<PAGE>   1
                     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, 1998

          [ ]  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 August
3, 1998 was 36,496,857 shares.


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


<PAGE>   2


                         SALIVA DIAGNOSTIC SYSTEMS, INC.

                                   FORM 10-QSB

                                      INDEX
<TABLE>
<CAPTION>
PART I    FINANCIAL INFORMATION                                                         Page
-------------------------------                                                         ----
         <S>                                                                           <C> 
         Item 1.  Financial Statements

                  Consolidated Balance Sheets -June 30, 1998
                  and December 31, 1997                                                  2

                  Consolidated Statements of Operations -Three Months
                  and Six Months Ended June 30, 1998 and 1997                            3

                  Consolidated Statements of Cash Flows -
                  Six Months Ended June 30, 1998 and 1997                                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 6.  Exhibits and Reports on Form 8-K                                      12
</TABLE>


                                       1
<PAGE>   3


                         SALIVA DIAGNOSTIC SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                  June 30,                December 31,
                                                                                    1998                       1997
                                                                                ------------               ------------
<S>                                                                             <C>                       <C> 
ASSETS
Current assets:
   Cash                                                                         $    147,441               $    271,312
   Accounts receivable, less allowance of $42,000 (1998)
       and $42,000 (1997)                                                            196,989                    154,052
   Inventories                                                                       357,822                    458,177
   Prepaid expenses                                                                   30,007                     51,876
                                                                                ------------               ------------
      Total current assets                                                           732,259                    935,417
   Property and equipment, less accumulated
      depreciation of $1,040,788 (1998) and $995,853 (1997)                          339,022                    434,457
   Deposits                                                                           14,307                     40,162
   Restricted cash                                                                   120,500                    120,500
   Patents and trademarks, less accumulated
     amortization of $52,971 (1998) and $48,375 (1997)                               103,945                    108,541
                                                                                ============               ============
                                                                                $  1,310,033               $  1,639,077
                                                                                ============               ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                             $    508,108               $    670,400
   Accrued expenses                                                                1,343,849                  1,473,944
   Accrued interest payable                                                           68,240                     68,240
   Current portion of long-term debt and
     obligations under capital leases                                                 21,766                     33,779
                                                                                ------------               ------------
       Total current liabilities                                                   1,941,963                  2,246,363
Long-term debt and obligations under capital
  leases, net of current portion                                                      48,324                     59,401
                                                                                ------------               ------------
       Total liabilities                                                           1,990,287                  2,305,764

Series 1998-A Convertible Redeemable Preferred Stock,
   $.01 par value, 1,360 shares issued and outstanding                             1,359,241                         --

Stockholders' equity:
   Common stock, $.01 par value, 50,000,000
    shares authorized, issued and outstanding:
    1998: 3,530,017 and 1997: 2,934,462                                               35,300                     29,344
   Additional paid-in capital                                                     28,872,073                 27,914,252
   Note receivable from shareholder for stock                                        (83,825)                   (83,825)
   Accumulated deficit                                                           (30,863,043)               (28,526,458)
                                                                                ------------               ------------
      Total stockholders' equity                                                  (2,039,495)                  (666,687)
                                                                                ============               ============
                                                                                $  1,310,033               $  1,639,077
                                                                                ============               ============
</TABLE>




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


                                       2
<PAGE>   4


                         SALIVA DIAGNOSTIC SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                    Three months ended                       Six months ended
                                                         June 30,                                June 30,
                                              ------------------------------        ------------------------------
                                                  1998               1997               1998              1997
                                              -----------        -----------        -----------        -----------
<S>                                           <C>               <C>                <C>                <C> 
Revenues                                      $   251,531        $   484,869            449,109        $   711,903

Costs and expenses:
  Cost of products sold                           315,077            402,738            567,777            600,898
  Research and development expense                142,659            156,124            315,038            350,836
  Selling, general and administrative
    expense                                       623,792            891,379          1,270,169          2,301,339
                                              -----------        -----------        -----------        -----------
      Loss from operations                       (829,997)          (965,372)        (1,703,875)        (2,541,170)


Interest income                                     3,779              8,447             10,354             14,126
Interest expense                                   (1,300)          (400,705)            (2,705)          (409,284)
Other income (expense)                            (16,608)            (1,200)            27,132              8,030
                                              -----------        -----------        -----------        -----------
   Net loss                                      (844,126)        (1,358,830)        (1,669,094)        (2,928,298)

Dividends including deemed dividends
   on preferred stock                            (342,038)                --           (667,491)                --
                                              -----------        -----------        -----------        -----------

   Net loss to common stockholders            $(1,186,164)       $(1,358,830)       $(2,336,585)       $(2,928,298)
                                              ===========        ===========        ===========        ===========

  Basic and diluted net loss per share        $     (0.36)       $     (0.61)       $     (0.73)       $     (1.32)
                                              ===========        ===========        ===========        ===========

  Shares used in per share calculations         3,314,317          2,232,234          3,179,119          2,220,656
                                              ===========        ===========        ===========        ===========
</TABLE>







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


                                       3
<PAGE>   5


                         SALIVA DIAGNOSTIC SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                              Six months ended
                                                                                  June 30,
                                                                       ------------------------------
                                                                           1998               1997
                                                                       ------------       ------------
 <S>                                                                  <C>                <C> 
 CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                            $(1,669,094)       $(2,928,298)
   Adjustments to reconcile net loss to net cash
   (used in) operating activities:
       Depreciation and amortization                                       134,533            147,632
       Gain on sale of property and equipment                              (43,479)                --
       Compensation expense relating to Option Plan                             --            397,749
       Interest expense related to conversion of Debentures                     --            404,395
       Other                                                                    --            (10,459)
   Changes in current assets and liabilities:
     Accounts receivable                                                   (42,937)           (49,269)
     Inventories                                                           100,355           (165,513)
     Prepaid expenses and deposits                                          47,724            (21,758)
     Accounts payable and accrued expenses                                (266,787)           505,967
                                                                       -----------        -----------
       Net cash used in operating activities                            (1,739,685)        (1,719,554)

 CASH FLOWS FROM INVESTING ACTIVITIES:
    Additions to property and equipment                                    (35,585)           (59,387)
    Proceeds from sale of property and equipment                            33,482                 --
                                                                       -----------        -----------
      Net cash provided by (used in) investing activities                   (2,103)           (59,387)

 CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from sale of Common Stock                                     250,000                 --
 Exercise of Common Stock options and warrants                                  --                450
    Proceeds from sale of preferred stock, net of issuance costs         1,380,000                 --
    Proceeds from Convertible Debentures, net of issuance costs                 --          1,380,000
    Repayment of long term debt and capital lease obligations              (12,083)           (17,764)
                                                                       -----------        -----------
      Net cash provided by financing activities                          1,617,917          1,362,686
                                                                       -----------        -----------

      Net decrease in cash and cash equivalents                           (123,871)          (416,255)
          Cash and cash equivalents, beginning of period                   391,812            776,380
                                                                       -----------        -----------
          Cash and cash equivalents, end of period                     $   267,941        $   360,125
                                                                       ===========        ===========


 SUPPLEMENTAL DISCLOSURES:
   Cash paid during the period for interest                            $     1,405        $        --

   Noncash transactions:
     Debt extinguished on disposition of property and
     equipment                                                              11,007                 --
     Conversion of Debentures into Common Stock                                 --          1,380,000
     Subscription receivable for Common Stock                                   --            912,500
     Dividends payable on 1998-A Convertible Preferred Stock                34,945                 --
     Deemed dividends on 1998-A Convertible Preferred Stock                632,546                 --
     Payment of common stock to former employee                             25,600                 --

</TABLE>


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

                                       4

<PAGE>   6


                         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, 1998 and 1997 have been prepared in
conformity with generally accepted accounting principles. The financial
information as of December 31, 1997 is derived from Saliva Diagnostic Systems,
Inc. (the "Company") consolidated financial statements included in the Company's
Annual Report on Form 10-KSB/A for the year ended December 31, 1997. 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, 1997, as included in the
Company's Annual Report on Form 10-KSB/A for the year ended December 31, 1997.

Operating results for the three and six month periods ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the entire
fiscal year ending December 31, 1998, or any other portion thereof.

Certain amounts have been restated for the consolidated financial statements for
the periods ended June 30, 1998 due to adjustments made as a result of the audit
of the Company's Annual Report on Form 10-KSB/A for the year ended December 31,
1997.

2.  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:

<TABLE>
<CAPTION>
                                           June 30,           December 31,
                                             1998                 1997
                                       --------------      ---------------
                  <S>                 <C>                 <C>
                   Raw materials       $     252,881       $      280,438
                   Work in process            16,911               11,569
                   Finished goods             88,030              166,170
                                       -------------       --------------
                                       $     357,822       $      458,177
                                       =============       ==============
</TABLE>

3.  LOSS PER SHARE

The Company has adopted Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). SFAS 128 changes the standards for computing and presenting earnings per
share (EPS) and supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share." Basic earnings per common share is computed using the weighted
average number of shares of common stock outstanding for the period. Diluted
earnings per common share is computed using the weighted average number of
shares of common stock and dilutive common equivalent shares related to stock
options and warrants outstanding during the period.

A net loss was reported in the second quarters and first six months of both 1998
and 1997, and accordingly, the denominator was equal to the weighted average
outstanding shares with no consideration for outstanding options and warrants to
purchase shares of the Company's common stock, because to do so would have been
anti-dilutive. Stock options for the purchase of 219,550 shares, warrants for
the purchase of 156,721 shares 


                                       5
<PAGE>   7

and approximately 1,034,548 shares which represent the number of common shares
that preferred stock would convert into at June 30, 1998 were not included in
loss per share calculations, because to do so would have been anti-dilutive.

4.    ACCRUED EXPENSES

<TABLE>
<CAPTION>
                                                        June 30,           December 31,
                                                          1998                  1997
                                                      -------------         -------------
<S>                                                   <C>                     <C>   
Accrued wages and salaries                            $    444,331           $   493,352
Accrued payroll taxes                                       83,803                92,144
Accrued restructuring expenses                              13,040               135,522
Litigation contingencies                                   801,000               750,000
Other accrued liabilities                                    1,675                 2,926
                                                      ------------           ------------
                                                      $  1,343,849           $  1,473,944
                                                      ============           ============
</TABLE>

5.  SERIES 1998-A CONVERTIBLE REDEEMABLE PREFERRED STOCK

On January 26, 1998, the Company entered into a Securities Purchase Agreement
with an investor for the issuance and sale of shares of the Company's newly
designated Series 1998-A Convertible Preferred Stock, stated value $1,000 per
share (the "1998-A Preferred Stock") (the "Preferred Offering"). Pursuant to the
Securities Purchase Agreement, the Company sold a total of 1,500 shares of the
1998-A Preferred Stock to an investor for an aggregate purchase price of
$1,500,000. See Management's Discussion and Analysis-Liquidity and Capital
Resources for additional disclosure regarding the 1998-A Preferred Stock.

The 1998-A Preferred Stock is convertible into Common Stock of the Company at a
beneficial conversion ratio, and as a result, a discount of $300,000 was
recorded at the date of issuance of the 1998-A Preferred Stock. The discount
will be accreted to deemed preferred dividends over the conversion period, which
ends July 25, 1998. Additionally, the Company incurred offering costs related to
the 1998-A Preferred Stock totaling approximately $120,000. These offering costs
are reflected as a discount to the 1998-A Preferred Stock and will be accreted
as deemed preferred dividends over the conversion period, which ends July 25,
1998. Deemed dividends of $195,208 and $197,708 at June 30, 1998 and March 31,
1998, respectively, have been recorded relating to the beneficial conversion
ratio and offering costs.  Dividends payable on conversion have been accrued 
for at $34,945. On April 28, 1998, 140 shares of the 1998-A Preferred Stock were
converted into Common Stock in accordance with the Agreement.

In connection with the issuance of the 1998-A Preferred Stock, the Company
issued warrants to purchase up to 75,000 shares of Common Stock at an exercise
price of $3.375 per share, which expire on January 26, 2003. The fair value of
these warrants of $248,250 has been reflected as a discount to the 1998-A
Preferred Stock and will be accreted as deemed preferred dividends over the
conversion period, which ends July 25, 1998. Deemed dividends of $111,885 and
$127,745 at June 30, 1998 and March 31, 1998, respectively, have been recorded
related to the fair value of the warrants.

6.  IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130). This statement establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general purpose financial statements. The objective of SFAS 130
is to report a measure of all changes in equity of an enterprise that result
from transactions and other economic events of the period other than
transactions with owners. The Company adopted SFAS 130 during the first quarter
of 1998. Comprehensive loss did not differ from currently reported net loss in
the periods presented.


                                       6
<PAGE>   8


In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This statement establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 also requires that changes in the derivative instrument's
fair value be recognized currently in results of operations unless specific
hedge accounting criteria are met. SFAS 133 is effective for fiscal years
beginning after June 15, 1999. The Company expects that adoption of SFAS 133
will have no impact on the Company's financial condition or results of
operations.

7.  CONTINGENCIES

Luc Hardy, a former director and officer of the Company, filed a complaint in
Federal court against the Company and several individual defendants, including
former directors and officers of the Company, making certain allegations,
including breach of Mr. Hardy's employment agreement with the Company,
intentional interference with contract by the individual defendants, slander and
deceptive trade practices, all arising from his termination. The complaint seeks
damages and punitive damages in an unspecified amount. A jury verdict for the
plaintiff, which is not a final judgment, was rendered on July 25, 1997 in the
approximate amount of $740,000. In October 1997, a hearing was held on the
Company's motions to set aside the jury verdict and for a new trial. The Company
is currently awaiting a decision. There can be no assurance such motions will be
granted. A final judgment consistent with the jury verdict in this case will
have a material adverse effect on the Company.

In February 1998, a lawsuit was filed by Ronald Lealos, the former President of
the Company, who resigned in December 1996. The complaint alleges that Mr.
Lealos was entitled to certain cash payments and benefits under an employment
agreement whereby he would serve as the Company's president, and that the
Company's failure to make such payments and grant such benefits constituted
anticipatory breach and breach of that contract. In addition, the complaint
alleges that the Company wrongfully rescinded options to purchase 385,000 shares
of Common Stock in breach of a stock option agreement with Mr. Lealos. In March
1998, the Company filed an answer to the complaint in which it stated that the
alleged employment agreement was not intended to be effective and was rescinded
by the parties, and that the stock option agreement was not breached by the
Company. The Company's answer also asserted numerous counterclaims against Mr.
Lealos, including breach of fiduciary duty and conversion, for which the Company
is seeking damages in excess of $1,500,000. There can be no assurance that the
litigation will not be decided adverse to the Company and that such an adverse
decision would not have a material adverse effect on the Company.

8.  SUBSEQUENT EVENTS

Subsequent to June 30, 1998, the Company amended the Company's Certificate of
Incorporation declaring that each ten outstanding shares of the Company's Common
Stock be converted and reconstituted into one share of Common Stock. As a
result, all share amounts and values in these financial statements have been
restated to reflect the reverse stock split.

On July 30, 1998, the Company amended to eliminate the redemption rights
pursuant to the Securities Purchase Agreement for the Series 1998-A Convertible
Preferred Stock which is shown on the mezzanine level in the accompanying
financial statements. As a result of this amendment, these shares will be
accounted for as an equity instrument as of the date of the amendment.

On July 31, 1998, the Company amended the Securities Purchase Agreement with an
investor for the issuance and sale of shares of the Company's newly designated
Series 1998-B Convertible Preferred Stock, stated value $1,000 per share (the
"1998-B Preferred Stock"). Pursuant to the Securities Purchase Agreement, the
Company sold 500 shares of the 1998-B Preferred Stock to the investor for an
aggregate purchase price of $470,000 (net of issuance costs of $30,000). The
investor is committed to purchase an additional 1,000 shares of 1998-B Preferred
Stock prior to April 3, 1999 for an aggregate purchase price of $940,000 (net of
issuance costs of $60,000).


                                       7
<PAGE>   9

The 1998-B Preferred Stock is convertible into Common Stock of the Company at a
beneficial conversion ratio and, as a result, a discount of $125,000 will be
recorded at the date of issuance of the 1998-B Preferred Stock. The discount
will be accreted to deemed dividends over the conversion period, which ends
November 1, 1998.

In connection with the issuance of the 1998-B Preferred Stock, the Company
issued warrants to purchase up to 25,000 shares of Common Stock at an exercise
price of $3.375 per share, which expire on January 26, 2003. The fair value of
these warrants of $253,750 will be reflected as a discount to the 1998-B
Preferred Stock and will be accreted as deemed dividends over the conversion
period which ends November 1, 1998.

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

GENERAL

Since July 1990, the Company has been engaged almost exclusively in research and
development activities focused on developing proprietary saliva based collection
devices and rapid assays for infectious diseases. Other than sales of the
Company's collection devices, the Company has not yet commenced any significant
product commercialization. The Company has incurred significant operating losses
since its inception, resulting in an accumulated deficit of $30,863,043 at June
30, 1998. Such losses are expected to continue for the foreseeable future and
until such time, if ever, as the Company is able to attain sales levels
sufficient to support its operations. The Company believes that its current cash
position and cash received from the sale of its preferred stock in August 1998,
combined with revenues and other cash receipts, will be sufficient to fund the
Company's operations through 1998. However, substantial additional financing
will be required in 1999. There can be no assurance that such financing will be
achieved or that financings will be on terms favorable to the Company. The
Company's significant operating losses and significant capital requirements
raise substantial doubt about the Company's ability to continue as 
a going concern.

On August 3, 1998, the Company effected a one-for-ten reverse split of shares of
its outstanding common stock. As a result, all share amounts and values
described below reflect the reverse stock split.

RESULTS OF OPERATIONS

SECOND QUARTER AND FIRST SIX MONTHS OF 1998 COMPARED TO SECOND QUARTER AND FIRST
SIX MONTHS OF 1997

REVENUES. The Company's revenues consist of product sales. Revenues decreased
48% to $251,531 in the second quarter of 1998 from $484,869 in the second
quarter of 1997, and decreased 37% to $449,109 in the first six months of 1998
from $711,903 in the first six months of 1997. The decreases in revenue were
primarily attributable to establishing a manufacturing base in Vancouver and
delays in commissioning equipment. See "Cost of products sold" below. Sales to
four customers represented approximately 47% of total revenues in the first six
months of 1998, and sales to one customer represented approximately 24% of total
revenues in the six months ended June 30, 1997.

COST OF PRODUCTS SOLD. Costs of products sold decreased to $315,077 (125% of
product sales) in the second quarter of 1998 from $402,738 (83% of product
sales) in the second quarter of 1997, and decreased to $567,777 (126% of product
sales) in the first six months of 1998 from $600,898 (84% of product sales) in
the first six months of 1997.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased
9% to $142,659 in the second quarter of 1998 from $156,124 in the second quarter
of 1997, and decreased 10% to $315,038 in the first six months of 1998 from
$350,836 in the first six months of 1997, primarily as a result of reduced
payroll and related expenses. The Company is focused on cost controls in all
departments, including research and development, and thus intentionally reduced
these costs. This has been achieved without compromising standards in research
and development. See "Recent Developments" below.

                                       8

<PAGE>   10

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 25% to $623,792 in the second quarter of 1998
from $826,715 in the second quarter of 1997, and decreased 29% to $1,270,169 in
the first six months of 1998 from $1,780,628 in the first six months of 1997,
primarily as a result of the closure of facilities in Singapore, a reduction in
the number of administrative personnel and continued restraint on expenditure.

INTEREST EXPENSE. Interest expense decreased to $1,300 in the second quarter of
1998 from $400,705 in the second quarter of 1997, and decreased to $2,705 in the
first six months of 1998 from $409,284 in the first six months of 1997 due to a
non-recurring interest charge on the Convertible Debentures, due February 28,
1999, then outstanding.

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 common 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
preferred 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 $1.5
million Convertible Debentures, due February 28, 1999. In June 1997 and August
1997, the Company entered into three separate common stock subscription
agreements for the issuance and sale of a total of 408,290 shares of Common
Stock for an aggregate purchase price of $2,063,000 (net of issuance costs). In
January 1998, the Company entered into a securities purchase agreement with an
investor for the issuance and sale of 1,500 shares of the Company's newly
designated Series 1998-A Convertible Preferred Stock (the "1998-A Preferred
Stock") for an aggregate purchase price of $1,380,000 (net of issuance costs of
$120,000). In May 1998, the Company entered into a securities purchase agreement
with an investor for the issuance and sale of 156,250 shares of its common stock
for an aggregate purchase price of $250,000. In August 1998, the Company entered
into a securities purchase agreement with an investor for the issuance and sale
of 500 shares of the Company's Series 1998-B Convertible Preferred Stock for an
aggregate purchase price of $470,000 (net of issuance costs of $30,000).
Pursuant to such securities purchase agreement, the investor is obligated to
purchase an additional 500 shares of Series 1998-B Convertible Preferred Stock
for an aggregate purchase price of $470,000 (net of issuance costs of $30,000)
on or before December 3, 1998, and an additional 500 shares of Series 1998-B
Convertible Preferred Stock for an aggregate purchase price of $470,000 (net of
issuance costs of $30,000) on or before April 3, 1998.

Cash used in operating activities in the first six months of 1998 was
$1,739,685. This was primarily a result of a net loss of $1,669,094, adjustments
for depreciation and amortization, and a decrease in accounts payable, accrued
expenses and inventories. Accounts payable and inventories decreased due to
reduced production volume in the first quarter of 1998 resulting from delays in
the transfer of manufacturing to outsourced manufacturing facilities.

Accrued expenses totaled $1,343,849 at June 30, 1998 against $1,473,944 at
December 31, 1997. Accrued wages and salaries decreased to $444,331 at June 30,
1998 from $493,352 at December 31, 1997. Accrued restructuring costs decreased
to $13,040 at June 30, 1998 from $135,522 at December 31, 1997 due to the
completion of the closure of the Singapore operation. The residual amount will
be paid during the statutory liquidation of the Singapore subsidiary. Litigation
contingencies increased by $61,000 in the period to reflect new estimates of
ongoing legal costs related to the lawsuits.


                                       9
<PAGE>   11

Cash used in investing activities in the first six months of 1998 was $2,103,
which represented acquisition costs of property and equipment related to the
construction of drying facilities and reengineering of molds.

Cash provided by financing activities in the first six months of 1998 was
$1,617,917. This was primarily a result of net proceeds of $1,380,000 from the
sale of its 1998-A Preferred Stock and $250,000 from the sale of its common
stock.

On January 26, 1998, the Company entered into a securities purchase agreement
with an investor for the issuance and sale of shares of its 1998-A Preferred
Stock. Pursuant to the securities purchase agreement, the Company sold a total
of 1,500 shares of the 1998-A Preferred Stock to the investor for an aggregate
purchase price of $1,380,000 (net of issuance costs of $120,000). The investor
is entitled to receive a number of shares of the Company's common stock upon
conversion of the 1998-A Preferred Stock as determined by dividing the purchase
price of the 1998-A Preferred Stock by the lesser of (i) $3.375, and (ii) 80% of
the average closing bid price of the Company's common stock for the five trading
days prior to conversion.

The 1998-A Preferred Stock is convertible into the Company's common stock at a
beneficial conversion ratio, and as a result, a discount of $300,000 was
recorded at the date of issuance of the 1998-A Preferred Stock. The discount
will be accreted to deemed preferred dividends over the conversion period, which
ends July 25, 1998. Additionally, the Company incurred offering costs related to
the 1998-A Preferred Stock totaling approximately $120,000. These offering costs
are reflected as a discount to the 1998-A Preferred Stock and will be accreted
as deemed preferred dividends over the conversion period, which ends July 25,
1998. At June 30, 1998, $195,208 had been recorded as deemed dividends, relating
to the beneficial conversion ratio and offering costs. Initially, the 1998-A
Preferred Stock was redeemable at the option of the holders under certain
conditions which were outside the control of the Company. Accordingly, the
1998-A Preferred Stock has not been classified as stockholders' equity at June
30, 1998. On July 30, 1998, the Company amended the terms of the 1998-A
Preferred Stock such that the 1998-A Preferred Stock will be accounted for as an
equity instrument as of that date.

In connection with the issuance and sale of the 1998-A Preferred Stock, the
Company entered into a separate registration rights agreement with the investor
under which the Company is required to file a registration statement covering
resales of shares of the Common Stock issuable upon conversion of the 1998-A
Preferred Stock. The Agreement provides that the Company will pay certain
amounts to the investor if the registration statement is not filed on or before
February 26, 1998 or is not declared effective by the Securities and Exchange
Commission by April 26, 1998. A registration statement on Form S-3 was filed on
February 26, 1998. Because the Company is no longer eligible to file on Form S-3
due to the delisting of the Company's securities from Nasdaq, the Company has
filed a pre-effective amendment to the registration statement on Form SB-2. The
terms of the 1998-A Preferred Stock provide that, if the registration statement
is not declared effective by April 26, 1998, the Company shall pay, upon demand
of the investor, an amount equal to two percent (2%) of the purchase price of
the 1998-A Preferred Stock for the period from April 26, 1998 until the date the
registration statement is declared effective. The investor has indicated that
he does not currently intend to make demand for payment.

In connection with the issuance of the 1998-A Preferred Stock, the Company paid
a cash fee to the investor of 7.5% of the gross proceeds ($112,500) and
attorney's fees equal to 0.5% of the gross proceeds ($7,500). The Company also
issued warrants to the investor to purchase up to 75,000 shares of Common Stock
at an exercise price of $3.375 per share, which expire on January 26, 2003. The
fair value of these warrants of $248,250 has been reflected as a discount to the
1998-A Preferred Stock and will be accreted as deemed preferred dividends over
the conversion period, which ends July 25, 1998. At June 30, 1998, $111,885 had
been recorded as deemed dividends related to the fair value of the warrants.

On April 28, 1998, the Company issued to the Tail Wind Fund Ltd. ("Tail Wind")
149,663 shares of its common stock, which Tail Wind was entitled to receive
pursuant to the terms of a common stock purchase agreement dated as of June 30,
1997 between Tail Wind and the Company. The agreement provided for the 


                                       10

<PAGE>   12

issuance of such additional reset shares upon the occurrence of certain
conditions related to the market price of the Company's common stock during a
specified period.

Also on April 28, 1998, the Company issued to Biscount Overseas Limited 153,756
shares of its common stock upon the conversion of 140 shares of the 1998-A
Preferred Stock.

On May 26, 1998, the Company entered into a common stock subscription agreement
with Paul Bernstein for the issuance and sale of 156,250 shares of its common
stock for an aggregate purchase price of $250,000.

The Company's capital requirements have been and will continue to be
significant. 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.

The Company believes that its current cash position and cash received from the
sale of its preferred stock in August 1998, combined with revenues
and other cash receipts, will be sufficient to fund the Company's operations
through 1998. However, substantial additional financing will be required in
1999. There can be no assurance that such financing will be achieved or that
financings will be on terms favorable to the Company. The Company will continue
to seek public or private placement of its equity 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. The Company's
significant operating losses and capital requirements raise substantial doubt
about the Company's ability to continue as a going concern.

RECENT DEVELOPMENTS

On July 22, 1998, the Company issued to Biscount Overseas Limited 68,291 shares
of its common stock upon the conversion of 60 shares of the 1998-A Preferred
Stock.

On July 28, 1998, the Company issued to Tail Wind 51,376 shares of its common
stock, which Tail Wind was entitled to receive pursuant to the terms of the
common stock purchase agreement dated as of June 30, 1997 between Tail Wind and
the Company, which provided for the issuance of such additional reset shares
upon the occurrence of certain conditions related to the market price of the
Company's common stock during a specified period. Under the terms of such common
stock purchase agreement, Tail Wind remains entitled to receive an additional
17,410 shares of common stock.

On July 31, 1998, the US Food and Drug Administration notified the Company that
it has granted Certificates of Exportability covering all required countries for
all of the Company's HIV diagnostic devices, after determining that the
Company's Vancouver facility was compliant with FDA Good Manufacturing Practices
(GMP) regulations.

On July 31, 1998, the Company appointed Paul Bernstein as a member of its Board
of Directors.

On August 3, 1998, the Company entered into a securities purchase agreement with
an investor for the issuance and sale of shares of its newly designated Series
1998-B Convertible Preferred Stock (the "1998-B Preferred Stock"). Pursuant to
the securities purchase agreement, the Company sold a total of 500 shares of the
1998-B Preferred Stock to the investor for an aggregate purchase price of
$470,000 (net of issuance costs of $30,000). The investor is entitled to receive
a number of shares of the Company's common stock upon conversion of the 1998-B
Preferred Stock as determined by dividing the purchase price of the 1998-B
Preferred Stock by the lesser of (i) $1.69, and (ii) 80% of the average closing
bid price of the Company's common stock for the five trading days prior to
conversion. In addition, the investor is committed to 


                                       11

<PAGE>   13

purchase an additional 1,000 shares of 1998-B Preferred Stock prior to April 3,
1999 for an aggregate purchase price of $940,000 (net of issuance costs of
$60,000).

On August 7, 1998, the US Food and Drug Administration advised the Company that
it has cleared the Company's Stat-Simple(TM) pylori test for diagnostic use in
humans. Stat-Simple(TM) pylori is a finger-prick test for the bacterial
infection responsible for the majority of stomach ulcers and certain other
gastrointestinal diseases in humans, and may allow physicians to diagnose the
infection at the time of patient visit, thereby avoiding the expense and time
consumed in traditional laboratory-based testing.

REVERSE STOCK SPLIT

On August 3, 1998, the Company effected a one-for-ten reverse split of shares of
its outstanding common stock, which was previously approved by the Company's
shareholders at a special meeting held on February 28, 1998. The Company's
common stock currently trades on the OTC Bulletin Board under the symbol "SALVD"
to reflect the reverse split, and will resume trading under the symbol "SALV"
beginning September 3, 1998. Warrants to purchase the Company's common stock,
including the Company's publicly-held warrants, and options, preferred stock,
and other securities convertible into shares of the Company's common stock, will
be adjusted in accordance with their terms to reflect the reverse stock split.
Upon exercise or conversion, holders of such securities will be entitled to
receive one-tenth of the number of shares of post-split common stock as they
were entitled to receive of pre-split common stock.

YEAR 2000 ISSUE

The Company is aware of the critical business issue of how existing computer
software programs and operating systems will accommodate the Year 2000. Programs
and systems that do not properly recognize date sensitive information upon the
roll-over of the two-digit year value to "00" could generate erroneous data or
cause systems to fail. Management is in the process of determining the impact
the Year 2000 issue will have on the Company and its revenues, both directly and
indirectly through third parties such as suppliers. The Company intends to send
a written request to its suppliers for an assessment of the impact the Year 2000
issue might have on their activities. Based upon information currently
available, the Company does not expect the costs of addressing the Year 2000
issue will have a material impact on the Company's financial position or on its
results of operations.


                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

As discussed in the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended March 31, 1998, Meritxell Ltd. v. Saliva Diagnostic Systems, Inc.,
filed in the United States District Court for the Southern District of New York,
involved a dispute with respect to the conversion rate of a convertible
debenture issued to Meritxell by the Company. The plaintiff sought damages in an
unspecified amount. In February 1998, the Company's motion for summary judgment
was granted and the lawsuit was dismissed without prejudice.

As discussed in the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended March 31, 1998, Lealos v. Saliva Diagnostic Systems, Inc. was filed
in Superior Court in Clark County in the State of Washington by Ronald Lealos,
the former President of the Company, in February 1998. The complaint alleges
that Mr. Lealos was entitled to certain cash payments and benefits under an
employment agreement whereby he would serve as the Company's president, and that
the Company's failure to make such payments and grant such benefits constituted
anticipatory breach and breach of that contract. In addition, the complaint
alleges that the Company wrongfully rescinded options to purchase 385,000 shares
of Common Stock in breach of a stock option agreement with Mr. Lealos. In March
1998, the Company filed an answer to the complaint in which it stated that the
alleged employment agreement was not intended to be effective and was 


                                       12

<PAGE>   14

rescinded by the parties, and that the stock option agreement was not breached
by the Company. The Company's answer also asserted numerous counterclaims
against Mr. Lealos, including breach of fiduciary duty and conversion, for which
the Company is seeking damages in excess of $1,500,000. Although management of
the Company intends to vigorously defend against the suit, there can be no
assurance that the litigation will not be decided adverse to the Company and
that such an adverse decision would not have a material adverse effect on the
Company.

ITEM 2.  CHANGES IN SECURITIES

(a) On August 3, 1998, the Company amended its Certificate of Incorporation to
effect a one-for-ten reverse split of its common stock. As of that date, each
ten outstanding shares of the Company's common stock were converted and
reconstituted into one share of common stock, par value $0.01 per share. The
number of authorized shares of common stock of the Company was not affected by
the reverse stock split and remains at 50,000,000. Warrants to purchase the
Company's common stock, including the Company's publicly-held warrants, and
options, preferred stock and other securities convertible into shares of the
Company's common stock will be adjusted in accordance with their terms to
reflect the reverse stock split. Upon exercise or conversion, holders of such
securities will be entitled to receive one-tenth of the number of shares of
post-split common stock as they were entitled to receive of pre-split common
stock.

(b) On May 26, 1998, in reliance upon Rule 506 of Regulation D promulgated under
the Securities Act of 1933, as amended, the Company entered into a common stock
subscription agreement with Paul Bernstein for the issuance and sale of 156,250
shares (on a post-split basis) of its common stock for an aggregate purchase
price of $250,000.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

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

<TABLE>
<CAPTION>
    Exhibit
    No.      Description
    ---      -----------
<S>          <C> 
    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
    3.2      Certificate of Amendment, dated February 25, 1997, incorporated by
             reference to Exhibit 2.2 of the Company's Annual Report on Form
             10-KSB for its fiscal year ended December 31, 1996
    3.3      Certificate of Amendment, dated November 21, 1997, incorporated by
             reference to Exhibit 3.3 of the Company's Annual Report on Form
             10-KSB for its fiscal year ended December 31, 1997
    3.4      Certificate of Amendment, dated July 31, 1998.
    3.5      Company's By-laws, as amended, incorporated by reference to Exhibit
             3.4 of the Company's Annual Report on Form 10-KSB for its fiscal
             year ended December 31, 1997
    4.1      Specimen of Certificate Representing Common Stock, incorporated by
             reference to Exhibit 4.1 to the Company's Registration Statement on
             Form S-1 (Registration No. 33-46648)
    4.2      Form of Underwriter's Warrant, incorporated by reference to Exhibit
             4.2 of the Form S-1.
    4.3      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.
    4.4      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).
    4.5      Letter Agreement dated May 28, 1997 among the Company and The Tail
             Wind Fund Ltd. and Joseph Kaufman, 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").
    4.6      Letter Agreement dated June 27, 1997 among the Company and The Tail
             Wind Fund Ltd. and Joseph
</TABLE>


                                       13
<PAGE>   15
<TABLE>
<S>          <C> 
             Kaufman, incorporated by reference to Exhibit 4.10 to the June 1997
             8-K.
    4.7      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.
    4.8      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.
    4.9      Registration Rights Agreement dated as of June 30, 1997 between the
             Company and The Tail Wind Fund 4.9 Ltd., incorporated by reference
             to Exhibit 4.4 of the June 1997 8-K.
    4.10     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.
    4.11     Common Stock Subscription Agreement dated as of August 22, 1997 by
             and between the Company and David Freund, incorporated by reference
             to Exhibit 10.5 of Amendment No. 1 to the Company's Registration
             Statement on Form S-3 dated September 26, 1997 (Registration No.
             333-33429) (the "S-3/A").
    4.12     Registration Rights Agreement dated as of August 22, 1997 between
             the Company and David Freund, incorporated by reference to Exhibit
             10.6 of the S-3/A.
    4.13     Certificate of Designations, Rights and Preferences of the Series
             1998-A Convertible Preferred Stock, incorporated by reference to
             Exhibit 4.1 of the Company's Current Report on Form 8-K, dated
             January 26, 1998.
    4.14     Amended Certificate of Designations, Rights and Preferences of the
             Series 1998-A Convertible Preferred Stock.
    4.15     Warrant dated as of January 26, 1998 issued to Biscount Overseas
             Limited, incorporated by reference to Exhibit 4.3 of the Company's
             Registration Statement on Form S-3 dated February 26, 1998
             (Registration No. 333-46961) (the "1998 S-3").
    4.16     Certificate of Designations, Rights and Preferences of the Series
             1998-B Convertible Preferred Stock.
    27       Financial Data Schedule.
</TABLE>

    (b) Reports on Form 8-K

    No reports on Form 8-K were filed during the quarter ended June 30, 1998.


                                       14

<PAGE>   16


    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 14, 1998

                                      SALIVA DIAGNOSTIC SYSTEMS, INC.

                                      By:/s/ KENNETH J. MCLACHLAN       
                                         --------------------------------------
                                      Kenneth J. McLachlan
                                      President, Chief Executive Officer and
                                        Chief Financial Officer