<PAGE>

                       U.S. SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C. 20549


                                     FORM 1O-QSB



[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
       For the quarterly period ended June 30, 1997

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
        For the transition period from ________ to ________

                           Commission File Number : 0-21284



                           SALIVA DIAGNOSTIC SYSTEMS, INC.
          (Exact name of small business issuer as specified in its charter)


                DELAWARE                                         91-1549305
    (State or other jurisdiction                              (I.R.S. Employer
   of incorporation or organization)                         Identification No.)


                                 11719 NE 95TH STREET
                                 VANCOUVER, WA  98682
                 (Address of principal executive offices and zip code)
                                    (360) 696-4800
                    (Issuer's telephone number including area code)


Check whether the issuer (1) 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 [   ]


The number of shares outstanding of the Registrant's Common Stock as of  July
30, 1997 was 26,688,868 shares.


Transitional Small Business Disclosure Format (check one):  Yes [   ]    No [X]



<PAGE>



                           SALIVA DIAGNOSTIC SYSTEMS, INC.

                                     FORM 10-QSB

                                        INDEX

PART I   FINANCIAL INFORMATION                                         Page

    Item 1.   Financial Statements

              Consolidated Balance Sheets -June 30, 1997
              and December 31, 1996                                     2

              Consolidated Statements of Operations-Three Months
              and Six Months Ended June 30, 1997 and 1996               3

              Consolidated Statements of Cash Flows - 
              Six Months Ended June 30, 1997 and 1996                   4

              Notes to Consolidated Financial Statements                5

    Item 2.   Management's Discussion and Analysis of Financial
              Condition and Results of Operations                       7


PART II   OTHER INFORMATION

    Item 1.   Legal Proceedings                                         10

    Item 2.   Changes in Securities                                     11

    Item 4.   Submission of Matters to a Vote of Security Holders       11

    Item 6.   Exhibits and Reports on Form 8-K                          12


                                       1
<PAGE>


                           SALIVA DIAGNOSTIC SYSTEMS, INC.
                             CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                           June 30,       December 31,
                                                             1997             1996
                                                          -----------     ------------
<S>                                                       <C>             <C>
ASSETS
Current assets:
   Cash                                                    $  360,125     $  776,380
   Accounts receivable                                        227,705        178,436
   Inventories                                                433,944        268,431
   Prepaid expenses                                            47,092         34,425
   Stock subscriptions receivable                             912,500             --
                                                           ----------     ----------
      Total current assets                                  1,981,366      1,257,672

   Property and equipment, less accumulated
      depreciation of $912,859 and $792,309                   430,202        493,649
   Deposits                                                   197,738        188,647
   Restricted cash                                            120,500        120,500
   Patents and trademarks, less accumulated
     amortization of $43,779 and $39,183                      113,137        117,733
                                                           ----------     ----------
                                                           $2,842,943     $2,178,201
                                                           ----------     ----------
                                                           ----------     ----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued expenses                   $1,324,040       $818,073
   Accrued interest payable                                    68,239         68,240
   Current portion of long-term debt and 
     obligations under capital leases                          30,000         35,057
                                                           ----------     ----------
       Total current liabilities                            1,422,279        921,370

Long-term debt and obligations under capital
  leases, net of current portion                               83,493         96,199
                                                           ----------     ----------
       Total liabilities                                    1,505,772      1,017,569

Stockholders' equity:
   Common stock, $.01 par value, 33,000,000
     shares authorized, issued and outstanding:
       1997: 23,855,963 and 1996: 22,090,785                  238,560        220,908
   Additional paid-in capital                              25,697,948     22,998,052
   Note receivable from shareholder for stock                 (83,825)       (83,825)
   Cumulative foreign currency translation adjustment         (70,716)       (60,257)
   Accumulated deficit                                    (24,444,796)   (21,914,246)
                                                           ----------     ----------
      Total stockholders' equity                            1,337,171      1,160,632
                                                           ----------     ----------
                                                           $2,842,943     $2,178,201
                                                           ----------     ----------
                                                           ----------     ----------
</TABLE>

         The accompanying notes are an integral part of these balance sheets.



                                       2
<PAGE>


                           SALIVA DIAGNOSTIC SYSTEMS, INC.
                        CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                  Three months ended          Six months ended
                                                       June 30,                   June 30,
                                           --------------------------    --------------------------
                                               1997           1996           1997           1996
                                           -----------    ------------   ------------    -----------
<S>                                        <C>            <C>            <C>             <C>
Revenues:
 Product sales                                $484,869       $124,937       $711,903       $296,316
 Technology license income                          --         12,342             --         12,342
                                           -----------    -----------    -----------    -----------
                                               484,869        137,279        711,903        308,658

Costs and expenses:
 Cost of products sold                         464,219         66,753        723,860        187,263
 Research and development expense              156,124         91,843        350,836        195,838
 Selling, general and administrative
  expense                                      826,715      1,075,132      1,780,628      1,979,916
                                           -----------    -----------    -----------    -----------
   Loss from operations                       (962,189)    (1,096,449)    (2,143,421)    (2,054,359)


Interest income                                  8,447         17,395         14,126         39,737
Interest expense                              (400,705)          (645)      (409,284)       (69,668)
Other income (expense)                          (1,200)            --          8,030             --
                                           -----------    -----------    -----------    -----------
  Net loss                                 $(1,355,647)   $(1,079,699)   $(2,530,549)   $(2,084,290)
                                           -----------    -----------    -----------    -----------
                                           -----------    -----------    -----------    -----------
  Net loss per share                            $(0.06)        $(0.05)        $(0.11)        $(0.11)
                                           -----------    -----------    -----------    -----------
                                           -----------    -----------    -----------    -----------
  Shares used in per share calculations     22,322,340     20,992,000     22,206,563     18,760,000
                                           -----------    -----------    -----------    -----------
                                           -----------    -----------    -----------    -----------
</TABLE>

      The accompanying notes are an integral part of these financial statements.


                                       3
<PAGE>


                            SALIVA DIAGNOSTIC SYSTEMS, INC.
                        CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>

                                                                    Six months ended 
                                                                         June 30,
                                                               ---------------------------
                                                                   1997           1996
                                                               -------------  ------------
<S>                                                            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                                      $(2,530,549)   $(2,084,290)
 Adjustments to reconcile net loss to net cash
  provided by (used in) operating activities:
   Cumulative foreign translation adjustment                       (10,459)       (33,433)
   Depreciation and amortization                                   147,632        190,615
   Shares issued in lieu of fees and expenses                                      65,702
   Interest expense related to conversion of Debentures            404,395
  Changes in current assets and liabilities:
   Accounts receivable                                             (49,269)       (36,770)
   Inventories                                                    (165,513)       (52,673)
   Prepaid expenses and deposits                                   (21,758)         4,188
   Accounts payable and accrued expenses                           505,967         11,280
                                                               -------------  ------------
    Net cash used in operating activities                       (1,719,554)    (1,935,381)

CASH FLOWS FROM INVESTING ACTIVITIES:
 Additions to property and equipment                               (59,387)      (294,230)
 Other assets                                                           --         (3,004)
                                                               -------------  ------------
  Net cash used in investing activities                            (59,387)      (297,234)

CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from Convertible Debentures, net of
   issuance costs                                                1,380,000
 Payment of convertible debentures                                      --        (25,000)
 Notes payable and interim financing, net                               --        109,476
 Repayment of long term debt and capital lease obligations         (17,764)        (9,061)
 Exercise of Common Stock options and warrants                         450      1,905,897
                                                               -------------  ------------
  Net cash provided by financing activities                      1,362,686      1,981,312
                                                               -------------  ------------
  Net decrease in cash and cash equivalents                       (416,255)      (251,303)
    Cash and cash equivalents, beginning of period                 776,380      2,688,014
                                                               -------------  ------------
    Cash and cash equivalents, end of period                      $360,125     $2,436,711
                                                               -------------  ------------
                                                               -------------  ------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
 Shares issued in lieu of fees and expenses                     $       --     $   65,702
 Conversion of Debentures into Common Stock                      1,380,000      2,760,000
 Subscription receivable for Common Stock                          912,500             --

</TABLE>

      The accompanying notes are an integral part of these financial statements.



                                       4
<PAGE>


                           SALIVA DIAGNOSTIC SYSTEMS, INC.
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.  BASIS OF PRESENTATION

    The accompanying unaudited consolidated financial statements as of and 
for the three and six month periods ended June 30, 1997 and 1996 have been 
prepared in conformity with generally accepted accounting principles. The 
financial information as of December 31, 1996 is derived from Saliva 
Diagnostic Systems, Inc. (the "Company") consolidated financial statements 
included in the Company's Annual Report on Form 10-KSB for the year ended 
December 31, 1996. Certain information or footnote disclosures normally 
included in consolidated financial statements prepared in accordance with 
generally accepted accounting principles have been condensed or omitted, 
pursuant to the rules and regulations of the Securities and Exchange 
Commission. In the opinion of management, the accompanying consolidated 
financial statements include all adjustments necessary (which are of a normal 
and recurring nature) for the fair presentation of the results of the interim 
periods presented. The accompanying consolidated financial statements should 
be read in conjunction with the Company's audited financial statements for 
the year ended December 31, 1996, as included in the Company's Annual Report 
on Form 10-KSB for the year ended December 31, 1996.

    Operating results for the three month and six month periods ended June 30,
1997 are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 31, 1997, or any other portion thereof.

2.  RECLASSIFICATIONS

    Certain reclassifications have been made to the 1996 statement of 
operations to conform to the 1997 presentation. These reclassifications had 
no effect on the results of operations in any periods presented. 

3.  INVENTORIES

    Inventories are stated at the lower of cost or market determined on a 
first-in, first-out (FIFO) basis, and consist of the following:

                                            June 30,     December 31,
                                              1997           1996
                                          ------------   ------------
         Raw materials                      $251,411       $253,000
         Work in process                     102,622          2,495
         Finished goods                       79,911         12,936
                                            --------       --------
                                            $433,944       $268,431
                                            --------       --------
                                            --------       --------
4.  CONTINGENCIES

    As discussed in the Company's Annual Report on Form 10-KSB for the year 
ended December 31, 1996 and the Form 10-QSB for the quarter ended March 31, 
1997, in January 1997, a lawsuit was filed by Ronald Lealos, the former 
President of the Company, who resigned in December 1996. The complaint in the 
lawsuit alleged various breach of contract claims. This lawsuit was dismissed 
without prejudice as a prerequisite to a settlement agreement between Mr. 
Lealos and the Company currently in the process of being documented. There 
can be no assurance that a final settlement acceptable to the Company will be 
concluded with Mr. Lealos, or that if new litigation ensues and is decided 
adverse to the Company, that it would not have a material adverse effect on 
the Company.


                                       5
<PAGE>


    As previously disclosed, Luc Hardy, a former director and officer of the 
Company, filed a complaint in Federal court against the Company and several 
individual defendants making certain allegations, including breach of 
employment agreement, intentional interference with contract by the 
individual defendants, slander and deceptive trade practices, arising from 
his termination. On July 25, 1997, a jury in this case rendered a verdict for 
the plaintiff, awarding approximately $200,000 for lost compensation and 
$525,000 for unawarded stock options. The jury's award, which is not a final 
judgment, will be the subject of post-trial motions of the Company to set 
aside the verdict and enter judgment for the Company. Although the Company 
intends to defend itself vigorously and believes the jury verdict is 
unsupported by the evidence, there can be no assurance the Company's motions 
will be granted or that the final judgment in this case will not have a 
material adverse effect on the Company. A final judgment is expected 
subsequent to a September 29, 1997 hearing.

5.  IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

    In March 1997, the Financial Accounting Standards Board ("FASB") issued 
Statement of Financial Accounting Standards No. 128, "Earnings per Share" 
("SFAS 128") and Statement of Financial Accounting Standards No. 129, 
"Disclosure of Information about Capital Structure" ("SFAS 129"), which are 
effective for fiscal years ending after December 15, 1997. The Company 
believes the implementation of these statements will not have a material 
effect on its results of operations or financial statement disclosures.

    In June 1997, the FASB issued Statement of Financial Accounting Standards 
No. 130, "Reporting Comprehensive Income" (SFAS 130), which establishes 
requirements for disclosure of comprehensive income and is effective for the 
Company's fiscal year ending May 1999. Reclassification of earlier financial 
statements for comparative purposes is required. The Company believes the 
implementation of this statement will not have a material effect on its 
financial statement disclosures.

6.  SUBSEQUENT EVENTS

    As discussed below in "Management's Discussion and Analysis or Plan of 
Operation - Liquidity and Capital Resources," on June 30, 1997, the Company 
entered into two separate common stock subscription agreements for the 
issuance and sale of shares of the Company's Common Stock pursuant to 
Regulation D, promulgated under the Securities Act of 1933, as amended (the 
"Offering"). Pursuant to a Common Stock Purchase Agreement between the 
Company and certain investors named therein (the "Investors"), the Company 
sold a total of 2,420,000 shares of Common Stock to the Investors for an 
aggregate purchase price of $1,210,000, $612,500 of which was subscribed for 
by Investors as of June 30, 1997. Pursuant to a Common Stock Purchase 
Agreement between the Company and The Tail Wind Fund Ltd. ("Tail Wind"), the 
Company sold a total of 412,905 shares of Common Stock to Tail Wind for an 
aggregate purchase price of $300,000.

    The closing on $337,500 principal amount of the Offering to the Investors 
and $300,000 principal amount of the Offering to Tail Wind took place on July 
14, 1997; the closing of $547,500 principal amount of the Offering to the 
Investors took place on July 17, 1997; and the closing of the remaining 
$325,000 principal amount of the Offering to the Investors took place on July
22, 1997.


                                       6
<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

GENERAL

    Since its founding, the Company has been engaged almost exclusively in 
research and development activities focused on the development, manufacturing 
and marketing of rapid in vitro assays for use in the detection of infectious 
diseases and other conditions, proprietary specimen collection devices and 
other diagnostic devices.. 

    The Company has incurred significant operating losses since its 
inception, resulting in an accumulated deficit of $24,444,796 at June 30, 
1997. Such losses are expected to continue through 1997. There can be no 
assurance that the Company will achieve or maintain profitability in the 
future. The Company's significant operating losses and significant capital 
requirements raise substantial doubt about the Company's ability to continue 
as a going concern.

RESULTS OF OPERATIONS

SECOND QUARTER AND FIRST SIX MONTHS OF 1997 COMPARED TO SECOND QUARTER AND FIRST
SIX MONTHS OF 1996

    REVENUES. The Company's revenues consist primarily of product sales and 
license revenue. Revenues from product sales increased 288% to $484,900 in 
the second quarter of 1997 from $124,900 in the second quarter of 1996, and 
increased 140% to $711,900 in the first six months of 1997 from $296,300 in 
the first six months of 1996. The increases in product sales revenue were 
primarily attributable to increasing demand for the Company's rapid testing 
systems. There were no revenues received under license agreements in 1997. 
Sales to one customer represented approximately 24% of total revenues for the 
six months ended June 30, 1997.

    In 1996, the Company began to design and build equipment for automated 
production of its rapid tests at its Vancouver, Washington facility in the 
United States. The Company now believes such equipment will be fully 
installed and functioning by late 1997. The Company is required to meet 
certain conditions, including compliance with Food and Drug Administration 
requirements (such as good manufacturing practices), in order to manufacture 
its tests at its Vancouver facility and to export its products from there. 
The Company is currently addressing compliance with those requirements. 

    The Company has limited marketing resources. Achieving market acceptance 
will require substantial marketing efforts and capabilities. The Company 
relies in large part on forming partnerships with other companies for 
marketing and distribution of its products. There can be no assurance that 
the Company will form alliances with potential distributors or that these 
distributors will be successful in promoting the Company's products.

    COST OF PRODUCTS SOLD.  Costs of products sold increased to $464,200 (96% 
of product sales) in the second quarter of 1997 from $66,800 (53% of product 
sales) in the second quarter of 1996, and increased to $723,900 (102% of 
product sales) in the first six months of 1997 from $187,300 (63% of product 
sales) in the first six months of 1996. Costs of products sold increased as a 
percentage of product sales due to increased manufacturing overhead, larger 
square footage of manufacturing facilities and an increase in the number of 
manufacturing personnel.

    RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses 
increased 70% to $156,100 in the second quarter of 1997 from $91,800 in the 
second quarter of 1996, and increased 79% to $350,800 in the first six months 
of 1997 from $195,800 in the first six months of 1996. The increases were 
primarily a result of U.S. clinical trials for the Company's Stat-Simple test 
for  Helicobacter PYLORI  (H. PYLORI), which began in the second quarter of 
1997.

    Many of the Company's competitors are more established and have 
significantly greater financial and technological resources than the Company. 
In the biotechnology industry technological change and obsolescence

                                       7
<PAGE>


are rapid and frequent. There can be no assurance that the Company can keep pace
with such changes or avoid product obsolescence.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and 
administrative expenses decreased 23% to $826,700 in the second quarter of 
1997 from $1,075,100 in the second quarter of 1996, and decreased 10% to 
$1,780,600 in the first six months of 1997 from $1,979,900 in the first six 
months of 1996. The decreases were primarily a result of cost cutting 
programs put in place to reduce administrative expenses, offset by increased 
legal fees related to litigation matters, and increased accounting and legal 
fees related to securities compliance matters in the first six months of 1997.

    INTEREST EXPENSE AND LOAN FEES.  Interest expense increased to $400,700 
in the second quarter of 1997 from $600 in the second quarter of 1996, and 
increased to $409,200 in the first six months of 1997 from $69,700 in the 
first six months of 1996. In March 1997, in connection with the sale of $1.5 
million of Convertible Debentures, due February 28, 1999 (the "Debentures"), 
a discount of $375,000 was recorded, resulting from an allocation of proceeds 
to the discounted conversion feature. This discount was written off to 
interest expense at June 30, 1997, in connection with the conversion of the 
Debentures.

    INCOME TAXES. The Company is in a net deferred tax asset position and has 
generated net operating losses to date. Accordingly, no provision for or 
benefit from income taxes has been recorded in the accompanying statements of 
operations. The Company will continue to provide a valuation allowance for 
its deferred tax assets until it becomes more likely than not, in management's
assessment, that the Company's deferred tax assets will be realized.

LIQUIDITY AND CAPITAL RESOURCES

    Since inception, the Company has financed its capital requirements through 
proceeds from its public offering of stock in March 1993 and the exercise of
common stock purchase warrants pursuant to such offering, proceeds from sales of
convertible debentures, proceeds from private placements of Common Stock, and
the exercise of common stock purchase warrants and stock options. In March 1997,
the Company raised net proceeds of approximately $1,380,000 (net of issuance
costs of $120,000) from the private sale of the Debentures. In June 1997, the
Company entered into two separate common stock subscription agreements for the
issuance and sale of a total of 2,420,000 shares of Common Stock to the
Investors for an aggregate purchase price of $1,210,000.

    Cash used in operating activities in the first six months of 1997 was 
$1,719,600. This was primarily a result of a net loss of $2,530,500, and 
adjustments for the write off of the discounted conversion feature of the 
Debentures sold in March 1997 and the amount of accrued interest on the 
Debentures which was converted to Common Stock. Additionally, accounts 
receivable and inventories increased as a result of the increased level of 
revenues and accounts payable and accrued expenses increased as a result of 
the timing of payments.

    Cash used in investing activities in the first six months of 1997 was 
$59,400, which represented the purchase of manufacturing equipment. The 
Company has no material commitments for capital expenditures at June 30, 1997.

    Cash provided by financing activities in the first six months of 1997 was 
$1,362,700. This was primarily a result of net proceeds of $1,380,000 from 
the sale of the Debentures in March 1997, offset by the payment of long-term 
debt and capital lease obligations.

    In March 1997, the Company issued warrants to Grayson & Associates, Inc. 
("Grayson") in consideration of certain financial consulting services 
performed on behalf of the Company. The warrants entitle the holder thereof 
to purchase up to 89,552 shares of Common Stock from the Company for a 
purchase price of $1.34 per share on or before March 14, 2002. The 
warrantholder has certain demand and piggyback registration rights with 
respect to the shares that may be issued upon exercise of the warrants.


                                       8
<PAGE>

    In May and June 1997, the holders of the Debentures agreed to an 
acceleration of conversion and to hold the Common Stock issued pursuant to 
such conversion (the "Early Conversion Shares") in accordance generally with 
the original conversion schedule. On June 5, 1997, $800,000 in principal 
amount of the Debentures were converted into a total of 833,598 shares of the 
Company's Common Stock and on June 30, 1997 the remaining $700,000 in 
principal amount of the Debentures were converted into a total of 903,226 
shares of the Company's Common Stock. A total of $29,395 of accrued interest 
on the converted Debentures payable June 30, 1997 was paid to holders of the 
Debentures in the form of 27,604 shares of the Company's Common Stock. In 
addition, the Company agreed to certain conversion reset provisions, pursuant 
to which the holders of the Early Conversion Shares may receive certain 
additional shares of the Company's Common Stock under certain conditions.

    The number of shares of Common Stock issuable upon the conversion of the 
Debentures was determined by dividing the principal amount of the Debentures 
converted by the Conversion Price, as defined in the Debenture agreement. The 
number of shares of the Company's Common Stock issuable upon conversion was 
defined as the lesser of 115% of Company's Common Stock market price at 
issuance of the Debenture (i.e. $1.9191 per share) or 80% of the Company's 
Common Stock market price at conversion of the Debenture.

    A discount had been recorded at the date of issuance of the Debentures, 
resulting from an allocation of proceeds to the discounted conversion 
feature, which was to be amortized to interest expense over the conversion 
period. Additionally, financing costs related to these Debentures were 
deferred and amortized, using the effective interest method, over the term of 
the Debentures. The discount and remaining unamortized financing costs of 
$375,000 and $99,800, respectively, were written off to interest expense and 
additional paid in capital, respectively, upon conversion of the Debentures.

    On June 30, 1997, the Company entered into two separate common stock 
subscription agreements for the issuance and sale of shares of the Company's 
Common Stock pursuant to Regulation D, promulgated under the Securities Act 
of 1933, as amended  (the "Offering"). Pursuant to a Common Stock Purchase 
Agreement between the Company and certain investors named therein (the 
"Investors"), the Company sold a total of 2,420,000 shares of Common Stock to 
the Investors for an aggregate purchase price of $1,210,000, $612,500 of 
which was subscribed for by Investors as of June 30, 1997. Pursuant to a 
Common Stock Purchase Agreement between the Company and The Tail Wind Fund 
Ltd. ("Tail Wind"), the Company sold a total of 412,905 shares of Common 
Stock to Tail Wind for an aggregate purchase price of $300,000. Tail Wind is 
entitled to receive additional shares of Common Stock under its agreement 
subject to certain conditions related to the trading price of the Company's 
Common Stock during a specified period. The Common Stock purchased in the 
Offering is subject to certain resale restrictions. In connection with the 
Offering, the Company also entered into two separate registration rights 
agreements with the Investors and Tail Wind, under each of which the Company 
is required to file a registration statement covering resales of shares of 
the Common Stock sold in the Offering within 30 days after the date on which 
the closing relating to those shares occurred. Under each of such agreements, 
the Company may be required to make certain payments to the Investors and 
Tail Wind as damages if the registration statement is not declared effective 
by the Securities and Exchange Commission by October 12, 1997. In connection 
with the Offering, the Company has agreed to issue Grayson & Associates, Inc. 
("Grayson") warrants to purchase up to 226,632 shares of the Company's Common 
Stock which expire on June 30, 2002. Prior to September 1, 1997, the Company 
intends to issue to Tail Wind warrants to purchase up to 100,000 shares of 
the Company's Common Stock, exercisable at any time from January 1, 1998 to 
January 1, 2003, for an exercise price of $1.00 per share. Grayson and Tail 
Wind will have certain demand piggyback registration rights with respect to 
the shares of Common Stock that may be issued upon exercise of their 
respective warrants.

    The Company's capital requirements have been and will continue to be
significant. The Company's capital base is smaller than that of many of its
competitors, and there can be no assurance that the Company's cash resources
will be able to sustain its business. The Company currently has an accumulated
deficit due to its history of losses. The Company is dependent upon its effort
to raise capital to finance its future operations, including the cost of
manufacturing and marketing of its products, to conduct clinical trials and
submissions for FDA approval of its products and to continue the design and
development of its new products. Marketing, manufacturing and clinical testing
may require capital resources substantially greater than the resources available
to the Company.


                                       9
<PAGE>


The Company will continue to seek public or private placement of its equity 
and debt securities and corporate partners to develop products.

    The Company's future capital needs will depend upon numerous factors, 
including the progress of the approval for sale of the Company's products in 
various countries, including the United States, the extent and timing of the 
acceptance of the Company's products, the cost of marketing and manufacturing 
activities and the amount of revenues generated from operations, none of 
which can be predicted with certainty.

    Upon the filing by the Company of its Form 10-QSB for the period ended 
March 31, 1997, Nasdaq issued a letter to the Company asking the Company to 
demonstrate that it currently meets all Nasdaq listing requirements and can 
continue to meet those requirements. In order to continue to be included in 
Nasdaq, a company must maintain $2,000,000 in total assets, a $200,000 market 
value of the public float and $1,000,000 in total capital and surplus. In 
addition, continued inclusion requires two market-makers and a minimum bid 
price of $1.00 per share; provided, however, that if a company falls below 
such minimum bid price, it will remain eligible for continued inclusion in 
Nasdaq if the market value of the public float is at least $1,000,000 and the 
Company has $2,000,000 in capital and surplus. In June 5, 1997, the Company 
caused the early conversion of $800,000 of the 7.5% Convertible Debentures 
due February 28, 1999 to Common Stock  to demonstrate current compliance with 
the Nasdaq continued inclusion requirements and submitted to Nasdaq on June 
4, 1997, its plan to sustain compliance with the Nasdaq requirements. By 
letter dated July 16, 1997, Nasdaq advised the Company of its acceptance of 
the Company's plan of continued compliance upon certain conditions. To date, 
the Company has performed in accordance with such conditions.

    If the Company is removed from the Nasdaq system, trading, if any, in the 
Common Stock would thereafter be conducted in the over-the-counter market on 
an electronic bulletin board established for securities that do not meet the 
Nasdaq listing requirements or in what are commonly referred to as the "pink 
sheets". As a result, an investor would find it more difficult to dispose of, 
or to obtain accurate quotations as to the price of, the Company's 
securities. In addition, if the Company's securities were removed from the 
Nasdaq system, they would be subject to so-called "penny stock" rules that 
impose additional sales practice requirements on broker-dealers who sell such 
securities.  Consequently, removal from the Nasdaq system, if it were to 
occur, could affect the ability or willingness of broker-dealers to sell the 
Company's securities and the ability of purchasers of the Company's 
securities to sell their securities in the secondary market. 



                             PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

    As discussed in the Company's Annual Report on Form 10-KSB for the year 
ended December 31, 1996 ("Form 10-KSB") and the Form 10-QSB for the quarter 
ended March 31, 1997, in January 1997, a lawsuit was filed by Ronald Lealos, 
the former President of the Company, who resigned in December 1996. The 
complaint in the lawsuit alleged various breach of contract claims. This 
lawsuit was dismissed without prejudice as a prerequisite to a settlement 
agreement between the former President and the Company currently in the 
process of being documented. There can be no assurance that a final 
settlement acceptable to the Company will be concluded with Mr. Lealos, or 
that if new litigation ensues and is decided adverse to the Company, that it 
would not have a material adverse effect on the Company.

    As previously disclosed, Luc Hardy, a former director and officer of the 
Company, filed a complaint in U.S. District Court for the District of 
Connecticut in August 1994 against the Company and several individual 
defendants making certain allegations, including breach of employment 
agreement, intentional interference with contract by the individual 
defendants, slander and deceptive trade practices, arising from Mr. Hardy's 
termination. The complaint sought damages and punitive damages in an 
unspecified amount. On July 25, 1997, a jury in this case rendered a verdict 
for the plaintiff, awarding approximately $200,000 for lost compensation and 
$525,000 for unawarded stock options. The jury's award, which is not a final 
judgment, will be the subject of


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<PAGE>


post-trial motions of the Company to set aside the verdict and enter judgment 
for the Company. Although the Company intends to defend itself vigorously and 
believes the jury verdict is unsupported by the evidence, there can be no 
assurance the Company's motions will be granted or that the final judgment in 
this case will not have a material adverse effect on the Company. A final 
judgment is expected subsequent to a September 29, 1997 hearing.

ITEM 2.  CHANGES IN SECURITIES

    (c) On June 30, 1997, the Company entered into two separate common stock 
subscription agreements for the issuance and sale of shares of the Company's 
Common Stock pursuant to Regulation D, promulgated under the Securities Act 
of 1933, as amended. Pursuant to a Common Stock Purchase Agreement between 
the Company and certain accredited investors named therein (the "Investors"), 
the Company sold a total of 2,420,000 shares of Common Stock to the Investors 
for an aggregate purchase price of $1,210,000, $612,500 of which was 
subscribed for by Investors as of June 30, 1997. Pursuant to a Common Stock 
Purchase Agreement between the Company and The Tail Wind Fund Ltd. ("Tail 
Wind"), the Company sold a total of 412,905 shares of Common Stock to Tail 
Wind for an aggregate purchase price of $300,000. In connection with this 
offering, the Company paid a finders fee to Grayson & Associates, Inc. of 
$104,800 in cash and warrants to purchase up to 226,632 shares of the 
Company's Common Stock.

    On June 5 and June 30, 1997, a total of $1,500,000 of the Company's 7.5% 
Convertible Debentures due February 28, 1999 were converted by holders into 
1,736,824 shares of Common Stock. A total of 27,604 shares of Common Stock 
for payment of accrued interest on the Debentures payable June 30, 1997 were 
issued to the holders of the Debentures. See "Management's Discussion and 
Analysis or Plan of Operation - Liquidity and Capital Resources" for 
additional information about the Debentures. 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  The Company's annual meeting of shareholders was held on May 30, 1997. The
number of shares entitled to vote at the annual meeting was 22,040,785. The
following matters were submitted to shareholders for their consideration:

    1.  With respect to the three nominees for director identified in the
    Company's Proxy Statement; Kenneth J. McLachlan received 17,211,111 votes
    and 926,106 votes were withheld, Hans R. Vauthier received 17,213,661 votes
    and 923,556 votes were withheld, and Eric F. Stoer received 17,214,311 votes
    and  922,906 votes were withheld.

    2.  The ratification of the appointment of Arthur Andersen LLP as the
    Company's independent auditors for the year ending December 31, 1997 was
    ratified as follows: 17,276,135 shares were voted in favor, 112,874 shares
    were voted in opposition, 748,208 votes abstained and there were no broker
    non-votes.


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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The exhibits filed as part of this report are listed below: 


Exhibit
  No.      Description
-------    -----------
 3.1       Certificate of Incorporation, as amended, incorporated by reference
           to Exhibits 2.1 through 2.6 of the Company's Registration Statement
           No. 33-46648 filed on Form S-1 (the "Form S-1"); and to Exhibit 2.7
           of the Company's Annual Report on Form 10-KSB for its fiscal year
           ended December 31, 1995; and to Exhibit 2.2 of the Company's Annual
           Report on Form 10-KSB for its fiscal year ended December 31, 1996.

 3.2       Company's By-laws, incorporated by reference to Exhibit 3.1 of the
           Form S-1.

 4.1       7.5% Convertible Debenture due February 28, 1999, issued by the
           Company to The Tail Wind Fund, Ltd. on March 11, 1997, incorporated
           by reference to Exhibit 4 to the Company's Quarterly Report on Form
           10-QSB for its fiscal quarter ended March 31, 1997.

 4.2       Common Stock Purchase Warrant for 89,552 shares, issued by the
           Company to Grayson & Associates on March 14, 1997, incorporated by
           reference to Exhibit 4.3 of the Company's Registration Statement on
           Form SB-2 (Registration No. 333-26795).

 4.3       Letter Agreement dated May 28, 1997 between the Company and The Tail
           Wind Fund Ltd., incorporated by reference to Exhibit 4.9 to the
           Company's Current Report on Form 8-K dated June 5, 1997 (File No.
           000-21284) (the "June 1997 8-K").

 4.4       Letter Agreement dated June 27, 1997 between the Company and The Tail
           Wind Fund Ltd., incorporated by reference to Exhibit 4.10 to the June
           1997 8-K.

 4.5       Common Stock Subscription Agreement dated as of June 30, 1997 by and
           between the Company and The Tail Wind Fund Ltd., incorporated by
           reference to Exhibit 4.2 of the June 1997 8-K.

 4.6       Common Stock Subscription Agreement dated as of June 30, 1997 by and
           between the Company and the investors set forth on Schedule A
           thereto, incorporated by reference to Exhibit 4.3 of the June 1997
           8-K.

 4.7       Registration Rights Agreement dated as of June 30, 1997 between the
           Company and The Tail Wind Fund Ltd., incorporated by reference to
           Exhibit 4.4 of the June 1997 8-K.

 4.8       Form of Registration Rights Agreement dated as of June 30, 1997
           between the Company and the investors set forth on Schedule A to the
           Common Stock Subscription Agreement dated as of June 30, 1997 by and
           between the Company and the investors set forth on Schedule A
           thereto, incorporated by reference to Exhibit 4.5 of the June 1997
           8-K.

 4.9       Form of Warrant to be issued to each of Grayson & Associates, Inc.
           and The Tail Wind Fund Ltd., incorporated by reference to Exhibit 4.1
           of the June 1997 8-K.

 27        Financial Data Schedule *

    * Filed herewith.

(b) Reports on Form 8-K

    A Current Report on Form 8-K, dated  June 2, 1997 was filed reporting
    the Change in Registrant's Certifying Accountant  under Item 4.

    An Amended Current Report on Form 8-K/A dated June 9, 1997 was filed
    reporting the Change in Registrant's Certifying Accountant, under Item 4.


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                                     SIGNATURES

      In accordance with 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.

Dated:   August 8, 1997



                                       SALIVA DIAGNOSTIC SYSTEMS, INC.

                                       By: /s/ PAUL D. SLOWEY
                                          ----------------------------
                                       Paul D. Slowey
                                       Chief Operating Officer






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