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, 2010

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
incorporation 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

                                                                                                Yes [   ]                      No [   ]                       

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [   ]                                                            Accelerated filer [ X ]                                          Non-accelerated filer [  ]Smaller reporting company  [   ]

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

Yes [   ]                      No [ X ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class	Outstanding at July 15, 2010
Common Stock, $0.15 par value per share		8,717,314

MEDTOX SCIENTIFIC, INC.

INDEX

			Page
Part I	Financial Information:
	Item 1:	Financial Statements (Unaudited)
		Consolidated Statements of Income – Three and Six
		Months Ended June 30, 2010 and 2009	3
		Consolidated Balance Sheets – June 30, 2010
		and December 31, 2009	4
		Consolidated Statements of Cash Flows – Six Months
		Ended June 30, 2010 and 2009	5
		Notes to Consolidated Financial Statements	6
	Item 2:	Management's Discussion and Analysis of
		Financial Condition and Results of Operations	10
	Item 3:	Quantitative and Qualitative Disclosures
		About Market Risk	20
	Item 4:	Controls and Procedures	20
Part II	Other Information		21
	Item 1A:	Risk Factors	21
	Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	21
	Item 5:	Other Information	21
	Item 6:	Exhibits	21
		Signatures	22
		Exhibit Index	23

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PART I                 FINANCIAL INFORMATION

Item 1:                 FINANCIAL STATEMENTS(UNAUDITED)

MEDTOX SCIENTIFIC, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share data)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2010			June 30, 2009			June 30, 2010			June 30, 2009
REVENUES:
Laboratory services:
Drugs-of-abuse testing services	$	10,160		$	9,618		$	18,956		$	18,064
Clinical & other laboratory services		7,578			5,377			14,468			10,774
Clinical trial services		2,037			1,592			2,870			3,907
Product sales		5,410			4,745			10,052			9,245
		25,185			21,332			46,346			41,990
COST OF REVENUES:
Cost of services		12,551			11,634			23,584			22,751
Cost of sales		2,293			2,032			4,321			3,930
		14,844			13,666			27,905			26,681
GROSS PROFIT		10,341			7,666			18,441			15,309
OPERATING EXPENSES:
Selling, general and administrative		8,231			6,521			15,664			12,742
Research and development		573			589			1,122			1,159
		8,804			7,110			16,786			13,901
INCOME FROM OPERATIONS		1,537			556			1,655			1,408
OTHER INCOME (EXPENSE):
Interest expense		-			(5	)		(1	)		(11	)
Other income (expense)		56			(62	)		61			(246	)
		56			(67	)		60			(257	)
INCOME BEFORE INCOME TAX EXPENSE		1,593			489			1,715			1,151
INCOME TAX EXPENSE		(581	)		(178	)		(626	)		(420	)
NET INCOME	$	1,012		$	311		$	1,089		$	731
BASIC EARNINGS PER COMMON SHARE	$	0.12		$	0.04		$	0.13		$	0.09
DILUTED EARNINGS PER COMMON SHARE	$	0.11		$	0.04		$	0.12		$	0.08
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic		8,700,838			8,538,965			8,669,326			8,518,524
Diluted		8,963,870			8,816,645			8,907,773			8,759,333

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, 2010			December 31, 2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	4,946		$	4,165
Accounts receivable:
Trade, less allowance for doubtful accounts ($718 in 2010 and $529 in 2009)		19,370			14,916
Other		1,219			1,257
Total accounts receivable		20,589			16,173
Inventories		3,547			3,593
Prepaid expenses and other		1,501			1,429
Deferred income taxes		2,977			3,603
Total current assets		33,560			28,963
BUILDING, EQUIPMENT AND IMPROVEMENTS, net		28,696			29,509
GOODWILL		15,967			15,967
INTANGIBLE ASSETS, net		236			273
OTHER ASSETS		1,017			1,405
TOTAL ASSETS	$	79,476		$	76,117
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	4,066		$	4,143
Accrued expenses		6,827			4,670
Current portion of long-term debt		-			302
Total current liabilities		10,893			9,115
OTHER LONG-TERM LIABILITIES		3,287			3,224
DEFERRED INCOME TAXES, net		2,346			2,346
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; authorized shares, 50,000; none issued and outstanding		-			-
Common stock, $0.15 par value; authorized shares, 28,000,000; issued shares, 8,820,745 in
2010 and 8,675,510  in 2009		1,323			1,301
Additional paid-in capital		88,729			88,078
Accumulated deficit		(21,834	)		(22,923	)
Common stock held in trust, at cost, 388,531 shares in 2010 and 367,911 shares in 2009		(4,268	)		(4,024	)
Treasury stock, at cost, 103,431 shares in 2010 and 2009		(1,000	)		(1,000	)
Total stockholders' equity		62,950			61,432
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	79,476		$	76,117

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, 2010			June 30, 2009
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income	$	1,089		$	731
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		2,840			2,641
Provision for losses on accounts receivable		582			310
Loss on sale of equipment		6			13
Deferred and stock-based compensation		541			378
Deferred income taxes		626			420
Changes in operating assets and liabilities:
Accounts receivable		(4,998	)		(1,851	)
Inventories		46			171
Prepaid expenses and other current assets		(72	)		191
Other assets		(45	)		(153	)
Accounts payable and accrued expenses		2,497			(1,003	)
Net cash provided by operating activities		3,112			1,848
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of building, equipment and improvements		(2,413	)		(2,144	)
Net cash used in investing activities		(2,413	)		(2,144	)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Principal payments on long-term debt		(302	)		(339	)
Purchase of common stock for incentive plan		(289	)		(410	)
Net proceeds from the exercise of stock options		673			236
Net cash provided by (used in) financing activities		82			(513	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		781			(809	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		4,165			4,069
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	4,946		$	3,260
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest	$	2		$	12
Income taxes		25			31
Supplemental noncash activities:
Asset additions and related obligations in payables		822			656

See Notes to Consolidated Financial Statements (Unaudited).

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MEDTOX SCIENTIFIC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2010

1.  BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of MEDTOX Scientific, Inc. (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by generally accepted accounting principles.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of financial condition and results of operations have been included.  Operating results for the three and six month periods ended June 30, 2010 are not necessarily indicative of the results that may be attained for the entire year.
60; 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, 2009.

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 (NBBC).  Services provided include drugs-of-abuse testing services; clinical & other laboratory services, which include clinical toxicology, clinical testing for occupational health clinics, clinical testing for physician offices, pediatric lead testing, heavy metals analyses, courier delivery, and medical surveillance; and clinical trial services which include central laboratory services, assay development, bio-analytical, bio-equivalence and pharmacokinetic testing.  The Product Sales segment, which includes POCT (point-of-collection testing) disposable diagnostic devices, consists of MEDTOX Diagnostics, Inc.  Products manufactured include easy to use, inexpensive, on-site drug tests such as PROFILE®-II, PROFILE®-II A, PROFILE®-III, PROFILE®-III A, PROFILE-II ER®, PROFILE®-III ER, PROFILE®-IV, PROFILE®-V, MEDTOXScan®, VERDICT®-II and SURE-SCREEN®, in addition to a variety of other diagnostic tests for the detection of alcohol.  MEDTOX Diagnostics 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 different products and services. They are managed separately as each business requires different products, services and marketing strategies.

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

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(In thousands)	Three Months Ended June 30,					Six Months Ended June 30,
	2010		2009			2010			2009
Laboratory Services:
Revenues	$	19,775	$	16,587		$	36,294		$	32,745
Depreciation and amortization		1,218		1,172			2,441			2,323
Income (loss) from operations		495		(297	)		(66	)		(223	)
Capital expenditures for segment assets		1,267		1,348			2,268			1,971
Product Sales:
Revenues	$	5,410	$	4,745		$	10,052		$	9,245
Depreciation and amortization		202		170			399			318
Income from operations		1,042		853			1,721			1,631
Capital expenditures for segment assets		98		76			145			173
Corporate (unallocated):
Other income (expense)	$	56	$	(67	)	$	60		$	(257	)
Company:
Revenues	$	25,185	$	21,332		$	46,346		$	41,990
Depreciation and amortization		1,420		1,342			2,840			2,641
Income from operations		1,537		556			1,655			1,408
Other income (expense)		56		(67	)		60			(257	)
Income before income tax expense		1,593		489			1,715			1,151
Capital expenditures for assets		1,365		1,424			2,413			2,144

(In thousands)	June 30, 2010		December 31, 2009
Assets:
Laboratory Services	$	62,365	$	60,630
Product Sales		14,134		11,884
Corporate (unallocated)		2,977		3,603
Company	$	79,476	$	76,117

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

(In thousands)	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
POC on-site testing products	$	4,682	$	4,316	$	8,791	$	8,341
Contract manufacturing services		553		327		948		705
Other diagnostic products		175		102		313		199
	$	5,410	$	4,745	$	10,052	$	9,245

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3.  INVENTORIES

Inventories consisted of the following:

(In thousands)	June 30, 2010		December 31, 2009
Raw materials	$	691	$	653
Work in process		396		400
Finished goods		317		360
Supplies, including off-site inventory		2,143		2,180
	$	3,547	$	3,593

4.  EARNINGS PER SHARE

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

(In thousands, except share and per share data)	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Net income (A)	$	1,012	$	311	$	1,089	$	731
Weighted average number of basic common shares outstanding (B)		8,700,838		8,538,965		8,669,326		8,518,524
Dilutive effect of stock options  computed based on the treasury stock method		263,032		277,680		238,447		240,809
Weighted average number of diluted common shares outstanding (C)		8,963,870		8,816,645		8,907,773		8,759,333
Basic earnings per common share (A/B)	$	0.12	$	0.04	$	0.13	$	0.09
Diluted earnings per common share (A/C)	$	0.11	$	0.04	$	0.12	$	0.08

5.  INCOME TAXES

At December 31, 2009, the Company had federal net operating loss carryforwards (NOLs) of approximately $9.0 million, which are available to offset future taxable income.  The Company's federal NOLs expire in varying amounts each year from 2018 through 2028 in accordance with applicable federal tax regulations and the timing of when the NOLs were incurred.  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 u naffected until the benefit of the NOLs is completely utilized or expires unused.

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6.  CONTINGENCIES

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

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

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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”, “expec ts”, and similar expressions constitute forward looking statements, although not all forward looking statements contain such identifying words.  Examples of forward looking statements include, but are not limited to (i) projections of, or statements regarding, future revenues, income or loss, earnings or loss per share, capital expenditures, dividends, capital structure, margins and other financial items, (ii) statements regarding our plans and objectives and the impacts thereof, including planned introductions of new products and services, planned exiting of lines of business and planned regulatory filings, or estimates or predictions of actions by customers, suppliers, competitors or regulatory authorities, (iii) estimates of market sizes and market opportunities, (iv) statements regarding economic conditions, and (v) statements of assumptions underlying other statements and statements about our business.

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 representat ion by us or anyone else that we will achieve such results.  Moreover, we assume no obligation to update these forward looking statements to reflect actual results or changes in assumptions, expectations, or projections.  In addition, our financial and performance outlook concerning future revenues, margins, earnings, earnings per share, and other operating or performance results does not include the impact of any future acquisitions, future acquisition-related expenses or accruals, or any future restructuring or other charges that may occur from time to time due to management decisions and changing business circumstances and conditions.

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

·   increased competition, including price competition

·   changes in demand for our services and products by our customers

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

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

·   our ability to attract and retain experienced and qualified personnel

·   risks and uncertainties with respect to our patents and proprietary rights, including:

o   other companies challenging our patents

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

o   other companies designing around technologies we have developed

o   our inability to obtain appropriate licenses from third parties

o   our inability to protect our trade secrets

o   risk of infringement upon the proprietary rights of others

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

·   our inability to control the costs in our business

·   our inability to obtain sufficient financing to continue to sustain or expand our operations

·   adverse results in litigation matters

·   our inability to continue to develop innovative products and services

·   our inability to provide our services in a timely manner

·   an unforeseen decrease in the acceptance of current new products and services, including in the market for clinical laboratory testing for physicians offices and patients

·   fluctuations in clinical trial activities

·   inaccurate information regarding market opportunities

·   failure to receive regulatory approvals and clearances

·   other factors, including those set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009

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

Executive Overview

Our Business

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

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Laboratory Services

Our “Laboratory Services” business segment includes the activities of our wholly-owned subsidiary, MEDTOX Laboratories, Inc.  MEDTOX Laboratories, Inc. engages in drugs-of-abuse testing services, providing these services to private and public companies, drug treatment counseling centers, criminal justice facilities, occupational health clinics and hospitals, as well as third party administrators.

MEDTOX Laboratories, Inc. also provides clinical and other laboratory services which consist of clinical toxicology, clinical testing for occupational health clinics, and heavy metal, trace element and solvent analyses.  We provide these services to hospitals, clinics, HMOs and other laboratories.  Testing is conducted using methodologies that include various immunoassays, gas liquid chromatography, gas chromatography/mass spectrometry, and high performance liquid chromatography with tandem mass spectrometry.  We recently expanded our clinical & other laboratory services to include laboratory tests used by physicians and other healthcare providers for the purpose of diagnosing or treating disease or illness or the assessment of health in humans.  Testing is performed on blood, body fluids or tissues.  Our comprehensive clinical laboratory services include clinical chemistry, hematology, coagulation, urinalysis, immunology/serology (viruses, infectious diseases, immune system), immunohematology (blood typing, antibody screens), microbiology (bacteria, parasites), anatomical pathology/cytology (tissue biopsies, cancer), molecular diagnostics (infectious diseases, genetic disorders) and sub-specialties of these categories.  We also provide services in the areas of logistics management, data management and program management.  These services support our underlying business of laboratory analysis and provide added value to our clients.

MEDTOX Laboratories, Inc. also provides clinical trial services which includes central laboratory services, assay (test) development, bio-analytical, bio-equivalence and pharmacokinetic testing.  Central laboratory services include tests that are used to monitor the safety and efficacy of a drug.  These tests or “safety labs” include tests that are performed in our general clinical laboratory and pathology laboratory such as clinical chemistries (liver function, kidney function, cardiac and bone), hematology (blood count), immunology (immune status), and flow cytometry (cell identification).  Assay development, bio-analytical and bio-equivalence studies are performed in our bio-analytical laboratory.  These tests are conducted using methodologies such as immunoassay, gas chromatograph y, high performance liquid chromatography, gas chromatography/mass spectrometry and tandem mass spectrometry.  Clients for our clinical testing services include clinical trial sponsors (pharmaceutical and biotech companies), clinical research organizations (CROs), research organizations, and investigators with trial management, patient recruitment/enrollment and site management.

The New Brighton Business Center, LLC (NBBC) is a wholly-owned limited liability company formed for the sole purpose of acquiring the facilities in St. Paul, Minnesota, where our Laboratory Services administrative offices and laboratory operations are located.

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Product Sales

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

Key Trends Influencing Our Operating Results

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

Economic Uncertainties Causing Variability in Testing Volumes in the Laboratory Services and Product Sales, Drugs-of-Abuse Business

In the first and second quarters of 2010, testing volume from our existing workplace drugs-of-abuse clients was lower than in the prior year periods, which we primarily attributed to lower new job creation and reduced employment levels and corresponding drops in hiring caused by economic uncertainties.  We feel economic uncertainties may continue to cause variability in our workplace drugs-of-abuse testing volume in the foreseeable future.

Increased POCT Diagnostic Device Test Competition

We have experienced increased competition with respect to our POCT diagnostic tests from systems and products developed by others, many of whom compete solely on price.  Due to the recent downturn in the economy, we have experienced increased price competition for certain diagnostic testing devices, particularly in the probation, parole and rehabilitation market.

Our Strategy

Our strategy is to drive profitable growth by building market share, leveraging our existing infrastructure and technical expertise, and driving innovation.  We maintain a disciplined culture, focused on the successful execution of our strategy and plans.

Building Market Share

We have solid niche positions in large markets, relative to our size, that allow us to build market share by offering high quality products and services that are delivered rapidly, priced competitively, and supported by excellent customer service and value-added services.  Our value added services include data management, collection site management, training, technical support and expertise, as well as review of drug testing policies for clients.

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Our success in penetrating new accounts has represented a significant component of our growth in market share.  Over the past four years, we have expanded our number of sales representatives from 23 to 51.  The increase in sales representatives has increased our business from new accounts and helps offset risks from uncertain economic conditions that may cause lower activity from existing workplace drugs-of-abuse clients.

Leveraging Existing Infrastructure and Technical Expertise

We leverage our existing infrastructure and technical expertise to facilitate top line growth and improve operating margins.

In 2008, we expanded our clinical laboratory capabilities to include clinical and anatomic pathology, microbiology, molecular diagnostics, and other specialized testing capabilities.  This expansion leverages existing capabilities and opens up new revenue opportunities by offering full-service testing capabilities to the physician office market.

Our LEAN and Six-Sigma initiatives support our effort to leverage existing infrastructure by improving quality and productivity, cutting costs, and increasing throughput.  LEAN is a highly disciplined process that helps us focus on reducing waste and eliminating unnecessary steps in our business processes.  Our Six-Sigma initiatives address quality and variability within processes. While all key departments in the Laboratory Services and Product Sales segments have now been through initial LEAN processes, as an organization we recognize that LEAN is an ongoing philosophy, not a project to be “finished.”

Driving Innovation

We have introduced a number of innovative products and services.

In 2009, we introduced the next generation PROFILE®-V MEDTOXScan® Drugs-of-Abuse Test System with added functionality for hospital laboratories and emergency rooms.

In 2008, we introduced ToxAssure®, a comprehensive program for effective pain management testing.

Critical Accounting Policies

There were no significant changes to our critical accounting policies during the three and six-month periods ended June 30, 2010 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.

Results of Operations

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

To maximize our operating income, we have sought revenue growth, improved gross margin and reduced selling, general and administrative (SG&A) expense as a percentage of revenues.  As discussed below, during the second quarter of 2010 and the first six months of this year, we were able to achieve revenue growth and improved gross margin, but we experienced an increase in SG&A expenses as a percentage of revenues.

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Revenues

	Three Months Ended									Six Months Ended
(In thousands, except percentages)	June 30, 2010		June 30, 2009		$ Change		% Change			June 30, 2010		June 30, 2009		$ Change			% Change
Revenues:
Laboratory Services
Drugs-of abuse testing  services	$	10,160	$	9,618	$	542		6	%	$	18,956	$	18,064	$	892			5	%
Clinical & other laboratory services		7,578		5,377		2,201		41	%		14,468		10,774		3,694			34	%
Clinical trial services		2,037		1,592		445		28	%		2,870		3,907		(1,037	)		(27	)%
Product Sales		5,410		4,745		665		14	%		10,052		9,245		807			9	%
	$	25,185	$	21,332	$	3,853		18	%	$	46,346	$	41,990	$	4,356			10	%

Our Laboratory Services segment includes revenues from workplace drugs-of-abuse testing, clinical and other laboratory services and clinical trial services.  Our revenues from drugs-of-abuse testing increased 6% to $10.2 million and 5% to $19.0 million for the three and six month periods ended June 30, 2010, respectively.  The increase in both periods was primarily a result of an increase in new account revenues.  The increases were partially offset by a 9% and 8% decline in revenues from our existing drugs-of-abuse clients for the three and six months periods ended June 30, 2010, respectively, due to challenging economic conditions affecting hiring decisions.  We expect a continuing negative impact on revenue from our drugs-of-abuse clients in 2010 caused by the negative economic conditions affe cting hiring.  Pricing for our workplace drugs-of-abuse testing services tends to be fairly stable overall; however, the average price per testing specimen can vary slightly from quarter-to-quarter.  Test price can vary by client based on the percentage of samples that test positive for drugs-of-abuse and the average number of samples per shipment.

Revenues in our clinical and other laboratory services increased 41% to $7.6 million and 34% to $14.5 million for the three and six month periods ended June 30, 2010, respectively.  The improvement in both periods was due to continued strong growth generated by our expanded clinical laboratory capabilities and diversification initiatives undertaken in 2008.

Revenues in clinical trial services increased 28% to $2.0 million for the three months ended June 30, 2010 and reflects an increase in activity and deferral of work into this period after the slow-down of projects experienced in the first quarter.    For the six months ended June 30, 2010, revenues decreased 27% to $2.9 million due to a slow-down of projects in the first quarter of 2010.   Revenues from clinical trial services can fluctuate from quarter-to-quarter based on the project nature, size, and the actual timing of clinical trials.

Our Product Sales segment includes revenues from point-of-collection on site testing products (POCT), contract manufacturing services and other diagnostic products.

Sales of POCT products, which consist of the PROFILE®-II, PROFILE®-II A, PROFILE-II ER®, PROFILE®-III ER, PROFILE®-III, PROFILE®-III A, PROFILE®-IV, PROFILE®-V, VERDICT®-II and SURE-SCREEN® on-site test kits and other ancillary products for the detection of abused substances, increased 8% to $4.7 million and 5% to $8.8 million for the three and six months ended June 30, 2010, respectively.  The increase in both periods was due primarily to an increase in revenues from device sales in the workplace and hospital markets.  Overall, pricing for our POCT devices was slightly lower than the prior year periods.

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Sales of contract manufacturing services increased 69% to $0.6 million and 35% to $0.9 million for the three and six months ended June 30, 2010, respectively.   After an analysis of this product category in 2007, we concluded that it had diminishing opportunities for us, and we are phasing out contract manufacturing services.  The increase in both periods was due to additional revenue from one of our clients whose contract expired on June 30, 2010.  Based on the expected increased sales of higher-margin POCT products, we do not anticipate a significant impact on our results of operations from exiting this business.

Sales of other diagnostic products increased $73,000 to $175,000 for the three months ended June 30, 2010 and increased $114,000 to $313,000 for the six months ended June 30, 2010 due to the sale of the new NexScreen 12 panel diagnostic product.

Cost of Revenues and Gross Margin

	Three Months Ended										Quarter-over-Quarter
(In thousands, except percentages)	June 30, 2010		% of Revenues			June 30, 2009		% of Revenues			$ Change		% Change
Cost of Revenues:
Cost of Services	$	12,551		63.5	%*	$	11,634		70.1	%*	$	917		8	%
Cost of Sales		2,293		42.4	%**		2,032		42.8	%**		261		13	%
	$	14,844		58.9	%	$	13,666		64.1	%	$	1,178		9	%

	Six Months Ended										Year-over-Year
(In thousands, except percentages)	June 30, 2010		% of Revenues			June 30, 2009		% of Revenues			$ Change		% Change
Cost of Revenues:
Cost of Services	$	23,584		65.0	%*	$	22,751		69.5	%*	$	833		4	%
Cost of Sales		4,321		43.0	%**		3,930		42.5	%**		391		10	%
	$	27,905		60.2	%	$	26,681		63.5	%	$	1,224		5	%

*      Cost of services as a percentage of Laboratory Services revenues

**      Cost of sales as a percentage of Product Sales revenues

Consolidated gross margin was 41.1% and 39.8% of revenues for the three and six months ended June 30, 2010, respectively, compared to 35.9% and 36.5% of revenues for the same periods in 2009.

Laboratory Services gross margin was 36.5% and 35.0% for the three and six months ended June 30, 2010, respectively, up from 29.9% and 30.5% for the same periods of 2009.  The increase in both periods in 2010 was primarily due to an increase in higher margin clinical testing revenues.

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Gross margin from Product Sales was 57.6% and 57.0% for the three and six months ended June 30, 2010, respectively, compared to 57.2% and 57.5% for the same periods of 2009.

Operating Expenses

	Three Months Ended										Quarter-over-Quarter
(In thousands, except percentages)	June 30, 2010		% of Revenues			June 30, 2009		% of Revenues			$ Change			% Change
Operating Expenses:
Selling, general and    administrative	$	8,231		32.7	%	$	6,521		30.6	%	$	1,710			26	%
Research and    development		573		2.3	%		589		2.8	%		(16	)		(3	)%
	$	8,804		35.0	%	$	7,110		33.3	%	$	1,694			24	%

	Six Months Ended										Year-over-Year
(In thousands, except percentages)	June 30, 2010		% of Revenues			June 30, 2009		% of Revenues			$ Change			% Change
Operating Expenses:
Selling, general and    administrative	$	15,664		33.8	%	$	12,742		30.3	%	$	2,922			23	%
Research and    development		1,122		2.4	%		1,159		2.8	%		(37	)		(3	)%
	$	16,786		36.2	%	$	13,901		33.1	%	$	2,885			21	%

   Selling, General and Administrative Expenses.  Selling, general and administrative (SG&A) expenses increased to $8.2 million, or 32.7% of revenues for the three months ended June 30, 2010, compared to $6.5 million, or 30.6% of revenues for the same period in 2009.  For the six months ended June 30, 2010, SG&A expenses increased to $15.7 million, or 33.8% of revenues, compared to $12.7 million, or 30.3% of revenues for the same period in 2009.  The increase in both periods was primarily due to increased costs associated with the growth in clinical revenue and increased incentive-based compensation.  Increased expenses associated with the growth in our clinical & other laboratory services busin ess include the expansion of our sales force in the second half of last year,  higher sales related expenses including sales commissions and travel-related expenses, and an increase in expenses related to third party and patient billing.

Other Income (Expense)

Other income  (expense) consists primarily of our investment gains/losses, the net expenses associated with our building rental activities and interest expense.  Other income was $56,000 for the three months ended June 30, 2010 compared to other expense of $67,000 for the same period in 2009.  Other income was $60,000 for the six months ended June 30, 2010 compared to other expense of $257,000 for the same period in 2009.  The variance in both periods was due to an investment gain on our marketable equity securities held in trust in the second quarter of 2010 compared to an investment loss in the same period of 2009.  The variance in the six month period was also due to the reclassification of $195,000 in the first quarter of 2010 from Other Income (Expense) which was determined to be m ore appropriately classified in SG&A expenses.

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Liquidity and Capital Resources

Our working capital requirements have been funded primarily by profitable operations.  Cash and cash equivalents at June 30, 2010 were $4.9 million, compared to $4.2 million at December 31, 2009.

Net cash provided by operating activities was $3.1 million for the six months ended June 30, 2010, compared to $1.8 million for the six months ended June 30, 2009.  The increase was attributable to an increase in net earnings, excluding non-cash charges such as depreciation, amortization, deferred compensation and provision for losses on accounts receivable.

Net cash used in investing activities, consisting of capital expenditures, was $2.4 million for the six months ended June 30, 2010, compared to $2.1 million for the same period of 2009.   In both periods, these expenditures included equipment purchased and costs incurred to upgrade equipment, improve efficiencies and increase service levels to our clients.

Net cash provided by financing activities was $0.1 million for the six months ended June 30, 2010, compared to net cash used in financing activities of $0.5 million in the prior year period.  The change was primarily due to an increase in the net proceeds from the exercise of stock options, as well as a  decrease in the repurchase of shares of our common stock.  In the first six months of 2010, we repurchased 23,290 shares of our common stock in the open market for a cost of $0.3 million.  In the first six months of 2009, we repurchased 60,644 shares of our common stock in the open market for a cost of $0.4 million. The shares repurchased were placed in trust to fund our Long-Term Incentive Plan.

We are party to a credit security agreement (the "Wells Fargo Credit Agreement") with Wells Fargo Bank, National Association (the “Bank”).  The Wells Fargo Credit Agreement, as amended, consists of a revolving line of credit ("Line of Credit") of up to $8.0 million bearing interest at a fluctuating rate of 2.25% above the daily three month LIBOR, as defined and calculated by the Bank.  We did not have an outstanding balance on the Line of Credit at June 30, 2010 or December, 31, 2009.

Subject to certain conditions, the Wells Fargo Credit Agreement also provides for the issuance of letters of credit which, if drawn upon, would be deemed advances under the Line of Credit.  We are required to pay a fee equal to 0.25% per annum on the average daily unused amount of the Line of Credit.  We have granted the Bank a first priority security interest in all of the Company’s accounts receivable, other rights to payment, general intangibles, inventory, and equipment to secure all indebtedness of the Company to the Bank.

Extensions of credit under the Wells Fargo Credit Agreement are subject to certain conditions.  The Wells Fargo Credit Agreement also requires us to comply with certain financial covenants, including maintaining, on a consolidated basis:

·   Tangible Net Worth not less than $40,000,000 at any time, with “Tangible Net Worth” defined as the aggregate of total stockholders’ equity plus subordinated debt less any intangible assets.

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·   Current Ratio not less than 1.3 to 1.0 at each month end, with “Current Ratio” defined as total current assets divided by total current liabilities.

·   Total Liabilities divided by Tangible Net Worth not greater than 1.75 to 1.0 at any time, with “Total Liabilities” defined as the aggregate of current liabilities and non-current liabilities less subordinated debt, and with “Tangible Net Worth” as defined above.

·   A Debt Service Coverage Ratio not less than 1.5 to 1.0 as of each fiscal quarter end, determined on a rolling four-quarter basis, with “Debt Service Coverage Ratio” defined as the aggregate of net income before non-cash tax expense plus depreciation expense and amortization expense, divided by the aggregate of the current maturity of long-term debt for the previous four fiscal quarters plus current capital lease obligations for the previous four fiscal quarters.

We were in compliance with all of the financial covenants under the Wells Fargo Credit Agreement at June 30, 2010.

Off-Balance Sheet Transactions

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

Impact of Inflation and Changing Prices

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

Seasonality

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

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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 June 30, 2010.  For additional information refer to Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2009.

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 and 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.

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PART II                     OTHER INFORMATION

ITEM 1A                   RISK FACTORS.  There have been no material changes to our risk factors during the three and six months ended June 30, 2010.  For additional information refer to Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009.

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

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased (a)		Average Price Paid per Share		Total Number of Shares Purchased as part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1 - 30		23,259	$	12.37		-		-
May 1 - 31		-		-		-		-
June 1 - 30		31		12.81		-		-
Total		23,290	$	12.37		-		-

(a)  Represents the number of shares of the Company’s common stock repurchased to fund the Company’s Long-Term Incentive Plan and Supplemental Executive Retirement Plan.  Repurchases of shares may be made through open market or privately negotiated transactions at times and in such amounts as management deems appropriate.

ITEM 5                      OTHER INFORMATION.  The MEDTOX Scientific, Inc. 2010 Stock Incentive Plan (the ‘Plan”) was approved by the stockholders on June 15, 2010.  A description of the material terms of the Plan appeared in the Definitive Proxy Statement for the 2010 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on April 22, 2010, which is incorporated by reference herein.

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

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SIGNATURES

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

Signature	Title	Date
/s/ Richard J. Braun	President, Chief Executive Officer, and	July 29, 2010
Richard J. Braun	Chairman of the Board of Directors (Principal Executive Officer)
/s/ Kevin J. Wiersma	Vice President and Chief Financial Officer	July 29, 2010
Kevin J. Wiersma	(Principal Financial Officer)
/s/ Angela M. Lacis	Corporate Controller	July 29, 2010
Angela M. Lacis	(Principal Accounting Officer)

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EXHIBIT INDEX

MEDTOX SCIENTIFIC, INC.

FORM 10-Q FOR QUARTER ENDED JUNE 30, 2010

Exhibit

Number                   Description

10.1 MEDTOX Scientific, Inc. 2010 Stock Incentive Plan

31.1   Section 302 Certification

31.2   Section 302 Certification

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.

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EX-10.1

Exhibit 10.1

MEDTOX SCIENTIFIC, INC.

2010 STOCK INCENTIVE PLAN

SECTION 1:                         Purpose; Definitions

The purpose of the Plan is to give the Company a competitive advantage in attracting, retaining and motivating officers and employees other than senior management, and to provide the Company and its Subsidiaries with a stock plan providing incentives directly linked to the profitability of the Company's businesses and increases in stockholder value.

For purposes of the Plan, the following terms are defined as set forth below:

a.   "Award" means an award of Restricted Stock.

b.   "Board" means the Board of Directors of the Company.

c.   "Change of Control" has the meaning set forth in Section 8(b).

d.   "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto.

e.   "Commission" means the Securities and Exchange Commission or any successor agency.

f.   "Committee" means the Committee referred to in Section 2.

g.   "Common Stock" means common stock, par value $.01 per share, of the Company.

h.   "Company" means MEDTOX Scientific, Inc., a Delaware corporation.

i.   "Covered Employee" means a participant designated prior to the grant of Restricted Stock by the Committee who is or may be a "covered employee" within the meaning of Section 162(m)(3) of the Code in the year in which Restricted Stock is expected to be taxable to such participant.

j.   "Disability" means permanent and total disability as determined for purposes of the Company's Long Term Disability Plan for the staff of the Company's corporate headquarters.

k.   "Eligible Individuals" means officers or other employees of the Company or any of its Subsidiaries and prospective employees who have accepted offers of employment from the Company or its Subsidiaries who are or will be responsible for or contribute to the management, growth or profitability of the business of the Company or its Subsidiaries.

l.   "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto.

m.   "Performance Goals" means the performance goals established by the Committee in connection with the grant of Restricted Stock.  In the case of Qualified Performance-Based Awards, the following requirements shall apply.  Such Performance Goals shall be expressed in terms of one or more of the following financial or other objective goals which may be Company-wide or otherwise, including on a division basis, regional basis or on an individual basis: (i) total stockholder return, including its components of stock price appreciation, dividends and/or dividend yield; (ii) return  on  assets, equity, invested  capital, cash  flow, investment, or related return ratios; (iii) sales, operating income, revenues or net revenues; (iv) pre-tax or after-tax profit levels, including: net earnings, net earnin gs growth, earnings per share, and earnings before interest, taxes, depreciation and amortization (EBITDA); (v) cash flow, operating cash flow, or free cash flow; or (vi) levels of operating expense, including reductions in the Company’s overhead ratio, expense to sales ratios, or debt levels.

Any criteria may be measured in absolute terms or as compared to another company or companies.  Criteria in addition to those provided above (including, but not limited to, criteria relating to confidential business information) may also be taken into account, but only to the extent permitted by Section 162(m) of the Code.  To the extent applicable, any such Performance Goal shall be determined (I) in accordance with the Company’s audited financial statements and generally accepted accounting principles and reported upon by the Company’s independent accountants or (II) so that a third party having knowledge of the relevant facts could determine whether such Performance Goal is met.  Performance Goals shall include a threshold level of performance below which no Award shall be made, levels of p erformance at which specified percentages of the target Award shall be paid and a maximum level of performance above which no additional Award shall be paid.  The Performance Goals established by the Committee may be (but need not be) different for different performance periods and different Performance Goals may be applicable to different Eligible Individuals.  The applicable Performance Goal or Goals may be adjusted for such events and circumstances as the Committee deems appropriate, provided, however, that all Performance Goals and any related adjustments to the Performance Goals applicable to officers covered by Section 162(m) of the Code shall be preestablished in accordance with Section 162(m) of the Code and regulations thereunder.

n.   "Plan" means the MEDTOX Scientific, Inc. 2010 Stock Incentive Plan, as set forth herein and as hereinafter amended from time to time.

o.   "Qualified Performance-Based Award" means an Award of Restricted Stock designated as such by the Committee at the time of grant, based upon a determination that (i) the recipient is or may be a "covered employee" within the meaning of Section 162(m)(3) of the Code in the year in which the Company would expect to be able to claim a tax deduction with respect to such Restricted Stock and (ii) the Committee wishes such Award to qualify for the Section 162(m) Exemption.

p.   "Restricted Stock" means an Award granted under Section 5.

q.   "Section 162(m) Exemption" means the exemption from the limitation on deductibility imposed by Section 162(m) of the Code that is set forth in Section 162(m)(4)(C) of the Code.

r.   "Subsidiary" means any corporation, partnership, joint venture or other entity during any period in which at least a majority voting interest in such entity is owned, directly or indirectly, by the Company or any successor to the Company.

s.   "Termination of Employment" means the termination of the participant's employment with the Company and any of its Subsidiaries.  A participant employed by a Subsidiary shall also be deemed to incur a Termination of Employment if the Subsidiary ceases to be such a Subsidiary, and the participant does not immediately thereafter become an employee of the Company or another Subsidiary.  Temporary absences from employment because of illness, vacation or leave of absence and transfers among the Company and its Subsidiaries shall not be considered Terminations of Employment.  If so determined by the Committee, a participant shall be deemed not to have incurred a Termination of Employment if the participant enters into a contract with the Company or a subsidiary providing for the rendering by the participant of consulting service s to the Company or such subsidiary on terms approved by the Committee; however, Termination of Employment of the participant shall occur when such contract ceases to be in effect.

In addition, certain other terms used herein have definitions given to them in the first place in which they are used.

SECTION 2:                         Administration

The Plan shall be administered by the Compensation Committee or such other committee of the Board as the Board may from time to time designate (the "Committee"), which shall be composed of not less than two directors, and shall be appointed by and serve at the pleasure of the Board.

The Committee shall have plenary authority to grant Awards pursuant to the terms of the Plan to Eligible Individuals.

Among other things, the Committee shall have the authority, subject to its power to delegate its authority as described below and subject to the other terms of the Plan:

(a)To select the Eligible Individuals to whom Awards may from time to time be granted;

(b)To determine the number of shares of Common Stock to be covered by each Award granted hereunder;

(c)To determine the terms and conditions of any Award granted hereunder, including, but not limited to, any vesting condition, restriction or limitation (which may be related to the performance of the participant, the Company or any Subsidiary) and any vesting acceleration or forfeiture waiver regarding any Award and the shares of Common Stock relating thereto, based on such factors as the Committee shall determine; and

(d)To modify, amend or adjust the terms and conditions of any Award, at any time or from time to time, including but not limited to Performance Goals; provided, however, that the Committee may not adjust upwards the amount payable with respect to a Qualified Performance-Based Award or waive or alter the Performance Goals associated therewith or cause such Restricted Stock to vest earlier than permitted by Section 5(c)(viii).

The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall from time to time deem advisable, to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreement relating thereto) and to otherwise supervise the administration of the Plan.

The Committee may act only by a majority of its members then in office, except that the Committee may, except to the extent prohibited by applicable law or regulation or the applicable rules of a stock exchange, allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers to any person or persons selected by it; provided that no such delegation may be made that would cause Awards or other transactions under the Plan to cease to be exempt from Section 16(b) of the Exchange Act or cause an Award designated as a Qualified Performance-Based Award not to qualify for, or to cease to qualify for, the Section 162(m) Exemption.  Any such allocation or delegation may be revoked by the Committee at any time.

Any determination made by the Committee or pursuant to delegated authority pursuant to the provisions of the Plan with respect to any Award shall be made in the sole discretion of the Committee or such delegate at the time of the grant of the Award or, unless in contravention of any express term of the Plan, at any time thereafter.  All decisions made by the Committee or any appropriately delegated officer pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants.

Any authority granted to the Committee may also be exercised by the full Board, except to the extent that the grant or exercise of such authority would cause any Award or transaction to become subject to (or lose an exemption under) the short-swing profit recovery provisions of Section 16 of the Exchange Act or cause an Award designated as a Qualified Performance-Based Award not to qualify for, or to cease to qualify for, the Section 162(m) Exemption.  To the extent that any permitted action taken by the Board conflicts with action taken by the Committee, the Board action shall control.

SECTION 3:                                Common Stock Subject to Plan

The maximum number of shares of Common Stock that may be issued to participants and their beneficiaries under the Plan shall be 500,000.  No participant may be granted Awards covering in excess of 5,000 shares of Common Stock in any calendar year during which the Plan is in existence.  Shares subject to an Award under the Plan may be authorized and unissued shares or may be treasury shares.  If any Award is forfeited, shares of Common Stock subject to such Awards shall again be available for distribution in connection with Awards under the Plan.  To the extent any shares of Common Stock subject to an Award are not delivered to a participant because such shares are used to satisfy an applicable tax-withholding obligation, such shares shall not be deemed to have been issued for purposes of determin ing the maximum number of shares of Common Stock available for issuance under the Plan.

In the event of any change in corporate capitalization (including, but not limited to, a change in the number of shares of Common Stock outstanding), such as a stock split or a corporate transaction, any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code) or any partial or complete liquidation of the Company, the Committee or Board may make such substitution or adjustments in the aggregate number and kind of shares reserved for issuance under the Plan; provided, however, that the number of shares subject to any Award shall always be a whole number.

SECTION 4:                         Eligibility

Awards may be granted under the Plan to Eligible Individuals.  No grant shall be made under this Plan to a director who is not an officer or a salaried employee of the Company or its Subsidiaries.

SECTION 5:                         Restricted Stock Awards

(a)Administration.  Shares of Restricted Stock may be awarded either alone or in addition to other Awards granted under the Plan.  The Committee shall determine the Eligible Individuals to whom and the time or times at which grants of Restricted Stock will be awarded, the number of shares to be awarded to any Eligible Individual, the conditions for vesting, the time or times within which such Awards may be subject to forfeiture and any other terms and conditions of the Awards, in addition to those contained in Section 5(c).

(b)Awards and Certificates.  Shares of Restricted Stock shall be evidenced in such manner as the Committee may deem appropriate, including book-entry registration or issuance of one or more stock certificates.  Any certificate issued in respect of shares of Restricted Stock shall be registered in the name of such Eligible Individual and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award, substantially in the following form:

"The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the MEDTOX Scientific, Inc. 2010 Stock Incentive Plan and a Restricted Stock Agreement.  Copies of such Plan and Agreement are on file at the offices of MEDTOX Scientific, Inc., 402 West County Road D, St. Paul, MN 55112."

The Committee may require that the certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed and that, as a condition of any Award of Restricted Stock, the participant shall have delivered a stock power, endorsed in blank, relating to the Common Stock covered by such Award.

(c)   Terms and Conditions.  Shares of Restricted Stock shall be subject to the following terms and conditions:

(i)The Committee may, prior to or at the time of grant, designate an Award of Restricted Stock as a Qualified Performance-Based Award, in which event it shall condition the grant or vesting, as applicable, of such Restricted Stock upon the attainment of Performance Goals.  If the Committee does not designate an Award of Restricted Stock as a Qualified Performance-Based Award, it may also condition the grant or vesting thereof upon the attainment of Performance Goals.  Regardless of whether an Award of Restricted Stock is a Qualified Performance-Based Award, the Committee may also condition the grant or vesting thereof upon the continued service of the participant.  The conditions for grant or vesting a nd the other provisions of Restricted Stock Awards (including without limitation any applicable Performance Goals) need not be the same with respect to each recipient.  The Committee may at any time, in its sole discretion, accelerate or waive, in whole or in part, any of the foregoing restrictions; provided, however, that in the case of Restricted Stock that is a Qualified Performance-Based Award, the applicable Performance Goals have been satisfied.

(ii)Subject to the provisions of the Plan and the Restricted Stock Agreement referred to in Section 5(c)(vi), during the period, if any, set by the Committee, commencing with the date of such Award for which such participant's continued service is required (the "Restriction Period"), and until the later of (i) the expiration of the Restriction Period and (ii) the date the applicable Performance Goals (if any) are satisfied, the participant shall not be permitted to sell, assign, transfer, pledge or otherwise encumber shares of Restricted Stock.

(iii)Except as provided in this paragraph (iii) and Sections 5(c)(i) and 5(c)(ii) and the Restricted Stock Agreement, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Company holding the class or series of Common Stock that is the subject of the Restricted Stock, including, if applicable, the right to vote the shares and the right to receive any cash dividends.  If so determined by the Committee in the applicable Restricted Stock Agreement, (A) cash dividends on the class or series of Common Stock that is the subject of the Restricted Stock Award shall be automatically deferred and reinvested in additional Restricted Stock, held subject to the vesting of the underlying Restricted Stock, or held subject to meeting Performance Goals applicable only to dividends, and (B) dividends payable in Common Stock shall be paid in the form of Restricted Stock of the same class as the Common Stock with which such dividend was paid, held subject to the vesting of the underlying Restricted Stock, or held subject to meeting Performance Goals applicable only to dividends.

(iv)Except to the extent otherwise provided in the applicable Restricted Stock Agreement or Section 5(c)(i), 5(c)(ii), 5(c)(v) or 8(a)(ii), upon a participant's Termination of Employment for any reason during the Restriction Period or before the applicable Performance Goals are satisfied, all shares still subject to restriction shall be forfeited by the participant.

(v)       Except to the extent otherwise provided in Section 6(a)(i), in the event that a participant retires or such participant's employment is involuntarily terminated, the Committee shall have the discretion to waive, in whole or in part, any or all remaining restrictions (other than, in the case of Restricted Stock with respect to which a participant is a Covered Employee, satisfaction of the applicable Performance Goals unless the participant's employment is terminated by reason of death or Disability) with respect to any or all of such participant's shares of Restricted Stock.

(vi)If and when any applicable Performance Goals are satisfied and the Restriction Period expires without a prior forfeiture of the Restricted Stock, unlegended certificates for such shares shall be delivered to the participant upon surrender of the legended certificates.

(vii)Each Award shall be confirmed by, and be subject to, the terms of a Restricted Stock Agreement.

(viii)Notwithstanding the foregoing, but subject to the provisions of Section 8 hereof, no Award in the form of Restricted Stock, the vesting of which is conditioned only upon the continued service of the participant, shall vest earlier than the first, second and third anniversaries of the date of grant thereof, on each of which dates a maximum of one-third of the shares of Common Stock subject to the Award may vest, and no award in the form of Restricted Stock, the vesting of which is conditioned upon the attainment of a specified Performance Goal or Goals, shall vest earlier than the first anniversary of the date of grant thereof.

SECTION 6:                         Change of Control Provisions

(a)Impact of Event.  Notwithstanding any other provision of the Plan to the contrary, in the event of a Change of Control:

(i)The restrictions and deferral limitations applicable to any Restricted Stock shall lapse, and such Restricted Stock shall become free of all restrictions and become fully vested and transferable to the full extent of the original grant.

(ii)The Committee may also make additional adjustments and/or settlements of outstanding Awards as it deems appropriate and consistent with the Plan’s purposes.

(b)Definition of Change of Control.  For purposes of the Plan, a "Change of Control" shall mean the happening of any of the following:

(i)a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act, whether or not the Company is then subject to such reporting requirement; or

(ii)       a merger or consolidation to which the Company is a party if, following the effective date of such merger or consolidation, the individuals and entities who were stockholders of the Company prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of less than fifty percent (50%) of the combined voting power of the surviving corporation following the effective date of such merger or consolidation; or

(iii)       when, during any period of twenty-four (24) consecutive months, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof, provided, however, that a director who was not a director at the beginning of such twenty-four (24) month period shall be deemed to have satisfied such twenty-four (24) month requirement, and be an Incumbent Director, if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually, because they were directors at the beginning of such twenty-four (24) month period, or by prior operation of this Section.

SECTION 7:                         Term, Amendment and Termination

The Plan will terminate on the tenth anniversary of the effective date of the Plan.  Under the Plan, Awards outstanding as of such date shall not be affected or impaired by the termination of the Plan.

The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made which would impair the rights of a recipient of an Award, theretofore granted without the recipient's consent, except such an amendment made to comply with applicable law, stock exchange rules or accounting rules.  In addition, no such amendment shall be made without the approval of the Company's stockholders to the extent such approval is required by applicable law or stock exchange rules and no such amendment may, without the approval of the Company's stockholders, (1) increase, other than by operation of the antidilution clauses contained in Section 3 of the Plan, the number of shares of Common Stock available for the grant of Awards under the Plan or to alter the maximum number of shares available for the gr ant of Awards; (2) modify the criteria for eligibility to participate in the Plan or the nature of the Awards which may be granted under the Plan; and (3) alter the provisions set forth in Section 5(c)(viii) of the Plan with respect to minimum vesting schedules relating to Awards in the form of Restricted Stock.

The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, but no such amendment shall cause a Qualified Performance-Based Award to cease to qualify for the Section 162(m) Exemption or impair the rights of any holder without the holder's consent except such an amendment made to cause the Plan or Award to comply with applicable law, or regulation, stock exchange rules, or accounting rules.

Subject to the above provisions, the Board shall have authority to amend the Plan to take into account changes in law and tax and accounting rules as well as other developments, and to grant Awards which qualify for beneficial treatment under such rules without stockholder approval.

SECTION 8:                         General Provisions

(a)The Committee may require each person purchasing or receiving shares pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to the distribution thereof.  The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer.

Notwithstanding any other provision of the Plan or agreements made pursuant thereto, the Company shall not be required to issue or deliver any certificate or certificates for shares of Common Stock under the Plan prior to fulfillment of all of the following conditions:

(i)Listing or approval for listing upon notice of issuance, of such shares on the securities exchange as may at the time be the principal market for the Common Stock;

(ii)Any registration or other qualification of such shares of the Company under any state or federal law or regulation, or the maintaining in effect of any such registration or other qualification which the Committee shall, in its absolute discretion upon the advice of counsel, deem necessary or advisable; and

(iii)Obtaining any other consent, approval, or permit from any state or federal governmental agency which the Committee shall, in its absolute discretion after receiving the advice of counsel, determineto be necessary or advisable.

(b)Nothingcontained in the Plan shall prevent the Company or any Subsidiary from adopting other or additional compensation arrangements for its employees.

(c)The Plan shall not constitute a contract of employment, and adoption of the Plan shall not confer upon any employee any right to continued employment, nor shall it interfere in any way with the right of the Company or any Subsidiary to terminate the employment of any employee at any time.

(d)No later than the date as of which an amount first becomes includible in the gross income of the participant for federal income tax purposes with respect to any Award under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount.  Withholding obligations may be settled with Common Stock, including Common Stock that is part of the Award that gives rise to the withholding requirement; provided, that not more than the legally required minimum withholding may be settled with Common Stock.  The obligations of the Company under the Pla n shall be conditional on such payment or arrangements, and the Company and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the participant.  The Committee may establish such procedures as it deems appropriate, including making irrevocable elections, for the settlement of withholding obligations with Common Stock.

(e)The Committee shall establish such procedures as it deems appropriate for a participant to designate a beneficiary to whom any amounts payable in the event of the participant's death are to be paid or by whom any rights of the participant, after the participant's death, may be exercised.

(f)In the case of a grant of an Award to any employee of a Subsidiary of the Company, the Company may, if the Committee so directs, issue or transfer the shares of Common Stock, if any, covered by the Award to the Subsidiary, for such lawful consideration as the Committee may specify, upon the condition or understanding that the Subsidiary will transfer the shares of Common Stock to the employee in accordance with the terms of the Award specified by the Committee pursuant to the provisions of the Plan.  All shares of Common Stock underlying Awards that are forfeited or canceled shall revert to the Company.

(g)The Plan and all Awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws.

(h)In the event an Award is granted to an Eligible Individual who is employed or providing services outside the United States and who is not compensated from a payroll maintained in the United States, the Committee may, in its sole discretion, modify the provisions of the Plan as they pertain to such individual to comply with applicable foreign law.

SECTION 12:                                Effective Date of Plan

The Plan shall be effective as of the date it is approved by the stockholders of the Company.

EX-31.1

EXHIBIT 31.1

Certification

       I, Richard J. Braun, certify that:

1. I have reviewed this 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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

d) 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:   July 29, 2010	By:   /s/ Richard J. Braun
	Richard J. Braun Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Certification

       I, Kevin J. Wiersma, certify that:

1. I have reviewed this 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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

d) 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:   July 29, 2010	By:   /s/ Kevin J. Wiersma
	Kevin J. Wiersma Chief Financial Officer

EX-32.1

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, 2010, 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:   July 29, 2010	By:   /s/ Richard J. Braun
	Richard J. Braun Chief Executive Officer

EX-32.2

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, 2010, 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:   July 29, 2010	By:   /s/ Kevin J. Wiersma
	Kevin J. Wiersma Chief Financial Officer