10-Q

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

(Mark One)

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

For the quarterly period ended June 30, 2003

OR

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

For the transition period                           to                          

Commission file number 1-11394

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

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

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

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

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

Yes       X       No           

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

Yes            No       X     

The number of shares of Common Stock, $.15 par value, outstanding as of August 6, 2003, was 4,939,821.

MEDTOX SCIENTIFIC, INC.

INDEX

	Page
Part I        Financial Information:
Item 1: Financial Statements (Unaudited)
Consolidated Statements of Operations - Three and Six
Months Ended June 30, 2003 and 2002	3
Consolidated Balance Sheets - June 30, 2003
and December 31, 2002	4
Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2003 and 2002	5
Notes to Consolidated Financial Statements	6
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations	12
Item 3:
Quantitative and Qualitative Disclosure
About Market Risk	23
Item 4:
Evaluation of Disclosure Controls and Procedures	23
Part II       Other Information	25
Item 1: Legal Proceedings	25
Item 2: Changes in Securities	25
Item 3: Defaults on Senior Securities	25
Item 4: Submission of Matters to a vote of Securities Holders	25
Item 5: Other Information	25
Item 6: Exhibits and Reports on Form 8-K	25
Signatures	27
Exhibit Index	28

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PART I    FINANCIAL INFORMATION

Item 1: FINANCIAL STATEMENTS (UNAUDITED)

MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share amounts)
(Unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2003			June 30, 2002			June 30, 2003			June 30, 2002
REVENUES:
Laboratory services	$	10,085		$	10,540		$	19,619		$	19,877
Product sales		3,072			3,378			6,009			6,392
		13,157			13,918			25,628			26,269
COST OF REVENUES:
Cost of services		6,735			6,724			13,202			13,080
Cost of sales		1,357			1,272			2,621			2,361
		8,092			7,996			15,823			15,441
GROSS PROFIT		5,065			5,922			9,805			10,828
OPERATING EXPENSES:
Selling, general and administrative		4,460			4,237			8,721			8,015
Research and development		419			304			832			578
		4,879			4,541			9,553			8,593
INCOME FROM OPERATIONS		186			1,381			252			2,235
OTHER INCOME (EXPENSE):
Interest expense, net		(296	)		(340	)		(595	)		(693	)
Other expense, net		(140	)		(33	)		(234	)		(49	)
		(436	)		(373	)		(829	)		(742	)
INCOME (LOSS) BEFORE INCOME TAX BENEFIT		(250	)		1,008			(577	)		1,493
INCOME TAX BENEFIT		--			--			124			--
NET INCOME (LOSS)	$	(250	)	$	1,008		$	(453	)	$	1,493
BASIC EARNINGS (LOSS) PER COMMON SHARE	$	(0.05	)	$	0.21		$	(0.09	)	$	0.31
DILUTED EARNINGS (LOSS) PER COMMON SHARE	$	(0.05	)	$	0.20		$	(0.09	)	$	0.29
WEIGHTED AVERAGE NUMBER OF     SHARES OUTSTANDING:
Basic		4,926,708			4,792,279			4,920,317			4,788,576
Diluted		4,926,708			5,145,718			4,920,317			5,086,791

See Notes to Consolidated Financial Statements (Unaudited).

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

	June 30, 2003			December 31, 2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	841		$	439
Accounts receivable:
Trade, less allowance for doubtful accounts ($505 in 2003 and $1,125 in 2002)		9,022			9,155
Other		300			243
Total accounts receivable		9,322			9,398
Inventories		3,744			4,395
Deferred income taxes		964			849
Prepaid expenses and other		1,063			1,169
Total current assets		15,934			16,250
BUILDING, EQUIPMENT AND IMPROVEMENTS, net		15,308			14,769
GOODWILL		15,967			15,967
OTHER INTANGIBLE ASSETS, net		1,967			2,218
DEFERRED INCOME TAXES, net		8,373			8,488
OTHER ASSETS		217			363
TOTAL ASSETS	$	57,766		$	58,055
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit	$	4,739		$	4,345
Accounts payable		3,491			3,966
Accrued expenses		3,111			3,485
Current portion of long-term debt		2,434			2,285
Current portion of capital leases		68			83
Total current liabilities		13,843			14,164
LONG-TERM DEBT, net of current portion		9,052			8,822
LONG-TERM PORTION OF CAPITAL LEASES, net of current portion		151			185
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; authorized shares, 50,000; none issued and		--			--
outstanding
Common stock, $0.15 par value; authorized shares, 14,400,000; issued and
outstanding shares, 4,937,542 in 2003 and 4,814,001 in 2002		741			722
Additional paid-in capital		81,475			80,699
Deferred stock-based compensation		(1,003	)		(498	)
Accumulated deficit		(46,317	)		(45,863	)
Treasury stock		(176	)		(176	)
Total stockholders' equity		34,720			34,884
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	57,766		$	58,055

See Notes to Consolidated Financial Statements (Unaudited).

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

	Six Months Ended
	June 30, 2003			June 30, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(453	)	$	1,493
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization		1,400			1,241
Provision for losses on accounts receivable		393			183
Deferred compensation		265			182
Changes in operating assets and liabilities:
Accounts receivable		(317	)		(2,327	)
Inventories		651			107
Prepaid expenses and other current assets		106			119
Other assets		147			(17	)
Accounts payable and accrued expenses		(849	)		(420	)
Net cash provided by operating activities		1,343			561
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(1,609	)		(2,309	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock		26			66
Net proceeds on revolving credit facility		394			2,108
Proceeds from long-term debt		1,641			1,103
Principal payments on long-term debt		(1,344	)		(1,227	)
Principal payments on capital leases		(49	)		(141	)
Net cash provided by financing activities		668			1,909
INCREASE IN CASH AND CASH EQUIVALENTS		402			161
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		439			67
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	841		$	228
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest	$	588		$	669

See Notes to Consolidated Financial Statements (Unaudited).

5

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

1.     BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of MEDTOX Scientific, Inc. (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of financial condition and results of operations have been included. Operating results for the six-month period ended June 30, 2003 are not necessarily indicative of the results that may be attained for the entire year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

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

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

(In thousands, except per share data)

		Three Months Ended						Six Months Ended
		June 30, 2003			June 30, 2002			June 30, 2003			June 30, 2002
Net income (loss)......................................	As reported	$	(250	)	$	1,008		$	(453	)	$	1,493
Less: Total stock-based compensation
expense, net of related tax effect			(152	)		(147	)		(249	)		(301	)
	Pro forma		(402	)		861			(702	)		1,192
Basic earnings (loss) per share..............	As reported	$	(0.05	)	$	0.21		$	(0.09	)	$	0.31
	Pro forma		(0.08	)		0.18			(0.14	)		0.25
Diluted earnings (loss) per share...........	As reported	$	(0.05	)	$	0.20		$	(0.09	)	$	0.29
	Pro forma		(0.08	)		0.17			(0.14	)		0.23

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New Accounting Standards: In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”.  FIN 46 addresses consolidation by business enterprises of variable interest entities and significantly changes the consolidation application of consolidation policies to variable interest entities and, thus improves comparability between enterprises engaged in similar activities when those activities are conducted through variable interest entities.  FIN 46 applies to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date.  FIN 46 applies to the Company’s third quarter for variable interest entities in which the Company holds a variable interest acquired before February 1, 2003.  The Company does not hold any variable interest entities.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends SFAS No. 133 to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires that contracts with similar characteristics be accounted for on a comparable basis.  The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003.  The Company does not expect that the adoption of SFAS No. 149 will have a material impact on its results of operations or financial position.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity.  The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003.  The Company does not believe that the adoption of SFAS No. 150 will 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 services, which include clinical toxicology, clinical testing for the pharmaceutical industry, pediatric lead testing, heavy metals analyses, courier delivery, and medical surveillance. Providing revenues from external customers for each group of services within the Laboratory Services segment is impracticable. The Product Sales segment where POC (point of care) disposable diagnostics devices consists of MEDTOX Diagnostics Inc. Products manufactured include easy to use, inexpensive, on-site drug tests such as PROFILE®-II, PROFILE®-II ER, and VERDICT®-II in addition to a variety of agricultural testing products. MEDTOX Diagnostics Inc. also provides contract manufacturing services in its FDA/GMP facility.

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

7

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

(In thousands)

	Three Months Ended					Six Months Ended
	June 30, 2003			June 30, 2002		June 30, 2003			June 30, 2002
Laboratory Services:
Revenues	$	10,085		$	10,540	$	19,619		$	19,877
Interest expense, net		280			323		567			663
Depreciation and amortization		579			577		1,169			1,149
Segment income (loss) before income taxes		(325	)		316		(705	)		330
Segment assets		41,503			41,708		41,503			41,708
Capital expenditures for segment assets		482			974		713			1,436
Product Sales:
Revenues	$	3,072		$	3,378	$	6,009		$	6,392
Interest expense, net		16			17		28			30
Depreciation and amortization		108			50		231			92
Segment income before income taxes		75			692		128			1,163
Segment assets		6,926			5,760		6,926			5,760
Capital expenditures for segment		648			713		896			873
Corporate (unallocated):
Deferred tax asset, net	$	9,337		$	--	$	9,337		$	--
Company:
Revenues	$	13,157		$	13,918	$	25,628		$	26,269
Interest expense, net		296			340		595			693
Depreciation and amortization		687			627		1,400			1,241
Income (loss) before income taxes		(250	)		1,008		(577	)		1,493
Total assets		57,766			47,468		57,766			47,468
Capital expenditures for assets		1,130			1,687		1,609			2,309

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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				Six Months Ended
	June 30, 2003		June 30, 2002		June 30, 2003		June 30, 2002
Workplace drugs of abuse testing	$	6,434	$	7,031	$	12,130	$	13,037
Other specialty laboratory services		3,651		3,509		7,489		6,840
	$	10,085	$	10,540	$	19,619		19,877

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				Six Months Ended
	June 30, 2003		June 30, 2002		June 30, 2003		June 30, 2002
Substance abuse testing products	$	2,520	$	2,962	$	5,070	$	5,545
Contract manufacturing services		444		362		752		713
Other diagnostic products		108		54		187		134
	$	3,072	$	3,378	$	6,009	$	6,392

3. INVENTORIES

Inventories consisted of the following:
(In thousands)

	June 30, 2003		December 31, 2002
Raw materials	$	1,326	$	1,616
Work in process		626		521
Finished goods		494		844
Supplies, including off-site inventory		1,298		1,414
	$	3,744	$	4,395

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4.     EARNINGS PER SHARE

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

	Three Months Ended					Six Months Ended
	June 30, 2003			June 30, 2002		June 30, 2003			June 30, 2002
Net income (loss) (A)	$	(250	)	$	1,008	$	(453	)	$	1,493
Weighted average number of basic
common shares outstanding (B)		4,926,708			4,792,279		4,920,317			4,788,576
Dilutive effect of stock options and
warrants computed based on the
treasury stock method using average
market price		--			353,439		--			298,215
Weighted average number of diluted
common shares outstanding (C)		4,926,708			5,145,718		4,920,317			5,086,791
Basic earnings (loss) per common share (A/B)	$	(0.05	)	$	0.21	$	(0.09	)	$	0.31
Diluted earnings (loss) per common share (A/C)	$	(0.05	)	$	0.20	$	(0.09	)	$	0.29

Options and warrants to purchase 1,557,452, 1,557,452, 11,289 and 11,289 shares of common stock were outstanding during the three and six months ended June 30, 2003 and 2002, respectively, but were not included in the computation of diluted earnings per share as their exercise prices were greater than the average market price of the common shares, or because they were antidilutive in 2003 due to net losses.

5.     INCOME TAXES

At June 30, 2003, the Company had federal and state net operating loss carryforwards (NOLs) of approximately $28.7 and $7.5 million, respectively, which are available to offset taxable income through 2020. For financial reporting purposes, a valuation allowance has been recorded to offset deferred tax assets that, more likely than not, will not be realized based on the Company’s projected future taxable income, the timing of expiring NOLs, and the Company’s tax planning strategies. Section 382 of the Internal Revenue Code restricts the annual utilization of certain NOLs incurred prior to a change in ownership. Although the Section 382 limitation is currently not expected to impair the realization of these NOLs, other factors could, such as projected future taxable income, the timing of expiring NOLs, and the Company’s tax planning strategies.

In 2002, the Company recorded a $10.2 million income tax benefit and reduced its valuation allowance on deferred tax assets.  The reduction in the valuation allowance at that time was based on the available evidence, including the Company’s historical performance, tax planning strategies, and projected future results.  The valuation allowance at December 31, 2002 of $1.4 million represented the portion of the net operating loss (NOL) carryforwards that were expected to expire unused in 2003 and future years.  Based on the Company’s operating performance through the first half of 2003, it appears that more NOL carryforwards may expire unused in 2003 than was originally anticipated.  Therefore, the Company has not recorded an income tax benefit for the second quarter’s loss, in order to better reflect the anticipated effective rate for the full year. Should operating results for the remainder of 2003 and possibly 2004 fail to meet expectations, the valuation allowance against the Company’s NOL carryforwards and the related deferred tax asset may require adjustment in future periods.

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6.     RELATED PARTY TRANSACTIONS

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

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

7.     COMMITMENTS AND CONTINGENCIES

Leases — The Company leases other offices and facilities and office equipment under certain operating leases, which expire on various dates through April 2011. Under the terms of the facility leases, a pro rata share of operating expenses and real estate taxes are charged as additional rent.

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

8.     SUBSEQUENT EVENT

On July 1, 2003, the Company completed the acquisition of the forensic drug testing accounts from Cox Toxicology, a full-service, SAMHSA-certified drug testing laboratory and a division of CoxHealth. The purchase price of the transaction is based on varying percentages of the revenue realized from the transitioned business over the next three years. During this period, the Company estimates that revenue from these accounts will total approximately $1.2 million and that the sum of the payments for the acquisition should not exceed 25% of this total.

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

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

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

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

o     increased competition, including price competition

o     general economic and business conditions, both nationally and internationally

o     changes in business strategy or development plans

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

o     our inability to obtain appropriate licenses from third parties, protect our trade secrets, operate without
        infringing upon the proprietary rights of others, or prevent others from infringing on our proprietary rights

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

o     changes in demand for products and services by our customers

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

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o     failure to maintain our days sales outstanding levels

o     losses due to bad debt

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

General

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

The Company has two reportable segments: “Laboratory Services” conducted by the Company’s wholly owned subsidiaries, MEDTOX Laboratories, Inc. and New Brighton Business Center, LLC and “Products Sales” conducted by the Company’s wholly owned subsidiary MEDTOX Diagnostics, Inc. Laboratory Services include forensic toxicology (primarily workplace drugs of abuse testing) and specialty laboratory services, including clinical toxicology, clinical testing for the pharmaceutical industry (central laboratory services, bioanalytical and pharmacokinetic testing), and analysis of heavy and trace metals. In addition, the Laboratory Services segment provides logistical support, data management and overall program management services. Product Sales include sales of a variety of on-site screening products and contract manufacturing. For financial information relating to the Company’s segments, see Note 2 of Notes to the Consolidated Financial Statements. For the three and six months ended June 30, 2003, Laboratory Services revenue accounted for 77% of the Company’s revenue, compared with 76% for the same periods in 2002. Revenue from Product Sales accounted for 23% of the Company’s revenue for the three and six months ended June 30, 2003 compared with 24% for the same periods in 2002.

Critical Accounting Policies

The Company has identified the policies outlined below as critical to understanding its business and results of operations. The listing is not intended to be a comprehensive list of all accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management’s judgment in their application. The impact and any associated risks related to these policies on the Company’s business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements in Item 15 on Form 10-K for the year ended December 31, 2002. Note that the preparation of this Form 10-Q requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

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The Company’s critical accounting policies are as follows:

Accounts Receivable:
The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customers’ current credit worthiness, as determined by management’s review of their current credit information. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon the Company’s historical experience and any specific customer collection issues that have been identified. While such credit losses have generally been within the Company’s historical expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that have occurred in the past. The Company’s consolidated trade accounts receivable balance as of June 30, 2003 was $9.3 million, net of allowance for doubtful accounts of $0.5 million.

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

Off-Site Supplies Inventory:
Off-site supplies represent collection kits and forms located at collections sites throughout the United States used by Laboratory Services’ customers to submit specimens for testing services. At June 30, 2003, off-site inventory was $0.7 million. The process for valuing off-site inventory involves significant assumptions regarding the average time that a collection site uses the inventory, as well as the amount of inventory expected to be scrapped.

Goodwill and Other Intangible Assets:
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 requires that goodwill and other intangible assets be tested for impairment within six months of adoption of SFAS No. 142 and then on a periodic basis thereafter. During the first half of 2002, the Company completed impairment testing and determined that there were no impairment losses related to goodwill and other intangible assets. In the fourth quarter of 2002, the Company updated its impairment testing and determined that there was no impairment. In assessing the recoverability of goodwill and other intangible assets, projections regarding estimated future cash flows and other factors are made to determine the fair value of the respective assets. If these estimates or related projections change in the future, the Company may be required to record impairment charges for these assets. During the six months ended June 30, 2003, no circumstances occurred that required an impairment charge.

14

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

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against net deferred tax assets. The Company’s deferred tax assets primarily consist of certain net operating losses (NOLs) carried forward. The valuation allowance is based on management’s estimate of taxable income, the period over which NOLs will be recoverable, and tax planning strategies. In the future, subsequent revisions to the estimated net realizable value of these deferred tax assets could cause the provision for income taxes to vary significantly from period to period, although the Company’s cash payments would remain unaffected until the benefit of the NOL is completely utilized or expires unused.

Results of Operations

Total revenues for the second quarter of 2003 declined 5% over the second quarter of 2002, reflecting the continued softness in new business employment. Gross margin was negatively impacted by a decline in the average price per testing specimen for laboratory workplace drug testing and a deteriorating margin in the Product Sales segment. Operating expenses as a percentage of sales were also higher in the second quarter of 2003, reflecting severance costs related to staffing reductions, increased bad debt expense, and the continued investment in research and development. The following table sets forth the percentages of total revenues represented by certain items reflected in the Company’s Consolidated Statements of Operations:

15

	Three Months Ended						Six Months Ended
	June 30, 2003			June 30, 2002			June 30, 2003			June 30, 2002
Revenues		100	.0%		100	.0%		100	.0%		100	.0%
Cost of revenues		61	.5		57	.4		61	.7		58	.8
Gross margin		38	.5		42	.6		38	.3		41	.2
Operating expenses:
Selling, general, and administrative		33	.9		30	.5		34	.0		30	.5
Research and development		3	.2		2	.2		3	.3		2	.2
		37	.1		32	.7		37	.3		32	.7
Income from operations		1	.4		9	.9		1	.0		8	.5
Other expense		3	.3		2	.7		3	.2		2	.8
Income (loss) before income tax benefit		(1	.9)		7	.2		(2	.2)		5	.7
Income tax benefit		--			--			0	.4		--
Net income (loss)		(1	.9)%		7	.2%		(1	.8)%		5	.7%

Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002

Revenues

Revenues decreased 5% to $13.2 million for the three months ended June 30, 2003, reflecting a $0.5 million decline in Laboratory Services revenue and a $0.3 million drop in Product Sales revenues.

Laboratory Services revenues were impacted by a 2% drop in specimen volume from the Company’s occupational health and corporate clients, reflecting the continued softness in new business employment. In addition, the average price per testing specimen for workplace drugs of abuse testing declined in an effort to attract new business to offset the impact of the reduction in specimen volume. This impact has been partially mitigated by the Company’s continued success in acquiring new client relationships and gaining market share. On a positive note, revenues from the Company’s specialty laboratory services increased 4% in the quarter.

In the Product Sales segment, sales of substance abuse testing products, which incorporates the PROFILE®-II, PROFILE®-II ER, PROFILE®-II A and VERDICT®-II on-site test kits and other ancillary products for the detection of abused substances, declined 15% to $2.5 million in the second quarter of 2003. The decline is primarily attributable to lower sales within the VERDICT®-II product line to government clients for probation, parole and rehabilitation. The economic uncertainty and budget constraints that the Company’s government clients are experiencing resulted in lower purchasing levels among these clients. The Company anticipates that the government sector will continue to be a challenging environment, and will continue to pursue new sales efforts that the Company believes will improve this portion of its business going forward. Sales of PROFILE®-II devices to existing workplace and occupational clients were also down from last year and continue to be impacted by the reduction in nationwide hiring; additionally, some customers are alternatively purchasing the PROFILE®-II A device, which screens for the same five drugs of abuse, but also includes a patented lateral flow test strip to screen for the five most common adulterants. Sales of the PROFILE®-II A have increased 64% over the second quarter of last year.

Product sales from agricultural diagnostic products increased $54,000 to $108,000 primarily as a result of increased purchases from the U.S. Department of Agriculture (USDA) for the Company’s products. The USDA’s needs for the Company’s products vary from year-to-year and sales to the USDA are expected to fluctuate accordingly. Sales of contract manufacturing services, microbiological and associated products increased 23% to $0.4 million and were positively impacted by the timing of orders from existing clients.

16

Gross Profit

Consolidated gross margin declined to 38.5% of revenues for the three months ended June 30, 2003, compared to 42.6% of revenues for the same period in 2002, reflecting declines in both Laboratory Services and Product Sales gross margin.

Laboratory Services gross margin was 33.2% of revenues for the three months ended June 30, 2003, down from 36.2% of revenues for the same period in 2002. The margin shortfall was primarily attributable to the impact of the high fixed costs nature of workplace drugs of abuse testing combined with a decline in the average price per testing specimen. Gross margin from Product Sales declined to 55.8% of revenues for the three months ended June 30, 2003, from 62.3% of revenues in the comparable period of 2002. The lower gross margin was primarily the result of the impact of fixed type costs on lower production levels associated with the decline in sales, as well as increased spending in quality control.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $4.5 million, or 33.9% of revenues in the second quarter of 2003, compared to $4.2 million or 30.5% of revenues in the second quarter of 2002. The increase was primarily due to severance costs related to staffing reductions, increased bad debt expense and higher business insurance expenses.

Research and Development Expense

Research and development expenses were $0.4 million, or 3.2% of revenues in the second quarter of 2003, compared to $0.3 million, or 2.2% of revenues in the second quarter of 2002. The increase was primarily due to increased development activity associated with new product configurations and assays and other new product research in the Product Sales segment, which is expected to continue through the remainder of 2003.

Other Income and Expense

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

Income (Loss) Before Income Taxes

During the three months ended June 30, 2003, the Company recorded a pre-tax loss of $0.3 million, compared to pre-tax income of $1.0 million in the same period of 2002. The decline in performance was caused primarily by lower revenues and gross margin in both the Laboratory Services and Product Sales segments.

17

Laboratory Services loss was $0.3 million for the three months ended June 30, 2003 compared to income of $0.3 million in the same period of 2002. The decline was primarily attributable to a drop in revenues, lower gross margin and higher selling, general and administrative expenses.

Product Sales income was $0.1 million for the three months ended June 30, 2003, compared to $0.7 million for the same period of 2002. This shortfall was primarily caused by a reduction in revenues and gross margin and increased operating expenses.

Income Taxes

In 2002, the Company recorded a $10.2 million income tax benefit and reduced its valuation allowance on deferred tax assets.  The reduction in the valuation allowance at that time was based on the available evidence, including the Company’s historical performance, tax planning strategies, and projected future results.  The valuation allowance at December 31, 2002 of $1.4 million represented the portion of the net operating loss (NOL) carryforwards that were expected to expire unused in 2003 and future years.  Based on the Company’s operating performance through the first half of 2003, it appears that more NOL carryforwards may expire unused in 2003 than was originally anticipated.  Therefore, the Company has not recorded an income tax benefit for the second quarter’s loss, in order to better reflect the anticipated effective rate for the full year. Should operating results for the remainder of 2003 and possibly 2004 fail to meet expectations, the valuation allowance against the Company’s NOL carryforwards and the related deferred tax asset may require adjustment in future periods.

Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

Revenues

Revenues decreased 2% to $25.6 million for the six months ended June 30, 2003, reflecting a $0.3 million decline in Laboratory Services revenue and a $0.4 million drop in Product Sales revenues.

Laboratory Services revenues were impacted by a decline in the average price per testing specimen for workplace drugs of abuse testing. The lower pricing is part of the Company’s strategy to attract new business to offset the impact of the recent decline in specimen volume from existing workplace drug testing clients. For the six months ended June 30, 2003, specimen volume from the Company’s occupational health and corporate clients was flat with the prior year period. This impact has been partially mitigated by the Company’s continued success in acquiring new client relationships and gaining market share, despite the continued softness in new business employment. Revenues from the Company’s specialty laboratory services increased 10% for the six months ended June 30, 2003.

18

In the Product Sales segment, sales of substance abuse testing products, which incorporates the PROFILE®-II, PROFILE®-II ER, PROFILE®-II A and VERDICT®-II on-site test kits and other ancillary products for the detection of abused substances, declined 9% to $5.1 million in the first six months of 2003. The decline is primarily attributable to lower sales within the VERDICT®-II product line to government clients for probation, parole and rehabilitation. The economic uncertainty and budget constraints that the Company’s government clients are experiencing resulted in lower purchasing levels among these clients. The Company anticipates that the government sector will continue to be a challenging environment, and will continue to pursue new sales efforts that the Company believes will improve this portion of its business going forward. Sales of PROFILE®-II devices to existing workplace and occupational clients were also down from last year and continue to be impacted by the reduction in nationwide hiring; additionally, some customers are alternatively purchasing the PROFILE®-II A device, which screens for the same five drugs of abuse, but also includes a patented lateral flow test strip to screen for the five most common adulterants. Sales of the PROFILE®-II A have increased 98% over the same period last year.

Product sales from agricultural diagnostic products increased $53,000 to $187,000 primarily as a result of increased purchases from the U.S. Department of Agriculture (USDA) for the Company’s products. Sales of contract manufacturing services, microbiological and associated products increased 6% to $0.8 million and were positively impacted by the timing of orders from existing clients in the second quarter of 2003.

Gross Profit

Consolidated gross margin declined to 38.3% of revenues for the six months ended June 30, 2003, compared to 41.2% of revenues for the same period in 2002, reflecting declines in both Laboratory Services and Product Sales gross margin.

Laboratory Services gross margin was 32.7% of revenues for the six months ended June 30, 2003, down from 34.2% of revenues for the same period in 2002. The margin shortfall was primarily attributable to the impact of the high fixed costs nature of workplace drugs of abuse testing combined with a decline in specimen volume and average price per testing specimen. Gross margin from Product Sales declined to 56.4% of revenues for the six months ended June 30, 2003, from 63.1% of revenues in the comparable period of 2002. The lower gross margin was primarily the result of the impact of fixed type costs on lower production levels associated with the decline in sales, as well as increased spending in quality control.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $8.7 million, or 34.0% of revenues in the first six months of 2003, compared to $8.0 million or 30.5% of revenues in the same period of 2002. The increase was primarily due to severance costs related to staffing reductions, increased bad debt expense, higher business insurance expenses and increased spending in client service support for specialty lab services.

Research and Development Expense

Research and development expenses were $0.8 million, or 3.3% of revenues in the first six months of 2003, compared to $0.6 million, or 2.2% of revenues in the first six months of 2002. The increase was primarily due to increased development activity associated with new product configurations and assays and other new product research in the Product Sales segment, which is expected to continue through the remainder of 2003.

19

Other Income and Expense

Other income and expense consists primarily of interest expense and the net expenses associated with the Company’s building rental activities. These expenses increased 12% to $0.8 million in the first six months of 2003. The increase was primarily due to reduced rental income as a result of higher vacancy rates. While the Company is actively seeking additional tenants for the building, there can be no assurance it will be able to lower overall vacancy rates during the remainder of 2003. This increase was partially offset by a reduction in interest expense due to lower interest rates.

Income (Loss) Before Income Taxes

During the six months ended June 30, 2003, the Company recorded a loss before income tax benefit of $0.6 million, compared to pre-tax income of $1.5 million in the same period of 2002. The change in performance was caused primarily by the lower revenues and gross margin, as well as higher operating expenses in both the Laboratory Services and Product Sales segments.

Laboratory Services loss before income tax benefit was $0.7 million for the six months ended June 30, 2003 compared to pre-tax income of $0.3 million in the same period of 2002. The decline was primarily attributable to a drop in revenues, a lower gross margin and higher selling, general and administrative expenses.

Product Sales pre-tax income was $0.1 million for the six months ended June 30, 2003, compared to $1.2 million for the same period of 2002. This shortfall was primarily caused by a reduction in revenues and gross margin and increased operating expenses.

Income Taxes

In 2002, the Company recorded a $10.2 million income tax benefit and reduced its valuation allowance on deferred tax assets.  The reduction in the valuation allowance at that time was based on the available evidence, including the Company’s historical performance, tax planning strategies, and projected future results.  The valuation allowance at December 31, 2002 of $1.4 million represented the portion of the net operating loss (NOL) carryforwards that were expected to expire unused in 2003 and future years.  Based on the Company’s operating performance through the first half of 2003, it appears that more NOL carryforwards will expire unused in 2003 than was originally anticipated.  Therefore, the Company has not recorded an income tax benefit for the second quarter’s loss, in order to better reflect the anticipated effective rate for the full year.  Should operating results for the remainder of 2003 and possibly 2004 fail to meet expectations, the valuation allowance against the Company’s NOL carryforwards and the related deferred tax asset may require adjustment in future periods.

20

Liquidity and Capital Resources

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

Net cash provided by operating activities was $1.3 million for the six months ended June 30, 2003 compared to $0.6 million in the same period of 2002. Although the Company had lower net income in the first six months of 2003 of $1.9 million as compared to 2002, this decrease was more than offset by a reduction in accounts receivable and inventory. Accounts receivable increased $0.3 million during the first six months of 2003 compared to an increase of $2.3 million for the same period of 2002. The significant increase in accounts receivable in the prior year period was primarily the result of an increase in receivables due from third-party payors such as insurance companies and Medicaid state agencies. Payment cycles from such payors can be lengthy, and in certain cases, were adversely affected in 2002 by incomplete or incorrect billing information provided to the Company by its customers. In 2003, the Company has been able to shorten the payment cycle for such payors through a better understanding of the insurance claim filing requirements and by converting manual billings to an electronic format for certain Medicaid state agencies.

Net cash used in investing activities, consisting of capital expenditures, was $1.6 million for the six months ended June 30, 2003 compared to $2.3 million in the same period of 2002. The increased spending for equipment and capital improvement expenditures in the 2002 period reflected equipment purchases to improve efficiencies and reduce operating costs.

Net cash provided by financing activities was $0.7 million for the six months ended June 30, 2003 compared to $1.9 million in the same period of 2002. The decrease was primarily the result of a reduction in the use of the revolving credit facility in 2003. During the six months ended June 30, 2003, the Company also received proceeds from long-term debt of $1.6 million to finance capital equipment purchases, partially offset by payments on long-term debt of $1.3 million.

The Company has a Credit Security Agreement (the Wells Fargo Credit Agreement) with Wells Fargo Business Credit, Inc. (the Bank). The Wells Fargo Credit Agreement, as amended, consists of (i) a term loan of $3.185 million bearing interest at prime + 1.25%; (ii) a revolving line of credit, payable on demand, of not more than $6.0 million or 85% of the Company’s eligible trade accounts receivable bearing interest at prime + 1%; and (iii) a capex note of up to $3.5 million for the purchase of capital equipment bearing interest at prime + 1.25% and (iv) availability of letters of credit in amounts not to exceed the lesser of $300,000 (less outstanding letters of credit) or the unborrowed portion of the revolving line of credit (less outstanding letters of credit).

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

21

In the first six months of 2003, the Company entered into a Credit and Security Agreement with Wells Fargo Equipment Finance, Inc. for the acquisition of various pieces of equipment. In connection with the agreement, the Company signed a note payable for $1.6 million, payable in monthly installments over 3.5 years. Interest is payable at a variable rate of 1.25% over prime. The note is secured by the equipment purchased with the proceeds of the loan.

The Company is relying on expected positive cash flow from operations and its line of credit to fund its future working capital and asset purchases. The amount available on the revolving line of credit is based primarily on the receivables of the Company and, as such, varies with accounts receivable, and to a lesser degree, the inventory of the Company. As of June 30, 2003, the Company had total borrowing capacity of $6.0 million on its line of credit, of which $4.7 million was borrowed, leaving a net availability of $1.3 million and a cash balance of $0.8 million.

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

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

Impact of Inflation and Changing Prices

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

Seasonality

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

22

Impact of New Accounting Standards

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”.  FIN 46 addresses consolidation by business enterprises of variable interest entities and significantly changes the consolidation application of consolidation policies to variable interest entities and, thus improves comparability between enterprises engaged in similar activities when those activities are conducted through variable interest entities.  FIN 46 applies to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date.  FIN 46 applies to the Company’s third quarter for variable interest entities in which the Company holds a variable interest acquired before February 1, 2003.  The Company does not hold any variable interest entities.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends SFAS No. 133 to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires that contracts with similar characteristics be accounted for on a comparable basis.  The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003.  The Company does not expect that the adoption of SFAS No. 149 will have a material impact on its results of operations or financial position.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity.  The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003.  The Company does not expect that the adoption of SFAS No. 150 will have a material impact on the Company’s results of operations or financial position.

Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
             MARKET RISK.

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

Item 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls Procedures.

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

23

Changes in Internal Controls.

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

24

PART II	OTHER INFORMATION
ITEM 1	LEGAL PROCEEDINGS.   Inapplicable
ITEM 2	CHANGES IN SECURITIES.   Inapplicable
ITEM 3	DEFAULTS ON SENIOR SECURITIES.   Inapplicable
ITEM 4	SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
	Set forth below is information concerning each matter submitted to a vote at the Annual Meeting of Stockholders of the Company on May 22, 2003.
	Proposal No. 1: The stockholders elected each of the following persons to serve on the Board of Directors of the Company for three year terms or until their respective successors are duly elected and qualified.

Director's Name	Votes For	Votes Withheld
Samuel C. Powell	4,311,635	97,240
Robert A. Rudell	4,312,756	96,119

	During the second quarter of 2003, no other matters were submitted to a vote of the securities holders of the Company.
ITEM 5	OTHER INFORMATION.   Inapplicable
ITEM 6	EXHIBITS AND REPORTS ON FORM 8-K.
	a.  Exhibits: See Exhibit Index on page following Certifications under Section 302 of the Sarbanes-      Oxley Act of 2002.
	b.  Reports on Form 8-K:
	On April 23, 2003, the Company filed a Form 8-K stating it held its quarterly conference call and announced results for the first quarter ended March 31, 2003.
	On April 23, 2003, the Company filed a Form 8-K announcing results for the first quarter ended March 31, 2003.
	On May 23, 2003, the Company filed a Form 8-K announcing the results of its Annual Meeting of Shareholders.
	On May 23, 2003, the Company filed a Form 8-K announcing the addition of a new patent securing the method and design of a new lateral flow test strip within its diagnostic services.

25

On June 4, 2003, the Company filed a Form 8-K announcing the completion of an exclusive Canadian distribution agreement with Spectral Diagnostics Inc.

On June 6, 2003, the Company filed a Form 8-K announcing some recent company changes.

26

SIGNATURES

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

Signature	Title	Date
/s/ Richard J. Braun	President, Chief Executive Officer, and	August 14, 2003
Richard J. Braun	Chairman of the Board of Directors
	(Principal Executive Officer)
/s/ Kevin J. Wiersma	Vice President and Chief Operating Officer	August 14, 2003
Kevin J. Wiersma	(Principal Financial Officer)

27

EXHIBIT INDEX

MEDTOX SCIENTIFIC, INC.

FORM 10-Q FOR QUARTER ENDED JUNE 30, 2003

Exhibit number	Description
31.1	Section 302 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
31.2	Section 302 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
32.1	Section 906 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2	Section 906 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

28

EX-31

EXHIBIT 31.1

CERTIFICATIONS

Certification of Chief Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

I, Richard J. Braun, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of MEDTOX Scientific, Inc.;  

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)    designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)    evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)    disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)    all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:   August 14, 2003	By:   /s/ Richard J. Braun
	Richard J. Braun
	Chief Executive Officer

29

EX-31

EXHIBIT 31.2

Certification of Chief Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

I, Kevin J. Wiersma, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of MEDTOX Scientific, Inc.;  

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)    designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)    evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)    disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)    all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:   August 14, 2003	By:   /s/ Kevin J. Wiersma
	Kevin J. Wiersma
	Chief Financial Officer

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EX-32

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the Quarterly Report of MEDTOX Scientific, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2003 as filed with the Securities and Exchange Commission (the “Report”), I, Richard J. Braun, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

    (1)        The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

    (2)        The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:   August 14, 2003	By:   /s/ Richard J. Braun
	Richard J. Braun
	Chief Executive Officer

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EX-32

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the Quarterly Report of MEDTOX Scientific, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2003 as filed with the Securities and Exchange Commission (the “Report”), I, Kevin J. Wiersma, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

    (1)        The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

    (2)        The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:   August 14, 2003	By:   /s/ Kevin J. Wiersma
	Kevin J. Wiersma
	Chief Financial Officer

32