SALIVA DIAGNOSTIC SYSTEMS INC, 424B3, 1996-06-18

SALIVA DIAGNOSTIC SYSTEMS INC
424B3, 1996-06-18
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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SALIVA DIAGNOSTIC SYSTEMS, INC.

Supplement No. 1 dated June 7, 1996 to Prospectus
dated May 29, 1996

The following information pertains to page 33 of the
Prospectus.

Dr. Eugene Seymour has resigned from the Board of Directors to
pursue other endeavors. The Board of Directors has elected Hans R.
Vauthier, Ph.D., to fill the vacancy. Since 1981, Dr. Vauthier, 71,
has been a principal of Vauthier & Partner A.G., a consulting firm
located in Berne, Switzerland, a company which assists
pharmaceutical companies in discovering and developing new
products. Dr. Vauthier received his Doctorate in Economics and
Business Administration from the University of Berne in
Switzerland. In addition, Mr. McLachlan, a director of the
Company, has been appointed Chief Financial Officer of the Company.

An additional "Risk Factor" has been added to page 16 and
reads as follows:

"20. Litigation. The Company had granted a license to Home
Access Health Corporation ("Home Access") in March 1995 to use
certain proprietary technology relating to Omni-SAL solely in
testing kit form in certain markets (the "License Agreement"). An
amendment to the License Agreement (the "Amendment") and a
Sublicense Agreement (the "Sublicense") were entered into between
Home Access and the Company in December 1995. In the Sublicense
the Company in effect licensed back its rights to Omni-SAL and
agreed to transfer to Home Access the 510(k) premarket notification
relating to Saliva Sampler and the IDE granted to the Company
related to Omni-SAL. A dispute has arisen between the Company and
Home Access over the scope and validity of the License Agreement,
the Amendment and the Sublicense (collectively the "Agreements").
The Company's position is that only Omni-SAL devices sold in kits
are covered by the Agreements. Home Access' position is that
pursuant to the Agreements the Company licensed to Home Access all
rights to the Omni-SAL for remote laboratory testing (excluding
rapid testing). Due to the dispute and Home Access' failure to
actively pursue use of the technology licensed pursuant to the
Agreements, the Company commenced a suit in Clark County Superior
Court in January 1996 for declaratory judgment, seeking termination
of the Agreements and/or a court interpretation of the scope of the
Agreements.

Home Access has asserted counterclaims in its answer to the
complaint dated June 4, 1996. Home Access alleges it is the
Company's failure to transfer the IDE and 510(k) and the Company's
notice of termination of the Agreements that impeded Home Access'
efforts to market and utilize the Technology licensed pursuant to
the Agreements. Home Access has counterclaimed for breach of
contract, tortious interference with its business relationships and
unfair competition. Home Access alleges it has incurred damages
estimated in excess of $1,000,000, plus its attorneys' fees and
costs.

In the event the Company does not prevail in the litigation,
in addition to payment of monetary damages, the Company may be
precluded from selling Omni-SAL for use in remote laboratory
applications (excluding rapid testing) except for uses the Company
has obtained in the Sublicense (to the extent the Sublicense is
valid). Furthermore, the Company may not be able to utilize the
510(k) for Saliva Sampler and may be precluded from conducting
clinical trials relating to the usage of Omni-SAL. No such trials
are presently scheduled.

The Company believes that the Agreements never covered
anything but licensing Omni-SAL to Home Access for applications in
kit form and that Home Acess' erroneous interpretation of the
Agreements would make the consideration transferred for the
Agreements wholly inadequate. The Company further believes that
Home Access has cancelled the Sublicense. The litigation is at an
early stage and the Company intends to vigorously defend itself in
this litigation. In the event, however, that Home Access prevails
in this litigation, such event could have a material adverse effect
on the Company. See "The Company -- Domestic Regulations" and "The
Company -- Legal Proceedings."

The following information pertains to the section on page 28
entitled "The Company -- Legal Proceedings."

In response to the Company's amended complaint, on June 4,
1996, Home Access answered the amended complaint and asserted
counterclaims against the Company. Home Access alleged it is SDS'
failure to transfer the IDE and 510(k) and the Company's notice of
termination of the Agreements that impeded Home Access' efforts to
market and utilize the technology originally licensed to Home
Access pursuant to the License Agreement. Home Access has
counterclaimed for breach of contract, tortious interference with
its business relationships and unfair competition. Home Access
alleges it has incurred damages estimated in excess of $1,000,000,
plus its attorneys' fees and costs.

In the event the Company does not prevail in the litigation,
in addition to payment of monetary damages, the Company may be
precluded from selling Omni-SAL for use in remote laboratory
applications (excluding rapid testing) except for uses the Company
has obtained in the Sublicense (to the extent the Sublicense is
valid). Furthermore, the Company may not be able to utilize the
510(k) or conduct clinical trials utilizing the IDE. No such
trials are presently scheduled.

The Company believes that the Agreements never covered
anything but licensing Omni-SAL to Home Access for applications in
kit form and further believes Home Acess' erroneous interpretation
of the Agreements would make the consideration transferred for the
Agreements wholly inadequate. The Company further believes that
Home Access has cancelled the Sublicense. The litigation is at an
early stage and the Company intends to vigorously defend itself in
this litigation. In the event, however, that Home Access prevails,
it could have a material adverse effect on the Company. See "Risk
Factors -- Litigation" and "The Company -- Domestic Regulations."

<PAGE>
PROSPECTUS
SALIVA DIAGNOSTIC SYSTEMS, INC.

90,000 Shares of Common Stock
Par value $.01 per Share

All of the shares of Common Stock (the "Common Stock") of
Saliva Diagnostic Systems, Inc. (the "Company") offered hereby are
being sold by Mr. Robert Kramer (the "Selling Shareholder"). In
1995 in connection with a consulting agreement between Whale
Securities Co., L.P. ("Whale") and the Company, Whale acquired
warrants from the Company to purchase 400,000 shares of Common
Stock at an exercise price of $1.00 per share (the "Consulting
Warrants"). Whale assigned Consulting Warrants to purchase 250,000
shares of Common Stock to Mr. Kramer, a registered representative
of Whale. Mr. Kramer exercised and sold shares of Common Stock
issued upon exercise of 160,000 Consulting Warrants. Whale
exercised and sold shares of Common Stock issued upon exercise of
all of the remaining 150,000 Consulting Warrants.

The Company will receive an aggregate of $90,000 from the
Selling Shareholder upon the exercise of the balance of the
Consulting Warrants. There is no assurance that such exercise will
occur. The exercise price of the Consulting Warrants was based on
negotiation between the parties. The Company will not receive any
of the proceeds from the sale of the shares of Common Stock offered
hereby by the Selling Shareholder.

The Common Stock is traded in the over-the-counter market
under the NASDAQ symbol SALV. The closing "bid" and "ask" prices
of the Common Stock on April 29, 1996 as reported by NASDAQ were
and $4 3/8 and $4 1/2, respectively.

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS."
______________

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

The date of this Prospectus is May 9, 1996

<PAGE>
AVAILABLE INFORMATION

The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and in accordance therewith, files reports and other information
with the Securities and Exchange Commission (the "Commission").
Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; and the
Commission's regional offices at Room 1204, 219 South Dearborn
Street, Chicago, Illinois 60604, Room 1028, 7 World Trade Center,
New York, New York 10007, and Suite 500 East, 5757 Wilshire
Boulevard, Los Angeles, California 90036. Copies of such material
can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549 at the prescribed rates.

The Company furnishes Annual Reports to the holders of its
securities which contain financial information which have been
examined and reported upon, with an opinion expressed by, its
independent certified public accountants.

INFORMATION INCORPORATED BY REFERENCE

The Company will furnish, without charge, to each person,
including any beneficial owners, to whom a copy of this Prospectus
is delivered, upon the written or oral request of such person, a
copy of any or all of any documents which may have been
incorporated herein by reference (other than exhibits to such
documents unless such exhibits are specifically incorporated by
reference into the document that this Prospectus incorporates by
reference). Requests for such documents should be directed to
Shareholder Relations, Saliva Diagnostic Systems, Inc., 11719 NE
95th Street, Vancouver, Washington 98682; telephone number (360)
696-4800.

The Selling Shareholder may sell the shares in one or more
transactions (which may involve one or more block transactions) on
the over-the-counter markets on the NASDAQ and upon terms then
prevailing or at prices related to the then current market price,
or in separately negotiated transactions or in a combination of
such transactions. The Shares offered hereby may be sold by one or
more of the following methods, without limitation: (a) a block
trade in which a broker or dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction; (b) purchases by
a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (c) ordinary brokerage
transactions and transactions in which the broker solicits
purchasers; and (d) face-to-face transactions between sellers and
purchasers without a broker-dealer.

In effecting sales, brokers or dealers engaged by the Selling
Shareholder may arrange for other brokers or dealers to
participate. Such broker or dealers may receive commissions or
discounts from the Selling Shareholder in amounts to be negotiated.
All other expenses incurred in connection with this offering will
be borne by the Company other than the Selling Shareholder's legal
fees. Such brokers and dealers and any other participating brokers
or dealers may, in connection with such sales, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"). Any discounts or commissions
received by any such brokers or dealers may be deemed to be
underwriting discounts and commissions under the Securities Act.
The Company has agreed to indemnify the Selling Shareholder and the
Selling Shareholder has agreed to indemnify the Company against
certain civil liabilities, including liabilities under the
Securities Act.

The Selling Shareholder reserves his right to withdraw or
cancel any offer and reject any offer, in whole or in part. The
Selling Shareholder may be deemed to be underwriters of the shares
offered hereby within the meaning of the Securities Act.

The expenses of this offering are estimated to be
approximately $35,000, all of which shall be paid by the Company.
Regular brokerage commissions and other expenses, including
expenses of counsel, if any, for the Selling Shareholder, shall be
borne by the Selling Shareholder.

Prospective purchasers should carefully consider the matters
discussed under the caption "Risk Factors."

<PAGE>
PROSPECTUS SUMMARY

The following summary is qualified in its entirety by
reference to the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in
this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety.

Saliva Diagnostic Systems, Inc., a Delaware corporation (the
"Company") is primarily engaged in the development, manufacturing
and marketing of proprietary specimen collection devices for use in
conjunction with diagnostic assays and rapid blood and saliva-based
tests designed to detect the presence of antibodies to the Human
Immunodeficiency Virus (HIV) virus and other diseases and the
presence of drugs of abuse, such as cocaine and marijuana. The
Company has a limited operating history and limited revenues from
product sales to date.

The Company was initially founded in 1990 to develop
proprietary saliva specimen collection devices designed for use in
conjunction with diagnostic assays to detect the presence of
antibodies to the HIV virus and the presence of drugs of abuse as
an alternative to the predominantly used blood based testing. In
1994, the Company broadened its product base to include other types
of alternative testing technologies including blood-based testing
to represent alternative approaches to take advantage of unique
market niches.

The Company has two categories of products: medical specimen
collection devices and rapid antibody immunoassays (tests). The
Company's initial product, Omni-SAL, an on-site, easy-to-use
medical collection device, utilizes saliva as a diagnostic tool to
detect the presence of the HIV virus, other diseases, nicotine and
drugs of abuse. The Company has commenced limited distribution of
Omni-SAL to customers located outside the United States, which are
manufactured by a foreign subsidiary. The Company's other
collection devices include Saliva Sampler which is used to collect
saliva specimens and Omni-SWAB, a serrated cotton swab with an
injectible head, which can be used to obtain DNA specimens for gene
amplification processes. See "The Company -- Principal Products."

The first of the Company's second category of products, rapid
antibody immunoassays, is Sero.Strip HIV 1/2, now being produced in
limited quantities by SDS's foreign subsidiary in Singapore. It is
a serum and plasma based test that uses one microliter (the volume
on the head of a pin) of specimen.

The second product in the Company's second category of
products, in the final stages of development, is Hema.Strip HIV
1/2. This is a self-contained system for the collection,
processing and analysis of three microliters of blood gathered from
a fingerstick. This device is ideal for on-site testing, emergency
situations and, in many parts of the world, for screening blood
donors. The third product, which is in its final stages of
development, is Saliva.Strip HIV 1/2, which uses saliva as the
specimen. Research in this platform continues for detection of
other diseases. SDS has begun to develop products for detection of
hepatitis, rubella, and H.pylori. See "The Company -- Principal
Products."

The Company is the successor corporation to E&J Systems, Inc.,
a California corporation formed in 1986, which merged into a
Delaware corporation in 1992. The Company has three subsidiaries.
In 1994, the Company's (then) 90%-owned subsidiary, Saliva
Diagnostic Systems (Asia) Ltd. ("SDS Asia"), formed Saliva
Diagnostic Systems (Singapore) Pte. Ltd. ("SDS Singapore"). In
1995, the Company reacquired the minority interest (10%) in SDS
Asia and the outstanding minority interest (19%) in SDS Singapore.
Unless otherwise indicated, all references to the Company include
the Company and its wholly-owned subsidiaries, SDS U.K., Ltd., SDS
Asia and SDS Singapore.

The Offering

Securities Offered................ 90,000 shares of Common
Stock. See "Description of
Securities."

Common Stock outstanding after
the offering(1)................. 20,887,035 shares

Risk Factors...................... The securities offered hereby
involve a high degree of risk
and should not be purchased by
investors who cannot afford the
loss of their entire
investment. See "Risk Factors."

NASDAQ symbols.....................Common Stock - SALV
Warrants -SALVW

(1) Assumes exercise of all of the Consulting Warrants. Does not
include (i) 464,000 shares of Common Stock reserved for
issuance upon exercise of outstanding options under the
Company's Stock Option Plans (the "Stock Option Plans"), (ii)
47,500 shares of Common Stock reserved for issuance upon
exercise of options available for future grant under the Stock
Option Plans, (iii) 3,680,000 shares of Common Stock reserved
for issuance upon exercise of other warrants and options, and
(iv) a three year warrant granted to a licensee of the Company
whereby the Licensee has the right to purchase up to
$1,000,000 of Common Stock at a price equal to 60% of the
average of the closing bid and ask prices of the Common Stock
during the ten days prior to exercise. Mr. Ronald Lealos,
President of the Company, has agreed not to exercise 300,000
of his options until the Company's certificate of
incorporation can be amended to authorize the issuance of
additional shares. See "Risk Factors -- Significant
Outstanding Options and Warrants in Excess of the Company's
Authorized Shares."

Summary Financial Information

The summary financial information set forth below is derived from
the financial statements appearing elsewhere in this Prospectus. Such
information should be read in conjunction with such financial
statements, including the notes thereto.

Balance Sheet Data
December 31, 1994 December 31, 1995

Working capital
(deficit) $ (465,603) $ (290,228)
Total assets $ 999,288 $4,358,458
Total liabilities $ 745,297 $3,381,147
Shareholders' equity $ (216,853) $ 977,311

Income Statement Data

Year Ended December 31,
1994 1995

Net revenues $ 460,673 $ 522,814
Net (loss) $ (3,357,771) $(4,597,770)
Net (loss) per
common share $ (.70) $ (.46)
Weighted average
number of common
shares outstanding 4,790,000 9,900,000

<PAGE>
RISK FACTORS

The securities offered hereby are speculative and involve a
high degree of risk, including, but not limited to, the risk
factors described below. Each prospective investor should
carefully consider the following risk factors inherent in and
affecting the business of the Company and this offering before
making an investment decision.

1. Limited Operating History. Since July 1990, the Company
has been engaged almost exclusively in research and development
activities focused on developing proprietary collection devices and
rapid assays. Other than limited sales of the Company's initial
products, Omni-SAL (which sales were terminated in the United
States in May 1992, for testing for HIV), Omni-SWAB and Sero.Strip
HIV 1/2 (which is manufactured by SDS Singapore) the Company has
not yet commenced any significant product commercialization and,
until such time as it does, will not generate significant product
revenues. To date, sales of Omni-SAL, Omni-SWAB and Sero.Strip HIV
1/2 have been to a limited customer base. The Company has a
limited relevant operating history upon which an evaluation of the
Company's prospects can be made. Such prospects must be considered
in light of the risks, expenses and difficulties frequently
encountered in the establishment of a new business in a continually
evolving, heavily regulated industry, characterized by an
increasing number of market entrants and intense competition, as
well as the risks, expenses and difficulties encountered in the
shift from development to commercialization of new products based
on innovative technology. The Company has been supplying Omni-
SAL, Omni-SWAB and Sero.Strip HIV 1/2 devices on a limited basis
and intends to continue to provide quantities of these devices for
testing purposes to various proposed distributors and customers, in
order to establish their efficacy, thus incurring expenses without
corresponding revenue. There can be no assurance that the Company
will be able to implement successfully its marketing strategy,
obtain necessary regulatory approval, generate increased revenues
or ever achieve profitable operations.

2. Significant Operating Losses; Accumulated Deficit;
Explanatory Paragraph in Report of Independent Certified Public
Accountants. The Company has incurred significant operating losses
since its inception, resulting in an accumulated deficit of
$12,164,077 and $16,761,847 at December 31, 1994 and December 31,
1995, respectively, and a shareholders' equity of $216,853 and
$977,311 at December 31, 1994 and December 31, 1995, respectively.
The Company has incurred additional losses through the date of this
Prospectus. 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's independent certified public accountants have
included an explanatory paragraph in their report stating that the
Company's ability to continue as a going concern is dependent on
its ability to raise capital and to attain future profitable
operations.

3. Significant Capital Requirements; Dependence on Proceeds
of This Offering; Need for Additional Financing. The Company's
capital requirements have been and will continue to be significant.
The Company has been dependent on private placements of its debt
and equity securities and on a public offering of securities in
March 1993 (the "Public Offering") pursuant to a Prospectus dated
March 3, 1993 (the "Prospectus") to fund such requirements. The
Company is dependent upon its other efforts to raise capital
resources, including proceeds received from the exercise of
warrants such as those being registered hereby, to finance the
costs of manufacturing, marketing and conducting clinical trials
and submissions for FDA approval of its products and continuing the
design and development of the Company's new products which utilize
its rapid testing format. The Company anticipates, based on
currently proposed plans and assumptions relating to its operations
(including assumptions regarding the progress of its research and
development and the timing and cost associated with obtaining
regulatory approvals for, and manufacturing and marketing of,-Omni-
SAL) that the net proceeds, if any, received by the Company upon
payment for the exercise price of the securities offered hereby
will provide only a small portion of the funds necessary in
connection with implementation and continuation of its programs.
Marketing, manufacturing and clinical testing may require capital
resources substantially greater than the resources currently
available to the Company. There can be no assurance that the
Company will be able to obtain the substantial additional capital
resources necessary to permit the Company to implement or continue
its programs. The Company has no current arrangements with respect
to, or sources of, additional financing and there can be no
assurance that such financing will be available on commercially
reasonable terms or at all. It is not anticipated that any of the
officers, directors or shareholders of the Company will provide any
portion of the Company's future financing requirements. Any
additional equity financing may involve substantial dilution to the
interests of the Company's shareholders, which dilution has
periodically occurred in the past.

4. Uncertain Efficacy of Saliva as a Diagnostic Tool. The
human specimens traditionally used for the diagnostic testing and
quantitative measurement of most physiologically active substances,
drugs and toxins in the body, are blood and urine. Substantially
all of the assay-based diagnostic test kits currently available
were approved by the FDA for use with these testing specimens.
Historically, saliva has not been accepted as a suitable human
diagnostic specimen due to concerns regarding the relatively low
antibody concentration in saliva, the stability of saliva as a
specimen and the impact of a person's diet and enzymes on saliva.
In order to assure the efficacy of saliva collection, provisions
must be made to assure that a sufficient amount of saliva is
collected, the specimen is adequately stabilized and bacterial
growth does not cause test interference. Additionally, the Company
must develop and implement testing protocols which adapt, for use
with saliva, assays approved by the FDA for use with blood and
urine. Although the FDA has recently approved another saliva
collection device, Ora-Sure, manufactured by Epitope, there can be
no assurance that saliva specimens will prove to be as accurate as
blood or urine specimens, that these concerns can be addressed,
that saliva will be accepted as a diagnostic specimen or that the
Company will be able to develop or implement the necessary testing
protocols.

Political and social factors may create impediments to the use
of saliva as a diagnostic specimen. These factors include whether
certain diagnostic tests, such as HIV antibody tests, should be
conducted without trained specialists and whether tests using
saliva specimens in nontraditional testing environments will lead
to invasions of privacy. Although the Company acknowledges the
existence of such considerations, it is committed to developing
saliva collection and testing devices as useful diagnostic tools.
Limitations on the Company's ability to develop saliva as a
diagnostic specimen for testing purposes caused by political and
social factors could have a material adverse effect on the
Company's operations, possibly requiring the Company to
significantly curtail its operations.

5. Uncertainty of New Product Development. The design and
development of the Company's rapid testing platforms have been
completed and limited revenues have been generated from sales
thereof. The Company will be required to devote considerable
additional efforts to finalize the evaluation of its products.
Satisfactory completion of development, testing, evaluations,
obtaining regulatory approvals and achieving sufficient production
levels of such products will be required prior to their being
available for commercial sale. The Company's products remain
subject to all the risks inherent in the introduction of new
diagnostic products, including unanticipated problems, as well as
the possible insufficiency of funds to continue design and
development which could result in abandonment of or substantial
change in the design or development of such products. There can be
no assurance that such products will be successfully developed, be
developed on a timely basis or prove to be as effective as products
based on existing or newly developed technologies. The inability
to successfully complete development, or a determination by the
Company, for financial or other reasons, not to undertake to
complete development of any product, particularly in instances in
which the Company has made significant capital expenditures, could
have a material adverse effect on the Company.

6. Competition. The market which the Company plans to enter,
saliva-based and rapid-testing collections and diagnostic testing,
is highly competitive. The Company is aware of certain entities,
including ChemTrak, Inc., Epitope, Inc., Quidel and Trinity
Biotech, plc and specialized biotechnology firms, as well as
universities and other research institutions, which have developed
or are developing technologies and products which are competitive
with Omni-SAL and the Company's products under development. Many
of these competitors are established and have substantially greater
research, marketing and financial resources than the Company. The
Company expects that the number of products competing with its
products will increase as the perceived benefits of saliva-based
testing become more widely recognized. There can be no assurance
the Company will be able to compete successfully.

7. Technological Change and Risk of Technological
Obsolescence. The biotechnology industry, and, in particular,
saliva-based diagnostic testing, is subject to rapid and
significant technological change. The development of a cure for
AIDS or a vaccine to prevent HIV or AIDS could also have a material
adverse effect on the Company. There can be no assurance that the
Company's competitors will not succeed in developing technologies
and products relating to the collection of saliva for diagnostic
testing prior to the Company or that they will not develop
technologies and products that are more effective than any which
have been or are being developed by the Company. In addition, the
diagnostic products market is characterized by changing technology
and developing industry standards sometimes resulting in product
obsolescence or short product life cycles. Accordingly, the
ability of the Company to compete will be dependent on its
introducing products to the marketplace in a timely manner and
enhancing and improving such products. There can be no assurance
that the Company will be able to keep pace with technological
developments or that its products will not become obsolete.

8. Cessation of United States Manufacturing and Distribution.
In May 1992, the FDA advised the Company that saliva specimen
collection devices, including Omni-SAL, when used for HIV antibody
testing, are regulated as Class III medical devices under the FDC
Act and, as such, require the filing with and approval by the FDA
of a pre-marketing approval application ("PMA") in order to be
marketed. In response to the FDA's request, the Company agreed to
discontinue shipment of Omni-SAL devices manufactured in the United
States, both domestically and internationally, for testing for HIV
antibodies, whether for investigational or other use, prior to
filing an Investigational Device Exemption ("IDE") and obtaining a
PMA. In 1995, the FDA approved the Company's request to review a
premarketing application (PMA) for Omni-SAL, and authorized the
Company to begin clinical trials in the United States. SDS has not
conducted any clinical trials for Omni-SAL in the United States,
although preclinical data has been generated for the device in the
United States and foreign countries. The Company would be required
to use other, FDA-approved confirmatory testing procedures during
the trials. There is no assurance that the Company will receive
FDA approval to market Omni-SAL or other products in the United
States.

9. Government Regulation. The development, manufacture and sale
of the Company's products in the United States are subject to
regulation by the FDA and other governmental agencies. The process
of obtaining FDA approval is costly and time-consuming, and there
can be no assurance that any of the Company's products will be
approved by the FDA or other regulatory agencies. Delays in
obtaining regulatory approvals may adversely affect the
development, testing or marketing of the Company's products and the
ability of the Company to generate product revenues therefrom. The
Company is subject to regulation in certain foreign markets. There
can be no assurance that regulatory approvals for any of the
Company's products will be obtained in a timely manner, or at all.

The procedures for FDA approval vary depending on the type of
product involved. The Company's planned diagnostic products for
detection of HIV antibodies will be reviewed by the FDA's Center
for Biologic Evaluation and Research ("CBER") and will likely
receive more extensive regulatory scrutiny than diagnostic tests
not related to HIV. The FDA approval process generally takes
several years and there can be no assurance that it will ever be
obtained.

The FDA has not approved any AIDS-related testing devices
outside of a professional use setting. There can be no assurance
that, if the Company receives FDA approval of any of its products
for use in conjunction with AIDS-related testing, such approval
will not be limited to sale for professional use.

In addition, changes in existing regulations or enforcement
policy or the adoption of new regulations could make regulatory
compliance by the Company more difficult in the future. The FDA
has increased its scrutiny of product applications and regulatory
compliance of medical device companies, thus slowing the product
approval process for medical devices. This could have a material
adverse effect on the Company's proposed sale of certain products.
Failure to comply with applicable requirements may result in civil
penalties, delays or suspensions of clearances, seizures,
injunctions or recalls of products, operating restrictions and
criminal prosecutions and could have a material adverse effect on
the Company.

Agencies similar to the FDA regulate medical devices in some
foreign countries, whereas other countries allow unregulated
marketing of such devices. The Company's products will be required
to meet the regulations, if any, of any foreign country where they
are marketed.

If and when one of the Company's products is approved by the
FDA, it will be subject to continuing regulation by the FDA and
state and local agencies. The FDA has established a number of
requirements for manufacturers, including good manufacturing
practices ("GMP"), and requirements regarding labeling and
reporting. The failure to comply with these requirements can
result in regulatory action, including warning letters, product
seizure, injunction, product recalls, civil fines and prosecution.
An FDA enforcement action could have a material adverse effect on
the Company. To date, the Company has not been the subject of any
FDA enforcement actions. The FDA also audits clinical studies for
compliance with applicable requirements.

The Company is, or may become, subject to federal, state and
local laws and regulations relating to safe working conditions,
laboratory and manufacturing practices, and the use and disposal of
hazardous substances, including infectious disease agents used in
conjunction with the Company's research work. These regulations
could increase the Company's costs and could have an adverse effect
on the production and marketing of the Company's products.

The Company anticipates that its products will be affected by
the Clinical Laboratory Improvement Act of 1988 ("CLIA '88"). CLIA
'88 sets forth performance requirements that apply to subject
laboratories. CLIA '88 greatly expanded the number of laboratories
that are subject to regulation. CLIA '88 is intended to insure the
quality and reliability of all laboratory diagnostic testing in the
United States by, among other things, establishing training and
experience requirements for personnel operating clinical
laboratories. Because the regulations implementing CLIA '88 have
not yet been fully implemented, the Company is unable to assess its
impact on the Company. See "The Company -- Domestic Regulation."

10. Risks Related to Foreign Activities. The FDC Act
prohibits the export of Class III medical devices, including-Omni-
SAL, from the United States without FDA approval. The Company's
subsidiary has commenced the manufacture and sale of Omni-SAL
devices in certain foreign countries other than the United States.
The Company and its manufacturers may be subject to various import
duties imposed by foreign governments applicable to both finished
products and components and may be affected by various other import
and export restrictions or duties as well as other developments
having an impact upon international trade. These factors could,
under certain circumstances, have an impact both on the
manufacturing cost and the wholesale and retail prices of such
products. To the extent that transactions relating to foreign
sales, manufacturing of the Company's products and purchases of
components involve currencies other than United States dollars, the
operating results of the Company could be adversely impacted by
fluctuations in foreign currency exchange rates. See "The Company
- - -- Overseas Regulation and Distribution."

11. Uncertainty of Market Acceptance; Dependence Upon Third
Party Distributors. The Company has limited marketing capabilities
and resources. Achieving market acceptance will require
substantial marketing efforts and the expenditure of significant
funds to inform potential consumers and the public of the perceived
benefits of the Company's current and proposed products. Moreover,
the Company does not have the financial or other resources to
undertake extensive marketing and advertising activities. The
Company has recently begun to develop strategic alliances and
marketing arrangements, including joint ventures, license or
distribution arrangements. The Company's prospects will be
significantly affected by its ability to successfully develop and
maintain its relationships with its joint venturers, licensors and
distributors and upon the marketing efforts of such third parties.
While the Company believes that any independent distributors and
sales representatives with whom it enters into such arrangements
will have an economic motivation to commercialize the Company's
products, the time and resources devoted to those activities
generally will be controlled by such entities and not by the
Company. There can be no assurance that the Company will be able,
for financial or other reasons, to develop and maintain any third
party distribution or marketing arrangements or that such
arrangements, if established, will result in the successful
commercialization of any of the Company's products.

12. Dependence on Manufacturers. The Company relies on
arrangements with third parties for the manufacture of its
products. Such manufacturers, if located in the United States or
if manufacturing products to be sold in the United States, must
comply with GMP and pass pre-approval inspections by the FDA and
periodic GMP inspections. There can be no assurance that the
Company's manufacturer will continue to comply with GMP, that the
Company will be able to locate additional manufacturers that comply
with GMP and secure agreements with such manufacturers on terms
acceptable to the Company. MML Diagnostic Packaging, Inc. ("MML"),
manufactures Omni-SWAB and Saliva Sampler for the Company in the
United States. There can be no assurance that MML will be able to
meet the Company's requirements. See "The Company --
Manufacturing."

13. Dependence Upon Third-Party Suppliers. The Company
believes that most of the components used in the manufacture of its
proposed products are currently available from numerous suppliers
located in the United States, Europe and Asia. The Company
believes, however, that certain components are available from a
limited number of suppliers. Although the Company believes that it
will not encounter difficulties in obtaining these components,
there can be no assurance that the Company will be able to enter
into satisfactory agreements or arrangements for the purchase of
commercial quantities of such components. The failure to enter
into agreements or otherwise arrange for adequate or timely
supplies of components and the possible inability to secure
alternative sources of components could have a material adverse
effect on the Company's ability to manufacture its products. In
addition, development and regulatory approval of the Company's
products in the United States are dependent upon the Company's
ability to procure certain components and certain packaging
materials from FDA-approved sources. Since the FDA approval
process requires manufacturers to specify their proposed suppliers
of certain components in their PMAs, if any such component were no
longer available from the specified supplier, FDA approval of a new
supplier would be required, resulting in potential manufacturing
delays.

14. Dependence on Key Personnel. The success of the Company
will be largely dependent on the personal efforts of Mr. Ronald L.
Lealos, its President, and certain key management and scientific
personnel. Although the Company has entered into a three-year
employment agreement with Mr. Lealos, the loss of his services or
the services of other key management or scientific personnel would
have a material adverse effect on the Company's business and
prospects. Competition among biotechnology companies for qualified
employees is intense, and the loss of key personnel or the
inability to attract and retain the additional highly skilled
employees required for the Company's activities could adversely
affect its business. There can be no assurance that the Company
will be able to hire or retain such necessary personnel.

15. Uncertainty of Patent Protection; Proprietary
Information. The Company has applied for ten United States patents
on certain aspects of its saliva collection and diagnostic testing
devices and has been awarded eight of these patents. To the extent
possible, the Company also anticipates filing patent applications
for protection on future products and technology which it develops.
There can be no assurance that patents applied for will be
obtained, that any such patents will afford the Company
commercially significant protection of its technology or that the
Company will have adequate resources to enforce its patents.
Inasmuch as the Company intends to sell its products in foreign
markets, it is in the process of seeking foreign patent protection
on its current products and technologies. The patent laws of other
countries may differ from those of the United States as to the
patentability of the Company's products and technologies and the
degree of protection afforded. Other companies may independently
develop equivalent or superior products and technologies and may
obtain patent or similar rights with respect thereto. Although the
Company believes that its products and technologies have been
independently developed and do not infringe on the patents of
others, there can be no assurance that the Company's products and
technologies do not and will not infringe on the patents of others.
In the event of infringement, the Company would, under certain
circumstances, be required to modify its device or obtain a
license. There can be no assurance that the Company will be able
to do either of the foregoing in a timely manner or upon acceptable
terms and conditions, and the failure to do so could have a
material adverse effect on the Company. There can be no assurance
that the Company will have the financial or other resources
necessary to successfully defend a claim of violation of
proprietary rights. See "The Company -- Patents and Proprietary
Information."

The Company also relies on confidentiality and nondisclosure
arrangements with its employees, licensees and other entities
engaged in joint product development and expects to enter into
confidentiality agreements with its employees. There can be no
assurance that these agreements will provide meaningful protection
to the Company.

16. Product Liability; Absence of Insurance Coverage. The
Company may be exposed to potential product liability claims by
consumers. The Company does not currently maintain product
liability insurance coverage. Although the Company will seek to
obtain directly or through its distributors product liability
insurance prior to the commercialization of any new products, there
can be no assurance that the Company will obtain such insurance or,
if obtained, that any such insurance will be sufficient to cover
all possible liabilities. In the event of a successful suit
against the Company, insufficiency of insurance coverage could have
a material adverse effect on the Company.

17. Possible Delisting of Securities from NASDAQ System;
Disclosure Relating to Low-Priced Stocks. The National Association
of Securities Dealers, Inc. (the "NASD"), which administers NASDAQ,
has established criteria for continued NASDAQ eligibility. 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. The failure to meet these maintenance
criteria in the future may result in the discontinuance of the
inclusion of the Company's securities in NASDAQ. In such event,
trading, if any, in the Company's securities may then continue to
be conducted in the non-NASDAQ over-the-counter market. As a
result, an investor may find it more difficult to dispose of, or to
obtain accurate quotations as to the market value of, the Company's
securities. In addition, the Company would be subject to a
Commission rule that, if the Company fails to meet certain criteria
set forth in such rule, imposes various sales practice requirements
on broker-dealers who sell securities governed by the rule to
persons other than established customers and accredited investors.
For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior
to sale. Consequently, the rule may have an adverse effect on the
ability of broker-dealers to effect transactions in the Company's
securities and may affect the ability of purchasers in this
offering to sell the Company's securities in the secondary market.
The Company has been required to increase its equity several times
over the past year in order to remain eligible for inclusion in
NASDAQ. There is no assurance that the Company will be able to
acquire additional capital to continue to qualify for entry on
NASDAQ as it has done before. Thus, there is no assurance that the
Company will continue to remain eligible for continued inclusion on
NASDAQ.

The Commission has adopted rules that define a "penny stock."
Although the Common Stock is presently outside the definitional
scope of a penny stock under these rules, in the event the Common
Stock were subsequently to become characterized as a penny stock,
broker-dealers dealing in the Common Stock will be subject to the
disclosure rules for transactions involving penny stocks. The
additional burdens imposed upon broker-dealers may discourage
broker-dealers from effecting transactions in penny stocks, which
could reduce the liquidity of the Common Stock and have a material
adverse effect on the trading market for the Common Stock.

18. No Dividends. To date, the Company has not paid any
dividends on its Common Stock and does not expect to declare or pay
any dividends in the foreseeable future.

19. Significant Outstanding Options and Warrants in Excess of
the Company's Authorized Shares. The Company has outstanding
options and warrants which if exercised would exceed the number of
shares the Company is authorized to issue. Upon completion of this
offering and the exercise of the Consulting Warrant, there are
currently outstanding stock options to purchase (i) an aggregate of
464,000 shares of Common Stock at exercise prices ranging from $.60
to $2.625 per share; (ii) warrants to purchase 1,380,000 shares
which were issued in the Company's public offering and are
exercisable at $7.20 per share; (iii) warrants to purchase
1,000,000 shares at $1.00 per share granted to Whale; and (iv) and
warrants and options to purchase an aggregate of 1,300,000 shares
which have been granted to various individuals. The Company also
has granted a three year warrant to a licensee to purchase up to
$1,000,000 of Common Stock at a price equal to 60% of the average
of the closing bid and ask prices of the Common Stock during the
ten days prior to exercise. To the extent that outstanding options
or warrants are exercised, dilution to the Company's shareholders
may occur. Moreover, the terms upon which the Company will be able
to obtain additional equity capital may be adversely affected since
the holders of outstanding options and warrants can be expected to
exercise them at a time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the
Company than the exercise terms provided by such outstanding
securities. Mr. Lealos has agreed not to exercise 300,000 of his
options until the Company's certificate of incorporation has been
amended to authorize additional shares.

<PAGE>
GLOSSARY OF CERTAIN TECHNICAL TERMS

AIDS.............. Acquired Immunodeficiency Syndrome. AIDS is
caused by the Human Immunodeficiency Virus,
HIV.

ANTIBODY.......... A protein which is a natural part of the human
immune system produced by specialized cells to
neutralize antigens, including viruses and
bacteria, that invade the body. Each antibody
producing cell manufactures a unique antibody
that is directed against, binds to and
eliminates one, and only one, specific type of
antigen.

ANTIGEN........... Any substance which, upon entering the body,
stimulates the immune system leading to the
formation of antibodies. Among the more
common antigens are bacteria, pollens, toxins,
and viruses.

ASSAY............. In medicine, a means of measuring a substance
of clinical interest. The results may be
either qualitative, as in "yes/no" (such as
pregnant/not pregnant) or quantitative, as in
determining the number of red blood cells in a
sample.

BIOTECHNOLOGY...... The commercial application of bioscience,
representing the disciplines of molecular
biology, cell biology, genetics, enzymology,
immunology, bacteriology, biochemistry and
fermentation processes through the use of
living organisms.

DIAGNOSTIC......... Pertaining to the determination of the nature
or cause of a disease or condition. Also
refers to reagents or procedures used in
diagnosis to measure proteins in a clinical
sample.

ELISA.............. Enzyme Linked Immunoabsorbent Assays. Assays
in which an enzyme is employed to produce a
color change indication for a reaction
endpoint.

ENZYME............. A protein that facilitates specific chemical
reactions.

HIV................ Human Immunodeficiency Virus. HIV (also
called HIV-1), a retrovirus, causes AIDS. A
similar retrovirus, HIV-2, causes a variant
disease, sometimes referred to as West African
AIDS. HIV infection leads to the destruction
of the immune system.

IMMUNOASSAY........ An assay which exploits antigen-antibody
reactions.

IMMUNOLOGY......... The study of immunity to diseases.

IMMUNODIAGNOSTICS.. Diagnostic tests which use antigen/antibody
reactions to determine the presence of a
disease, disorder or condition.

PATHOGEN.......... A microorganism or substance which produces a
disease.

PROTOCOL.......... A procedure pursuant to which an
immunodiagnostic test is performed on a
particular specimen in order to obtain the
desired reaction.

REAGENT............ A chemical added to a sample under
investigation in order to cause a chemical or
biological reaction which will enable
measurement or identification of a target
substance.

RETROVIRUS......... A type of virus which contains the enzyme
Reverse Transcriptase and is capable of
transforming infected cells to produce
diseases in the host such as AIDS.

SENSITIVITY........ Refers to the ability of an assay to detect
and measure small quantities of a substance of
interest. The greater the sensitivity, the
smaller the quantity of the substance of
interest the assay can detect. Also refers to
the likelihood of detecting the antigen when
present.

SPECIFICITY........ The ability of an assay to distinguish between
similar materials. The greater the
specificity, the better an assay is at
identifying a substance in the presence of
substances of similar makeup.

VIRUS............. A parasitic microorganism not visible by light
microscopy and dependent on host cells for its
reproductive and metabolic needs.

<PAGE>
THE COMPANY

Principal Products

The Company has two categories of products: medical specimen
collection devices and rapid antibody immunoassays (tests).

Sample Collectors

In the sample collector (medical specimen) category of the
Company's products, the Company has completed development and
commenced preliminary distribution of its three specimen collection
devices, Omni-SAL, Omni-Swab, and Saliva Sampler. To date, most of
the Company's revenues have been derived from sales and licensing
agreements for these products and their component parts. Omni-SAL
and Omni-Swab are sold internationally through foreign
distributors. Omni-Swab is also distributed in the United States.
Saliva Sampler is distributed in the United States. See "Overseas
Regulation and Distribution."

Omni-SAL consists of a small absorbent paper pad attached to
a stick, a visual sample adequacy indicator and a transport tube
containing a buffer solution which stabilizes the saliva specimen
for up to 21 days at ambient temperatures. To collect a saliva
specimen, the device is placed under a subject's tongue, generally
for no more than a few minutes. The sample adequacy indicator is
designed to assure a sufficient quantity of saliva has been
collected for analysis. The buffer solution permits the storage
and transportation of the specimen between points of collection and
testing, which is essential in developing countries where
refrigerated storage may not be feasible, or where specimens are
transported under uncontrolled conditions.

Omni-SAL is used overseas to collect saliva samples for HIV
and nicotine testing with other makers' assays. Omni-SAL is also
used to collect saliva samples for research purposes, in studies of
infectious diseases such as Hepatitis A, tuberculosis,
schistosomiasis and leptospirosis, and for drugs of abuse such as
cocaine and marijuana.

Saliva Sampler is a saliva collection device approved by the
FDA for the collection of saliva samples in the United States for
general purposes.

Until recently, saliva has not been an accepted diagnostic
medium, due to lower antibody concentrations and potential impact
of diet and enzymes in saliva. With the increased sensitivity of
new diagnostic techniques, lower antibody concentrations are not a
limiting factor. A large number of independent studies evaluating
the use of saliva for various diagnostic purposes have been
conducted worldwide and published within the last decade. As a
result of these studies, saliva is now recognized as an acceptable
diagnostic medium for detecting the presence of certain analytes.
These analytes include antibodies to various diseases, including
HIV. To date, very few diagnostic assays for testing saliva
samples have been commercialized. The Company believes that the
market for saliva diagnostics will expand rapidly as new assays,
developed by the Company and its competitors, become available.

The Company completed initial development of Omni-Swab in
1994, and received approval from the U. S. Food and Drug
Administration ("FDA") to distribute Omni-Swab in the United States
for general medical purposes in 1994. Omni-Swab is a sample
collection device comprised of a serrated cotton swab with an
ejectable head. It is used to collect various body cells for a
number of testing purposes, including DNA identification. The
Company has granted Life Technologies, Inc. of Gaithersburg,
Maryland, and Fitzco, Inc. of Maple Plain, Minnesota non-exclusive
marketing rights to sell Omni-Swab.

Rapid Antibody Immunoassays

The second category of the Company's products are its rapid
diagnostic assays for various diseases including HIV infection,
Hepatitis A & B, Helicobacter pylori (H. pylori) and
Schistosomiasis. To date, the Company has completed development of
two of its three HIV assays, Sero-Strip HIV-1/2 and Hema-Strip-HIV-
1/2. Saliva Strip HIV-1/2 is in the final stages of development.
The Company is still in the development stages for its rapid assays
for the detection of other infectious diseases and drugs of abuse.

Sero-Strip HIV-1/2 ("Sero-Strip"), which uses serum and plasma
to detect HIV antibodies, is currently being produced and sold in
limited quantities. The Company commenced limited production and
distribution of Sero-Strip in 1995. Sero-Strip is designed to be
used in professional health care settings, where blood samples can
be drawn, and serum and plasma can be separated. Other than a
collection device, no medical equipment is needed to use the test,
and no special handling or storage is required. Up to 30 tests can
be performed with a single Sero-Strip kit. Sero-Strip appears to
provide stable results within 15 minutes.

Development of Hema-Strip HIV-1/2 ("Hema-Strip") which uses a
drop of whole blood for analysis, was completed in March 1996 and
the test is now being brought into production. Hema-Strip is
designed so that it may be used outside clinical settings. The kit
contains a collection device and is sold in lots of 30 individually
packaged tests. No other equipment is required to use the test.
Like Sero-Strip, the assay appears to produce stable results within
15 minutes. No special handling or storage appears to be required
other than the avoidance of extreme conditions.

Saliva Strip HIV-1/2 ("Saliva Strip"), an antibody assay with
sample collection and processing incorporated, is intended to
detect HIV antibodies in saliva. Saliva Strip is in the final
stages of development. Studies to collect data for the test are
underway in several countries in Asia, Latin America and Africa.
Final packaging design of the test is not complete. During 1995,
the Company commenced limited distribution of Saliva Strip to
researchers in Mexico and Brazil. The Company is continuing to
develop Saliva Strip for use in detection of other diseases and
substances.

Domestic Regulation

In the United States, under the Federal Food, Drug, and
Cosmetics Act ("the FDC Act"), the Food and Drug Administration
("FDA") regulates almost all aspects, including manufacture,
testing, and marketing, of medical devices that are made or
distributed domestically. The Company's domestically made and/or
distributed products have received FDA approval for certain limited
purposes. These include Omni-Swab and Saliva Sampler. The Company
has not yet initiated activities for FDA approval of its products
that are manufactured and distributed outside the United States.

All medical devices are categorized by the FDA as Class I,
Class II, or Class III. Class I devices are subject only to general
control provisions of the FDC Act, such as purity, labeling and
good manufacturing practices ("GMP"). Class II devices are required
to also ensure reasonable safety and efficacy through performance
standards and other controls. Class III devices must, in addition
to fulfilling all other provisions of the FDC Act, meet extensive
and rigorous FDA standards that may require clinical trials.
A manufacturer of medical devices which can establish that a
new device is "substantially equivalent" to a legally marketed
Class I or Class II medical device or to a Class III medical device
for which the FDA has not required a PMA (premarket approval
application) can seek FDA marketing clearance for the device by
filing a 510(k) Premarket Notification. The 510(k) Premarket
Notification may have to be supported by various types of
information, including performance data, indicating that the device
is as safe and effective for its intended use as a legally marketed
predicate device.

The Company is pursuing several strategies for initiating FDA
approval of its products not already approved for domestic
distribution. These strategies include alliances with other
companies and selling limited licensing rights to SDS products to
companies who agree to seek FDA approval for them. The Company may
also directly apply for FDA approval of those products.

In 1994, the FDA approved Omni-Swab as a Class I medical
device. In May 1995, in response to a "510K" application made by
the Company, the FDA approved Saliva Sampler as a Class II device,
accepting the Company's contention that, under the 510K application
guidelines, Saliva Sampler demonstrated "substantial equivalency"
to other non-saliva collection devices already in use for general
purposes.

The Company believes that all of its HIV products would, if
submitted to the FDA, fall under the Class III category of medical
devices. This includes the Company's saliva collection device,
Omni-SAL, if marketed as a specimen collection device for HIV
testing. The Company believes its proposed assay for H.pylori,
however, could be approved as Class II device. The Company
believes its rapid tests for drugs of abuse when completed may
qualify for a 510K application. There is no assurance that the
Company's position with respect to these products will prevail with
the FDA.

If human clinical trials of a proposed device are required,
and the device presents "significant risk," the manufacturer or
distributor of the device will have to file an IDE (Investigational
Device Exemption) with the FDA prior to commencing human clinical
trials. The IDE must be supported by data, typically including the
results of animal and mechanical testing. If the IDE application
is approved, human clinical trials may begin at a specific number
of investigational sites and is limited to the number of subjects
approved by the FDA.

The Company has generated supporting data for its immunoassays
for diseases and conditions such as HIV infection, schistosomiasis
and H.pylori.

In 1994, the FDA approved the Company's request to classify
Omni-SAL under the Investigational Device Exemption (IDE)
provisions of the FDC Act, allowing the Company to manufacture and
distribute Omni-SAL for the limited purpose of demonstrating the
efficacy of using saliva as a diagnostic medium for HIV antibody
testing.

In 1995, the FDA approved the Company's request to review a
premarketing application (PMA) for Omni-SAL, and authorized the
Company to begin clinical trials in the United States. SDS has not
conducted any clinical trials for Omni-SAL in the United States,
although preclinical data has been generated for the device in the
United States and foreign countries. The Company would be required
to use other, FDA-approved confirmatory testing procedures during
the trials.

If and when the Company's products are approved by the FDA,
they will be subject to continuing regulation by the FDA and state
and local agencies. The FDA has established a number of
requirements for manufacturers, including good manufacturing
practices (GMP), and requirements regarding labeling and reporting.
The failure to comply with these requirements can result in
regulatory action, including warning letters, product seizure,
injunction, product recalls, civil fines and prosecution. An FDA
enforcement action could have a material adverse effect on the
Company. To date, the Company has not been the subject of any FDA
enforcement actions. The FDA also audits clinical studies for
compliance with applicable requirements.

Clinical Laboratory Improvement Act

In 1988, Congress passed the Clinical Laboratory Improvement
Act ("CLIA '88"). CLIA '88 greatly expanded the number of
laboratories that are subject to regulation. CLIA '88 sets forth
performance standards that apply to subject laboratories. In
February 1992, final regulations implementing CLIA '88 were issued.
The Company believes these complex regulations may have a
significant effect on diagnostic testing in the United States.

While it is difficult to predict the ultimate impact of CLIA
'88 on the Company, it is possible that it may make it more costly
and difficult for physicians to operate their own office
laboratories, resulting in closure of some of these small private
laboratories. This may reduce demand for some of the Company's
products.

New guidelines established by the FDA to implement CLIA '88
may also require the Company to generate additional testing data to
support a PMA or 510(K) Pre-Market notification.

Overseas Regulation and Distribution

Regulatory approval for medical devices varies from country to
country. Some countries do not require regulatory approval when
registering a product for sale to the private sector. Others rely
on evaluations by the agencies such as the World Health
Organization (WHO). The Company has submitted Sero-Strip to WHO
for evaluation, and intends to submit its other HIV tests as well.
Evaluation by WHO of Sero-Strip has been completed, and its final
report will be released after it incorporates the Company's
response to the analysis of the WHO's data.

The following lists the Company's products, where the products
are distributed, and where regulatory approval is pending (if
needed). In certain cases, the Company has utilized the experience
and assistance of local distributors in obtaining approval.

1. Omni-SAL is being distributed or has been approved as a
sample collection device for HIV testing and other uses in the
following countries: Argentina, Bahamas, Brazil, Canada, China,
Denmark, England, Finland, Greece, Ireland, Israel, Luxembourg,
Mexico, Malaysia, New Zealand, Norway, Peru, Philippines,
Singapore, Switzerland, Thailand, and Turkey. The Company has
submitted Omni-SAL for approval as a sample collection device for
HIV testing and other uses in France and South Africa, and plans to
apply for approval in several other European and Middle Eastern
nations.

2. Omni-Swab is distributed to many of the same countries as
Omni-SAL and the United States.

3. Saliva Sampler is distributed mainly in the United
States. FDA approval of this and Omni-Swab has pre-empted
regulatory review in many countries outside the United States.

4. Sero-Strip was approved for use and sale in Russia by the
Russian Ministry of Health in 1996, and has received a certificate
of free sale from Singapore, where it is manufactured. Sero-Strip
is also approved in the United Kingdom. It is currently being
distributed in Brazil, Malaysia, and Turkey, where regulatory
approval is not required. The test is pending approval (where
needed) to other Asian, European, and Latin American countries.
The Center for Disease Control in Atlanta, Georgia has concluded a
preliminary study using Sero-Strip and ordered more of the tests
for research use in Atlanta and epidemiological purposes in Kenya.

5. Hema-Strip is pending regulatory approval in Russia,
India, the Ukraine and the United Kingdom, and is being evaluated
by several health institutes in Malaysia, where regulatory approval
is not needed. Hema-Strip received a certificate of free sale from
the Ministry of Health in Singapore in April 1996 which allows
Hema-Strip to be manufactured in and distributed from Singapore to
other countries, as well as Singapore. The Company intends to
submit Hema-Strip to many if not all of the regions where its other
products are distributed or pending approval.

6. Saliva-Strip is in final stages of development. When
completed, the Company intends to submit the device for approval
(if needed) and distribution in the same areas where its other
products are sold. There is no assurance, however, that any such
approvals will be timely obtained or obtained at all.

Manufacturing

Omni-SAL is manufactured and distributed from the Company's
manufacturing facility in Singapore, while Omni-Swab and Saliva
Sampler are manufactured at MML Diagnostic Packaging, Inc. ("MML")
in the United States and distributed by the Company. Sero-Strip
HIV 1/2 and Hema-Strip HIV 1/2 are also manufactured and
distributed from the Company's facility in Singapore.
Manufacturers, if located in the United States or if manufacturing
products which are to be sold in the United States, must comply
with good manufacturing practices ("GMP") and pass pre-approval
inspections by the FDA and periodic GMP inspections. The Company
has been advised by MML that MML is in compliance with GMP and FDA
regulations.

The Company believes that the components used in the
manufacture of its current and proposed products are currently
available from numerous suppliers located in the United States,
Europe and Asia. The Company believes that certain components are
available from a limited number of suppliers. Although the Company
believes that it will not encounter difficulties in obtaining these
components, there can be no assurance that the Company will be able
to enter into satisfactory agreements or arrangements for the
purchase of commercial quantities of such components.

Marketing

The Company has directed its primary marketing and
distribution efforts for most of its HIV products to international
markets, principally in Asia, Latin America, Europe and the Middle
East. Continuing data collection studies conducted by the Company
in conjunction with overseas governments and health agencies have
established relationships between the Company and these entities
and promoted familiarity with the Company's products in these
areas.

For its other products, particularly the Company's proposed
assay for the H. pylori bacteria, the Company has actively sought
the attention of pharmaceutical corporations who manufacture or
distribute therapies for peptic ulcers. The Company is currently
in discussions with several such firms.

The Company is also attempting to develop strategic alliances
with other companies to jointly develop diagnostic tests which use
saliva and/or blood as the testing specimen.

There can be no assurance, however, that the Company's
marketing efforts to develop alliances with other companies will be
successful.

Principal Customers

During the Company's fiscal year ended December 31, 1995
("Fiscal 1995"), two customers, Fitzco, Inc. and Osborn
Laboratories, accounted for approximately 50% of the Company's
revenues. In addition, the Company sold Omni-SWAB to the British
government for use in its penal system to collect epithelial
surface cells for DNA samples for identity testing and several
insurance companies in Great Britain purchased Omni-SAL to test for
HIV. A loss of any these customers would have a material adverse
effect on the Company.

Licenses

The Company intends to utilize certain licensees to assist it
in distributing its products. In March 1995, the Company entered
into a license agreement with Home Access Health Corporation ("Home
Access") granting Home Access an exclusive license to utilize the
Company's proprietary technology regarding Omni-SAL for a limited
market segment. This license agreement was terminated during 1995
and the Company has sued Home Access. See " -- Legal Proceedings".

In March 1994, the Company granted a non-exclusive license to
Orgenics, Ltd. ("Orgenics") pursuant to which Orgenics can make or
have made diagnostic products incorporating the features of Omni-
SAL. Orgenics has paid the Company an initial licensing fee of
$200,000 and will pay 4% royalties on Orgenics' products which
incorporate the Omni-SAL technology, and 6% royalties on kits of
Omni-SAL sold by Orgenics. In addition, Orgenics received a
warrant expiring in March 1997 to purchase up to $1,000,000 of the
Company's Common Stock at a 40% discount from the average of the
closing bid and ask prices during the ten days immediately prior to
such purchase.

Research and Development

During the years ended December 31, 1995 and 1994, the
Company's research and development expenses were approximately
$353,098 and $584,939, respectively.

Competition

The saliva and blood-based collection and diagnostic testing
market in which the Company participates is highly competitive.
The Company is aware of other corporations in the United States
that have or are developing similar products. These companies
include ChemTrak, Inc., Epitope Inc., Quidel and Trinity Biotech
PLC, as well as universities and other research institutions. The
Company's products will compete with these entities, some of which
are well established and have substantially greater research,
marketing, and financial resources than the Company. The Company
expects that competition will increase as the advantages of-saliva-
based testing become more widely recognized.

Patents and Proprietary Information

The Company has applied for ten patents on certain aspects of
its saliva collection and diagnostic testing devices. The Company
has been awarded eight of these patents and there can be no
assurance that any more patents will be obtained. Inasmuch as the
Company intends to sell its products in foreign markets, it intends
to seek foreign patent protection on such products and
technologies. The patent laws of other countries may differ from
those of the United States as to the patentability of the Company's
products and technologies and the degree of protection afforded.

Much of the technology developed by the Company is subject to
trade secret protection. To reduce the risk of loss of trade
secret protection through disclosure, the Company generally enters
into confidentiality agreements with its employees. There can be
no assurance that the Company will be successful in maintaining
such trade secret protection or that others will not capitalize on
certain of the Company's technology.

Personnel

At April 29, 1996, the Company had 23 full-time employees, and
one part-time employee, including eighteen persons engaged in
research, development, testing and regulatory affairs, six persons
engaged in management, marketing and administration. The Company
considers its relations with its employees to be good. None of the
Company's employees are represented by labor unions.

Description of Property.

The Company's executive offices and laboratory facility are
located at 11719 NE 95th Street, Vancouver, Washington in a 7,488
square foot facility. The Company has additional laboratory
facilities in a 3,020 foot facility located across the street from
its principal facility. The premises are occupied pursuant to
leases with an unaffiliated party which expire in August 31, 2002.

The Company leases 432.80 square meters (approximately 4,500
square feet) in Singapore which it uses for offices and
manufacturing facilities. The three-year lease is from an
unaffiliated party and expires in June 1997.
Legal Proceedings

Hardy v. Saliva Diagnostic Systems, Inc., Ronald L. Lealos,
Eugene Seymour and Richard S. Kalin, was brought in United States
District Court, District of Connecticut by Mr. Luc Hardy, a former
director and officer of the Company. The complaint lists several
causes of action against the Company and the individual defendants,
including breach of Mr. Hardy's employment agreement with the
Company, intentional interference with contract by the individual
defendants, slander and deceptive trade practices. The complaint
seeks damages and punitive damages in an unspecified amount. The
Company believes this complaint is without merit as Mr. Hardy was
fired for cause and intends to vigorously defend itself. Discovery
has been completed.

In January 1996, the Company filed suit against Home Access
Health Corporation ("HAHC") (Saliva Diagnostic Systems, Inc. v.
Home Access Health Corporation) in Washington Superior Court, Clark
County. The Company had entered into a license agreement with HAHC
which gave HAHC the exclusive right to market Omni-SAL for home
testing kits. The Company believes HAHC has failed to utilize the
license and is seeking declaratory judgment to revoke the license.
The lawsuit is in the preliminary stage; although the Company
intends to vigorously pursue this case, there is no assurance that
it will prevail. In the event the Company does not prevail, the
Company may be forced to pay royalties to HAHC for Omni-SAL
products directly sold by the Company.

Meritxell Ltd. v. Saliva Diagnostic Systems, Inc., commenced
in the United States District Court for the Southern District,
involves the conversion rate of a convertible debenture issued by
the Company pursuant to Regulation S. The Company believes the suit
is without merit inasmuch as the plaintiff failed to comply with
all of the terms of the convertible debenture and therefore did not
receive the conversion rate that would have been advantageous to
the plaintiff. Plaintiff is seeking damages in an unspecified
amount. This suit is in the preliminary stages and management of
the Company intends to vigorously defend the Company.

Other than that set forth above, to the best knowledge of the
Company, no other proceedings are pending or have been threatened.

DIVIDEND POLICY

To date, the Company has not declared or paid any dividends on
its Common Stock. The payment of future dividends, if any, on the
Common Stock, is within the discretion of the Board of Directors
and will depend upon the Company's earnings, its capital
requirements and financial condition and other relevant factors.
The Board does not intend to declare any dividends on its Common
Stock in the foreseeable future, but instead intends to retain all
future earnings, if any, for use in the Company's business
operations.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Results of Operations

The following discussion and analysis of financial condition
results of operations for the years ended 1995 and 1994 should be
read in conjunction with the financial statements and notes thereto
included herein.

General

Since July 1990, the Company has been engaged almost
exclusively in research and development activities focused on
developing proprietary saliva and blood-based collection devices
and rapid tests for infectious diseases and drugs of abuse. 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 $16,761,847 at
December 31, 1995. 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's independent certified public accountants have
included an explanatory paragraph in their report stating that the
Company's ability to continue as a going concern is dependent on
its ability and to attain future profitable operations or to
continue to raise additional capital.

Year Ended December 31, 1995 Compared to Year Ended December 31,
1994.

Revenues for the year ended December 31, 1995 ("Fiscal 1995")
were $621,299, as compared to revenues of $460,673 for the year
ended December 31, 1994 ("Fiscal 1994"). The increase in revenues
was primarily attributable to sales of Omni-SAL from the Company's
Singapore facility and sales of Omni-SWAB.

Research and development costs for Fiscal 1995 decreased to
$353,098 from $584,939 in Fiscal 1994. The decrease was a result
of the Company's attempt to control costs in light of its limited
capital resources.

Selling, general and administrative expenses ("SGA") for
Fiscal 1995 were $4,158,641, an increase of $1,232,020, or
approximately 42% from $2,926,621 for Fiscal 1994. The Company
attributes the increase in SGA to an increase in salaries paid to
consultants and employees and costs associated with the Company's
capital-raising activities.
For Fiscal 1995, the Company incurred a net loss of
$4,597,770, or $.46 per share as compared to a net loss of
$3,357,771, or $.70 per share for Fiscal 1994, an increase of
$1,239,999 (a decrease of $.24 per share).

Liquidity and Capital Resources

The Company's working capital deficit decreased to $290,228 at
December 31, 1995 from $465,603 at December 31, 1994, a decrease of
$175,375. Its current ratio was .91 to 1.

During Fiscal 1995, net cash used by the Company's operating
activities was $2,999,571 as compared to $2,717,976 of cash used in
operating activities in Fiscal 1994. The primary use of funds
during both periods was to finance losses from operations.

Cash used from investment activities in 1995 was $128,468 as
compared to cash used of $311,868 in 1994. The primary use of
funds in both periods was the purchase of equipment.

Cash provided from financing activities in 1995 was $5,719,622
as compared to cash provided from these activities in 1994 of
$2,868,867. The largest portion of cash provided during Fiscal
1995 was from the Company's private offerings of securities.

In October and November 1995, the Company sold an aggregate of
$3,685,000, nine percent convertible debentures to 12 overseas
investors. The convertible debentures were converted into an
aggregate of 7,901,380 shares of Common Stock from January through
March 1996 (approximately 40% of the outstanding shares).

In November 1995, the Company received gross proceeds of
$300,000 from a private offering of its securities. The offering
consisted of Units; each Unit cost $100,000 and contained 100,000
shares of Common Stock and warrants to purchase an additional
150,000 shares at an exercise price of 50% of the closing bid price
of the shares of Common Stock as reported by NASDAQ on the date the
holder elects to exercise his warrant. In January 1996, holders of
an aggregate of 345,000 warrants have elected to exercise their
warrants for an aggregate purchase price of $101,952. Mr. Ronald
Lealos, the President of the Company, purchased .3 Units and
exercised his warrant to purchase 45,000 shares. Dr. Eugene Seymour
and Dr. M.J. Scheinbaum, directors of the Company, each purchased
one Unit and each exercised his warrant to purchase an additional
150,000 shares.

From November 1994 through March 1995 the Company received
gross proceeds of approximately $2.1 million from a private
offering of its securities, pursuant to which it issued 4,545,000
shares of Common Stock.

In March 1994, as a result of entry into a license agreement
with Orgenics Ltd., Orgenics Ltd. was granted a three year option,
expiring in March 1997, to purchase up to $1,000,000 (but not more
than 19%) of the Common Stock at 60% of the average of the closing
bid and asked price for the Common Stock during the ten trading
days prior to such purchase.

The Company has significant requirements for capital to
continue to fund its activities. As a result of the above-
described activities, management believes it has adequate resources
to fund its current activities for the next several months. After
this period, unless the Company has developed alternative financing
arrangements, it will likely be required to obtain additional
capital to continue to fund its activities. There is no assurance,
however, that such additional capital will be available, or if
available, whether it will be available on terms acceptable to the
Company.

MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS

The Common Stock is traded in the Over-the-Counter market and
is quoted on NASDAQ.

The following table sets forth, in each fiscal quarter for the
Company's two most recent fiscal years, high and low bid quotations
for the Common Stock. The market quotations represent prices
between dealers, do not include retail markup, markdown, or
commissions and may not represent actual transactions.

Quarter Ended High Bid Low Bid

December 31, 1995 $3.1875 $ .6875
September 30, 1995 4.50 2.8125
June 30, 1995 4.125 2.3125
March 31, 1995 3.00 .5625

March 31, 1994 5.00 3.00
June 30, 1994 3.75 1.00
September 30, 1994 2.625 1.25
December 31, 1994 1.6875 1.00

On April 29, 1996, the closing bid price in the Over-the-
Counter market for the Common Stock, as reported by NASDAQ, was
$4.375 and the closing bid for the Company's warrants to purchase
1,380,000 shares of Common Stock at $7.20 per share, as reported by
NASDAQ, was $.75.

On April 29, 1996, there were approximately 349 holders of
record of the Common Stock. The Company believes that there are
significantly more beneficial holders of the Common Stock as many
of the shares of Common Stock are held in "street" name. There
were also 34 holders of record of the publicly-traded warrants. See
"Description of Securities."

<TABLE>
<CAPTION>
MANAGEMENT

Position with Director
Name Age the Company Since
<S> <C> <C> <C>
David Barnes, MD 51 Director November 1993

Ronald L. Lealos 47 President and Director January 1992

Kenneth J. McLachlan 49 Director December 1995

M.J. Scheinbaum, MD 55 Director February 1996

Eugene Seymour, MD 55 Chairman and Director June 1986
</TABLE>

Dr. David Barnes. Dr. Barnes, a pathologist, was elected to
the Board of Directors in November 1993. Dr. Barnes has been the
Managing Director of SDS International Ltd. (U.K.) ("SDS-UK") since
commencement of its operations. Prior to being Managing Director of
SDS-UK, Dr. Barnes was Director of Medical Services for Hemotex
Ltd., a laboratory service mainly dealing with the U.K. insurance
industry. He was responsible for forming a joint-venture
partnership with the Royal London hospital. Before this, Dr.
Barnes worked in South America and in Saudi Arabia where as Deputy
Minister of Health he was responsible for all of the medical
aspects of the Saudi Kingdom's hospital building program.

Ronald L. Lealos. Mr. Lealos was elected President and
Treasurer in July 1993, and Director and General Manager in January
1992. He has been employed by the Company since September 1990,
when the Company commenced its current business activities. Since
commencement of his employment to date, Mr. Lealos has overseen the
research work on Omni-SAL, directed the Company's manufacturing
operations and has coordinated much of the Company's research
activities.

M.J. Scheinbaum, MD. Dr. Scheinbaum was elected to the Board
of Directors in February 1996 to fill a vacancy. Dr. Scheinbaum,
a psychiatrist, has been in private practice since 1970. Dr.
Scheinbaum received his medical degree in 1966 from Howard
University Medical School.

Kenneth J. McLachlan. Mr. McLachlan was elected to the Board
of Directors in December 1995 to fill a vacancy. From 1988 until
1993, Mr. McLachlan served as Chief Financial Officer and Executive
Vice President of Corange Boehringer Mannheim, a privately-owned
multinational health care group. In 1993, he founded his own
international finance and tax firm, located in the Netherlands.
Mr. McLachlan is a director of Burnfield PLC, a publicly-held
company located in Great Britain.

Dr. Eugene Seymour. Until his resignation in June 1994, Dr.
Seymour was Chief Executive Officer. During the past 25 years, Dr.
Seymour practiced internal medicine in Los Angeles. Dr. Seymour is
also the owner of Wilshire Center Geriatrics Medical Group, Inc.,
a privately-held company which operates a number of urgent care
medical clinics in Los Angeles, California. Dr. Seymour received
his M.D. Degree from Baylor University College of Medicine in 1965
and a Masters in Public Health from the U.C.L.A. School of Public
Health in 1970.

During the year ended December 31, 1995 ("Fiscal 1995"), the
Board of Directors had six meetings and acted five times by
unanimous consent. The Company currently does not have a standing
audit, compensation or nominating committee.

OTHER EXECUTIVE OFFICERS
Position
Name Age Position With the Company Held Since

Willfried 51 Vice President for 1993
Schramm, Ph.D. Research & Development

Duke van 43 Managing Director 1993
Kalken

Willfried Schramm, Ph.D. Dr. Schramm has been Vice President
for Research and Development of the Company since August 1993. He
commenced his employment with the Company in 1993. From 1985 until
his commencement of employment by the Company, he was Vice
President for Research and Development for BioQuant, Inc., Ann
Arbor, Michigan ("BioQuant"), where he conducted research on
biotechnical issues including usage of saliva as a diagnostic
specimen. Dr. Schramm was also on the Board of Directors of
BioQuant from 1991 until 1993. Dr. Schramm received his Ph.D. in
chemistry from the University of Hamburg in 1977.

Duke van Kalken. Mr. van Kalken has been Managing Director of
SDS (Singapore) Pte. Ltd. since April 1993 and has been Managing
Director of SDS (Asia) Ltd. Hong Kong since May 1992. From December
1991 until May 1992, Mr. van Kalken was a consultant to the Bangkok
Royal Country Club in Thailand and to Golf Digest Magazine. From
January 1988 until December 1992, he was President of Saugatuck
Investment Co. in Westport, Connecticut, which specialized in real
estate investments.

EXECUTIVE COMPENSATION

The following table sets forth information relating to the
cash compensation received during Fiscal 1995 and the Company's
fiscal years ended December 31, 1994 and 1993 by the Company's
executive officers:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE

Long Term
Name and Annual Com- Other Compen-
Principal Fiscal pensation Annual Com- sation
Position Year Salary ($) pensation ($) Options
<S> <C> <C> <C> <C>
Ronald L. Lealos 1995 31,925 $130,000(1) 400,000
President 1994 106,200 - 130,000
1993 93,625 17,731 -

Duke van Kalken 1995 123,220 58,300(2) 50,000
Managing 1994 136,800 69,308(2) 130,000
Director 1993 100,351 68,411(2) -

Willfried 1995 100,000 - 75,000
Schramm

Dr. David Barnes 1995 131,750 - 175,000
Managing
Director
_________________

(1) Received 230,000 shares of Common Stock in the Company in lieu
of $130,000 salary.

(2) Additional foreign cost of living allowance.
</TABLE>

EMPLOYMENT AND CONSULTING AGREEMENTS

In January 1995 the Company entered into a five year
employment agreement with its President, Ronald L. Lealos. The
employment agreement provides for an annual base compensation of
approximately $250,000 plus an nonaccountable travel allowance of
$12,000. The employment agreement also provides that the Company
provide Mr. Lealos with any benefits received by the Company's
other executive employees including health and life insurance in
addition to certain other benefits.

In January 1994, the Company and its subsidiary, SDS Asia,
entered into a three year consulting agreement with Duke van Kalken
under which Mr. van Kalken receives an annual salary of US $60,000.
In addition, Mr. van Kalken was granted an option to purchase
50,000 shares of Common Stock.

STOCK OPTION PLANS

On March 19, 1992, the Company adopted a Stock Option Plan
(the "1992 Plan") pursuant to which options to purchase up to an
aggregate of 350,000 shares of Common Stock could be granted. Such
options shall be non-incentive options.

On May 17, 1994, the Company adopted a 1994 Stock Option Plan
(the "1994 Plan") pursuant to which options to purchase up to
350,000 shares of Common Stock may be granted to employees,
consultants, advisors to the Company's Board of Directors, and
qualified directors. Options granted pursuant to the Plan may be
incentive options or non-qualified options as such terms are
defined in the Internal Revenue Code of 1986, as amended (the 1992
Plan and the 1994 Plan are collectively referred to as the
"Plans").

The Plans are administered by the Board of Directors which has
the authority to determine the persons to whom options may be
granted, the number of shares of Common Stock to be covered by each
option, the time or times at which the options may be granted or
exercised whether under the 1994 Plan, the options are to be
incentive options or non-qualified options and, for the most part,
the terms and provisions of the options. The exercise price of
options granted under the Plans may not be less than the fair
market value of the shares of Common Stock on the date of grant.
The following tables indicate the options granted to officers and
directors of the Company during Fiscal:

OPTION GRANTS DURING FISCAL 1995

Percent of
Total Options Expira-
Options Granted in Exercise tion
Name Granted Fiscal Year Price($) Date

David Barnes 175,000 17.5% $1.00 3/2/98

Ronald L. Lealos 400,000 40.1% $1.00 3/2/98

Dr. Eugene Seymour 10,000 1.0% $1.00 3/2/98

Willfried Schramm 75,000 7.5% $1.00 3/2/98

Duke van Kalken 50,000 5.0% $1.00 3/2/98

<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1995
AND OPTIONS/SAR VALUES

Value of
Unexercised
Number of In-the-money
Shares Unexercised Options at
Acquired on Value Options (All Year End (All
Name Exercise(#) Realized($) Exercisable) Exercisable)
<S> <C> <C> <C> <C>
Dr. David Barnes 0 0 187,500 0
Ronald Lealos 0 0 530,000 0
Dr. Eugene Seymour 0 0 38,000 0
</TABLE>

COMPENSATION OF DIRECTORS

Directors are not compensated for their services as such,
including attendance at directors' and other meetings. All non-
employee directors are entitled to an option grant for 3,000 shares
of Common Stock under the Plans.

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information as of the
date of the Prospectus and as adjusted to reflect the sale of the
securities offered hereby, based on information obtained from the
persons named below, with respect to the beneficial ownership of
shares of Common Stock by (i) each person known to the Company who
beneficially owns more than five (5%) percent of the outstanding
shares of Common Stock, (ii) each director of the Company, (iii)
all officers and directors of the Company as a group and (iv) the
Selling Shareholders:
<TABLE>
<CAPTION>

Number of
Name Shares Percentage of
and Address of Beneficially Outstanding
Beneficial Owner Owned(1) Shares of Common Stock(8)

Before After
Offering Offering
<S> <C> <C> <C>
Eugene Seymour, M.D. 1,501,401(2) 7.2% 7.2%
1465 Monaco Drive
Pacific Palisades,
CA 90272

Mr. Ronald Lealos 1,266,912(3) 5.9% 5.9%
11719 NE 95th Street
Vancouver, WA 98682

<CAPTION>
Number of
Name Shares Percentage of
and Address of Beneficially Outstanding
Beneficial Owner Owned(1) Shares of Common Stock(7)

Before After
Offering Offering

<S> <C> <C> <C>
David Barnes, MD 458,000(4) 2.1% 2.1%
11 Sovereign Close
Sovereign Court
London E19 HW England

Kenneth J. McLachlan 25,000(5) * *
403 Collingwood House
Dolphin Square
London SW1 3NF England

M. Joel Scheinbaum 750,000(5) 3.6% 3.6%
7509 W. 83rd Street
Los Angeles, CA 90293

All Officers and 4,301,313(2)(3)(4) 19.5 % 19.5%
Directors as a (5)
Group (5 persons)

Robert Kramer(6) 90,000 2.1% *
c/o Whale Securities
Co., LP
650 Fifth Avenue
New York, NY 10019

_______________

* Less than 1%.

(1) A person is deemed to be the beneficial owner of securities
that can be acquired by such person within 60 days from the
date hereof upon the exercise of options or warrants. Each
beneficial owner's percentage ownership is determined by
assuming that options that are held by such person (but not
those held by any other person) and that are exercisable
within 60 days from the date hereof have been exercised.
Except as otherwise indicated, and subject to applicable
community property and similar laws, each of the persons named
below has sole voting and investment power with respect to the
shares shown as beneficially owned.

(2) Includes (i) options to purchase 38,000 shares of Common Stock
at exercise prices ranging from $1.00 per share to $2.625 per
share, and (ii) 37,500 shares of Common Stock and warrants to
purchase 80,000 shares of Common Stock exercisable at prices
ranging from $2.00 to $3.50 per share owned by Wilshire
Medical Group Defined Benefit Pension Plan, of which Dr.
Seymour is Trustee.

(3) Includes options to purchase 625,000 shares of Common Stock at
exercise prices ranging from $.43 per share to $1.375 per
share. Does not include options to purchase 300,000 shares of
Common Stock which Mr. Lealos agreed not to exercise until the
Company's Certificate of Incorporation is amended.

(4) Includes options to purchase 458,000 shares of Common Stock at
exercise prices ranging from $.43 per share to $5.50 per
share.

(5) Includes warrants to purchase 100,000 shares of Common Stock
at $2.00 per share.

(6) This stockholder has not held any position or office within
the Company nor has had any other material relationships with
the Company.

(7) Assumes exercise of all of the Warrants and the Underlying
Warrants.
</TABLE>

The Company is unaware of any arrangement, the operation of
which, at a subsequent date, may result in a change of control of
the Company.

CERTAIN RELATIONSHIPS

During the four fiscal years ended December 31, 1995, Dr.
Seymour lent the Company substantial amounts of money to fund its
operations. During Fiscal 1994 and Fiscal 1995, the Company
converted the remaining balances of loans it received from Dr.
Seymour into shares of Common Stock at the rate of $1.00 per share.
Dr. Seymour received 231,120 and 90,000 shares in exchange for his
loans during Fiscal 1994 and Fiscal 1995, respectively. During
Fiscal 1994, the Company also terminated Dr. Seymour's employment
contract, and issued Dr. Seymour 75,000 shares as consideration for
the termination and as settlement of amounts due under the
employment agreement.

During Fiscal 1994 and Fiscal 1995, the Company conducted a
private placement of its securities (the "Private Placement")
whereby it sold 4,545,000 shares of Common Stock for approximately
$2,200,000. A pension plan affiliated with Dr. Seymour (the
"Pension Plan") acquired 450,000 shares of Common Stock and a
warrant to purchase 75,000 shares at an exercise price of $3.50 per
share in the Private Placement. The Pension Plan acquired the
securities on the same terms as the other investors in the Private
Placement who acquired their securities before January 1, 1995.
Mr. Lealos purchased 200,000 shares of Common Stock in the Private
Placement on the same terms as the other investors in the Private
Placement.

In April 1995, Dr. Chyang Fang, a former director and employee
of the Company, and the Company agreed to terminate Dr. Fang's
contract. The settlement agreement provided that Dr. Fang could
exercise his option to purchase 100,000 shares of the Company's
Common Stock; the first 50,000 options were exercised in April
1995; the remaining options, exercisable in April 1996, remain
unexercised.

In November 1995, the Company received gross proceeds of
$300,000 from a private offering of its securities. The offering
consisted of Units; each Unit cost $100,000 and contained 100,000
shares of Common Stock and warrants to purchase an additional
150,000 shares at an exercise price of 50% of the closing bid price
of the shares of Common Stock as reported by NASDAQ on the date the
holder elects to exercise his warrant. In January 1996, holders of
an aggregate of 345,000 warrants elected to exercise their warrants
for an aggregate purchase price of $101,952. Mr. Lealos purchased
0.3 Units and exercised his warrant to purchase 45,000 shares of
Common Stock. Drs. Eugene Seymour and M.J. Scheinbaum, directors
of the Company, each purchased one Unit and each exercised his
warrant to purchase an additional 150,000 shares of Common Stock.

Other Transactions

As to each transaction between the Company and an affiliate of
the Company, a majority of the disinterested members of the Board
of Directors determined that such transactions were on terms at
least as fair as had they been consummated with unrelated third
parties. The Board of Directors has adopted a policy that in the
future, before it enters into any transactions with a related
party, it will be a requirement for a similar determination to be
made by a majority of the Company's disinterested directors.

DESCRIPTION OF SECURITIES
General

The Company's Certificate of Incorporation authorizes the
Company to issue up to 25,000,000 shares of Common Stock, par value
$.01 per share. As of the date of this Prospectus, 20,797,035
shares of Common Stock are outstanding.

Common Stock

The holders of Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by stockholders.
There is no cumulative voting with respect to the election of
directors, with the result that the holders of more than 50% of the
shares voted for the election of directors can elect all of the
directors. The holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining
available for distribution to them after payment of liabilities and
after provision has been made for each class of stock, if any,
having preference over the Common Stock. Holders of shares of
Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions
applicable to the Common Stock. All of the outstanding shares of
Common Stock are, and the shares of Common Stock offered hereby,
when issued against the consideration set forth in this Prospectus,
will be, fully paid and nonassessable.

Public Warrants

The Company has 1,380,000 outstanding warrants which are
publicly traded (the "Public Warrants"). Each Public Warrant
entitles the registered holder thereof (the "Warrantholders") to
purchase one share of Common Stock at a price of $7.20, subject to
adjustment in certain circumstances, until 5:00 p.m., Eastern Time,
on June 1, 1996. The Public Warrants may be purchased separately
and will be separately transferable immediately upon issuance.

The Public Warrants are redeemable by the Company, with the
consent of Whale, at any time upon notice of not less than 60 days
at a price of $.10 per Warrant, provided that the last sale price
of the Common Stock on all ten of the trading days ending on the
third day prior to the day on which the Company gives notice has
been at least 150% (currently $10.80, subject to adjustment) of
the then effective exercise price of the Public Warrants. The
Warrantholders shall have exercise rights until the close of
business on the date fixed for redemption.

The exercise price and number of shares of Common Stock or
other securities issuable on exercise of the Public Warrants are
subject to adjustment in certain circumstances, including in the
event of a stock dividend, recapitalization, reorganization, merger
or consolidation of the Company.

The Public Warrants may be exercised upon surrender of the
warrant certificate on or prior to the expiration date at the
offices of the warrant agent, with the exercise form on the reverse
side of the warrant certificate completed and executed as
indicated, accompanied by full payment of the exercise price (by
certified check payable to the Company) to the warrant agent for
the number of Public Warrants being exercised. The Warrantholders
do not have the rights or privileges of holders of Common Stock.

No Public Warrant will be exercisable unless at the time of
exercise the Company has filed with the Commission a current
prospectus covering shares of Common Stock and such shares have
been registered or qualified to be exempt under the securities laws
of the state of residence of the holder of such Public Warrant.
The Company will use its best efforts to have all shares so
registered or qualified on or before the exercise date and to
maintain a current prospectus relating thereto until the expiration
of the Public Warrants, subject to the terms of the Warrant
Agreement. While it is the Company's intention to do so, there can
be no assurances that it will be able to do so.

No fractional shares will be issued upon exercise of the
Public Warrants. However, if a Warrantholder exercises all Public
Warrants then owned of record by him, the Company will pay such
Warrantholder, in lieu of the issuance of any fractional share
which is otherwise issuable, an amount is cash based on the market
value of the Common Stock on the last trading day prior to the
exercise date.

Exercise of Underwriter's Warrant

Whale acquired an underwriter's warrant (the "Underwriter's
Warrant") in the Public Offering which occurred in March 1993. In
connection with the Public Offering, the Company sold to Whale for
$120 the Underwriter's Warrant which entitled it to purchase up to
120,000 shares of Common Stock at $7.20 per share (adjusted to
720,000 shares at an exercise price of $1.50 per share as set forth
below) (the "Warrant Exercise Price") and/or 120,000 warrants (the
"Underlying Warrants") at an exercise price of $9.00 per share of
Common Stock. The terms of the Underwriter's Warrant provided that
holders of the Underwriter's Warrant were given, at nominal cost,
the opportunity to profit from a rise in the market price of the
Common Stock and were also given antidilution rights in the event
the Company issued additional shares of Common Stock. The
Underwriter's Warrant provided that the Warrant Exercise Price and
the number of shares of Common Stock issuable upon exercise of the
Underwriter's Warrant would be adjusted in the event the Company
issued shares of Common Stock for a consideration less than the
Warrant Exercise Price or the market price of the Common Stock.
The Company had issued additional securities since March 1993
resulting in activation of the antidilution provision of the
Underwriter's Warrant. The number of shares of Common Stock
purchasable upon exercise of the Underwriter's Warrant were
initially adjusted so that Whale and its designees were entitled to
purchase 720,000 shares at an Underwriter's Warrant Exercise Price
of $1.50 per share. In September 1995 Whale exercised a portion of
the Underwriter's Warrant to purchase an aggregate of 180,462
shares. In April 1996, the Underwriter's Warrant was further
amended to adjust the number of shares based on issuances of Common
Stock by the Company after September 1995. The Company and Whale
disagreed about the calculations to adjust the remaining shares and
the exercise price of the shares remaining in the Underwriter's
Warrant. The Company and Whale entered into a settlement agreement
pursuant to which the Company adjusted the shares issuable pursuant
to the Underwriter's Warrant to 753,361 and the new Exercise Price
was $1.07. These warrants were exercised and the shares of Common
Stock have been sold. In addition, the Company granted Whale an
option to purchase 1,000,000 shares of Common Stock at $1.00 per
share (the "New Whale Warrant"). The Underlying Warrants have
expired.

New Whale Warrant

As partial settlement for the Company's and Whale's
discrepancy in calculating the adjustment pursuant to the
antidilution provision in the Underwriter's Warrant, the Company
granted Whale a warrant to purchase 1,000,000 shares of Common
Stock at an exercise price of $1.00 per share. 500,000 shares are
exercisable until the later of June 17, 1996 or the 30th day after
the date a registration statement relating to the New Whale
Warrants becomes effective. The remaining 500,000 Warrants are
exercisable until the later of October 16, 1996, or 90 days after
the date said registration statement becomes effective.

Consulting Warrants

Whale was granted warrants to purchase 400,000 shares of
Common Stock at an exercise price of $1.00 per share in connection
with a consulting agreement between the Company and Whale (the
"Consulting Warrants"). Whale assigned the right to acquire 250,000
shares of Common Stock included in the Consulting Warrants to Mr.
Robert Kramer, a registered representative of Whale. The
consulting agreement between Whale and the Company provided for
Whale to assist the Company in evaluating financing, merger and
acquisition proposals for the Company, preparation of reports and
studies, and assistance in negotiations on the Company's behalf.
To date, 90,000 of Mr. Kramer's Consulting Warrants remain
unexercised; all of Whale's Consulting Warrants were exercised.

The Selling Shareholder has entered into a selling shareholder
agreement with the Company pursuant to which the Selling
Shareholder agrees that the information regarding the Selling
Shareholder contained herein is accurate and the parties agree to
indemnify each other in the event of any untrue statements.

LEGAL MATTERS

The validity of the securities being offered will be passed
upon for the Company by Kalin & Banner, 757 Third Avenue, New York,
New York 10017. Mr. Richard S. Kalin, a partner in Kalin & Banner,
is an assistant Secretary of the Company and purchased 50,000
shares in the Company's 1995 private placement upon the same terms
as the other investors thereto.

EXPERTS

The financial statements of the Company for the fiscal years
ended December 31, 1994 and 1995 included in this Prospectus and in
the Registration Statement have been audited by Hollander, Gilbert
& Co., independent certified public accountants, to the extent and
for the periods set forth in their report appearing elsewhere
herein and in the Registration Statement, and are included in
reliance upon such report given upon the authority of said firm as
experts in auditing and accounting.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law empowers
a corporation to indemnify its directors and officers and to
purchase insurance with respect to liability arising out of their
capacity or status as directors and officers provided that this
provision shall not eliminate or limit the liability of a director
(i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing
violation of law, (iii) arising under Section 174 of the General
Corporation Law of Delaware, or (iv) for any transaction from which
the director derived an improper personal benefit.

The Delaware Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive
of any other rights to which the directors and officers may be
entitled under the corporation's by-laws, any agreement, vote of
shareholders or otherwise.

Article tenth of the Company's Certificate of Incorporation
eliminates the personal liability of directors to the fullest
extent permitted by Section 145 of the Delaware Corporation Law.

The effect of the foregoing is to require the Company to
indemnify the officers and directors of the Company for any claim
arising against such persons in their official capacities if such
person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful.

INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE
SECURITIES ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR
PERSONS CONTROLLING THE COMPANY PURSUANT TO THE FOREGOING
PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE OPINION OF
THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT AND IS
THEREFORE UNENFORCEABLE.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange
Commission (the "Commission"), Washington, D.C., a Registration
Statement on Form SB-2 (the "Registration Statement") under the
Securities Act with respect to the Common Stock offered by this
Prospectus. This Prospectus, filed as part of such Registration
Statement, does not contain all of the information set forth in, or
annexed as exhibits to, the Registration Statement, certain parts
of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the
Company and this offering, reference is made to the Registration
Statement, including the exhibits filed therewith, which may be
inspected without charge at the Office of the Commission, 450 Fifth
Street, NW, Washington, DC, 20549. Copies of the Registration
Statement may obtained from the Commission at its principal office
upon payment of prescribed fees. Statements contained in this
Prospectus as to the contents of any contract or other document are
not necessarily complete and, where the contract or other document
has been filed as an exhibit to the Registration Statement, each
statement is qualified in all respects by reference to the
applicable document filed with the Commission.

<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995

Page

Independent Auditors' Report F-2

Consolidated Balance Sheets
as of December 31, 1994 and 1995 F-3

Consolidated Statements of Operations -
For the Years Ended December 31, 1994 and 1995 F-5

Consolidated Statement of Stockholders' Equity -
For the Years Ended December 31, 1994 and 1995 F-6

Consolidated Statements of Cash Flows -
For the Years Ended December 31, 1994 and 1995 F-8

Notes to Consolidated Financial Statements F-10

F-1

<PAGE>
REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
Saliva Diagnostic Systems, Inc.

We have audited the consolidated balance sheets of Saliva
Diagnostic Systems, Inc. and subsidiaries as of December 31, 1994
and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Saliva Diagnostic Systems, Inc. and subsidiaries as
of December 31, 1994 and 1995 and the results of operations,
stockholders' equity and cash flows for the years then ended, in
conformity with generally accepted accounting principles.

As discussed in Note 3, the Company's recovery of goodwill
aggregating $585,000 at December 31, 1995 is dependent on the
future development of commercial viability of its products. The
ultimate outcome of this uncertainty cannot presently be
determined. Accordingly, the financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.

The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed
in Note 2 to the financial statements, the Company's significant
operating losses and significant capital requirements raise
substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.

Hollander, Gilbert & Co.
Los Angeles, California
March 29, 1996
F-2

<PAGE>
<TABLE>
<CAPTION>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995

1994 1995
__________ _________
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 96,431 $ 2,688,014
Accounts receivable 47,039 43,291
Inventories (Note 4) 92,600 300,161
Prepaid expenses 28,956
________ _________
TOTAL CURRENT ASSETS 236,070 3,060,422
_______ ________
PROPERTY AND EQUIPMENT, Net (Note 5) 560,284 470,593
________ _______
OTHER ASSETS
Deposits 64,156 70,019
Patents and trademarks, net of
accumulated amortization
of $18,952 in 1994 and
$29,983 in 1995 133,778 127,057
Goodwill, net of accumulated
amortization of $15,000 in
1995 (Note 3) 585,000
Prepaid loan fees (Note 6) 45,367
Prepaid consulting fees 5,000

_________ _________
TOTAL OTHER ASSETS 202,934 827,443
_________ _________
$999,288 $4,358,458
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $569,960 $ 553,489
Accrued interest payable 8,000 49,703
Current portion of obligations under
capital leases (Note 8) 23,713 15,869
Convertible debentures (Note 6) 100,000 2,785,000
_________ _________
TOTAL CURRENT LIABILITIES 701,673 3,404,061
_______ _________
OBLIGATIONS UNDER CAPITAL LEASES,
net of current portion (Note 8) 43,624 30,497

MINORITY INTEREST (Note 3) 37,138

COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Note 6)
Common stock - authorized 25,000,000 shares,
$.01 par value, issued and outstanding
6,304,332 in 1994 and 13,126,366
in 1995 63,043 131,264
Additional paid-in capital 12,434,356 17,726,578
Notes receivable related to sale
of stock (83,825) (83,825)
Cumulative foreign translation
adjustment (32,644) (34,859)
Accumulated deficit (12,164,077) (16,815,258)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 216,853 923,900
____________ ___________

$ 999,288 $4,358,458
========== =========

See accompanying Notes to Consolidated Financial Statements.

F-3

<PAGE>
<CAPTION>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994 AND 1995

1994 1995
____ ____
<S> <C> <C>
REVENUES
Product sales $ 242,207 $ 522,814
Technology licensing inco 200,000 59,855
Other fees and interest income 18,466 38,630
__________ ________
TOTAL REVENUES 640,673 621,299
__________ ________

COSTS AND EXPENSES
Cost of product sold 177,054 149,629
Research and development 584,939 353,098
Selling, general and administrative 2,926,621 4,212,052
Interest expense and loan fees 129,830 557,701
_________ _________

TOTAL COSTS AND EXPENSES 3,818,444 5,272,480
_________ _________

NET LOSS $(3,357,771) (4,651,181)
========== =========

WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,790,000 9,900,000
=========== =========

LOSS PER COMMON SHARE $ (0.70) $ (0.47)
=========== =========

See accompanying Notes to Consolidated Financial Statements.

F-4

<PAGE>
<CAPTION>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1995

Common Stock Note Cumulative
_____________________ Additional Receivable Foreign Accumu-
Shares Paid-in (Sale of Translation lated
Outstanding Amount Capital Stock) Adjustment Deficit Total
___________ _____ _________ _______ _________ _______ _________
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 3,370,842 $ 33,708 $ 8,732,143 $(83,825) $ 30,486 $(8,806,306) $ (93,794)
Sale of common stock in
private offering 81,125 811 161,439 162,250
Issuance of shares for
services 2,500 25 2,475 2,500
Sale of common stock in
exempt offering 953,995 9,540 2,092,454 2,101,994
Notes payable converted
into common shares 580,000 5,800 574,200 580,000
Advances from majority
stockholder converted
into common stock 231,120 2,311 228,809 231,120
Issuance of shares to
majority stockholder
for services 75,000 750 74,250 75,000
Discount on note receivable
related to sale of stock (1,066) (1,066)
Notes payable converted into
common shares 149,750 1,498 148,252 149,750
Sale of common stock in
private offering 860,000 8,600 421,400 430,000
Foreign translation
adjustment (63,130) (63,130)
Net loss for the year (3,357,771)(3,357,771)
__________ ______ _________ ________ ______ _________ _________

BALANCE, December 31, 1994 6,304,332 63,043 12,434,356 (83,825) (32,644) (12,164,077) 216,853
Sale of common stock in
private offerings 3,715,000 37,150 1,935,350 1,972,500
Issuance of shares to
officer for
compensation 230,000 2,300 127,700 130,000
Convertible debentures
converted into common
shares 1,726,572 17,266 945,234 962,500

F-5

<PAGE>
<CAPTION>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1995

(continued)

Common Stock Note Cumulative
____________________ Additional Receivable Foreign Accumu-
Shares Paid-in (Sale of Translation lated
Outstanding Amount Capital Stock) Adjustment Deficit Total
___________ _____ _______ _______ __________ _______ _____

<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of warrants
to consultants 780,000 780,000
Issuance of options in
settlement agreement 88,750 88,750
Issuance of shares to
consultants 100,000 1,000 149,000 150,000
Options exercised 170,000 1,700 154,300 156,000
Underwriter's warrants
exercised 180,462 1,805 268,888 270,693
Consulting warrants
exercised 250,000 2,500 247,500 250,000
Issuance of shares to
acquire minority
interest in
subsidiaries 450,000 4,500 495,500 600,000
Foreign translation
adjustment (2,215) (2,215)
Net loss for the year (4,651,181)(4,651,181)
__________ _______ __________ ______ _______ ___________ _________
BALANCE, December
31, 1995 13,126,366 $131,264 $17,726,578 $(83,825) $(34,859) $(16,815,258) $923,900

See accompanying Notes to Consolidated Financial Statements.

F-6

<PAGE>
<CAPTION>
SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995

1994 1995
__________ _____
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,357,771) $(4,651,181)
Adjustments to reconcile net loss
to net cash used by operating activities:
Cumulative foreign translation adjustment (63,130) (2,215)
Depreciation and amortization 323,934 749,750
Expenses satisfied with issuance of shares 77,500 1,148,750
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 26,372 3,748
(Increase) decrease in inventory 63,082 (207,561)
Increase (decrease) in prepaid expenses (28,956)
Increase (decrease) in accounts payable
and accrued expenses 212,037 (11,906)
____________ ________

NET CASH USED BY OPERATING ACTIVITIES (2,717,976) (2,999,571)
____________ __________

CASH FLOWS FROM INVESTING ACTIVITIES
Patents and trademarks (26,109) (4,310)
Deposits (46,261) (5,863)
Purchase of equipment (239,498) (118,295)
____________ _________

NET CASH USED BY INVESTING ACTIVITIES (311,868) (128,468)
____________ __________

CASH FLOWS FROM FINANCING ACTIVITIES
Convertible debentures 153,156 3,128,900
Repayments of convertible debentures (37,500)
Repayment of obligations under capital leases (20,971)
Sale of stock - private placement
and exempt offering 2,694,244 1,972,500
Collection of note receivable related to
sale of stock 21,467
Stock warrants and options exercised 676,693
____________ __________

NET CASH PROVIDED BY FINANCING ACTIVITIES 2,868,867 5,719,622
____________ __________
NET INCREASE (DECREASE) IN CASH $ (160,977) $ 2,591,583
CASH BALANCE, Beginning of period 257,408 96,431
____________ __________
CASH BALANCE, End of period $ 96,431 $ 2,688,014
============ ==========
INTEREST AND LOAN FEES PAID $ 113,399 $ 565,035

SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES

Shares issued in lieu of fees and expenses $ 77,500 $ 1,148,750
Advances from majority stockholder converted
into common shares $ 231,120
Acquisition of minority interest $ 600,000

See accompanying Notes to Consolidated Financial Statements.

F-7

</TABLE>

SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business - The Company is primarily engaged
in development, marketing and distribution of proprietary saliva
and other specimen collection devices, designed for use in
conjunction with diagnostic assays to detect the presence of
antibodies including the HIV virus and the presence of drugs of
abuse, such as cocaine and marijuana. In response to the FDA's
request, the Company agreed in May 1992 to discontinue shipment
of Omni-SAL manufactured in the United States, both domestically
and internationally, for testing for HIV antibodies, whether for
investigational or other use, prior to filing an IDE and
obtaining FDA pre-market approval. In January 1995, the FDA gave
permission for clinical trials to begin for the Omni-SAL saliva
collection device. The Company's other products include
Omni-SWAB, a sterile cotton swab with a potential injectable
swab-head which can be used to obtain DNA specimens for gene
amplification processes, and products which were developed to
ultimately lead to the development of rapid-based tests available
for "point of care" uses. The Company has commenced limited
distribution of Omni-SAL to customers located outside the United
States and Omni-SWAB in the United States.

Principles of Consolidation - The consolidated financial
statements in 1994 include the accounts of the Company and its
wholly-owned subsidiary, Saliva Diagnostic Systems International
Limited, 90%-owned subsidiary, Saliva Diagnostic Systems Ltd.
("Asia") and Asia's 83%-owned subsidiary, Saliva Diagnostic
Systems (S) PTE. Ltd. ("Singapore"). All intercompany
transactions have been eliminated. In 1995, the Company acquired
the minority interest in Asia and Singapore. As a result, Asia
and Singapore became wholly-owned subsidiaries of the Company
(see Note 3).

Inventories - Inventories consisting of finished goods are
stated at the lower of cost or market determined on a first-in,
first-out (FIFO) basis.

Property and Equipment - Property and equipment is stated at
cost. Depreciation is computed on the straight-line method based
upon the estimated useful life of the asset. Useful lives are
generally as follows;

Office furniture & equipment 5 to 7 years
Equipment 7 years
Tooling 7 years
Exhibits 7 years
Vehicles 5 years

F-8

Patents and Trademarks - The costs of patents and trademarks
are being amortized on the straight line method over a 17 year
life.

Goodwill - Goodwill represents the excess of the cost of
companies acquired over the fair value of their net assets at the
date of acquisition and is being amortized on the straight-line
method over ten years.

Product Liability - The Company has not established any
allowance for product liability at present because of the limited
distribution of its product and limited history which reflect no
instance of problems with liability.

Income Taxes - The Company utilizes the asset and liability
approach for financial accounting and reporting for income taxes.
If it is more likely than not that some portion or all of a
deferred tax asset will not be realized, a valuation allowance is
recognized.

Loss Per Share - Loss per common share is based upon the
weighted average number of common shares and common share
equivalents outstanding during the periods. Common share
equivalents are not included as they are anti-dilutive.

Revenues - The Company derived revenues from two sources:
sale of product and licensing. Revenues are recognized as the
service or product has been delivered.

Research and Development - Research and development
expenditures include those costs associated with the Company's
own on-going research and development activities. All research
and development costs are expensed as incurred.

The Company has entered into various informal arrangements
with certain laboratories/manufacturers of assay kits whereby
these laboratories/manufacturers will share certain unspecified
costs of research and development. However, the Company has no
obligation to perform research and development for these
entities.

Currency Fluctuations - Foreign currency transactions and
financial statements are to be translated into U.S. dollars at
current rates, except that revenues, costs and expenses are
translated at average current rates during each reporting period.
The resulting translation adjustments are recorded directly into
a separate component of stockholders' equity. Gains and losses
resulting from foreign currency transactions, which are
insignificant, are included in income currently.

F-9

2. GOING CONCERN

Significant Operating Losses - Accumulated Deficit - The
Company has incurred significant operating losses since its
inception, resulting in an accumulated deficit of $16,815,258 and
$12,164,077, at December 31, 1995 and December 31, 1994,
respectively, and limited stockholders' equity of $923,900 and
$216,853 December 31, 1995 and December 31, 1994, respectively.
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.

Significant Capital Requirements - Need for Additional
Financing - The Company's capital requirements have been and will
continue to be significant. The Company has been dependent on
private placements of its debt and equity securities and on a
public offering of securities in March 1993 to fund such
requirements. Additionally, since 1992, Dr. Eugene Seymour, a
major stockholder and a director of the Company, has loaned and
advanced over $755,000 to the Company, of which approximately
$360,000 has been repaid, approximately $155,000 has been
contributed to the capital of the Company and the balance has
been converted to shares of common stock at a rate of $1.00 per
share. An affiliate of Dr. Seymour has invested an additional
$200,000 in the Company during 1994. The Company is dependent
upon its other efforts to raise capital resources, including
proceeds received from the exercise of Warrants to finance the
cost of manufacturing, marketing and conducting clinical trials
and submissions for FDA approval of its products and continuing
the design and development of the Company's new products which
utilize its rapid testing format. Marketing, manufacturing and
clinical testing may require capital resources substantially
greater than the resources currently available to the Company.
There can be no assurance that the Company will be able to obtain
the substantial additional capital resources necessary to permit
the Company to implement or continue its programs. The Company
has no current arrangements with respect to, or sources of,
additional financing and there can be no assurance that such
financing will be available on commercially reasonable terms or
at all. It is not anticipated that any of the officers,
directors or shareholders of the Company will provide any portion
of the Company's future financing requirements.

The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.

F-10

3. ACQUISITIONS

On September 30, 1995, the Company purchased the minority
interest in its 90% owned subsidiary, Saliva Diagnostic Systems
(Asia) Ltd. and the minority interest in Asia's 83% owned
subsidiary. The Company issued 350,000 shares of its common stock
valued at $500,000 to a director/stockholder of the foreign
subsidiaries and 100,000 shares to unrelated stockholder valued
at $100,000. The assets acquired were valued at fair market value
based on the estimates of the management of the Company which
approximate the adjusted fair market value of the shares issued.

The transaction was accounted for as a purchase and resulted
in an excess of purchase price over net assets acquired of
$600,000. Amortization of goodwill amounted to $15,000 in 1995.

4. INVENTORIES

Inventories consisted of the following at December 31, 1994
and 1995:
1994 1995
________ ________

Raw materials $ $ 186,492
Work in process 21,202 66,807
Finished goods 71,398 46,862
________ _______
$ 92,600 $ 300,161
======== =======

5. PROPERTY AND EQUIPMENT

Property and Equipment consisted of the following at
December 31, 1994 and 1995:
1994 1995
________ ________

Office Furniture & Equipment $ 85,072 $ 76,711
Machinery and Laboratory Equipment 502,823 650,461
Tooling 196,897 156,457
Leasehold Improvements 48,725 38,727
Vehicle 122,677 126,388
Exhibits 30,955 60,710
________ _________
987,149 1,109,454
Less: accumulated depreciation
and amortization 426,865 638,861
________ ___________
$ 560,284 $ 470,593
======== ===========

F-11

6. STOCKHOLDERS' EQUITY

Public Offering - In March 1993 the Company closed a public
offering in which it sold 1,300,000 shares of its common stock at
$6.00 per share and 1,380,000 warrants to purchase 1,380,000
shares of the Company's common stock for $7.20 per share, at $.10
per warrant. The Company received net proceeds of $6,364,630
after expenses related to the offering of $1,573,490.

The Company also sold for $120 to the underwriter a
five-year warrant to purchase up to 120,000 shares of common
stock at $9 per share, exercisable for four years commencing
March 3, 1994 at a price of 110% of the public offering price, as
adjusted, of the common stock. During 1995, the underwriter
exercised a portion of its warrants and purchased 180,462 shares
for an aggregate amount of $270,693. As of December 31, 1995, the
number of shares that the remaining warrants can purchase has
been adjusted to 756,362 shares at $1.07 per share.

Note Receivable Related to Sale of Stock - In January 1992
the Company sold to its President 366,912 shares of common stock
for $92,970. The officer paid $9,145 and issued a note to the
Company for $83,825, payable in three years with interest of 6%
per annum. These shares were considered outstanding for all
periods in the calculation of earnings per share. The note which
was originally due December 1994 was extended until December
1995. In December 1995, the Company extended the note for another
year.

Convertible Debentures - During 1992, the Company sold
privately $630,000 of its 8% convertible debentures payable in
May 1994 to various investors, including $25,000 to an affiliate
of the Company. These debentures can be converted into the
Company's common stock at a rate of $7.00 per share. In May 1994
certain debenture holders converted $580,000 principal amount of
debentures into an aggregate of 580,000 shares of common stock.
In November 1995, the Company repaid $25,000 principal amount of
debentures including all accrued and unpaid interest. In January
1996, the Company repaid the remaining $25,000 debenture
including all accrued and unpaid interest.

F-12

The Company raised $75,000 and $324,500 in 1993 and 1994,
respectively, in a combination of common shares, non-negotiable
two year 8% convertible debentures convertible at a rate of $2.00
per share after one year from the date of issuance and three year
warrant to purchase additional shares of common stock at $3.50
per share. Each $50,000 unit consisted of 12,500 common shares, a
$25,000 convertible debenture and a warrant to purchase 5,000
shares of common stock. The Company issued a total of 99,875
shares of common stock and $199,750 convertible debentures and
warrants to purchase a total of 39,950 shares of common stock. In
July 1994, certain debenture holders converted $149,750 principal
amount of debentures into an aggregate of 149,750 shares of
common stock. In September 1995, certain debenture holders
converted $37,500 principal amount of debentures into an
aggregate of 37,500 shares of common stock. In November 1995, the
Company repaid $12,500 principal amount of debentures including
all accrued and unpaid interest.

During 1995, the Company sold privately $3,685,000 of its 9%
convertible debentures payable on October 31, 1996. The holders
of the debentures are entitled, at their option, at any time
commencing 45 days after issue to convert any or all of the
original principal amount of the debentures into shares of common
stock of the Company at a conversion price for each share of
common stock equal to seventy percent (70%) of the market price
(as defined in the debenture agreement) of the common stock. In
December 1995, certain debenture holders converted $925,000
principal amount of debentures into an aggregate of 1,689,072
shares of common stock. The Company incurred $556,100 in
loan fees of which $510,733 was charged to expense in 1995.
Subsequent to year end, certain debenture holders converted
$2,760,000 principal amount of debentures into 6,212,308 shares
of common stock (see Note 11).

Private Placements - In April 1994 the Company sold an
aggregate of 953,995 shares of common stock to overseas investors
for a net consideration of $2,101,994.

In December 1994 the Company sold 860,000 shares of common
stock for an aggregate consideration of $430,000. During 1995,
the Company, sold an additional 3,645,000 shares of common stock
for $1,802,500, including 200,000 shares issued to its President.

In December 1995, the Company, in a new private placement,
sold 300,000 shares of common stock for an aggregate
consideration of $300,000, including 30,000 shares to its
President.

F-13

Warrants and Shares Issued to Consultants - During 1995, the
Company issued warrants to purchase a total of 650,000 shares of
common stock at an exercise price of $1.00 per share for
consulting services rendered. The warrants were valued at $1.20
per share. As of December 31, 1995, 250,000 warrants have been
exercised.

In 1995, the Company issued 100,000 shares of common stock
to consultants valued at a total of $150,000.

Settlement Agreement - During 1995, the Company reached a
settlement agreement with a director of its subsidiary whereby
the Company granted the director options to purchase 100,000
shares of common stock at an exercise price of $.60 per share.
The options were valued at a total of $88,750. The director
immediately exercised 50,000 shares and paid the Company $30,000.

Shares Issued to Officer - During 1995, the Company issued
230,000 shares of common stock to its President valued at
$130,000 as additional compensation for the year 1995. The
President also receive cash compensation of $31,925 in 1995. As
of December 31, 1995, the Company has accrued salaries due to its
President in the amount of $88,075.

Stock Option Plans - In March 1992, the Company established
a stock option plan (1992 Plan). The 1992 Plan, as amended,
covers 350,000 shares of its common stock. Under the terms of the
1992 Plan, the Company is authorized to issue options to
employees and directors of the Company or its subsidiaries.
Decisions such as grants to employees, the selection of
recipients, number of options, the exercise price, duration and
other terms, including whether the options shall be incentive
stock options as defined by the Internal Revenue Code of 1986 or
non-qualified options, are subject to the discretion of the Board
of Directors except that the exercise price may not be less than
110% of the fair market value at the time of grant to holders of
in excess of 10% of the Company's common stock.

In addition, the 1992 Plan provides for automatic grants to
each non-employee director of the Company (including anyone
designated by the Underwriter) of 3,000 shares of common stock on
the date of the proposed public offering or, in the case of
election to the Board of Directors after consummation of said
offering, upon such election at a price of 100% of fair market
value of the common stock at the time of grant. The options may
be exercised after six months and before five years from the date
of grant.

As of December 31, 1995, 178,000 options were outstanding
under the 1992 Plan with exercise prices ranging from $0.60 to
$5.60 per share.

F-14

In July 1994, the Company established a stock option plan
(1994 Plan). The 1994 Plan, covers 350,000 shares of its common
stock. Under the terms of the 1994 Plan, the Company is
authorized to issue incentive and non-statutory stock options to
employees, consultants, advisors and/or directors. Options shall
be exercisable at the fair market value at the date of the grant
except options issued to persons who own in excess of 10% of the
Company's stock may be no less than 110% of the fair market
value.

In addition, the 1994 Plan provides for automatic grants to
all directors and advisors who are not employees of the Company
or its subsidiaries of 3,000 fully vested non-qualified options
at the time this Plan was adopted by the Board or upon election
or appointment to the Board, if not a member of the Board at the
time this plan was adopted by the Board.

As of December 31, 1995, 286,000 options were outstanding
under the 1994 Plan with exercise prices ranging from $0.60 to
$2.625 per share.

On March 2, 1995, the Company's Board of Directors granted
options to purchase 997,000 shares, including 400,000 shares to
its President, of the Company's common stock to its employees,
outside of the above Stock Option Plans. Such options are
exercisable on March 2, 1995, at $1.00 per share and expire on
March 2, 1998. As of December 31, 1995, 970,000 options were
outstanding.

7. INCOME TAXES

The Company has a net operating loss carryforward of
approximately $14 million which is available to offset future
taxable income, if any, expiring through the year 2010. The
Company has not recorded any deferred tax asset as a result of
the net operating loss carryforward as it has provided a 100%
allowance against this asset.

8. COMMITMENTS AND CONTINGENCIES

Employment Agreements - The Company has entered into various
three year employment agreements with certain officers. These
employment agreements provide for minimum annual compensation of
between $100,000 and $250,000. In addition, each employment
agreement provides for bonuses, cost of living increases,
reimbursement of business expenses, health insurance and related
benefits.

F-15

Each employment agreement provides that it may be terminated
if the employee becomes permanently disabled (ill health,
physical or mental disability, or inability for reasons beyond
his control to perform duties for six months) or if the Company
discontinues operating its business. Each employment agreement
further provides that each of the officers will not compete with
the Company for three years from the date of the agreement or one
year from the termination of the respective agreements, whichever
is later.

Obligations under Capital Leases - The Company has acquired
vehicles under notes requiring 48 to 60 payments of $1,842 per
month including interest at 6% to 10% per annum.

The following represents the maturity schedule as of
December 31, 1995:

1996 $ 15,869
1997 15,323
1998 15,174
____________
Total 46,366

Less current portion 15,869
____________
$ 30,497
============

Litigation - A former director and officer of the Company
has filed a complaint in Federal court listing several causes of
action against the Company and the individual defendants,
including breach of employment agreement with the Company,
intentional interference with contract by the individual
defendants, slander and deceptive trade practices. The complaint
seeks damages and punitive damages in an unspecified amount. The
Company believes this complaint is without merit as the plaintiff
was fired for cause and intends to vigorously defend itself.

9. OPERATING LEASES

The Company leases its offices and laboratory spaces, under
operating leases with initial terms of three to seven years.
Future minimum lease payments by year and in the aggregate, under
noncancelable operating leases with initial or remaining lease
terms in excess of one year, consisted of the following at
December 31, 1995:

F-17

SALIVA DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
Continued

Year Ended December 31,
1996 $ 198,085
1997 151,278
1998 118,548
1999 124,476
2000 128,556
Thereafter 214,260
____________
$ 935,203
============

Rent expense for the years ended December 31, 1994 and 1995
were $164,603 and $237,855, respectively.

10. SEGMENT INFORMATION

Information about the Company's operations in different
geographic areas follows:
<TABLE>
<CAPTION>

Adjustments
United United and
States Asia Kingdom Eliminations Consolidated
______ ______ _______ ____________ ____________
<S> <C> <C> <C> <C> <C>
Product sales to
to unaffiliated
customers $ 317,812 $ 70,696 $ 134,306 $ $ 522,814
Technology licensing
income 59,855 59,855
Other fees and
interest income 23,057 15,537 36 38,630
Transfers between
geographic areas 59,235 172,961 (232,196) 0
________ __________ _______ _________ _________
Total revenues $ 400,104 $ 319,049 $ 134,342 $(232,196) $ 621,299
======== ========== ======= ========= =========
Operating profit
(loss) $(3,959,955) $ (497,969) $(139,846) $ $(4,597,770)
=========== ========== ========= ======== ==========
Identifiable
assets at
December 31,
1995 $ 3,342,815 $ 955,776 $ 59,867 $ $ 4,358,458
========= ========== ====== ======== ==========
</TABLE>
Transfers between geographic areas are accounted for at an
amount which approximates cost. Operating loss is total revenues
less operating expenses. Identifiable assets are those assets of
the Company that are identifiable with the operations in each
geographic area.

Customer Concentration - During 1994, one customer accounted
for approximately 23% of total sales. During 1995, two customers
accounted for approximately 50% of total sales.

F-17

11. PROFORMA STOCKHOLDERS' EQUITY (UNAUDITED)

Subsequent to year end the Company, in a continuing private
placement, sold an additional 345,000 shares of common stock for
aggregate net proceeds of $101,952. In addition, certain
debenture holders converted $2,760,000 principal amount of
debentures into 6,212,308 shares of common stock.

Following is a condensed unaudited proforma statement of
stockholders' equity and total assets as of December 31, 1995,
giving effect to the above transactions in the Company's common
stock after year end:
____________
Historical stockholders' equity $ 923,900

Sale of common stock in private placement 101,952

Conversion of convertible debentures
into shares of common stock 2,760,000
____________
Proforma stockholders' equity $ 3,785,852
============
Historical total assets $ 4,358,458
Sale of common stock in private placement 101,952
____________
Proforma total assets $ 4,460,410
============

F-18

<PAGE>
No dealer, sales representative
or other individual has been authorized to give
any information o make any representation not
contained in this Prospectus in connection with
this offering other than those contained in this
Prospectus and if given or made, such information
or representation must not be relied upon as
having been authorized by the Company or the
Underwriter. This Prospectus does not constitute
an offer to sell or solicitation of an offer to
buy the Common Stock by anyone in any jurisdiction
in which such offer or solicitation is not
authorized or in which the person making such
offer or solicitation is not qualified to do so or
to any person to whom it is unlawful to make such
offer or solicitation. Neither the delivery of
this Prospectus nor any sale made hereunder shall
under any circumstances create an implication that
the information contained herein is correct as of
any time subsequent to its date.

TABLE OF CONTENTS

Page

Prospectus Summary. . . . . 4
Risk Factors. . . . . . . . 7
The Company . . . . . . 20
Dividend Policy . . . . . . 29
Management's Discussion
and Analysis . . . . . . 30
Market for Registrant's
Common Equity and
Related Stockholder
Matters. . . . . . . . . 32
Management. . . . . . . . . 33
Principal and Selling
Shareholders . . . . . . 37
Certain Relationships . . . 39
Description of Securities . 40
Legal Matters . . . . . . . 43
Experts . . . . . . . . . . 44
Indemnification of Directors
and Officers . . . . . . 44
Additional Information. . . 45
Index to Financial
Statements. . . . . . . F-1

Until June 3, 1996 (25 days after the
date of the Prospectus), all dealers effecting
transactions in the registered securities, whether
or not participating in this distribution, may be
required to deliver a Prospectus. This delivery
requirement is in addition to the obligation of
dealers to deliver a Prospectus when acting as
Underwriter and with respect to their unsold
allotments or subscriptions.

SALIVA DIAGNOSTIC SYSTEMS,
INC.

90,000 Shares of Common
Stock

Prospectus

May 9, 1996