The Company – The consolidated financial statements include the accounts of MEDTOX Scientific, Inc. and its wholly-owned subsidiaries: MEDTOX Laboratories, Inc. (MEDTOX Laboratories), MEDTOX Diagnostics, Inc. (MEDTOX Diagnostics) and New Brighton Business Center, LLC (NBBC) (collectively referred to as the "Company").

MEDTOX Laboratories provides 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, prescription management testing, courier delivery, and medical surveillance; and clinical trial services which include central laboratory services, assay development, bio-analytical, bio-equivalence and pharmacokinetic testing.

MEDTOX Diagnostics is engaged in the development, manufacturing, and distribution of a variety of POCT diagnostic drug screening devices, such as our PROFILE®-II, PROFILE®-II A, PROFILE®-III A, PROFILE-II ER®, PROFILE®-III ER, PROFILE®-IV, PROFILE®-V, MEDTOXScan®, VERDICT®-II and SURE-SCREEN®, and EZ-SCREEN® Cup, in addition to other diagnostic tests for the detection of alcohol. MEDTOX Diagnostics, Inc. also provides contract manufacturing services, such as coagulation market controls.

Use of Estimates - The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The more significant estimates include the valuation of accounts receivable, inventories, goodwill and other intangible assets, deferred income taxes and the recorded amounts for certain accruals. Actual results could differ from those estimates. Results for 2011 include $1,600,000 of bad debt expense which related to a change in estimate in the allowance for doubtful accounts for patient and third party receivables at December 31, 2010. The revision was based on our increased experience and the increased actual collection data that we obtained in 2011 relating to these receivables

Accounts Receivable and allowance for doubtful accounts - Accounts receivable are reported at realizable value, net of allowance for doubtful accounts, which is estimated and recorded in the period the related revenue is recorded. The Company has a standardized approach to estimate and review the collectability of its receivables based on the period of time they have been outstanding. The Company’s process for determining the appropriate level of the allowance for doubtful accounts involves judgment, and considers such factors as the age of the underlying receivables, specific account reviews, historical collection experience, and other external factors that could affect the collectability of its receivables. Revisions to the allowance for doubtful accounts are recorded as an adjustment to bad debt expense within selling, general and administrative. Accounts are written off against the allowance for doubtful accounts when they are deemed to be uncollectible. Recoveries of receivables previously written-off are recorded as credits to the allowance for doubtful accounts.

Goodwill – The Company reviews goodwill for impairment at least annually and between annual test dates in certain circumstances. The Company performs its annual impairment test for goodwill in the fourth quarter of each year after the Company’s annual forecasting process. No impairments were indicated as a result of the annual impairment reviews for goodwill in 2011, 2010 or 2009. In assessing the recoverability of goodwill, projections regarding estimated future cash flows and other factors are made to determine the fair value of the respective assets. If these estimates or related projections change in the future, the Company may be required to record impairment charges for these assets.

Goodwill is allocated to the Company’s reporting unit, which is one reporting level below the operating segment. The Company compares the fair value of the reporting unit to its carrying amount on an annual basis to determine if there is potential impairment. If the fair value of the reporting unit is less than its carrying value, impairment is indicated to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. If the carrying amount of the goodwill exceeds its fair value, an impairment loss is recognized. Fair value for the reporting unit is determined based on discounted cash flows.

Intangible Assets and Other Long-Lived Assets – Finite-lived intangible assets consist of customer lists, technology, patents and trademarks and are amortized on a straight-line or accelerated basis based upon estimated useful or contractual lives, ranging from 5 to 20 years. The Company reviews finite-lived intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset plus net proceeds expected from disposition of the asset (if any). When the Company recognizes an impairment loss, the carrying amount of the asset is reduced to estimated fair value based on discounted cash flows, quoted market prices or other valuation techniques. Assets to be disposed of are reported at the lower of the carrying amount of the asset or fair value less costs to sell.

Revenue Recognition - Revenues from Laboratory Services are recognized as earned at such time as the Company has completed services. The Company’s services are considered to be complete when it has performed the applicable laboratory testing services and the results have been sent to the Company’s customers or posted to the Company’s secure website. Billings for services reimbursed by third-party payers, including Medicare, Medicaid, and insurance companies are recorded as revenues net of allowances for differences between amounts billed and the estimated receipts from such payers. Adjustments to the allowances, based on actual receipts from the third-party payers, are recorded upon settlement.

Income Taxes – The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to be settled.

The Company recognizes in its financial statements the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

Earnings per Common Share – Basic earnings per common share equals net earnings divided by the weighted average common shares outstanding during the period. Diluted earnings per common share equals net earnings divided by the weighted average common shares outstanding during the period, including the dilutive effects of stock options and non-vested share awards.

Fair Value of Financial Instruments – The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses are considered to be representative of their respective fair values due to their short-term nature. The carrying amount of the line of credit at December 31, 2010 approximated fair value due to the variable interest rate.

Concentrations of Credit Risk – Concentrations of credit risk with respect to accounts receivable are limited due to the diversity of the Company’s clients as well as their dispersion across many different geographic regions. The Company had no customers that accounted for more than 10% of consolidated revenues in 2011, 2010, or 2009 or accounts receivable at December 31, 2011 or 2010.

Comprehensive Income – Comprehensive income is a measure of all non-owner changes in shareholders’ equity and includes such items as net income, certain foreign currency translation items, minimum pension liability adjustments, and changes in the value of available-for-sale securities. In 2011, 2010, and 2009, comprehensive income for the Company was equal to net income as reported.

New Accounting Standards – In September 2011, the Financial Accounting Standards Board (FASB) issued updated guidance on the periodic testing of goodwill for impairment. This guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This new guidance was effective for the Company beginning January 1, 2012. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial statements.

In July 2011, the FASB issued guidance on the presentation and disclosure of patient service revenue, provision for bad debts, and the allowance for doubtful accounts for certain health care entities. This guidance requires certain health care entities to change the presentation of their statement of income by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The guidance also requires disclosures of patient service revenue (net of contractual allowances and discounts by major payor source) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. This new guidance was effective for the Company beginning January 1, 2012. The adoption of this guidance will decrease both our gross profit and selling, general and administrative expenses. The table below shows the estimated impact on revenues, gross margin, and selling, general and administrative expenses, by quarter in 2011 and 2010, of adopting this guidance.

($'s in thousands)	2010					2011
	Q1-10	Q2-10	Q3-10	Q4-10	Full Year	Q1-11	Q2-11	Q3-11	Q4-11	Full Year

Revenues, as reported	$ 21,161	$ 25,185	$ 25,799	$ 24,956	$ 97,101	$ 25,736	$ 27,921	$ 27,578	$ 26,914	$ 108,149
Revenues, as restated	20,962	24,942	25,424	23,969	95,297	25,098	26,931	26,521	25,889	104,439

Gross Margin, as reported	38.3%	41.1%	41.9%	41.6%	40.8%	40.6%	43.3%	41.2%	40.6%	41.5%
Gross Margin, as restated	37.7%	40.5%	41.1%	39.2%	39.7%	39.1%	41.2%	38.9%	38.3%	39.4%

SG&A, as reported	7,433	8,231	8,394	8,633	32,691	8,624	9,281	8,633	8,606	35,144
SG&A, as restated	7,234	7,988	8,019	7,646	30,887	7,986	8,291	7,576	7,581	31,434

SG&A %, as reported	35.1%	32.7%	32.5%	34.6%	33.7%	33.5%	33.2%	31.3%	32.0%	32.5%
SG&A %, as restated	34.5%	32.0%	31.5%	31.9%	32.4%	31.8%	30.8%	28.6%	29.3%	30.1%