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

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

For the quarterly period ended September 30, 2004

OR

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

For the transition period                           to                          

Commission file number 1-11394

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


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

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




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


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

Yes       X       No           

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

Yes            No       X     

The number of shares of Common Stock, $.15 par value, outstanding as of October 26, 2004, was 7,535,191.

MEDTOX SCIENTIFIC, INC.

INDEX

Page
Part I        Financial Information:  
 
                  Item 1: Financial Statements (Unaudited)
 
                           Consolidated Statements of Operations - Three and Nine
                           Months Ended September 30, 2004 and 2003 3 
 
                           Consolidated Balance Sheets - September 30, 2004
                           and December 31, 2003 4 
 
                           Consolidated Statements of Cash Flows - Nine
                           Months Ended September 30, 2004 and 2003 5 
 
                           Notes to Consolidated Financial Statements 6 
 
                  Item 2:
 
                           Management's Discussion and Analysis of
                           Financial Condition and Results of Operations 11 
 
                  Item 3:
 
                           Quantitative and Qualitative Disclosures
                           About Market Risk 21 
 
                  Item 4:
 
                           Controls and Procedures 21 
 
Part II       Other Information 22 
 
                  Item 1: Legal Proceedings 22 
                  Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 22 
                  Item 3: Defaults upon Senior Securities 22 
                  Item 4: Submission of Matters to a Vote of Security Holders 22 
                  Item 5: Other Information 22 
                  Item 6: Exhibits 22 
 
                           Signatures 23 
                           Exhibit Index 24 

2

PART I    FINANCIAL INFORMATION
Item 1:     FINANCIAL STATEMENTS (UNAUDITED)

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


Three Months Ended
September 30, 		Nine Months Ended
September 30,
2004
2003
2004
2003
REVENUES:                    
   Laboratory services     $ 10,979   $ 10,391   $ 32,694   $ 30,010  
   Product sales       3,494     3,177     10,426     9,186  
        14,473     13,568   43,120     39,196  
COST OF REVENUES:    
  Cost of services       7,055     6,804     20,638     20,006  
  Cost of sales       1,386     1,304     4,096     3,925  
        8,441     8,108     24,734     23,931  
GROSS PROFIT       6,032     5,460     18,386     15,265  
     
OPERATING EXPENSES:    
   Selling, general and administrative       4,397     4,157     13,310     12,878  
   Research and development       354     401     1,189     1,233  
        4,751     4,558     14,499     14,111  
INCOME FROM OPERATIONS       1,281     902     3,887     1,154  
     
OTHER INCOME (EXPENSE):    
   Interest expense       (264 )   (281 )   (790 )   (876 )
   Other expense, net       (99 )   (129 )   (337 )   (363 )
        (363 )   (410 )   (1,127 )   (1,239 )
INCOME (LOSS) BEFORE INCOME    
TAX (EXPENSE) BENEFIT       918     492     2,760     (85 )
     
INCOME TAX (EXPENSE) BENEFIT       (349 )   (109 )   (1,049 )   15  
NET INCOME (LOSS)     $ 569   $ 383   $ 1,711   $ (70 )
BASIC EARNINGS (LOSS) PER    
COMMON SHARE (1)    $ 0.08   $ 0.05   $ 0.23   $ (0.01 )
DILUTED EARNINGS (LOSS) PER    
COMMON SHARE (1)    $ 0.07   $ 0.05   $ 0.22   $ (0.01 )
WEIGHTED AVERAGE NUMBER OF    
   SHARES OUTSTANDING:    
          Basic (1)      7,444,973     7,424,004     7,451,174     7,406,906  
          Diluted (1)      7,930,347     7,585,857     7,806,901     7,406,906  

(1)     Share and per share amounts for the three and nine months ended September 30, 2003 have been restated for the three-for-two stock split paid August 20, 2004.

See Notes to Consolidated Financial Statements (Unaudited).

3

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

September 30,
2004
December 31,
2003
ASSETS            
CURRENT ASSETS:  
   Cash and cash equivalents   $ 542   $ 711  
   Accounts receivable:  
        Trade, less allowance for doubtful accounts ($491 in 2004 and $372 in 2003)    9,089    7,922  
        Other    147    145  
        Note receivable from related party    --    300  
            Total accounts receivable    9,236    8,367  
   Inventories    3,547    3,564  
   Deferred income taxes    1,258    1,258  
   Prepaid expenses and other    796    1,406  
            Total current assets    15,379    15,306  
BUILDING, EQUIPMENT AND IMPROVEMENTS, net    16,526    15,092  
GOODWILL    15,967    15,967  
OTHER INTANGIBLE ASSETS, net    1,746    1,836  
DEFERRED INCOME TAXES, net    7,028    8,077  
OTHER ASSETS    204    240  
TOTAL ASSETS   $ 56,850   $ 56,518  
LIABILITIES AND STOCKHOLDERS' EQUITY   
CURRENT LIABILITIES:  
   Line of credit   $ 5,510   $ 5,126  
   Accounts payable    1,853    2,236  
   Accrued expenses    3,982    3,649  
   Current portion of long-term debt    1,511    2,725  
   Current portion of capital leases    79    73  
             Total current liabilities    12,935    13,809  
LONG-TERM DEBT, net of current portion    6,347    7,526  
LONG-TERM PORTION OF CAPITAL LEASES, net of current portion    52    113  
   
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, 7,534,661 in 2004 and 4,977,221 in 2003    1,130    746  
   Additional paid-in capital    82,020    81,666  
   Deferred stock-based compensation    (626 )  (995 )
   Accumulated deficit    (44,832 )  (46,171 )
   Treasury stock    (176 )  (176 )
             Total stockholders' equity    37,516    35,070  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 56,850   $ 56,518  

See Notes to Consolidated Financial Statements (Unaudited).

4

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

Nine Months Ended
September 30,
2004
 2003
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:            
   Net income (loss)   $ 1,711   $ (70 )
   Adjustments to reconcile net income (loss) to net cash provided by  
           operating activities:  
      Depreciation and amortization    2,332    2,124  
      Provision for losses on accounts receivable    210    566  
      Loss on sale of equipment    7    --  
      Deferred compensation    336    396  
      Deferred income taxes    1,049    --  
      Changes in operating assets and liabilities:  
         Accounts receivable    (1,079 )  (263 )
         Inventories    17    860  
         Prepaid expenses and other current assets    610    213  
         Other assets    (157 )  97  
         Accounts payable and accrued expenses    (50 )  (2,034 )
                Net cash provided by operating activities    4,986    1,889  
   
CASH FLOWS USED IN INVESTING ACTIVITIES:   
   Capital expenditures    (3,447 )  (2,136 )
   Proceeds from sale of equipment    46    --  
                Net cash used in investing activities    (3,401 )  (2,136 )
   
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:   
   Net proceeds from sale of common stock    547    44  
   Net proceeds on revolving credit facility    384    751  
   Proceeds from long-term debt    --    1,641  
   Principal payments on long-term debt    (2,481 )  (1,994 )
   Principal payments on capital leases    (55 )  (66 )
   Payment of taxes from traded shares    (149 )  --  
              Net cash provided by (used in) financing activities    (1,754 )  376  
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS    (169 )  129  
   
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD    711    439  
CASH AND CASH EQUIVALENTS AT END OF PERIOD   $ 542   $ 568  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:  
   Cash paid for:  
          Interest   $ 789   $ 846  

See Notes to Consolidated Financial Statements (Unaudited).

5

MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2004

1.     BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of MEDTOX Scientific, Inc. (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of financial condition and results of operations have been included. Operating results for the nine-month period ended September 30, 2004 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, 2003.

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 has elected the continued use of APBO No. 25.

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


<
(In thousands, except per share data) Three Months Ended
September 30, 		Nine Months Ended
September 30,
2004
2003
2004
2003
Net income (loss)......................................