  | As reported                    
|Less:  Total stock-based compensation                   |  |                                 
|expense, net of related tax effect                      |  |                                  |                                
|                                                        |  |                                  |                                
|                                                        |  |                                  | Pro forma                      
|                                                        |  |                                 
|Basic earnings (loss) per share..............           |  |                                  | As reported                    
|                                                        |  |                                  | Pro forma                      
|                                                        |  |                                 
|Diluted earnings (loss) per share...........            |  |                                  | As reported                    
|                                                        |  |                                  | Pro forma                      

|6
|-

|New Accounting Standards:
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities.  FIN 46 addresses consolidation by business enterprises of
variable interest entities and significantly changes the consolidation application of
consolidation policies to variable interest entities and, thus improves comparability
between enterprises engaged in similar activities when those activities are conducted
through variable interest entities. The Company does not hold an interest in any variable
interest entities.


In April 2003, the
FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. SFAS No. 149 amends and clarifies certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 was effective for certain contracts entered into or
modified by the Company after June 30, 2003. The Company adopted SFAS No. 149
effective July 1, 2003 with no material impact on its results of operations or
financial position.


In May 2003, the FASB
issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes
standards on the classification and measurement of certain financial instruments with
characteristics of both liabilities and equity.  SFAS No. 150 was effective
immediately for all financial instruments entered into or modified after May 31,
2003. For all other instruments, SFAS No. 150 was effective at the beginning of the
third quarter of 2003. The Company adopted SFAS No. 150 effective July 1, 2003
with no 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 services, which include clinical toxicology, clinical testing for the
pharmaceutical industry, pediatric lead testing, heavy metals analyses, courier delivery,
and medical surveillance. The Product Sales
segment, which includes POC (point of care) disposable diagnostics devices, consists of MEDTOX
Diagnostics Inc. Products manufactured include easy to use, inexpensive, on-site drug
tests such as PROFILE®-II, 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 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.


In evaluating
financial performance, management focuses on income (loss) before income taxes as a
segments measure of profit or loss.



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

|(In thousands)
|--------------

|                                          | Three Months Ended
September 30, | Nine Months Ended
September 30,
|----------------------------------------- | -------------------------------- | -------------------------------
|
|Laboratory Services:                      |                                  |                                
|                                          |                                  |                                
|Revenues                                  |                                  |                                
|Interest expense, net                     |                                  |                                
|Depreciation and amortization             |                                  |                                
|Segment income (loss) before income taxes |                                  |                                
|Segment assets                            |                                  |                                
|Capital expenditures for segment assets   |                                  |                                
|                                          |                                  |                                
|Product Sales:                            |                                  |                                
|                                          |                                  |                                
|Revenues                                  |                                  |                                
|Interest expense, net                     |                                  |                                
|Depreciation and amortization             |                                  |                                
|Segment income before income taxes        |                                  |                                
|Segment assets                            |                                  |                                
|Capital expenditures for segment assets   |                                  |                                
|                                          |                                  |                                
|Corporate (unallocated):                  |                                  |                                
|                                          |                                  |                                
|Deferred tax asset, net                   |                                  |                                
|                                          |                                  |                                
|                                          |                                  |                                
|Company:                                  |                                  |                                
|                                          |                                  |                                
|Revenues                                  |                                  |                                
|Interest expense, net                     |                                  |                                
|Depreciation and amortization             |                                  |                                
|Income (loss) before income taxes         |                                  |                                
|Total assets                              |                                  |                                
|Capital expenditures for assets           |                                  |                                

|8
|-

|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
September 30, | Nine Months Ended
September 30,
|----------------------------------- | -------------------------------- | -------------------------------
|
|Workplace drugs of abuse testing    |                                  |                                
|Other specialty laboratory services |                                  |                                
|                                    |                                  |                                
|                                    |                                  |                                
|                                    |                                  |                                

|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
September 30, | Nine Months Ended
September 30,
|-------------------------------- | -------------------------------- | -------------------------------
|
|Substance abuse testing products |                                  |                                
|Contract manufacturing services  |                                  |                                
|Other diagnostic products        |                                  |                                
|                                 |                                  |                                
|                                 |                                  |                                
|                                 |                                  |                                

|3. ACQUISITION


On July 1, 2003, the
Company completed the acquisition of the forensic drug testing customer list from Cox
Toxicology, a full-service, SAMHSA-certified drug testing laboratory and a division of
CoxHealth. The purchase price of the transaction is based on varying percentages of the
revenue realized from the transitioned business over the next three years. During this
period, the Company estimates that revenue from these accounts will total approximately
$1.2 million and that the sum of the payments for the acquisition should not exceed 25% of
this total. As part of the agreement, the Company paid $50,000 as an initial payment at
closing. Per the terms of the agreement, as 50% of the revenue realized from the
transitioned business during the third quarter did not exceed the $50,000 initial payment,
no other payments were required. The $50,000 initial payment was recorded as a customer
list asset and is being amortized on a straight-line basis over a five-year period. Pro
forma results related to the Cox Toxicology customer list acquisition are not material to
the financial condition or results of operations of the Company.


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

|4. INVENTORIES


Inventories consisted
of the following: 
(In thousands)
|------------------------------------------------------------------------

|                                       | September 30,
2003 | December 31,
2002
|-------------------------------------- | ------------------ | -----------------
|Raw materials                          |                    |                  
|Work in process                        |                    |                  
|Finished goods                         |                    |                  
|Supplies, including off-site inventory |                    |                  
|                                       |                    |                  
|                                       |                    |                  
|                                       |                    |                  

|5.    
          EARNINGS PER SHARE


The following table
sets forth the computation of basic and diluted earnings per common share: 
(Dollars in thousands, except per share amounts)
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                               | Three Months Ended
September 30, | Nine Months Ended
September 30,
|---------------------------------------------- | -------------------------------- | -------------------------------
|
|Net income (loss) (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 (loss) per common share (A/B)   |                                  |                                
|                                               |                                  |                                
|Diluted earnings (loss) per common share (A/C) |                                  |                                
|                                               |                                  |                                

|Options and warrants
to purchase 1,351,678, 1,705,763, 978,359 and 915,565 shares of common stock were
outstanding during the three and nine months ended September 30, 2003 and 2002,
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, or
because they were antidilutive in the nine months ended September 30, 2003 due to a net
loss.


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

|6.    
          INCOME TAXES


At September 30,
2003, the Company had federal and state net operating loss carryforwards (NOLs) of
approximately $28.7 and $10.5 million, respectively, which are available to offset taxable
income through 2020. 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.
Although the Section 382 limitation is currently not expected to impair the realization of
these NOLs, other factors could, such as projected future taxable income, the timing of
expiring NOLs, and the Companys tax planning strategies.


In the third quarter
of 2002, the Company recorded a $10.8 million income tax benefit and reduced its valuation
allowance on deferred tax assets.  The reduction in the valuation allowance at that
time was based on the available evidence, including the Companys historical
performance, tax planning strategies, and projected future results.  The valuation
allowance at December 31, 2002 of $1.4 million represented the portion of the net
operating loss (NOL) carryforwards that were expected to expire unused in 2003 and future
years.   Should operating results for the remainder of 2003 and possibly 2004
fail to meet expectations, the valuation allowance against the Companys NOL
carryforwards and the related deferred tax asset may require adjustment in future periods.


     7.    
          RELATED PARTY TRANSACTIONS


In March 2001, the
Company entered into a 10-year lease of the Burlington, North Carolina production facility
for an annual base rent of $197,000, exclusive of operating expenses. This facility has
always been owned and leased to the Company by Samuel Powell, a director of the Company.
The Company believes it is renting this facility on terms similar to those available from
third parties for equivalent premises.


In February 2003, the
Company entered into a month-to-month lease for a warehousing and distribution facility in
Burlington, North Carolina. The monthly base rent for the facility is $9,400 exclusive of
operating expenses. It is the intent that the month-to-month lease shall be converted to a
long-term lease within the next several months. This facility is owned and leased to the
Company by Samuel Powell, a director of the Company. The Company believes it is renting
this facility on terms similar to those available from third parties for equivalent
premises.


     8.    
          COMMITMENTS AND CONTINGENCIES


Leases The Company leases other offices and facilities and office equipment under certain
operating leases, which expire on various dates through April 2011. 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.


11
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS 
THAT COULD CAUSE THE COMPANYS ACTUAL RESULTS TO DIFFER 
FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS


In connection with
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995, readers of this document and any document incorporated by reference herein, are
advised that this document and documents incorporated by reference into this document
contain both statements of historical facts and forward looking statements.
Forward looking statements are subject to certain risks and uncertainties, which could
cause actual results to differ materially from those indicated by the forward looking
statements. Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earnings or loss per share, capital expenditures,
dividends, capital structure and other financial items, (ii) statements of the plans and
objectives of the Company or its management or Board of Directors, including the
introduction of new products, or estimates or predictions of actions by customers,
suppliers, competitors or regulatory authorities, (iii) statements of future economic
performance, and (iv) statements of assumptions underlying other statements and statements
about the Company or its business.


This document and any
documents incorporated by reference herein also identify important factors which could
cause actual results to differ materially from those indicated by the forward looking
statements. The factors that could affect our actual results include the following:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o
       increased competition, including price
competition


o        general
economic and business conditions, both nationally and internationally


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:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o         lack
of meaningful 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 products and services by our customers


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

|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        failure
to maintain our days sales outstanding levels


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

|The cautionary
statements made pursuant to the Private Litigation Securities Reform Act of 1995 above and
elsewhere by the Company should not be construed as exhaustive or as any admission
regarding the adequacy of disclosures made by the Company prior to the effective date of
such Act. Forward looking statements are beyond the ability of the Company to control,
and in many cases the Company cannot predict what factors would cause results to differ
materially from those indicated by the forward looking statements.


General


MEDTOX Scientific,
Inc. (formerly EDITEK, Inc.), a Delaware corporation, was organized in September 1986.
MEDTOX Scientific, Inc. and its subsidiaries, MEDTOX Laboratories, Inc., MEDTOX
Diagnostics, Inc., and New Brighton Business Center, LLC are referred to herein as
the Company. The Company is engaged primarily in two distinct, but very much
related businesses. The business of forensic and clinical laboratory services is conducted
by MEDTOX Laboratories, Inc. at its facility in St. Paul, Minnesota, and the business of
manufacturing and distribution of diagnostic devices is executed by MEDTOX Diagnostics,
Inc. from its facility in Burlington, North Carolina.


The Company has two
reportable segments: Laboratory Services conducted by the Companys
wholly owned subsidiaries, MEDTOX Laboratories, Inc. and New Brighton Business Center, LLC
and Products Sales conducted by the Companys wholly owned subsidiary
MEDTOX Diagnostics, Inc. Laboratory Services include forensic toxicology (primarily
workplace drugs of abuse testing) and specialty laboratory services, including clinical
toxicology, clinical testing for the pharmaceutical industry (central laboratory services,
bioanalytical and pharmacokinetic testing), and analysis of heavy and trace metals. In
addition, the Laboratory Services segment provides logistical support, data management and
overall program management services. Product Sales include sales of a variety of on-site
screening products and contract manufacturing. For financial information relating to the
Companys segments, see Note 2 of Notes to the Consolidated Financial Statements. For
the three and nine months ended September 30, 2003, Laboratory Services revenue accounted
for 76.6% of the Companys revenues, compared with 77.5% and 76.3%, for the same
periods in 2002. Revenue from Product Sales accounted for 23.4% of the total revenues of
the Company for the three and nine months ended September 30, 2003, compared with 22.5%
and 23.7% for the same periods in 2002.


13
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|Critical Accounting
Policies


The Company has
identified the policies outlined below as critical to understanding its 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 the Companys 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, 2002. 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.


The Companys
critical accounting policies are as follows:


Accounts Receivable:
The Company performs
ongoing credit evaluations of its customers and adjusts credit limits based upon payment
history and the customers current credit worthiness, as determined by
managements review of their current credit information. The Company continuously
monitors collections and payments from its customers and maintains a provision for
estimated credit losses based upon the Companys historical experience and any
specific customer collection issues that have been identified. While such credit losses
have generally been within the Companys historical expectations and the provisions
established, the Company cannot guarantee that it will continue to experience the same
credit loss rates that have occurred in the past. The Companys consolidated trade
accounts receivable balance as of September 30, 2003 was $8.9 million, net of allowance
for doubtful accounts of $0.6 million.


Some of the
Companys 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 the Company. 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 the Company by the
customer. The Company estimates an aggregate discount on the billings for these tests, and
recognizes 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 the
Company believes 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. The Company considers historical
discounts when estimating future discounts on a quarterly basis.


14
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|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 September 30, 2003, off-site inventory was $0.6 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:
Effective January 1,
2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and
other intangible assets be tested for impairment within six months of adoption of SFAS No.
142 and then on a periodic basis thereafter. During the first half of 2002, the Company
completed impairment testing and determined that there were no impairment losses related
to goodwill and other intangible assets. In the fourth quarter of 2002, the Company
updated its impairment testing and determined that there was no impairment. 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, the
Company may be required to record impairment charges for these assets. During the nine
months ended September 30, 2003, no circumstances occurred that required an impairment
charge.


Accounting for Income
Taxes:
As part of the
process of preparing the consolidated financial statements, the Company is required to
estimate income taxes in each of the jurisdictions in which it operates. 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. The Company 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, the Company must establish a valuation allowance. To the extent the Company
increases or decreases the valuation allowance in a period, the Company 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. The Companys deferred tax assets primarily consist of certain net operating
losses (NOLs) carried forward. The valuation allowance is based on managements
estimate of 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 the Companys cash payments would
remain unaffected until the benefit of the NOL is completely utilized or expires unused.


15
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|Results of Operations


Total revenues for
the third quarter of 2003 were essentially flat with the third quarter of 2002. Gross
margin improved over the third quarter of 2002, reflecting improvement in Laboratory
Services gross margin. Operating expenses as a percentage of sales were slightly higher in
the third quarter of 2003, reflecting the continued investment in research and
development. Other expense was also higher than last year due to reduced rental income
from the Companys building rental activities. In the third quarter of last year, the
Company recorded a $10.8 million non-cash tax benefit as part of net income. The following
table sets forth the percentages of total revenues represented by certain items reflected
in the Companys Consolidated Statements of Operations:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | Three Months Ended
September 30, | Nine Months Ended
September 30,
|------------------------------------ | -------------------------------- | -------------------------------
|
|Revenues                             |                                  |                                
|Cost of revenues                     |                                  |                                
|                                     |                                  |                                
|Gross margin                         |                                  |                                
|Operating expenses:                  |                                  |                                
|Selling, general, and administrative |                                  |                                
|Research and development             |                                  |                                
|                                     |                                  |                                
|                                     |                                  |                                
|                                     |                                  |                                
|Income from operations               |                                  |                                
|Other expense                        |                                  |                                
|                                     |                                  |                                
|Income (loss) before income tax      |                                  |                                
|(expense) benefit                    |                                  |                                
|Income tax (expense) benefit         |                                  |                                
|                                     |                                  |                                
|Net income (loss)                    |                                  |                                
|                                     |                                  |                                

|Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002


Revenues


Revenues of $13.6
million for the three months ended September 30, 2003 were flat with the third quarter of
2002. Although Laboratory Services revenues declined 2%, this impact was mitigated by a 3%
improvement in Product Sales revenues.


Laboratory Services
revenues were impacted by a decline in the average price per testing specimen for
workplace drugs of abuse testing. The lower pricing was aimed at attracting new business
to offset the impact of the reduced specimen volume from existing workplace drug testing
clients experienced in the first two quarters of 2003. In the third quarter, specimen
volume from the Companys occupational health and corporate clients increased 5%,
reflecting the Companys continued success in acquiring new client relationships and
gaining market share, despite the continued softness in new business employment. In
addition, revenues from the Companys specialty laboratory services increased 2% in
the quarter.


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

|In the Product Sales
segment, sales of substance abuse testing products, which incorporates 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 3% to
$2.7 million in the third quarter of 2003. The improvement was driven by strong sales of
the PROFILE®-II ER device, an on-site, nine drugs-of-abuse panel, targeted at hospital
laboratories for emergency response screening in drugs-of-abuse overdose situations. Sales
of PROFILE®-II devices to existing workplace and occupational clients were down from
last year and continue to be impacted by the reduction in nationwide hiring; additionally,
some customers are alternatively purchasing the PROFILE®-II A device, which screens
for the same five drugs of abuse, but also includes a patented lateral flow test strip to
screen for the five most common adulterants. Sales within the VERDICT®-II product line
to government clients for probation, parole and rehabilitation continue to trend slightly
below last year. The economic uncertainty and budget constraints that the Companys
government clients are experiencing resulted in lower purchasing levels among these
clients. The Company anticipates that the government sector will continue to be a
challenging environment, and will continue to pursue new sales efforts that the Company
believes will improve this portion of its business going forward. Principally, during the
second quarter, the Company introduced a proprietary value added service called DARS (drug
abuse recognition system) that it believes will increase sales in the government market
place.


Product sales from
agricultural diagnostic products were flat due to level purchases from the U.S. Department
of Agriculture (USDA) for the Companys products. The USDAs needs for the
Companys products vary from year-to-year and sales to the USDA are expected to
fluctuate accordingly. Sales of contract manufacturing services, microbiological and
associated products increased 13% to $0.4 million and were positively impacted by the
timing of orders from existing clients.


Gross Profit


Consolidated gross
margin increased to 40.2% of revenues for the three months ended September 30, 2003,
compared to 39.2% of revenues for the same period in 2002, reflecting improvement in
Laboratory Services gross margin, partially offset by a decline in Product Sales gross
margin.


Laboratory Services
gross margin was 34.5% of revenues for the three months ended September 30, 2003, up from
32.7% of revenues for the same period in 2002. The margin improvement was a result of
labor savings due to staffing reductions, partially offset by a decline in the average
price per testing specimen. Gross margin from Product Sales declined to 59.0% of revenues
for the three months ended September 30, 2003, from 61.6% of revenues in the comparable
period of 2002. The lower gross margin was impacted by unabsorbed overhead resulting from
lower than anticipated production activity.


Selling, General and
Administrative Expenses


Selling, general and
administrative expenses were $4.2 million, or 30.6% of revenues in the third quarter of
2003, compared to $4.1 million or 30.4% of revenues in the third quarter of 2002. During
the first and second quarters of 2003, selling, general and administrative expenses were
34.2% and 33.9% of sales, respectively. The improvement during the third quarter of 2003
reflects savings from steps taken during the second quarter to reduce expenses, including
staffing reductions. In the third quarter of 2003, the Company also initiated three
significant LEAN projects with the objective of further reducing expenses in the
Laboratory Services segment.


Research and Development
Expense


Research and
development expenses were $0.4 million, or 3.0% of revenues in the third quarter of 2003,
compared to $0.3 million, or 2.4% of revenues in the third quarter of 2002. The increase
was primarily due to increased development activity associated with new product
configurations and assays and other new product research in the Product Sales segment,
which is expected to continue through the remainder of 2003.


17
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|Other Income and Expense


Other income and
expense consists primarily of interest expense and the net expenses associated with the
Companys building rental activities. These expenses increased 17% to $0.4 million in
the third quarter of 2003. The increase was primarily due to reduced rental income as a
result of higher vacancy rates. While the Company is actively seeking additional tenants
for the building, there can be no assurance it will be able to lower overall vacancy rates
during the remainder of 2003. This increase was partially offset by a reduction in
interest expense due to lower interest rates.


Income Before Income
Taxes


During the three
months ended September 30, 2003, the Company recorded pre-tax income of $0.5 million,
consistent with the prior year period.


Laboratory Services
income of $0.2 million for the three months ended September 30, 2003 was flat with the
prior year period. Although gross margin increased, this improvement was offset by a
slight reduction in revenues and higher net expenses associated with the Companys
building rental activities.


Product Sales income
of $0.3 million for the three months ended September 30, 2003 was also consistent with the
prior year period. The increase in revenues was offset by a decrease in gross margin and
higher research and development expenses.


Income Taxes


In the third quarter
of 2002, the Company recorded a $10.8 million income tax benefit and reduced its valuation
allowance on deferred tax assets.  The reduction in the valuation allowance at that
time was based on the available evidence, including the Companys historical
performance, tax planning strategies, and projected future results.  The valuation
allowance at December 31, 2002 of $1.4 million represented the portion of the net
operating loss (NOL) carryforwards that were expected to expire unused in 2003 and future
years.  The Company recorded a provision for income taxes for the three months ended
September 30, 2003 that reflects the anticipated effective rate for the full year. Should
operating results for the remainder of 2003 and possibly 2004 fail to meet expectations,
the valuation allowance against the Companys NOL carryforwards and the related
deferred tax asset may require adjustment in future periods.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002


Revenues decreased 2%
to $39.2 million for the nine months ended September 30, 2003, reflecting a $0.4 million
decline in Laboratory Services revenue and a $0.3 million decrease in Product Sales
revenues.


Laboratory Services
revenues were impacted by a decline in the average price per testing specimen for
workplace drugs of abuse testing. The lower pricing is part of the Companys strategy
to attract new business to offset the impact of the reduced specimen volume experienced in
the first half of 2003. For the nine months ended September 30, 2003, specimen volume from
the Companys occupational health and corporate clients was up 2% from the prior year
period, reflecting the Companys continued success in acquiring new client
relationships and gaining market share, despite the continued softness in new business
employment. Revenues from the Companys Specialty Laboratory Services increased 6%
for the nine months ended September 30, 2003.


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

|In the Product Sales
segment, sales of substance abuse testing products, which incorporates 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, declined 5% to
$7.8 million in the first nine months of 2003. The decline is primarily attributable to
lower sales within the VERDICT®-II product line to government clients for probation,
parole and rehabilitation. The economic uncertainty and budget constraints that the
Companys government clients are experiencing resulted in lower purchasing levels
among these clients. The Company anticipates that the government sector will continue to
be a challenging environment, and will continue to pursue new sales efforts that the
Company believes will improve this portion of its business going forward. Principally,
during the second quarter, the Company introduced a proprietary value added service called
DARS (drug abuse recognition system) that it believes will increase sales in the
government market place. Sales of
PROFILE®-II devices to existing workplace and occupational clients were also down from
last year and continue to be impacted by the reduction in nationwide hiring; additionally,
some customers are alternatively purchasing the PROFILE®-II A device, which screens
for the same five drugs of abuse, but also includes a patented lateral flow test strip to
screen for the five most common adulterants. Sales of the PROFILE®-II A have increased
82% over the same period last year.


Product sales from
agricultural diagnostic products increased 16% to $0.3 million primarily as a result of
increased purchases from the U.S. Department of Agriculture (USDA) for the Companys
products. Sales of contract manufacturing services, microbiological and associated
products increased 8% to $1.1 million and were positively impacted by the timing of orders
from existing clients in the second and third quarters of 2003.


Gross Profit


Consolidated gross
margin declined to 38.9% of revenues for the nine months ended September 30, 2003,
compared to 40.5% of revenues for the same period in 2002, reflecting declines in both
Laboratory Services and Product Sales gross margin.


Laboratory Services
gross margin was 33.3% of revenues for the nine months ended September 30, 2003, down from
33.7% of revenues for the same period in 2002. The margin shortfall was primarily
attributable to the impact of the high fixed costs nature of workplace drugs of abuse
testing combined with a decline in the average price per testing specimen. This impact was
partially offset by labor savings associated with staffing reductions. Gross margin from
Product Sales declined to 57.3% of revenues for the nine months ended September 30, 2003,
from 62.6% of revenues in the comparable period of 2002. The lower gross margin was
primarily the result of the impact of fixed type costs on lower production levels
associated with the decline in sales, as well as increased spending in quality control.


Selling, General and
Administrative Expenses


Selling, general and
administrative expenses were $12.9 million, or 32.9% of revenues in the first nine months
of 2003, compared to $12.2 million or 30.4% of revenues in the same period of 2002. The
increase was primarily due to severance costs associated with staffing reductions made in
the second quarter, increased bad debt expense and higher business insurance expenses.


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

|Research and Development
Expense


Research and
development expenses were $1.2 million, or 3.1% of revenues in the first nine months of 2003,
compared to $0.9 million, or 2.3% of revenues in the same period of 2002. The increase was
primarily due to increased development activity associated with new product configurations
and assays and other new product research in the Product Sales segment, which is expected
to continue through the remainder of 2003.


Other Income and Expense


Other income and
expense consists primarily of interest expense and the net expenses associated with the
Companys building rental activities. These expenses increased 14% to $1.2 million in
the first nine months of 2003. The increase was primarily due to reduced rental income as
a result of higher vacancy rates. While the Company is actively seeking additional tenants
for the building, there can be no assurance it will be able to lower overall vacancy rates
during the remainder of 2003. This increase was partially offset by a reduction in
interest expense due to lower interest rates.


Income (Loss) Before
Income Taxes


During the nine
months ended September 30, 2003, the Company recorded a loss before income tax benefit of
$0.1 million, compared to pre-tax income of $2.0 million in the same period of 2002. The
change in performance was caused primarily by lower revenues and gross margin, as well as
higher operating expenses in both the Laboratory Services and Product Sales segments.


Laboratory Services
loss before income tax benefit was $0.5 million for the nine months ended September 30,
2003 compared to pre-tax income of $0.5 million in the same period of 2002. The decline
was primarily attributable to a decrease in revenues, lower gross margin, increased
selling, general and administrative expenses, as well as higher net expenses associated
with the Companys building rental activities.


Product Sales pre-tax
income was $0.4 million for the nine months ended September 30, 2003, compared to $1.5
million for the same period of 2002. This shortfall was primarily caused by a reduction in
revenues and gross margin and increased operating expenses.


Income Taxes


In the third quarter
of 2002, the Company recorded a $10.8 million income tax benefit and reduced its valuation
allowance on deferred tax assets.  The reduction in the valuation allowance at that
time was based on the available evidence, including the Companys historical
performance, tax planning strategies, and projected future results.  The valuation
allowance at December 31, 2002 of $1.4 million represented the portion of the net
operating loss (NOL) carryforwards that were expected to expire unused in 2003 and future
years.  The Company recorded a tax benefit for the nine months ended September
30, 2003 that reflects the anticipated effective tax rate for the full year. Should
operating results for the remainder of 2003 and possibly 2004 fail to meet expectations,
the valuation allowance against the Companys NOL carryforwards and the related
deferred tax asset may require adjustment in future periods.


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

|Liquidity and Capital
Resources


The working capital
requirements of the Company have been funded primarily by cash received from bank
financing.


Net cash provided by
operating activities was $1.9 million for the nine months ended September 30, 2003
compared to $2.5 million in the same period of 2002. The decrease was primarily due to
lower income before income tax benefit as well as a reduction in accounts payable and
accrued expenses, partially offset by a reduction in accounts receivable and inventory.


Accounts payable and
accrued expenses decreased $2.0 million during the first nine months of 2003 compared to
an increase of $0.2 million for the same period of 2002. The significant reduction in the
current year period was primarily the result of the more timely payment of outstanding
invoices.


Accounts receivable
increased $0.3 million during the first nine months of 2003 compared to an increase of
$2.4 million for the same period of 2002. The significant increase in accounts receivable
in the prior year period was primarily the result of an increase in receivables due from
third-party payors such as insurance companies and Medicaid state agencies. Payment cycles
from such payors can be lengthy, and in certain cases, were adversely affected in 2002 by
incomplete or incorrect billing information provided to the Company by its customers. In
2003, the Company has been able to shorten the payment cycle for such payors through a
better understanding of the insurance claim filing requirements and by converting manual
billings to an electronic format for certain Medicaid state agencies.


Net cash used in
investing activities, consisting of capital expenditures, was $2.1 million for the nine
months ended September 30, 2003 compared to $3.2 million in the same period of 2002. The
increased spending for equipment and capital improvement expenditures in the 2002 period
reflected equipment purchases to improve efficiencies and reduce operating costs.


Net cash provided by
financing activities was $0.4 million for the nine months ended September 30, 2003
compared to $1.5 million in the same period of 2002. The decrease was primarily the result
of a reduction in the use of the revolving credit facility in 2003. During the nine months
ended September 30, 2003, the Company also received proceeds from long-term debt of $1.6
million to finance capital equipment purchases, offset by payments on long-term debt of
$2.0 million.


The Company has a
Credit Security Agreement (the Wells Fargo Credit Agreement) with Wells Fargo Business
Credit, Inc. (the Bank). The Wells Fargo Credit Agreement, as amended, consists of (i) a
term loan of $3.185 million bearing interest at prime + 1.25% and (ii) a revolving line of
credit, payable on demand, of not more than $8.0 million or 85% of the Companys
eligible trade accounts receivable bearing interest at prime + 1%; and (iii) a capex note
of up to $3.5 million for the purchase of capital equipment bearing interest at prime +
1.25%. 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. During the
third quarter an amendment to the capex note was required in order to allow further
borrowing. The amendment was not completed in the quarter and no funding from the note was
available in the quarter. The Company and the Bank are in the process of amending the note
to allow future borrowing for the purchase of capital equipment.


21
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|The Wells Fargo
Credit Agreement requires the Company to comply with certain covenants and maintain
certain quarterly financial ratios as to minimum debt service coverage and maximum debt to
book net worth, which are established annually. It also sets minimum quarterly net income
and book net worth levels, which restrict the payment of dividends. As of September 30,
2003 the Company was in compliance with the financial covenants of Wells Fargo Credit
Agreement.


In the first nine
months of 2003, the Company entered into a Credit and Security Agreement with Wells Fargo
Equipment Finance, Inc. for the acquisition of various pieces of equipment. In connection
with the agreement, the Company signed notes payable for $2.0 million, payable in monthly
installments over 3.5 years. Interest is payable at a variable rate of 1.25% over prime.
The note is secured by the equipment purchased with the proceeds of the loan.


The Company is
relying on expected positive cash flow from operations and its line of credit to fund its
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, and to a lesser degree, the inventory of the Company. As of
September, 2003, the Company had total borrowing capacity of $6.2 million on its line of
credit, of which $5.1 million was borrowed, leaving a net availability of $1.1 million and
a cash balance of $0.6 million.


In the short term,
the Company believes that the aforementioned capital will be sufficient to fund the
Companys planned operations through 2003. While there can be no assurance that the
available capital will be sufficient to fund the future operations of the Company beyond
2003, the Company believes that future profitable operations, as well as access to
additional capital through debt or equity financings, will be the primary means for
funding the operations of the Company for the long term.


The Company continues
to follow a plan which includes (i) aggressively monitoring and controlling costs, (ii)
increasing revenue from sales of the Companys existing products and services (iii)
developing new products and services, as well as (iv) continuing to selectively pursue
synergistic acquisitions to increase the Companys 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 the Company will be profitable.


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.


22
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|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 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.


Impact of New Accounting
Standards


In January 2003, the
FASB issued Interpretation No. 46, Consolidation of Variable Interest
Entities.  FIN 46 addresses consolidation by business enterprises of variable
interest entities and significantly changes the consolidation application of consolidation
policies to variable interest entities and, thus improves comparability between
enterprises engaged in similar activities when those activities are conducted through
variable interest entities.  FIN 46 is effective for variable interest entities
created after January 31, 2003 and to any variable interest entities in which an
enterprise obtains an interest after that date. The Company does not hold an interest in
any variable interest entities.


In April 2003, the
FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. SFAS No. 149 amends and clarifies certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 was effective for certain contracts entered into or
modified by the Company after June 30, 2003. The Company adopted SFAS No. 149
effective July 1, 2003 with no material impact on its results of operations or
financial position.


In May 2003, the FASB
issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes
standards on the classification and measurement of certain financial instruments with
characteristics of both liabilities and equity.  SFAS No. 150 was effective
immediately for all financial instruments entered into or modified after May 31,
2003. For all other instruments, SFAS No. 150 was effective at the beginning of the
third quarter of 2003. The Company adopted SFAS No. 150 effective July 1, 2003
with no material impact on its results of operations or financial position.


23
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|Item 3:     QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT
                 MARKET RISK.


There have been no
material changes in our market risk during the quarter ended September 30, 2003. For
additional information refer to Item 7A of our 2002 Annual Report on Form 10-K.




Item 4.     CONTROLS AND
PROCEDURES.


Evaluation of Disclosure
Controls Procedures.


As of the end of the
period covered by this report, the Company conducted an evaluation under the supervision
and with the participation of the companys management, including the Companys
Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the
design and operation of the Companys disclosure controls and procedures pursuant to
Rules 13a-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 the Companys disclosure controls and procedures are effective to
ensure that information that is required to be disclosed by the Company in reports that it
files under the Exchange Act is recorded, processed, summarized and reported within the
time period specified in the rules of the Securities Exchange Commission.


Changes in Internal
Controls.


There were no changes
in the Companys 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, the Companys internal control over financial reporting.


24
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|        |                                                                                                                                                               
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|PART II | OTHER INFORMATION                                                                                                                                             
|        |                                                                                                                                                               
|ITEM 1  | LEGAL PROCEEDINGS.   Inapplicable                                                                                                                             
|        |                                                                                                                                                               
|ITEM 2  | CHANGES IN SECURITIES.   Inapplicable                                                                                                                         
|        |                                                                                                                                                               
|ITEM 3  | DEFAULTS UPON SENIOR SECURITIES.   Inapplicable                                                                                                               
|        |                                                                                                                                                               
|ITEM 4  | SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.   Inapplicable                                                                                         
|        |                                                                                                                                                               
|ITEM 5  | OTHER INFORMATION.   Inapplicable                                                                                                                             
|        |                                                                                                                                                               
|ITEM 6  | EXHIBITS AND REPORTS ON FORM 8-K.                                                                                                                             
|        |                                                                                                                                                               
|        | a.  Exhibits: See Exhibit Index following signature page                                                                                                      
|        |                                                                                                                                                               
|        | b.  Reports on Form 8-K:                                                                                                                                      
|        |                                                                                                                                                               
|        | On July 3, 2003, the Company filed a Form 8-K announcing the acquisition of forensic drug testing accounts from Cox Toxicology                                
|        |                                                                                                                                                               
|        | On August 4, 2003, the Company filed a Form 8-K announcing and furnishing results for the second quarter ended June 30, 2003                                  
|        |                                                                                                                                                               
|        | On August 5, 2003, the Company filed a Form 8-K stating it held its quarterly conference call and announced results for the second quarter ended June 30, 2003

|25
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|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    | November 14, 2003
|Richard J. Braun     | Chairman of the Board of Directors        
|                     | (Principal Executive Officer)             
|                    
|/s/ Kevin J. Wiersma | Vice President and Chief Financial Officer | November 14, 2003
|Kevin J. Wiersma     | (Principal Financial Officer)             

|26
|--

|EXHIBIT INDEX


MEDTOX SCIENTIFIC, INC.


FORM 10-Q FOR QUARTER
ENDED SEPTEMBER 30, 2003
|----------------------------------------------------------------------------------------

|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.

|27
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