|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, 2005


OR


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


For the transition period  to


Commission file number
1-11394


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

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

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

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

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


Yes X  No


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


Yes  No X


Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes  No X


The number of shares
of Common Stock, $0.15 par value per share, outstanding as of October 25, 2005, was 8,141,245.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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, 2005 and 2004                             | 3   
|                                                                    
|Consolidated Balance Sheets - September 30, 2005                    
|and December 31, 2004                                                | 4   
|                                                                    
|Consolidated Statements of Cash Flows - Nine                        
|Months Ended September 30, 2005 and 2004                             | 5   
|                                                                    
|Notes to Consolidated Financial Statements                           | 6   
|                                                                    
|Item 2:                                                             
|                                                                    
|Management's Discussion and Analysis of                             
|Financial Condition and Results of Operations                        | 12  
|                                                                    
|Item 3:                                                             
|                                                                    
|Quantitative and Qualitative Disclosures                            
|About Market Risk                                                    | 27  
|                                                                    
|Item 4:                                                             
|                                                                    
|Controls and Procedures                                              | 27  
|                                                                    
|Part II       Other Information                                      | 28  
|                                                                    
|Item 1:  Legal Proceedings                                           | 28  
|Item 2:  Unregistered Sales of Equity Securities and Use of
Proceeds | 28  
|Item 3:  Defaults Upon Senior Securities                             | 28  
|Item 4:  Submission of Matters to a Vote of Securities Holders       | 28  
|Item 5:  Other Information                                           | 28  
|Item 6:  Exhibits                                                    | 28  
|                                                                    
|Signatures                                                           | 29  
|Exhibit Index                                                        | 30  

|2
|-

|PART I       FINANCIAL
INFORMATION


Item 1:        FINANCIAL
STATEMENTS (UNAUDITED)


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

|                                               | Three Months Ended
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                               |                                  |                                
|Other expense, net                             |                                  |                                
|                                               |                                  |                                
|                                               |                                  |                                
|                                               |                                  |                                
|INCOME BEFORE INCOME TAX EXPENSE               |                                  |                                
|                                               |                                  |                                
|INCOME TAX EXPENSE                             |                                  |                                
|                                               |                                  |                                
|NET INCOME                                     |                                  |                                
|                                               |                                  |                                
|BASIC EARNINGS PER COMMON SHARE                |                                  |                                
|                                               |                                  |                                
|DILUTED EARNINGS 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,
2005 | December 31,
2004
|------------------------------------------------------------------------------ | ------------------ | -----------------
|ASSETS                                                                         |                    |                  
|CURRENT ASSETS:                                                                |                    |                  
|Cash and cash equivalents                                                      |                    |                  
|Accounts receivable:                                                           |                    |                  
|Trade, less allowance for doubtful accounts ($563 in 2005 and $734 in 2004)    |                    |                  
|Other                                                                          |                    |                  
|                                                                               |                    |                  
|Total accounts receivable                                                      |                    |                  
|Inventories                                                                    |                    |                  
|Prepaid expenses and other                                                     |                    |                  
|Deferred income taxes                                                          |                    |                  
|                                                                               |                    |                  
|Total current assets                                                           |                    |                  
|BUILDING, EQUIPMENT AND IMPROVEMENTS, net                                      |                    |                  
|GOODWILL                                                                       |                    |                  
|OTHER INTANGIBLE ASSETS, net                                                   |                    |                  
|DEFERRED INCOME TAXES, net                                                     |                    |                  
|OTHER ASSETS                                                                   |                    |                  
|                                                                               |                    |                  
|TOTAL ASSETS                                                                   |                    |                  
|                                                                               |                    |                  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                           |                    |                  
|CURRENT LIABILITIES:                                                           |                    |                  
|Line of credit                                                                 |                    |                  
|Accounts payable                                                               |                    |                  
|Accrued expenses                                                               |                    |                  
|Current portion of long-term debt                                              |                    |                  
|Current portion of capital leases                                              |                    |                  
|                                                                               |                    |                  
|Total current liabilities                                                      |                    |                  
|LONG-TERM DEBT, net of current portion                                         |                    |                  
|OTHER LONG-TERM LIABILITIES                                                    |                    |                  
|LONG-TERM PORTION OF CAPITAL LEASES, net of current portion                    |                    |                  
|COMMITMENTS AND CONTINGENCIES                                                  |                    |                  
|STOCKHOLDERS' EQUITY:                                                          |                    |                  
|Preferred stock, $1.00 par value per share; authorized shares, 50,000; none    |                    |                  
|issued and outstanding                                                         |                    |                  
|Common stock, $0.15 par value per share; authorized shares, 28,000,000; issued |                    |                  
|and outstanding shares, 8,147,745 in 2005 and 7,534,842 in 2004                |                    |                  
|Additional paid-in capital                                                     |                    |                  
|Deferred stock-based compensation                                              |                    |                  
|Accumulated deficit                                                            |                    |                  
|Common stock held in trust                                                     |                    |                  
|Treasury stock                                                                 |                    |                  
|                                                                               |                    |                  
|Total stockholders' equity                                                     |                    |                  
|                                                                               |                    |                  
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                     |                    |                  
|                                                                               |                    |                  

|See Notes to Consolidated
Financial Statements (Unaudited).


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

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

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

|See Notes to Consolidated
Financial Statements (Unaudited).


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

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


     1.    
          BASIS OF PRESENTATION


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


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


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

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

|6
|-

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


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


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


2.    SEGMENTS


The Company has two
reportable segments: Laboratory Services and Product Sales. The Laboratory Services
segment consists of MEDTOX Laboratories, Inc. and New Brighton Business Center, LLC.
Services provided include forensic toxicology (primarily workplace drugs-of-abuse testing)
and Specialty Laboratory Services, which include clinical toxicology, clinical testing for
the pharmaceutical industry, pediatric lead testing, heavy metals analyses and courier
delivery, and medical surveillance. The Product Sales segment consists of MEDTOX
Diagnostics, Inc., which includes point-of-collection testing (POCT) disposable
diagnostics devices. Products manufactured include easy to use, inexpensive, on-site drug
tests such as PROFILE®-II, PROFILE®-II A, PROFILE-II
ER®, VERDICT®-II, and SURE-SCREEN®, in addition to a
variety of agricultural testing products. MEDTOX Diagnostics, Inc. also provides contract
manufacturing services in its Food and Drug Administration (FDA) registered/ISO 13845
certified facility.


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


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

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

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

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

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

|8
|-

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

|(In thousands)                  | Three Months Ended
September 30, | Nine Months Ended
September 30,
|------------------------------- | -------------------------------- | -------------------------------
|                                | 2005                             | 2004                           
|POCT products                   |                                  |                                
|Contract manufacturing services |                                  |                                
|Other diagnostic products       |                                  |                                
|                                |                                  |                                
|                                |                                  |                                
|                                |                                  |                                

|3.    INVENTORIES


Inventories consisted
of the following:
|-----------------------------------------------------------

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

|4.    
          EARNINGS PER SHARE


The following table
sets forth the computation of basic and diluted earnings per common share:
|------------------------------------------------------------------------------------------------------------------------------------

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

|Options and warrants
to purchase 8,589, 8,589, 8,682 and 1,338,243 shares of common stock were outstanding
during the three and nine months ended September 30, 2005 and 2004, respectively, but were
not included in the computation of diluted earnings per share as their exercise prices
were greater than the average market price of the common shares.


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

|5.    
          INCOME TAXES


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


     6.    
          STOCKHOLDERS EQUITY


Conversion of
Warrants  In connection with the Companys private placements in July and
August 2000, the Company issued warrants, exercisable for an aggregate of 1,120,439 shares
of its common stock for a five-year period from the time of issuance at an exercise price
of $6.75. The Company issued a total of 604,589 shares of its common stock in 2005, upon
exercise of such warrants, resulting in proceeds of approximately $4.1 million. The
remaining shares underlying the exercised warrants were issued in December 2004. Warrants
exercisable for an aggregate of 511,219 shares expired in July or August 2005 without
being exercised.


Deferred
Compensation Plan In December 2004, the Company adopted the Long-Term Incentive
Plan (LTIP) to provide performance based compensation to selected executives. Under the
LTIP, an executive becomes eligible for an annual long-term incentive contribution amount
based upon performance objectives established by the Compensation Committee of the Board
of Directors. Annual contribution amounts are subject to a three-year restriction period
with a risk of forfeiture if a participant terminates service prior to becoming vested.
Participants may elect to allocate LTIP awards in investment options authorized by the
Committee, including shares of the Companys stock.


The Compensation
Committee determined the total 2005 contribution amount to be $688,000 allocated among all
participants. All LTIP participants elected to allocate their 2005 contribution amounts to
Company stock, and accordingly, the future payment of benefits will be settled by delivery
of a fixed number of shares of stock. To fund the 2005 contribution amount, the Company
purchased $688,000 or 94,874 shares of its own stock from June through September 2005,
which was contributed to a grantor trust. Of the total stock purchased, 59,000 shares were
purchased in the open market and 35,874 shares were purchased from an officer of the
Company (at the closing market price on the American Stock Exchange on August 4, 2005).
The acquired stock was recorded as unearned compensation in the equity section of the
consolidated balance sheet. In accordance with EITF 97-14, Accounting for
Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and
Invested, the deferred compensation in the form of the Companys stock was
recorded at historical cost and classified as Common Stock Held in Trust. The Company will
record compensation expense on a straight-line basis over the three-year vesting period
(April 1, 2005 through March 31, 2008 for the 2005 contribution amount per the LTIP
agreement), which is recorded as a deferred compensation obligation in the Other Long-Term
Liability section of the balance sheet. The Company recorded approximately $57,000 and
$115,000 of compensation expense during the three and nine months ended September 30,
2005, respectively, in conjunction with the LTIP.


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

|7.    
          CONTINGENCIES


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


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


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

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


This Form 10-Q
contains certain forward looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are
intended to be covered by the safe harbors created by such acts. For this purpose, any
statements that are not statements of historical fact may be deemed to be forward looking
statements, including the statements under Managements Discussion and Analysis
of Financial Condition and Results of Operations regarding our strategy, future
operations, future expectations and future estimates, future financial position or results
and future plans and objectives of management. Those statements in this Form 10-Q
containing the words believes, anticipates, plans,
expects and similar expressions constitute forward looking statements,
although not all forward looking statements contain such identifying words.


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


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

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

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

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

| | o | technological,
evolving industry standards, or regulatory developments that could affect or delay the
sale of our products
| | - | --------------------------------------------------------------------------------------------------------------------------

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

|12
|--

| |  | 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 sustain or expand our operations
| | - | --------------------------------------------------------------------------------------------

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

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

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

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

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

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


Executive Overview


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


Laboratory Services


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


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


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


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

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


Product Sales


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


Key Trends Influencing
Our Operating Results


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


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


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


Increased POCT
Diagnostic Device Test Competition


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


Our Strategy


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


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

|Our strategy is to
build market share by offering the highest quality products and services, delivered
rapidly, priced competitively and supported by value-added services for customers. These
services include data management, collection site management, training, technical support
and expertise, as well as policy review. In the data management area, we have a new
service in developmente-Chain®, the first multi-purpose electronic
chain-of-custody system in the market. Also in development is MEDTOXScan, an
electronic reader for our devices for use in hospital laboratories and emergency rooms.
Recently, we introduced SURE-SCREEN®, a cup-based POCT device with
significantly lower detection levels for eight drugs-of-abuse, into the forensic markets
where FDA 510(k) marketing clearance is not required. On October 25, 2005, we received FDA
510(k) clearance for our  SURE-SCREEN® device and will now be able to expand the
markets into which it is sold.  Specific markets to which SURE-SCREEN® will be targeted are,
probation,  parole, drug rehabilitation,  hospital  emergency  departments,  physician  office
clinics,  laboratories,  and corporate  clients interested in lower detection levels for
pre-employment testing. In the fourth quarter, we will also
be introducing an integrated cup and testing device for sale to the workplace drug testing
market. This new device will be in the same format as SURE-SCREEN®, with
the higher detection levels typically used in the workplace drugs-of-abuse market.


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


Critical Accounting
Policies


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


Our critical
accounting policies are as follows:


Accounts Receivable:
We perform ongoing
credit evaluations of our customers and adjust credit limits based upon payment history
and the customers current credit worthiness, as determined by managements
review of their current credit information. We continuously monitor collections and
payments from our customers and maintain a provision for estimated credit losses based
upon our historical experience and any specific customer collection issues that have been
identified. While such credit losses have generally been within our historical
expectations and the provisions established, we cannot guarantee that we will continue to
experience the same credit loss rates that have occurred in the past. Our consolidated
trade accounts receivable balance as of September 30, 2005 was $10.8 million, net of
allowance for doubtful accounts of $0.6 million.


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

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


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


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


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


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

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


Results of Operations


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


To maximize our
operating income, we have sought revenue growth, improved gross margins and reduced
selling, general and administrative (SG&A) expense as a percentage of revenues. As
discussed below, during the third quarter of 2005 we were able to achieve solid revenue
growth and improved gross margins. During the first nine months of this year, we have made
positive strides on all three fronts.


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


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

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

|Total revenues
increased by 14% for the three months ended September 30, 2005 compared to the
corresponding period of the prior year. Our Laboratory Services revenues were $12.7
million, approximately 77% of total revenues in the quarter (a slight increase compared to
the third quarter of 2004).


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

|In the Laboratory
Services segment, revenues from workplace drugs-of-abuse testing increased 14% in the
third quarter of 2005 compared to the corresponding period of the prior year due to an
increase in sample volume, partially offset by a decrease in the average price per testing
specimen. Pricing for our workplace drugs-of-abuse testing services tends to be stable
overall; however, the average price per testing specimen can vary slightly from quarter to
quarter depending on client mix. Test price can vary by client based on the amount of
confirmation testing and transportation charges associated with the clients
workplace drugs-of-abuse samples. Our increased sample volume during the quarter was from
both new and existing customers across a broad customer base and resulted from the
execution of our business strategy.


Revenues from our
Specialty Laboratory Services increased 20% to $4.5 million in the third quarter due to
strong growth in testing for our clinical trial services.Overall, our clinical
trial services have grown steadily from quarter to quarter during 2005. However, revenues
from these services can fluctuate from quarter to quarter depending on the actual timing
of clinical trials as shown in the table below:


Revenues from Specialty
Laboratory Services:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|          | First
Quarter | Second
Quarter | Third
Quarter | Fourth
Quarter
|--------- | ------------- | -------------- | ------------- | --------------
|Revenues: |               |                |               |               
|          |               |               
|2005      |               |                | $             | 3,775         
|          |               |               
|2004      |               |                |               | 3,737         

|In the Product Sales
segment, sales of POCT products, which consists of the PROFILE®-II,
PROFILE-II ER®, PROFILE®-II A, VERDICT®-II
and SURE-SCREEN®on-site test kits and other ancillary products for the
detection of abused substances, increased 12% to $3.2 million in the third quarter of
2005. This growth reflected strong sales of PROFILE®-II products, which
grew 14% from the prior year period. Sales within the VERDICT®-II product
line to government clients for probation, parole and rehabilitation were flat with the
prior year period. During the quarter, we also continued the introduction of our new lower
detection POCT device (SURE-SCREEN®) into the forensic market.


Sales of contract
manufacturing services, microbiological and associated products decreased 17% to $0.5
million in the quarter and were impacted by the timing of the placement of orders from our
two existing clients for these services. Product sales from agricultural diagnostic
products were up $21,000, or 96%, due to increased purchases by the U.S. Department of
Agriculture (USDA). The USDAs need for our products varies from year-to-year and
sales to the USDA are expected to fluctuate accordingly.


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

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

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

|Consolidated gross
margin increased to 44.0% of revenues for the third quarter of 2005, compared to 41.7% of
revenues for the same period in 2004. The increase was driven by improvement in both
Laboratory Services and Product Sales gross margins.


Laboratory Services
gross margin was 38.9% for third quarter of 2005, up from 35.7% for the same period in
2004. The margin improvement was attributable to increased revenues from additional
testing volume through the current infrastructure. We also continued the implementation of
LEAN initiatives within our Specialty Laboratory Services.


Gross margin from
Product Sales improved slightly to 61.0% for the third quarter of 2005, from 60.3% in the
comparable period of 2004. Our margin benefited from increased volume and from the
elimination of costs incurred earlier in the year associated with the transition to a new
and improved product format for our PROFILE®-II product line. We also
continued the implementation of LEAN initiatives in our manufacturing processes of our
diagnostics operation.


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

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

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


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

|Selling,
General and Administrative Expenses. Selling, general and administrative
expenses increased to $5.0 million in the third quarter of 2005 compared to $4.4 million
in the third quarter of 2004, but remained constant at 30.4% of revenues. The increase in
spending reflects the continued increased investment in sales and marketing and
information technology, as well as higher bad debt expense. Our increased sales and
marketing expense was primarily associated with higher performance-based compensation
related to the increase in revenues. Bad debt expense, although up slightly in the third
quarter, is anticipated to continue to run at our historical level of around 1% of
revenues for the year.


Research
and Development Expenses. Research and development expenses increased $0.2
million, or 56%, to $0.6 million in the third quarter of 2005 primarily due to continued
spending for significant development projects in our Product Sales segment. During the
quarter, we continued to make substantial progress on development of an electronic reader
(MEDTOXScan) with production units scheduled to be available late in the first
quarter of 2006. The MEDTOXScan is expected to be utilized with our devices in the
hospital laboratory and emergency room market.


Other Expense


Other income and
expense consists primarily of interest expense and the net expenses associated with our
building rental activities. Other expenses of $0.4 million in the third quarter of 2005
were comparable to the third quarter of last year. Interest expense was down due to lower
average debt levels, which was offset by reduced net operating results of New Brighton
Business Center, LLC.


Income Taxes


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


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

|Nine Months Ended
September 30, 2005 Compared to Nine Months Ended September 30, 2004


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

|                    | Nine Months Ended  | Period over Period 
|------------------- | ------------------ | -------------------
|                    | September 30,
2005 | % of Total
Revenues
|Revenues:           |                    |                    
|                    |                    |                    
|Laboratory Services |                    |                    
|                    |                    |                    
|Product Sales       |                    |                    
|                    |                    |                    
|Total Revenues      |                    |                    
|                    |                    |                    

|Total revenues
increased 11% to $48.0 million for the nine months ended September 30, 2005 compared to
the corresponding period of the prior year.


In the Laboratory
Services segment, revenues from workplace drugs-of-abuse testing increased 15% in the
first nine months of 2005 compared to the corresponding period of the prior year due to
increased sample volume and stable pricing for our testing services. The increased sample
volume was from both new and existing customers across a broad customer base and resulted
from the execution of our business strategy. Client and prospect interest in our
development of our eChain® system for enhanced electronic results reporting
and sample and donor tracking remains strong and significant progress on the development
of eChain®was made during the year. In addition, during the first quarter
of 2005, we entered into contracts for collection and testing services with two of the
largest national third-party administrators. Revenues from our Specialty Laboratory
Services increased 7% with an increase in sample volume from clinical trial services
partially offset by reduced sample volume from therapeutic drug monitoring as hospitals
and other laboratories brought certain types of this testing in-house last year. The
decline in therapeutic drug monitoring samples has resulted in a lower average price for
our Specialty Laboratory Services year over year. Pricing for our Specialty Laboratory
Services has stabilized during the current year from quarter to quarter.


In the Product Sales
segment, sales of POCT products, which consists of the PROFILE®-II,
PROFILE-II ER®, PROFILE®-II A, VERDICT®-II,
and SURE-SCREEN®on-site test kits and other ancillary products for the
detection of abused substances, increased 10% to $9.5 million during the first nine months
of 2005. This growth reflected strong sales of PROFILE®-II products, which
grew 14% from the prior year period. Sales within the VERDICT®-II product
line to government clients for probation, parole and rehabilitation were down 1% from the
prior year period. During the second quarter, we also began selling our new lower
detection POCT device (SURE-SCREEN®) into the forensic market.


Sales of contract
manufacturing services, microbiological and associated products decreased 1% to $1.6
million in the first nine months of 2005. Product sales from agricultural diagnostic
products were down $28,000, or 15%, due to decreased purchases by the U.S. Department of
Agriculture (USDA). The USDAs need for our products varies from year-to-year and
sales to the USDA are expected to fluctuate accordingly.


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

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

|                  | Nine Months Ended  | Period over Period
|----------------- | ------------------ | ------------------
|                  | September 30,
2005 | % 
of Revenues    
|Cost of Revenues: |                    |                   
|                  |                    |                   
|Cost of Services  |                    |                   
|                  |                    |                   
|Cost of Sales     |                    |                   
|                  |                    |                   
|Total Cost of     |                    |                   
|Revenues          |                    |                   
|                  |                    |                   

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


Laboratory Services
gross margin was 38.2% for the nine months ended September 30, 2005, up from 36.9% for the
same period in 2004. The margin improvement was attributable to increased revenues from
additional testing volume through the current infrastructure. We also continued the
implementation of LEAN initiatives within our Specialty Laboratory Services.


Gross margin from
Product Sales declined to 59.2% for the nine months ended September 30, 2005, from 60.7%
in the comparable period of 2004, largely due to the impact of costs associated with the
transition to a new and improved product format for our PROFILE®-II product
line during the first half of the year. The new product began shipping late in the first
quarter of 2005. We also continued the implementation of LEAN initiatives in our
manufacturing processes of our diagnostics operation.


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

|                     | Nine Months Ended  | Period over Period 
|-------------------- | ------------------ | -------------------
|                     | September 30,
2005 | % of Total
Revenues
|Operating Expenses:  |                    |                    
|                     |                    |                    
|Selling, general and |                    |                    
|Administrative       |                    |                    
|                     |                    |                    
|Research and         |                    |                    
|Development          |                    |                    
|                     |                    |                    
|Total Operating      |                    |                    
|Expenses             |                    |                    
|                     |                    |                    

|22
|--

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


Selling,
General and Administrative Expenses.Selling, general and administrative
expenses were $14.3 million, or 29.7% of revenues in the first nine months of 2005,
compared to $13.3 million, or 30.9% of revenues in same period of 2004. The lower
percentage reflects the increase in revenue on marginally higher year-over-year expenses.
The increase in spending reflects the continued increased investment in sales and
marketing and information technology, as well as higher bad debt expense. Our increased
sales and marketing expense was primarily associated with higher performance-based
compensation related to the increase in revenues. Although bad debt expense increased
slightly in the third quarter, it is anticipated to continue to run at our historical
level of around 1% of revenues for the entire year.


Research
and Development Expenses.Research and development expenses increased $0.6
million, or 50%, to $1.8 million in the first nine months of 2005 primarily due to
continued spending for significant development projects in our Product Sales segment.
During the year, we completed enhancements to PROFILE®-II,
PROFILE®-II A, and PROFILE-II ER® products that shorten run
times, darken line intensity, improve readability and extend the positive result hold
time; filed a 510(k) application with the FDA for SURE-SCREEN®, which is a POCT device
intended to provide significantly lower detection levels for eight commonly abused drugs,
initially targeted at the probation, parole and rehabilitation markets; and made
substantial progress on development of an electronic reader (MEDTOXScan) expected to
be utilized with our devices in the hospital laboratory and emergency room market.


Other Expense


Other income and
expense consists primarily of interest expense and the net expenses associated with our
building rental activities. These expenses decreased 11% to $1.0 million in the first nine
months of 2005. The decrease was primarily due to lower interest expense, reflecting a
reduction in average debt levels, partially offset by reduced net operating results from
our building rental activities.


Income Taxes


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


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

|Liquidity and Capital
Resources


Our working capital
requirements have been funded primarily by various combinations of profitable operations,
cash received from debt financing, and the sale of equity securities. Cash and cash
equivalents at September 30, 2005 were $0.7 million, compared to $0.3 million at December
31, 2004.


Net cash provided by
operating activities was $4.4 million for the nine months ended September 30, 2005
compared to $5.2 million for the same period of 2004. The decrease was primarily due to a
significant increase in accounts receivable from December 31, 2004 to September 30, 2005
due to strong August and September 2005 sales. Our days sales outstanding was at 60 days
for the third quarter of 2005 compared to 58 days in the third quarter of last year.


Net cash used in
investing activities, consisting primarily of capital expenditures, was $2.8 million for
the nine months ended September 30, 2005 compared to $3.6 million in the same period of
2004. The increased spending in 2004 reflects equipment purchased and costs incurred in
redesigning the laboratory operations to improve operating efficiencies.


Net cash used in
financing activities was $1.1 million for the nine months ended September 30, 2005,
compared to $1.8 million in the prior year period.


In 2005, we received
proceeds of approximately $4.1 million from the exercise of warrants to acquire 604,589
common shares issued in connection with our private placements in July and August 2000. Of
the 604,589 total shares issued in 2005, 590,700 were issued in the third quarter. The
warrants were exercisable for a five-year period from the time of issuance at an exercise
price of $6.75. In July or August 2005, warrants exercisable for an aggregate of 511,219
shares expired without being exercised. The proceeds received from the exercise of such
warrants were used to reduce the amount outstanding on our revolving credit facility
during the third quarter.


In 2005, we purchased
59,000 shares of our common stock in the open market and 35,874 shares of our common stock
from an officer of our Company for a total cost of $688,000. The acquired stock was
contributed to our Long-Term Incentive Plan.


We also made payments
on long-term debt of $1.2 million and $2.5 million during the nine months ended September
30, 2005 and 2004, respectively.


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


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


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

|We are relying on
expected positive cash flow from operations and our line of credit to fund our future
working capital and asset purchases. The amount available on the revolving line of credit
is based primarily on the receivables of the Company and, as such, varies with accounts
receivable. As of September 30, 2005, we had total borrowing capacity of $8.0 million on
our line of credit, of which $1.1 million was borrowed, leaving a net availability of $6.9
million.


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


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


Disclosures about
Contractual Obligations and Commercial Commitments


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

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

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


Off-Balance Sheet
Transactions


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


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

|Impact of Inflation and
Changing Prices


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


Seasonality


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


Impact of New Accounting
Standards


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


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


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


26
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|Item 3:  QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.


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




Item 4:  CONTROLS AND
PROCEDURES.


Evaluation of Disclosure
Controls Procedures


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


Changes in Internal
Controls


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


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

|PART II    OTHER INFORMATION


ITEM 1      LEGAL PROCEEDINGS.  Inapplicable


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


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

|Period               | Total Number
of Shares
Purchased (a) | Average
Price Paid
per Share | Total Number of
Shares Purchased as
part of Publicly
Announced Plans or
Programs | Maximum Number 
of Shares that May 
Yet Be Purchased 
Under the Plans 
or Programs
|-------------------- | ------------------------------------ | ---------------------------- | -------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------
|July 1-31, 2005      |                                      |                              |                                                                                  | 3,000                                                                             
|August 1-31, 2005    |                                      |                              |                                                                                  | 70,374                                                                            
|September 1-30, 2005 |                                      |                              |                                                                                  | 8,000                                                                             
|                     |                                      |                              |                                                                                  |                                                                                   
|Total                |                                      |                              |                                                                                  | 81,374                                                                            
|                     |                                      |                              |                                                                                  |                                                                                   

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


ITEM 3      DEFAULTS UPON SENIOR SECURITIES.  Inapplicable


ITEM 4      SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS.  Inapplicable




ITEM 5      OTHER INFORMATION.    Inapplicable


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


28
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 2, 2005
|Richard J. Braun     | Chairman of the Board of Directors        
|                     | (Principal Executive Officer)             
|                    
|/s/ Kevin J. Wiersma | Vice President and Chief Financial Officer | November 2, 2005
|Kevin J. Wiersma     | (Principal Financial Officer)             
|                    
|/s/ Angela M. Lacis  | Controller                                 | November 2, 2005
|Angela M. Lacis      | (Principal Accounting Officer)            

|29
|--

|EXHIBIT INDEX


MEDTOX SCIENTIFIC, INC.


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

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

|30
|--