SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    Form 10-K
      (Mark One)

        [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934]

                   For the fiscal year ended December 31, 1997

                                       OR

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

            For the Transition period from ____________to___________

                          Commission File No. 333-3326
                                  DIATIDE, INC.
             (Exact name of registrant as specified in its charter)

                  Delaware                                 04-3078258
       (State or other jurisdiction of                  (I.R.S. Employer
       incorporation or organization)                Identification Number)

      Nine Delta Drive, Londonderry, NH                      03053
(Address of registrant's principal executive               (Zip Code)
                  offices)

        (603) 437-8970                                        2835
Registrant's telephone number,                    (Primary Standard Industrial
     including area code)                          Classification Code Number)

                                 ---------------

        Securities Registered Pursuant to Section 12 (b) of The Act: NONE

          Securities Registered Pursuant to Section 12 (g) of The Act:
                         Common Stock $0.001 Par Value

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.           YES [X]      NO [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

     On March 13, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $45,316,000 based on the last
reported sales price of the Common Stock on the Nasdaq National Market. There
were 10,554,152 shares of $0.001 par value Common Stock outstanding as of March
13, 1998.

Documents Incorporated by Reference
       Document Description                  10-K Part into which Incorporated
       --------------------                  ---------------------------------

Portions of the Registrant's Definitive
  Proxy Statement to be filed with the
  Securities and Exchange Commission
  for the Annual Meeting of
  Stockholders to be held May 12,
  1998.....................................Items 10, 11, 12 and 13 of Part III


<PAGE>

PART I
ITEM 1.  BUSINESS

Diatide, Inc. (the "Company"or "Diatide") is a biopharmaceutical company engaged
in the discovery and development of proprietary disease-specific
radiopharmaceuticals for the diagnosis and treatment of life threatening
conditions such as cancer, infection and cardiovascular disease. The Company is
applying its proprietary peptide and radiolabeling technologies to the
development of technetium-99m labeled synthetic peptides ("Techtides(R)") as
medical imaging agents for life-threatening and chronic diseases and conditions.
Because Techtides are designed to bind selectively with molecular targets that
localize or proliferate as disease is developing, the Company believes that
Techtides have the potential to produce images based on the process of disease
rather than the anatomical result of disease, which may alter patient treatment
protocols. The Company believes that its Techtides will permit a number of
clinically important new diagnostic procedures to be performed using the large
installed base of nuclear medicine imaging equipment and that nuclear medicine
imaging with Techtides may be more accurate, more cost-effective, less invasive
and/or safer than alternative imaging modalities for certain diseases or
conditions. In August 1995, the Company entered into a comprehensive strategic
alliance relating to its Techtides with Nycomed Imaging ASA (together with its
United States subsidiary, "Nycomed"), one of the world's leading producers of
medical imaging agents. The Company's lead product, AcuTect(TM), received an
approvable letter from the U.S. Food and Drug Administration ("FDA") in February
1998 for imaging acute venous thrombosis in the lower extremities, and the
Company expects to be able to market AcuTect in the U.S. by the end of 1998.

The Company has five Techtides at various stages of the clinical and regulatory
process: (i) AcuTect has received an approvable letter from the FDA for imaging
acute venous thrombosis in the lower extremities and is in Phase 2 clinical
trials for imaging carotid thrombus. AcuTect is also the subject of a Marketing
Approval Application ("MAA") currently under review by the European Medicines
Evaluation Agency ("EMEA"). (ii) P829 is in separate Phase 3 clinical trials for
imaging lung cancer, neuroendocrine tumors and metastasis of malignant melanoma;
(iii) P748 is in Phase 2 clinical trials for imaging pulmonary emboli; (iv)
P483H is in Phase 2 clinical trials for imaging inflammation due to infection;
and (v) P773 for unstable atherosclerotic plaque imaging is the subject of an
effective Investigative New Drug ("IND") application that was filed in December
of 1997 and expected to enter Phase 1 clinical trials in the first half of 1998.
The Company is conducting preclinical studies of additional Techtides for
imaging prostate, colorectal and breast tumors.

In addition to its Techtide programs, Diatide has exclusively licensed Sn-117m
DTPA, a non-peptide-based radiopharmaceutical for the reduction of pain due to
metastatic cancer to the bone, from Associated Universities, Inc., the operator
of Brookhaven National Laboratories ("BNL"). BNL initiated a Phase 2 clinical
trial of Sn-117m DTPA which was completed by the Company in 1995. This compound
is comprised of the tin radioisotope Sn-117m, which has an affinity for bone,
combined with DTPA, a common chelating agent (an organic compound used to make
Sn-117m soluble so that it will remain in the circulatory system until it
reaches the bone). In December of 1997 the Company began two additional Phase 2
clinical trials of Sn-117m DTPA. In 1997, Diatide instituted the Theratide(TM)
program to research the potential of using the Company's peptide-targeting
technology to deliver therapeutic payloads directly to the site of disease.
Theratides for oncology indications and dissolution of vascular thrombi are
currently in preclinical development. The Company expects to file a Theratide
IND application in the fourth quarter of 1998.

Techtides

Techtides are proprietary nuclear medicine imaging agents that combine
technetium and peptide carrier molecules to target particular tissues. Techtides
consist of two principal components, synthetic peptides, which are small
molecules that are designed to bind with high specificity and affinity with
certain molecular targets on diseased tissues, and technetium, a commonly-used
radioisotope which emits signals that can be detected using widely available
nuclear medicine diagnostic equipment. The Company's Techtide technology builds
on recent advances in molecular biology


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<PAGE>

and peptide chemistry that have led to the characterization of cell receptors
associated with various active disease states and the structure of peptides that
bind to these cell receptors. The Company develops Techtides by applying its
proprietary technologies in the areas of peptide engineering and radiolabeling
chemistry. After Diatide identifies a medical imaging need relating to a
selected disease, the Company uses rational drug design principles to develop a
synthetic peptide that it believes will bind with high affinity to a molecular
target that localizes or proliferates as disease is developing. These molecular
targets typically involve cell receptors that are implicated in the disease
process. Using proprietary methods of peptide synthesis, the Company combines
linkers and chelating agents to engineer its peptides so that these peptides may
be easily labeled with technetium in a manner that preserves their selectivity
and binding characteristics. The Company also incorporates into these compounds
additional peptide or amino acid units to improve biodistribution and clearance
from the body of excess Techtides that do not bind with targeted receptors. The
Company uses its medicinal chemistry expertise to optimize the pharmacokinetic
characteristics of these compounds.

Because the synthetic peptides designed by Diatide bind with technetium in a
very efficient manner, the amount of peptide required to produce Techtides is
relatively low, which reduces development and manufacturing costs. The Company's
technology for coupling technetium with synthetic peptides is the subject of six
issued United States patents.

The synthetic peptides used by Diatide in its Techtides are relatively small
molecules composed of approximately 10 to 30 amino acids. These amino acids are
readily available and inexpensive to synthesize. The relatively small size and
design of these synthetic peptide molecules permits them to diffuse quickly to
target sites in the body and to be removed quickly from the bloodstream,
facilitating rapid imaging of areas of interest.

The Company designs its Techtides to be administered to patients by intravenous
injection. The Company believes that it will be possible to obtain a nuclear
medicine image using Techtides within several minutes to two hours after
administration, with the precise time varying depending on the type of
procedure. Accordingly, the Company expects that nuclear medicine imaging with
Techtides will be performed in a single procedure in a one-day hospital visit.

Advantages of Techtides

Diatide believes that nuclear medicine imaging with Techtides may provide the
following advantages in comparison with other imaging modalities and other
nuclear medicine imaging agents:

[bullet] Improved Diagnostic Information. Nuclear medicine imaging with
         Techtides provides images by targeting molecular sites that localize or
         proliferate as disease is developing, such as activated platelets in
         clots and somatostatin receptors on tumors. This approach is
         fundamentally different from the approach used in other medical imaging
         modalities and may provide physiological information which is not
         available through other modalities. This information may affect patient
         management and clinical outcomes by permitting nuclear medicine
         physicians to make a more definitive diagnosis of disease, thereby
         avoiding the costs and delays incident to additional diagnostic tests
         or an inappropriate course of therapy, or by facilitating diagnosis at
         an earlier stage of disease development, when therapy can more
         favorably alter the outcome.

[bullet] Potential Pharmacoeconomic Benefits,. The components of the synthetic
         peptides used by the Company are readily available and inexpensive to
         synthesize with established techniques. Technetium also is widely
         available and inexpensive. The efficient manner in which the Company's
         synthetic peptides bind with technetium limits the amount of peptide
         required in the production process. These features result in a low
         manufacturing cost of the product. The Company believes that this low
         cost of production may allow it to offer Techtides at price levels that
         will be attractive if Techtides exhibit the performance and safety
         characteristics expected by the Company.

[bullet] Faster Imaging. Techtides are designed to diffuse rapidly to, and bind
         tightly with, their molecular targets and for the portion of the dose
         that does not bind with the target to quickly clear the circulatory
         system. The Company believes that


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<PAGE>

         these attributes, along with the favorable characteristics of
         technetium, will permit Techtides to produce high quality images within
         a short time (typically a few minutes to two hours) after
         administration. Accordingly, the Company believes that imaging
         procedures with Techtides may be performed in a single procedure,
         avoiding the need for an overnight hospital stay or multiple hospital
         visits.

[bullet] Safety and Ease of Administration. Because Techtides are relatively
         small molecules that contain only trace amounts of technetium and
         peptide, the Company does not believe that Techtides will be
         administered at doses that will be pharmacologically active. While
         clinical trials to ascertain the safety of Techtides at various dosing
         levels are still underway, no clinically significant adverse side
         effects have been identified in the more than 1,900 patients imaged to
         date. Moreover, imaging procedures with Techtides do not involve
         discomfort or serious adverse side effect risks that accompany certain
         competing modalities, such as angiography and contrast venography.

[bullet] Comparison with monoclonal antibodies ("MAbs"). Diatide believes that
         peptides offer several significant advantages in comparison with MAbs
         as carrier molecules for radiopharmaceutical imaging agents.
         Radiolabelled MAbs are large molecules that are relatively difficult to
         produce, typically require a long period of time after administration
         for imaging (four to forty-eight hours) and clear the body slowly,
         which can adversely affect image quality in some cases. In addition,
         some MAbs have engendered adverse immune responses caused by their
         derivation from mouse-derived proteins. MAbs are currently made
         primarily through cell fermentation techniques, which may expose them
         to biological contaminants. Moreover, it is significantly easier to
         modify peptides to optimize their pharmacokinetic properties than to
         modify MAbs for such purpose.

Diatide Strategy

Diatide is applying its proprietary technology in the areas of peptide
engineering and radiolabeling chemistry to develop novel nuclear medicine
products. The Company is directing its development programs at large existing
markets which it believes are not adequately served by existing products or
modalities. The key elements of Diatide's business strategy include:

[bullet] Enter the market with AcuTect. Diatide received a letter from the U.S.
         FDA in February 1998 indicating that the Company's New Drug Application
         ("NDA") filing for AcuTect was approvable. The Company believes that
         AcuTect's commercialization will enable the realization of market
         awareness of Techtides and will establish distribution channels for
         later products. The Company expects to commercially market AcuTect by
         the end of 1998.

[bullet] Establish Clinical Utility and Advantages of Techtides. The Company is
         developing Techtides for application to a broad range of diseases and
         conditions for which nuclear medicine imaging with Techtides
         demonstrates advantages in comparison with competing imaging
         modalities. Techtides are targeted imaging agents that combine the low
         cost and high image quality associated with technetium with the
         specific binding properties of peptides. The Company believes that
         nuclear medicine imaging using its Techtides may lead to a more rapid
         diagnosis and may be more accurate, more cost-effective, less invasive
         and/or safer than alternative imaging modalities for certain diseases
         or conditions.

[bullet] Exploit Large Installed Base of Nuclear Medicine Equipment and
         Know-how. The Company is designing Techtides to be used in nuclear
         medicine imaging procedures that employ the large installed base of
         nuclear medicine imaging equipment in hospitals and clinical facilities
         and are based on well-known imaging techniques and protocols. As a
         result, nuclear medicine imaging with Techtides is not expected to
         require the purchase of additional equipment or substantial additional
         training of nuclear medicine physicians and technicians.

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<PAGE>

[bullet] Leverage Strong Marketing Collaborations. The Company is currently a
         party to a comprehensive strategic collaboration with Nycomed with
         respect to its Techtides. The Company plans to leverage this
         relationship in the development and marketing of Techtides and, where
         appropriate, to seek to enter into additional strategic corporate
         collaborations to secure additional financial support for its research
         and development activities and to enhance the sales and marketing,
         distribution and promotion of its products on a worldwide basis.

The Company plans to further exploit its proprietary peptide technology and
understanding of radiolabeling by developing therapeutic radiopharmaceuticals
that specifically target certain types of tumors. The Company has licensed and
is developing Sn-117m DTPA as a therapy for the reduction of pain due to
metastatic cancer to the bone because the technology of this compound is related
to the Company's Techtide technology. The Company expects to distribute this
compound through the same types of channels as the Company's other products.


                                       5
<PAGE>


Products Under Development
The table below summarizes Diatide's principal products under development.

<TABLE>
<CAPTION>
                                                                                    Clinical
Product Name                    Indication                        Status (1)        Collaborator (2)
------------------------------  --------------------------------  ----------------  ----------------
Imaging Products (Techtides)
<S>                             <C>                               <C>               <C>
AcuTect                         Deep Vein Thrombosis              Approvable NDA
                                                                  Filed MAA         Nycomed
                                Carotid Thrombus                  Phase 2           Nycomed

P829                            Lung Cancer Tumors                Phase 3           Nycomed
                                Neuroendocrine Tumors             Phase 3           Nycomed
                                Metastasis of Melanoma            Phase 3           Nycomed

P748                            Pulmonary Embolism                Phase 2           Nycomed

P483H                           Inflammation due to infection     Phase 2           Nycomed

P773                            Atherosclerotic Plaque            Phase 1           Nycomed

Therapeutic Products
Sn-117m                         Reduction of Pain
DTPA                             due to Metastatic
                                Cancer to the Bone for:
                                Osteoblastic tumors
                                (Prostate cancer)                 Phase 2

                                Osteolytic tumors (multiple
                                Primary, cancers principally
                                breast)                           Phase 2
</TABLE>

(1)Phase 1 Clinical Trial.

The product is administered to healthy human subjects and tested for safety,
dosimetry, tolerance, metabolism, distribution, excretion and pharmacokinetics.

Phase 2 Clinical Trial.

The product is administered to a limited patient population to (i) evaluate the
effectiveness for specific indications, (ii) determine dose response and optimal
dosage and (iii) identify possible adverse effects and safety risks.

Phase 3 Clinical Trial.

The product is administered to an expanded patient population to (i) further
test the product for safety, (ii) further evaluate clinical effectiveness and
(iii) obtain additional information for labeling.

Approvable NDA.
The FDA determines that the application substantially meets the requirements for
marketing approval and believes it can approve the NDA, subject to commitments
or conditions on the part of the Company.

MAA.
The Marketing Approval Application seeking permission to market a drug in the
member states of the European Union and certain other countries which have
agreed to be bound by the authorization decisions of the European Medicine
Evaluation Agency (EMEA).


(2) Nycomed is providing research and development support and has an option to
co-promote Techtides in the U.S. and to license and distribute Techtides in
Europe, South Africa and certain countries in the Middle East. Nycomed has
exercised its co-promotion and licensing options with respect to AcuTect and
P829. See "Item 1. Business -- Corporate Collaborations."


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<PAGE>


The Company believes that its clinical development programs have benefited from
the minimally invasive nature of nuclear medicine imaging, the small doses of
Techtides used in these procedures and the rapid visibility of results from the
use of Techtides in these procedures. These attributes have made it relatively
easy to evaluate Techtides in humans for correct biodistribution and ability to
visualize the disease or condition of interest, thereby enabling the Company to
conduct pilot studies of Techtides in limited patient populations to obtain
preliminary information as to efficacy and determine whether full clinical
trials are warranted. Thus, through the use of these pilot studies, the Company
has been able to eliminate certain compounds as product candidates without
incurring a high level of related development costs.

Imaging Products

AcuTect for Deep Vein Thrombosis

The Company has filed an NDA with the FDA and received a letter indicating the
approvability of that application. The Company expects to receive final FDA
approval and introduce AcuTect to the market in the U.S. by the end of 1998.
However, the FDA has not approved the Company's NDA for AcuTect, the Company may
not market AcuTect until the NDA is approved, and there can be no assurance that
such approval in fact will be granted or as to the timing thereof. Nycomed has
filed an MAA with the EMEA seeking permission to market AcuTect in Europe.

AcuTect targets the GP IIb/IIIa receptor on platelets involved in blood clot
formation. A number of pharmaceutical and biotechnology companies have targeted
the GP IIb/IIIa receptor for therapeutic cardiovascular products. One such
product, ReoPro(R), has been approved by the FDA and a number of other product
candidates are in various phases of clinical trials. In DVT, a thick fibrous
blood clot, known as a thrombus, forms in the veins of the lower legs, thighs,
pelvic areas or, less frequently, in the upper extremities of humans, typically
as a result of trauma, surgery or stasis due to inactivity. Patients with DVT
are at risk of pulmonary embolism, which occurs when a clot associated with DVT
breaks free, travels to the lungs and blocks blood flow to the lungs.

Clots in the venous system can be characterized as either acute (recently
formed) or chronic (older). Physicians generally believe that acute clots
present the highest risk of producing a pulmonary embolus and therefore require
aggressive treatment. Chronic clots may be in a dormant state in which they pose
little or no risk of producing a pulmonary embolus. Such clots normally do not
require aggressive treatment. No existing imaging modality is able to accurately
differentiate chronic clots from acute clots.

There are approximately 2,000,000 episodes of DVT in the United States each
year, of which approximately 600,000 result in pulmonary embolism. Approximately
60,000 deaths occur each year in the United States as a result of pulmonary
emboli. It is important to accurately diagnose and treat patients with DVT in a
timely fashion to prevent them from developing pulmonary embolism.

Doppler ultrasound and contrast venography are the primary modalities used to
diagnose DVT. In the United States, Doppler ultrasound imaging, an operator
dependent technique which is not FDA-validated for the diagnosis of DVT, is
increasingly used for this purpose because it is relatively inexpensive and
non-invasive. In 1996, approximately 1,700,000 ultrasound procedures for imaging
of DVT were performed in the United States, and approximately 1,400,000 such
procedures were performed in Europe. Although Doppler ultrasound is considered
reasonably accurate in identifying DVT in the thigh and behind the knee, it is
less efficacious in the area below the knee, in the pelvis and, in some
patients, in the upper extremities of the body. Doppler ultrasound also is of
limited effectiveness in imaging obese patients, patients with swelling and
post-surgical orthopedic patients. In patients with recurrent DVT, Doppler
ultrasound


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returns a diagnosis of acute disease in approximately 88% of such patients,
while only about 33% of these patients with recurrent symptoms are experiencing
an acute event.

Contrast venography is used to diagnose DVT both as a primary imaging modality,
particularly in Europe, and when the results of ultrasound are indeterminate.
Contrast venography is currently recognized as the most accurate imaging
modality used to identify DVT. In a contrast venography procedure, a contrast
agent is infused into the patient's vein and imaged by x-ray. Although this
procedure produces high quality images in a large percentage of cases, it is
painful, more expensive than ultrasound and can result in serious adverse side
effects, including the triggering of thrombosis. In 1996, approximately 250,000
contrast venography procedures for imaging of DVT were performed in the United
States, and approximately 600,000 such procedures were performed in Europe.

The Company believes that nuclear medicine imaging with AcuTect will permit
diagnosis of DVT without the pain, degree of invasiveness and risk of serious
adverse side effects associated with contrast venography. The Company also
believes that AcuTect may be an alternative to Doppler ultrasound in diagnosing
DVT in certain areas, such as below the knee and in the pelvis, and in certain
patients, such as obese patients and patients with swelling, where ultrasound is
less efficacious. Moreover, because the peptide in AcuTect targets the GP
IIb/IIIa receptor on activated platelets, which are present in higher
concentrations in acute clots than in chronic clots, Diatide believes that
nuclear medicine imaging with AcuTect may enable physicians to distinguish
between chronic clots and acute clots. Such information may be critical to
management of DVT patients, especially patients who previously have experienced
DVT. An anticoagulant most likely would be prescribed in the case of an acute
clot, while it is possible that no intervention would be taken in the case of a
chronic clot. If AcuTect is shown to differentiate acute clots from chronic
clots, nuclear medicine imaging with this Techtide also might be useful to
monitor the effect of anticoagulant therapy, which carries a risk of bleeding.

In August 1997, the Company submitted an NDA and received an approvable
recommendation from the Medical Imaging Drugs Advisory Committee ("MIDAC")
and an approvable letter for the application from the FDA in February 1998. The
approvable letter indicates that Diatide's NDA will be approved once the Company
clarifies certain details and formally agrees to specific post-approval
requirements, including certain Phase 4 clinical trials. In November of 1997
Nycomed, the Company's strategic partner for the marketing and development of
their Techtides, submitted an MAA to the EMEA for AcuTect. The Company
anticipates that the Committee for Proprietary Medicinal Products ("CPMP") of
the EMEA will have questions about AcuTect similar to those articulated by the
MIDAC and FDA during the AcuTect NDA process. The Company will work with
Nycomed to answer any such questions from the CPMP.

In December 1996, the Company completed two pivotal Phase 3 clinical trials of
AcuTect for the diagnosis of DVT, which compared AcuTect with contrast
venography. These two pivotal Phase 3 clinical trials were conducted at
approximately 32 sites in the United States, Canada and Europe and involved
approximately 267 patients. The protocols and monitoring of these Phase 3
clinical trials were designed to limit enrollment to patients who had
experienced acute DVT symptoms in order to study only patients who were likely
to have acute clots. The primary endpoint, concordance of blindly read AcuTect
scans with blindly read contrast venograms, was met in the A study but not
achieved in the B study. In both studies, blindly read AcuTect scans showed a
higher agreement rate with the clinical diagnosis than did the blindly read
contrast venograms.

In December 1995, the Company completed a non-pivotal Phase 3 clinical trial of
AcuTect for the diagnosis of DVT, which compared AcuTect with ultrasound. This
study was conducted at 14 sites in the United States and involved 137 patients.
Because ultrasound is operator dependent and not FDA-validated for the diagnosis
of DVT, data comparing AcuTect with ultrasound may not be used for FDA purposes
to demonstrate efficacy. In addition, ultrasound is unable to reliably
differentiate between acute and chronic DVT. In the comparative study with
ultrasound, the test results showed only moderate correlation of AcuTect with
ultrasound. The Company performed subsequent analyses of these results. In a
subgroup consisting of 87 patients with "acute DVT symptoms," the correlation of
AcuTect with ultrasound was higher than in the overall (137 patient) group. The
Company defines "acute DVT symptoms" as clear signs and symptoms of DVT within
10 days of diagnosis with no prior history of DVT or pulmonary emboli. The
Company believes that these results may reflect the detection by AcuTect of
activated platelets associated with acute clots and the inability of ultrasound
to differentiate accurately between acute and chronic clots.


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<PAGE>

AcuTect for Carotid Thrombus

The Company is conducting Phase 2 clinical trials of the Techtide AcuTect for
medical imaging of carotid thrombus. Carotid thrombi are blood clots that are
attached to the inside wall of the carotids, the major arteries supplying blood
to the brain. A carotid thrombus poses a two-fold threat to a patient. First, it
indicates the presence of unstable plaque underlying the thrombus because stable
plaque does not cause a thrombus to form on its surface. The unstable plaque may
rupture without warning and cause a stroke, either by blocking the vessel or by
releasing debris into the vessel which is then carried into the brain, causing a
blockage. Secondly, carotid thrombi often break off and are carried into the
brain, where they block blood vessels and cause stroke.

Stroke accounts for approximately one-half of all patients hospitalized for
acute neurological diseases in the United States. According to the American
Heart Association, there are approximately 600,000 incidents of stroke each year
in the United States. When considered separately from other cardiovascular
diseases, stroke ranks as the third leading cause of death behind heart disease
and cancer.

Carotid disease is primarily diagnosed by ultrasound and carotid angiography,
with angiography currently recognized as the most accurate imaging modality for
this purpose. Carotid angiography is an invasive procedure involving the
placement of a catheter in the artery and the injection of a contrast agent. In
1996, approximately 300,000 carotid angiography procedures for imaging of
carotid disease were performed in the United States. Ultrasound is less invasive
and less expensive than carotid angiography for imaging of carotid disease. In
1996, approximately 2,000,000 ultrasound procedures for imaging of carotid
disease were performed in the United States. When used for the diagnosis of
carotid thrombus, both carotid angiography and ultrasound detect only the degree
of blockage of the artery; neither procedure is able to detect reliably the
presence or absence of thrombi in an artery as opposed to some other form of
blockage, such as arteriosclerosis.

Diatide is developing AcuTect for imaging of carotid thrombus because clots
located in arteries have substantially more activated platelets than clots
formed in the venous system. As described above, AcuTect is designed to bind to
the GP IIb/IIIa receptor on activated platelets, which are found in thrombi.
Diatide believes that nuclear medicine imaging of carotid thrombus with AcuTect
may provide a more valuable diagnosis than existing modalities if this procedure
can be shown to enable physicians to identify the presence or absence of
thrombi, as opposed to arteriosclerosis, in the artery. If thrombi are present,
immediate carotid surgery (endarterectomy) or immediate administration of an
anticoagulant may be required. If both carotid arteries are severely narrowed,
determining the location of thrombi is important since such a determination
would mandate that, if only one side has thrombus, that side be operated on
first in order to avoid a stroke, which would have a high likelihood of
occurring if the opposite side were operated on first.

The Company completed a Phase 2 clinical trial of AcuTect for the diagnosis of
carotid thrombus in December 1995. This study was conducted at one site in the
United States, involved ten patients and compared AcuTect with ultrasound and
pathology. The compound was well tolerated by all of the patients with no
clinically significant adverse side effects. Moreover, the results of this Phase
2 clinical trial indicated on a preliminary basis that AcuTect may be able to
identify both thrombi on carotid plaque and intra-arterial thrombi associated
with atherosclerotic plaque. The Company initiated additional Phase 2 clinical
trials of AcuTect for imaging of carotid thrombus in February 1997. In this
study AcuTect is being compared with pathology. This study involves 40 patients
at eight sites in the United States and Canada.


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<PAGE>


P829 for Lung Cancer Tumors,  Neuroendocrine Tumors, and Metastasis of Melanoma

In late 1997, the Company completed enrollment of separate pivotal Phase 3
clinical trials of P829 for lung cancer and neuroendocrine imaging. The Company
is in the process of analyzing the data from these trials and expects to release
them to the public in the second quarter of 1998 and submit an NDA for the lung
cancer indication in 1998.

Cancer is often manifested in tissue masses called tumors. Cancer often causes
death, particularly when tumor cells metastasize and spread to other parts of
the body. The detection of metastases, or small secondary tumors, is often
difficult. In addition, certain primary tumors, including several types of
neuroendocrine tumors, are difficult to identify with conventional imaging
technology.

There will be an estimated 171,500 new cases of lung cancer in 1998 in the U.S.,
making lung cancer the most common malignancy in men and women in the U.S.
Approximately two percent of all routine chest x-rays in the U.S. reveal the
existence of a solitary pulmonary nodule (SPN), a single, undefined object found
in the lung. Thirty-eight percent of SPNs are cancerous. Under most
circumstances, non-invasive diagnostic methods are insufficient to rule out
cancer in these patients and a needle biopsy or surgery is performed. Fourteen
percent of patients who undergo needle biopsy suffer a pneumothorax (collapsed
lung) as a result of the procedure. The Company believes that P829 will enable
physicians to rule out cancer in the 62% of non-cancerous SPN patients, thereby
eliminating the cost of a surgical procedure and saving patients the pain,
emotional trauma and risk of pneumothorax.

The Company's pivotal Phase 3 lung cancer trials were initiated in December 1996
and completed in late 1997. In these trials, P829 was compared against biopsy
and involved approximately 270 patients at approximately 24 sites in the United
States and Europe. The Company expects to have the data analysis in the second
quarter of 1998. The Company's pivotal Phase 3 neuroendocrine tumor trials were
initiated in February 1996 and completed in late 1997, compared second P829 and
OctreoScan with CT, MRI, biopsy and other standard institutional procedures and
involved approximately 252 patients at approximately 26 sites in the United
States and Europe. The Company's non-pivotal Phase 3 melanoma trials, which were
initiated in October 1996 and completed in October 1997, compared P829 with CT
and biopsy and involved approximately 66 patients at 7 sites in the United
States. The compound was well tolerated and the Company may engage in further
study for this indication. The American Cancer Society estimates that
approximately 41,600 patients will be newly diagnosed with melanoma in 1998.

The Company completed two Phase 2 clinical trials of P829 for the diagnosis of
tumors that overexpress the somatostatin receptor in September 1995. One of
these trials was a non-randomized dose ranging study, which was conducted at six
sites in the United States, involved 43 patients with neuroendocrine tumors or
lymphomas and compared P829 with CT, MRI, biopsy and other standard
institutional procedures. The second of these trials was conducted at three
sites in the United States, involved 44 patients with non-neuroendocrine tumors
that overexpress the somatostatin receptor, primarily lung and certain breast
tumors and lymphomas, and compared P829 with CT, MRI, biopsy and other standard
institutional procedures. P829 was well tolerated by all patients in both
clinical trials, with no clinically significant adverse side effects, and
demonstrated good image quality in imaging both neuroendocrine and
non-neuroendocrine tumors, and the test results with P829 correlated
sufficiently with the test results with CT, MRI, biopsy and other standard
institutional procedures to justify proceeding with Phase 3 clinical trials.

P748 for Pulmonary Embolism

The Company is conducting Phase 2 clinical trials of the Techtide P748 for
medical imaging of pulmonary emboli. Like AcuTect, P748 targets the GP IIb/IIIa
receptor on platelets involved in blood clot formation. A pulmonary embolus is a
blood clot that blocks blood flow to the lungs and often is fatal. There are
approximately 600,000 annual episodes of pulmonary emboli in the United
States. Approximately 60,000 deaths occur each year in the United States as a
result of pulmonary emboli.

                                       10
<PAGE>

To diagnose pulmonary emboli, physicians generally first x-ray the patient to
rule out other causes of the patient's symptoms. Next, physicians typically
perform perfusion and ventilation scans, a two-step nuclear medicine imaging
procedure involving the use of technetium-labeled albumin and a radiolabeled
gas, typically xenon-133. This dual procedure is minimally invasive, but
frequently gives inconclusive results. In 1996, approximately 978,000 perfusion
studies and 870,000 ventilation studies for imaging of pulmonary emboli were
performed in the United States. If the results of the perfusion and ventilation
scans are inconclusive, physicians often perform a pulmonary angiogram, which is
currently recognized as the most accurate imaging modality used to identify
pulmonary emboli. A pulmonary angiogram is an invasive procedure involving the
placement of a catheter near the pulmonary artery and the injection of a
contrast agent. In 1996, approximately 50,000 pulmonary angiograms for imaging
of pulmonary emboli were performed in the United States.

Based on the results of preclinical tests and pilot studies of P748, the Company
believes that diagnosis with P748 may provide significant improvements in
accuracy in comparison with perfusion and ventilation studies. The Company
further believes that nuclear medicine imaging with P748 will be significantly
less invasive than a pulmonary angiogram, while potentially providing the same
quality of diagnosis. As a result, P748 may be particularly attractive in
situations in which the patient is repeatedly imaged over time to monitor the
effects of thrombolytic agents which are administered as therapies for this
disease. Optimizing dosage of thrombolytic agents is important to minimize the
serious side effects associated with the bleeding that may be caused by these
agents, including ulcer or gastrointestinal bleeding, and cerebral hemorrhage,
which may cause stroke and death.

The Company's current Phase 2 clinical trial of P748 is a randomized dose
ranging study for the diagnosis of pulmonary embolism. This study is being
conducted at six sites in the United States and Canada and will involve
approximately 30 patients. It compares P748 with pulmonary angiography.

The Company completed two pilot studies of P748 in 1995. One of these studies
was conducted at one site in Europe and involved seven patients, and the other
was conducted at four sites in the United States and involved 17 patients. Both
studies compared P748 to perfusion and ventilation scans. In these studies, P748
was well tolerated by all patients with no clinically significant adverse side
effects, and the test results with P748 correlated sufficiently with the test
results with perfusion and ventilation scans to justify proceeding with Phase 2
clinical trials. In December 1995, the Company completed a Phase I clinical
trial of P748. This clinical trial was conducted at two sites in the United
States and involved ten normal volunteers. P748 was well tolerated by all
subjects with no clinically significant adverse side effects.

P483H for Inflammation Due to Infection

The Company is conducting Phase 2 clinical trials of the Techtide P483H for
medical imaging of inflammation due to infection, such as post-surgical
infection, osteomyelitis (bone infection), the location of white blood cells
associated with fevers of unknown origin and occult (hidden) infections.
Each year in the United States there are over 2,000,000 cases of inflammation
due to infection.

The most specific current procedure for medical imaging of inflammation due to
infection involves removing blood from the patient, isolating white blood cells
in the patient's blood, radiolabeling the white blood cells with indium-111 or
with technetium coupled to a carrier molecule and then injecting the white blood
cells back into the patient where they localize around the site of the infection
and emit radiation which can be detected using a gamma camera. Although
radiolabeled white blood cells are highly specific, this imaging procedure is
expensive, difficult to administer and often fails to yield good image quality
quickly.

                                       11
<PAGE>

P483H is being designed to bind in vivo with white blood cells present at
localized sites of infection. In addition, it is being designed to be
administered by injection and, therefore, not to require handling of the
patient's blood, which entails exposure to blood-borne diseases such as HIV.

The Company completed Phase 2 clinical trials of P483H in May 1997. These trials
involved approximately 30 patients at four centers in the United States. The
Company is currently analyzing the data from these trials. Additional Phase 2
trials are anticipated in the first half of 1998. These trials will evaluate
the safety and efficacy of P483H in patients with suspected abdominal infection,
comparing the degree of agreement between P483H and the final institutional
diagnosis.

In June 1996, the Company completed Phase 1 clinical trials of P483H in the
United States. These trials were conducted at two sites and involved 15 normal
volunteers. In this study, P483H was well tolerated by all subjects with no
clinically significant adverse side effects.

P773 for Atherosclerotic Plaque

The Company filed an IND in December of 1997 in order to commence Phase 1
clinical trials of the Techtide P773 for medical imaging of unstable
atherosclerotic plaque . This IND became effective in January 1998. The company
expects to begin Phase I clinical trials in 1998. Atherosclerosis is caused by
the accumulation of cholesterol in the walls of arteries. Continued accumulation
leads to the formation of plaque. There are two types of atherosclerotic plaque,
stable and unstable. Stable plaque may not require aggressive treatment.
Unstable plaque grows rapidly and can easily rupture leading to thrombus
formation that may block an artery. Common sites of atherosclerosis are the
coronary and carotid arteries. Obstruction of blood flow in these sites may
result in transient ischemic attacks ("TIA"), stroke, angina and heart attack.

Each year approximately 600,000 persons in the United States suffer a stroke,
which is the third leading cause of death in the United States. TIA is a warning
sign of stroke and occurs in about 10% of stroke victims. Each year
approximately 1,100,000 persons have heart attacks in the United States, which
is the leading cause of death in the United States. Angina is caused by partial
blockage of a coronary artery from thrombosis. Angina causes some muscle damage
and limits the amount of work that the affected portion of the heart can do.
There are an estimated 7,200,000 persons in the United States who suffer from
angina, with 350,000 new cases occurring each year. Atherosclerosis is the
leading cause of these diseases.

Several imaging modalities are currently used to detect the sites of
atherosclerosis, including angiography, ultrasound and nuclear medicine imaging
procedures with thallium-201. However, none of these procedures permits accurate
determination of whether atherosclerotic plaque is stable or unstable. The
Company believes that an imaging product that is able to detect sites of
unstable atherosclerotic plaque may provide early detection of cardiovascular
disease that might enable physicians to manage treatment of this disease before
costly interventional measures become necessary.

The Company completed a pilot study of an earlier generation Techtide for
nuclear medicine imaging of unstable atherosclerotic plaque in May 1995. The
study was conducted at four sites in the United States, involved 21 patients and
three normal volunteers and compared the Techtide with pathology reports from
surgical tissue specimens. Although the compound was well tolerated with no
clinically significant adverse side effects, the Techtide did not exhibit
sufficient sensitivity to warrant further development.

Other Imaging Programs

In addition to its more advanced imaging product candidates described above,
Diatide is conducting research and development activities with respect to
Techtides for medical imaging of colorectal, breast, and prostate tumors as well
as additional thrombus and inflammation imaging agents. In each of these
programs, the Company has identified active compounds and is evaluating these
compounds in relevant assays and/or animal models. In addition, the Company
believes that several of Diatide's products described above have the potential
to address additional indications. For


                                       12
<PAGE>

example, based on preclinical and clinical results to date, the Company believes
that, because they target the GP IIb/IIIa platelet receptor, AcuTect and P748
may be useful in detecting thrombi in other circumstances, such as the
monitoring of thrombi associated with coronary heart disease, angioplasty,
vascular stents and stroke.

Therapeutic Products

Sn-117m DTPA for Reduction of Pain Due to Metastatic Cancer to the Bone

The Company is conducting Phase 2 clinical trials of Sn-117m DTPA as a therapy
for the reduction of pain due to metastatic cancer to the bone. Diatide has
licensed the exclusive worldwide rights to Sn-117m DTPA (which includes an
issued United States composition of matter patent) under a royalty-bearing
license from Associated Universities Inc., the operator of BNL. This compound is
comprised of the radioisotope Sn-117m, which has an affinity for bone, combined
with DTPA, a common chelating agent (an organic compound used to make Sn-117m
soluble so that it will remain in the circulatory system until it reaches the
bone).

The three most prevalent cancers, prostate, breast and lung, metastasize to the
bone in approximately 45% to 75% of patients. In 1997, there were approximately
210,00 new cases of prostate cancer, 180,000 new cases of breast cancer and
180,000 new cases of lung cancer in the United States. The normal course of
treatment for the bone pain associated with these cancers has been external beam
radiation, chemotherapy, analgesics and opiates. These methods are costly and
lead to a poor quality of life in late-stage patients.

In 1993, the first therapeutic radiopharmaceutical for this indication,
Metastron, was approved for routine use by the FDA. The FDA approved a second
therapeutic radiopharmacentical, Quadramet(R), in 1997. Both Metastron and
Quadramet have been shown to significantly reduce metastatic bone pain for up to
six months with a single injection. The Company believes that
radiopharmaceuticals are well suited for this type of therapy because they can
deliver a high level of radiation to multiple metastases. However, Metastron,
Quadramet, and certain other radioisotopes for the reduction of pain due to
metastatic cancer to the bone that are under development are dose limited due to
myelosuppression, the destruction of bone marrow, which is the source of white
blood cells and platelets. Myelosuppression is a particular problem for patients
suffering from breast cancer, who already have suppressed bone marrow due to
chemotherapy. Because of the radiation characteristics of Sn-117m and based on
published data for other radioisotopes, the Company believes that Sn-117m will
result in less myelosuppression than other radioisotopes. In addition, Metastron
and Quadramet are approved for a limited subset of patients with cancer bone
pain. The Company is testing Sn-117m for its efficacy in palliating bone pain in
a broader range of cancer patients.

In December of 1997 the Company began two Phase 2 trials of Sn-117m DTPA. The
first trial is designed to evaluate the safety and efficacy of three dose levels
of Sn-117m DTPA against Metastron for palliation of bone pain from osseous
metastases in patients with prostate cancer. The trial will involve
approximately 100 patients and is due to complete enrollment in the third
quarter of 1998. The second trial is designed to evaluate the safety and
efficacy of two dose levels of Sn-117m DTPA versus placebo for the palliation of
bone pain from oncologic osteolytic bone metastases. The trial will involve
approximately 75 patients and is due to complete enrollment in the third quarter
of 1998.

A dose-escalating Phase 2 clinical trial of Sn-117m DTPA was begun by BNL and
completed by the Company in 1995. This Phase 2 clinical study was conducted at
four sites in the United States and involved 47 patients. Sn-117m DTPA was well
tolerated by all patients with no clinically significant adverse side effects.
Approximately 70% of the patients in this study were noted to experience
complete or partial pain relief.

Other Potential Therapeutic Applications

                                       13
<PAGE>

The Company believes that combinations of its synthetic peptides with certain
therapeutic payloads may have potential applications as targeted therapies. In
1997, the Company dedicated resources to and initiated preclinical research and
development programs in this area with a focus on oncology and cardiovascular
indications. The oncology research will attempt to capitalize on the Company's
existing peptide linking and nuclear medicine expertise by attaching a
therapeutic radioisotope payload to a targeting peptide. Additionally, the
Company is pursuing research in the cardiovascular area. In August 1997 the
Company received a research grant from the National Institute of Health ("NIH")
to study the effectiveness of Fibrolase, a fibrinolytic agent, and P734, a
synthetic peptide, for the treatment of arterial thrombosis, a major cause of
heart attacks and stroke. The Company anticipates having tumor regression
results in its oncology efforts and analysis during 1998. The Company may also
inlicense additional therapeutic radiopharmaceuticals if the technology is
related to the Company's technology and the distribution channels for the
product overlap with the distribution channels of the Company's other products.

Corporate Collaborations

A key element of Diatide's business strategy is to enter into collaborations
with pharmaceutical companies to secure financial support for its research and
development activities and to enhance the sales and marketing, distribution and
promotion of the Company's products worldwide upon receipt of requisite
regulatory approvals.

In August 1995, the Company entered into a comprehensive strategic alliance
relating to its Techtides with Nycomed. The strategic alliance provides for
research and development support and a marketing collaboration. At the time the
alliance was established, Nycomed made a $10 million equity investment in the
Company. Nycomed is one of the world's leading producers of medical imaging
agents, with net worldwide revenues from medical imaging operations of
approximately $700 million in 1996.

Under the Company's agreements with Nycomed, the Company granted Nycomed an
option to obtain exclusive co-promotion rights with respect to the Company's
Techtides in the United States and an option to obtain exclusive distribution
and license rights with respect to the Company's Techtides in Europe, South
Africa and certain countries in the Middle East. The options apply to each
Techtide which becomes the subject of an IND submission with the FDA during the
five-year period ending August 2000 (the "Research and Development Period"). As
to each such Techtide, the options are exercisable by Nycomed at any time prior
to the expiration of the 60-day period following the date on which Diatide
enrolls its first patient in a Phase 3 clinical trial with respect to such
Techtide, even if such 60-day period expires later than the expiration of the
Research and Development Period. Nycomed has exercised its co-promotion and
licensing options with respect to AcuTect and P829. There can be no assurance
that Nycomed will exercise its options as to any other Techtide.

During the Research and Development Period, Nycomed is required to make
quarterly research and development payments to Diatide as well as additional
payments upon the exercise of any option with respect to a Techtide. The
Research and Development Period is subject to termination prior to August 2000
in certain circumstances, although Nycomed may not shorten such period to
earlier than August 1998 without Diatide's consent, except in the case of a
breach by Diatide .

Under the United States co-promotion agreement, Nycomed is required to market
and promote, on a joint basis with Diatide, Techtides as to which Nycomed has
exercised its co-promotion right. Nycomed will have primary responsibility for
promoting products to group purchasing organizations, hospital pharmacies and
other relevant departments at hospitals, and Diatide will have primary
responsibility for promotion to commercial radiopharmacies. Nycomed's United
States co-promotion rights with respect to each Techtide that it elects to
co-promote will expire on the fifth anniversary of the first sale of the product
in the United States, subject to certain extension rights of up to three
additional years. In certain limited cases involving additions to the
indications of a previously optioned product, Nycomed may extend the term of its
co-promotion rights up to an additional five years by agreeing to fund 50% of
the Company's costs of conducting the Phase 3 clinical trials required with
respect to such additional indications. Diatide retains the right to


                                       14
<PAGE>

manufacture Techtides which are subject to this co-promotion arrangement. In
consideration of Nycomed's co-promotional efforts, Diatide is required to pay
Nycomed a specified percentage of United States adjusted net sales (as defined
in the agreement) of each co-promoted Techtide. Diatide has agreed that
generally it will not market or sell in the licensed territory any substantially
similar product that is targeted at the same receptor and has substantially the
same clinical indications as any Techtide for which Nycomed has exercised its
option to distribute and license.

Under the distribution and license agreement, Nycomed is required to make
certain milestone payments to Diatide upon the achievement of specified
regulatory objectives with respect to Techtides that Nycomed exercises its
option to distribute and license. In 1997, Nycomed paid to Diatide $2 million in
milestone payments. In addition, Nycomed is required to pay running royalties as
to such Techtides based on a percentage of Nycomed's net sales (as defined in
the agreement) in the licensed territory. Diatide generally is responsible for
conducting all required clinical trials of Techtides licensed by Nycomed, and
Nycomed is responsible for prosecuting the marketing approval applications in
the licensed territory and the funding of additional market studies to support
the marketing of licensed products. Nycomed is required to purchase from
Diatide, and Diatide is required to supply to Nycomed, Nycomed's requirements of
licensed products at specified transfer prices.

Marketing and Distribution

Diatide plans to market products for which it obtains regulatory approval
through co-marketing, licensing and distribution arrangements with
pharmaceutical company collaborators and through its own small, specialized
sales force. The Company believes that this approach will both increase market
penetration and commercial acceptance of its products and enable the Company to
avoid the need to expend significant funds to develop a large sales force.

The Company expects to market and distribute its imaging products outside of the
United States, including in Japan and the balance of the Far East (which are not
covered by Nycomed's options to license), primarily or exclusively through
co-marketing, licensing and distribution arrangements with pharmaceutical
company collaborators. The Company plans to market and distribute any
therapeutic products that it develops worldwide on a similar basis.

In the United States, the Company expects that its in-house sales force
primarily will market the Company's products to commercial radiopharmacies,
which currently serve as the distribution channel for approximately 80% of all
unit dose radiopharmaceuticals sold in the United States. The Company
anticipates that its marketing organization initially will consist of a small
number of sales representatives, coordinated by a sales manager and assisted by
a small marketing and technical support group. The Company is actively
developing its sales and marketing organization support the anticipated FDA
approval of AcuTect in 1998.

Because the Company's Techtides are being designed for imaging of some disease
states that have not previously been diagnosed with radiopharmaceuticals, the
Company believes that a successful marketing program will require significant
efforts to familiarize attending physicians with the availability and attributes
of these products. The Company expects to look to its pharmaceutical company
partners, which typically have large sales forces, to detail the Company's
products with hospital physicians, such as nuclear medicine physicians and
radiologists, as well as referring physicians, such as oncologists,
cardiologists and vascular surgeons.

Manufacturing

The principal components of Diatide's Techtides are synthetic peptides and
technetium. The peptides are synthesized from readily available amino acids, and
the production process involves inexpensive and well-established solid phase
peptide synthesis technology. Technetium is available from a variety of
commercial suppliers and is inexpensive.

To date, the Company has synthesized the peptides required for its research
activities. The Company has purchased the peptides required for clinical trials
of its Techtides from a large pharmaceutical manufacturer which produces
synthetic


                                       15
<PAGE>

peptides in accordance with the FDA's requirements for current Good
Manufacturing Practice ("cGMP"). Additionally, the Company currently contracts
with third-party manufacturers for the manufacture, assembly and shipment of its
Techtide products, including AcuTect. The Company is currently negotiating with
the manufacturer of the Company's peptides for the supply of peptides required
for the commercial production of AcuTect and with one of its other third-party
manufacturers for the manufacture, assembly and shipment of AcuTect on a
commercial basis. There can be no assurance as to the terms of any arrangements
entered into with such manufacturers.

The Company plans to package and ship its Techtides in the form of
non-radioactive ("cold") kits consisting only of the Diatide-engineered peptide.
The Company plans to sell Techtides as cold kits because such cold kits possess
a long shelf life and require no special storage procedures. Prior to
administration, a commercial or hospital radiopharmacy would combine technetium
with the peptide, which is designed to permit this coupling to occur in a simple
process. In some cases, heating of the synthetic peptide/technetium mixture is
expected to be required for a short period of time to facilitate coupling. This
heating process is customary in the preparation of radiopharmaceuticals.

The manufacturing process for Sn-117m DTPA is more complicated than that used
for Techtides. The Company expects that Sn-117m DTPA will be radiolabelled when
supplied and will have approximately a 30-day shelf life. The Company has
entered into an arrangement with a third-party manufacturer to supply the
Company with the Sn-117m DTPA required for clinical trials of this compound and
currently expects to enter into a similar arrangement for the supply of
commercial quantities of this compound if it obtains regulatory clearance for
commercial sale.

Any manufacturing operations by the Company will be subject to federal, state
and local laws and regulations governing the use, manufacture, storage, handling
and disposal of certain materials and waste products.

Patents, Trade Secrets and Licenses

Proprietary protection for the Company's product candidates, processes and
know-how is very important to Diatide's business. The Company's policy is to
file patent applications to protect technology, inventions and improvements that
are considered important to the development of its business. The Company also
relies upon trade secrets, know-how, continuing technological innovation and
licensing opportunities to develop and maintain its competitive position.

The Company owns 15 United States patents. Six of these patents cover technology
relating to labeling peptides with technetium. One was acquired from Receptor
Laboratories and covers a method of generating and screening peptide libraries,
two cover the composition of matter of AcuTect, two cover peptides agents for
imaging and therapy of tumors, and four cover technetium-labeled peptides for
imaging inflammation. The Company also has over 60 pending United States patent
applications for a wide variety of technologies relating to labeling peptides
with technetium, as well as specific compositions of matter useful for nuclear
medicine imaging of thrombosis, tumors and inflammation due to infection. The
Company has also sought corresponding foreign patent protection in other major
industrial countries in respect of its most commercially important technologies,
and to date has been granted 20 patents in South Africa, five patents in
Australia and two patents in Europe. All of the Company's United States and
foreign patents expire between 2011 and 2016.

The Company has licensed various patents and other technology from third parties
pursuant to license agreements, including exclusive licenses from the NIH, New
England Deaconess Hospital and Associated Universities Inc., the operator of
BNL, and non-exclusive licenses from Centocor, Inc. and Merck & Co., Inc. Among
other things, these licenses cover the products that the Company is developing
for nuclear medicine imaging of atherosclerotic plaque, the treatment of bone
pain associated with metastatic cancer and technology related to a component of
AcuTect. These third party licenses impose various commercialization,
sublicensing, royalty and other payment, insurance and other obligations on the
Company. Failure of the Company to comply with these requirements could result
in termination of the applicable license, which could have a material adverse
effect on the Company's business.

                                       16
<PAGE>

The patent positions of pharmaceutical and biotechnology firms, including
Diatide, are generally uncertain and involve complex legal and factual
questions. Consequently, even though Diatide currently is prosecuting its patent
applications with the United States Patent and Trademark Office ("PTO") and
certain foreign patent authorities, the Company does not know whether any of its
remaining applications will result in the issuance of any patents or, if any
patents are issued, whether they will provide significant proprietary protection
or will be circumvented or invalidated. Since patent applications in the United
States are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months, Diatide cannot be certain that it was the first
creator of inventions claimed by pending patent applications or that it was the
first to file patent applications for such inventions.

Competitors of the Company and other third parties hold issued patents and
pending patent applications relating to aspects of the Company's technology, and
it is uncertain whether these patents and patent applications will require the
Company to alter its products or processes, pay licensing fees or cease certain
activities. In particular, the Company is aware of one European patent issued to
a pharmaceutical company which, if valid, may be infringed by P748. The holder
of this patent has indicated to the Company that it is not prepared to offer a
license under the patent to the Company. Dr. Volker Vossius, European patent
counsel to the Company, has advised the Company that, in his opinion, the claims
of the patent that would be infringed by P748 are invalid for lack of an
inventive step and for insufficiency of disclosure. An opinion of counsel only
represents such counsel's view of applicable law and is not binding on any court
or governmental agency.

In addition, Diatide has become aware of a United States patent assigned to
another company that claims the same invention as a pending Diatide patent
application and which, if valid, may apply to an element of AcuTect. Diatide's
pending application is intended to provide protection for this element of
AcuTect and is believed by Diatide to deserve an earlier priority date than the
other company's patent. Diatide is aggressively seeking to protect its
proprietary rights and has requested that the PTO declare an interference
between the Diatide patent application and the issued patent. Diatide intends to
challenge the validity of the patent granted to the other company if the patent
is asserted against Diatide, and Diatide will seek to enforce its own patents if
any product of any other infringes Diatide's patent claims. McDonnell Boehnen
Hulbert & Berghoff, outside patent counsel for the Company, has advised the
Company that, in its opinion, the claims of the other Company's patent are
invalid. An opinion of counsel only represents such counsel's view of
applicable law and is not binding on any court or government agency.

Diatide's practice is to require its employees, consultants, members of its
Scientific Advisory Board, outside scientific collaborators and sponsored
researchers and other advisors to execute confidentiality agreements upon the
commencement of employment or consulting relationships with the Company. These
agreements provide that all confidential information developed or made known to
the individual during the course of the individual's relationship with Diatide
is to be kept confidential and not disclosed to third parties, subject to a
right to publish certain information in the scientific literature in certain
circumstances and subject to other specific exceptions. In the case of
employees, the agreements provide that all inventions conceived by the
individual shall be the exclusive property of the Company. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets or adequate remedies in the event of unauthorized
use or disclosure of such information.

Diatide engages in collaborations and sponsored research agreements and enters
into preclinical and clinical testing agreements with academic and research
institutions and United States government agencies to take advantage of their
technical expertise and staff and to gain access to clinical evaluation models,
patients, and related technology. Consistent with pharmaceutical industry and
academic standards, and the rules and regulations under the Federal Technology
Transfer Act of 1986, these agreements may provide that developments and results
will be freely published, that information or materials supplied by Diatide will
not be treated as confidential and that Diatide may be required to negotiate a
license to any such developments and results in order to commercialize products
incorporating them. There can be no assurance that the Company will be able
successfully to obtain any such license at a reasonable cost or that such
developments and results will not be made available to competitors of the
Company on an exclusive or nonexclusive basis.


                                       17
<PAGE>

Government Regulation

The research, testing, manufacture, labeling, distribution, sale, marketing,
promotion and advertising of the Company's products and its ongoing research and
development activities are subject to extensive and rigorous regulation by
governmental authorities in the United States and other countries.

FDA Approval

In the United States, pharmaceutical products intended for therapeutic or
diagnostic use in humans are subject to rigorous and extensive FDA regulation
before and after approval. The process of completing preclinical studies and
clinical trials and obtaining FDA approvals for a new drug can take a number of
years and requires the expenditure of substantial resources. There can be no
assurance that any product will receive such approval on a timely basis, if at
all.

The steps required before a new pharmaceutical product for human use may be
marketed in the United States include (i) preclinical tests, (ii) submission to
the FDA of an IND application, which must become effective before human clinical
trials may commence, (iii) adequate and well-controlled human clinical trials to
establish the safety and effectiveness of the product, (iv) submission of an NDA
to the FDA, which application is not automatically accepted for consideration by
the FDA, and (v) FDA approval of the NDA prior to any commercial sale or
shipment of the product. These required steps apply to products intended for
diagnostic as well as therapeutic use, but the clinical testing of diagnostic
products can take less time to complete than that of therapeutic products, which
must be shown to cure, mitigate, treat, or prevent disease. There can be no
assurance, however, that the possibility of clinical testing of shorter duration
will be borne out for any of the Company's current or future diagnostic
products.

Preclinical tests include laboratory evaluation of product chemistry and animal
studies to gain preliminary information of a product's pharmacology and
toxicology and to identify any safety problems that would preclude testing in
humans. Products must generally be manufactured according to cGMP and
preclinical safety tests must be conducted by laboratories that comply with FDA
regulations regarding Good Laboratory Practice ("GLP"). See "Item 1. Business --
Manufacturing." The results of the preclinical tests are submitted to the FDA as
part of an IND application and are reviewed by the FDA prior to the commencement
of human clinical trials. Unless the FDA objects to, or makes comments or raises
questions concerning, an IND, the IND will become effective 30 days following
its receipt by the FDA and initial clinical studies may begin, although
companies often obtain affirmative FDA approval before beginning such studies.
There can be no assurance that submission of an IND will result in FDA
authorization to commence clinical trials.

Clinical trials involve the administration of the investigational new drug to
healthy volunteers and to patients under the supervision of a qualified
principal investigator. Clinical trials must be conducted in accordance with the
FDA's Good Clinical Practice requirements under protocols that detail, among
other things, the objectives of the study, the parameters to be used to monitor
safety, and the effectiveness criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Further, each clinical study must be
conducted under the auspices of an Institutional Review Board ("IRB"). The IRB
will consider, among other things, ethical factors, the safety of human
subjects, the possible liability of the institution and the informed consent
disclosure which must be made to participants in the clinical trial.

Clinical trials are typically conducted in sequential phases, although the
phases may overlap. In Phase 1, the investigational new drug usually is
administered to healthy human subjects (10 to 50 persons) and is tested for
safety (adverse effects), dosimetry, tolerance, metabolism, distribution,
excretion and pharmacokinetics (clinical pharmacology). Phase 2 involves studies
in a limited patient population (approximately 10 to 70 persons) to (i) evaluate
the effectiveness of the investigational new drug for specific indications, (ii)
determine dose response and optimal dosage and (iii) identify possible adverse
effects and safety risks. When an investigational new drug is found to have an
effect and to have an acceptable safety profile in Phase 2 evaluation, Phase 3
trials are undertaken to further test for safety, further evaluate clinical
effectiveness and to obtain additional information for labelling within an
expanded patient


                                       18
<PAGE>

population at geographically dispersed clinical study sites. There can be no
assurance that Phase 1, Phase 2 or Phase 3 testing will be completed
successfully within any specified time period, if at all, with respect to any of
the Company's products subject to such testing. Furthermore, the FDA may at any
time impose a clinical hold on ongoing clinical trials or the Company may
suspend clinical trials at any time if it is felt that the participants are
being exposed to an unanticipated or unacceptable health risk. If the FDA
imposes a clinical hold, clinical trials may not recommence without prior FDA
authorization and then only under terms authorized by the FDA.

It is customary in the nuclear medicine imaging industry to conduct pilot
studies in a limited patient population (approximately 3 to 25 persons) to
determine whether the product candidate warrants further clinical trials based
on preliminary indications of efficacy. These pilot studies may be performed in
the United States after an IND has become effective or outside of the United
States prior to the filing of an IND in the United States in accordance with
government regulations and institutional procedures.

The results of the pharmaceutical development, preclinical studies and clinical
studies, the chemistry and manufacturing data, and the proposed labelling, among
other things, are submitted to the FDA in the form of an NDA for approval of the
marketing and commercial shipment of the product. The FDA may refuse to accept
the NDA for filing if certain administrative and NDA content criteria are not
satisfied, and even after accepting the NDA for review, the FDA may require
additional testing or information before approving the NDA. In any event, the
FDA must deny an NDA if applicable regulatory requirements are not ultimately
satisfied. Moreover, if regulatory approval of a product is granted, such
approval may require post-marketing testing and surveillance to monitor the
safety of the product or may entail limitations on the indicated uses for which
it may be marketed. Finally, product approvals may be withdrawn if compliance
with regulatory standards is not maintained or if problems occur following
initial marketing.

In addition to product approval, the Company will be required to obtain a
satisfactory inspection by the FDA covering manufacturing facilities of the
Company or of the Company's suppliers before a product of the Company can be
marketed in the United States. The FDA will review the manufacturing procedures
and inspect the manufacturer's facilities and equipment for compliance with GMP
and other requirements. Any material change in the manufacturing process,
equipment or location would necessitate additional preclinical and/or clinical
data, then FDA review and approval before marketing.

The Company expects that certain of its competitors' products, such as nuclear
medicine imaging products using MAbs, will be regulated as biologics. The FDA
will be proposing regulation to implement the new Biologics License Application
("BLA") provision in the Food and Drug Administration Modernization Act of 1997,
which allows for a single license application. To the extent any of the
Company's competitors' products might fit under the existing BLA regulation for
certain enumerated biotechnology products, the existing regulations set forth
guidance regarding agency expectations.

Foreign Regulatory Approval

Whether or not FDA approval has been obtained, approval of a pharmaceutical
product by comparable governmental regulatory authorities in foreign countries
must be obtained prior to the commencement of clinical trials and subsequent
marketing of such product in such countries. The approval procedure varies from
country to country, and the time required may be longer or shorter than that
required for FDA approval. Nycomed filed a Marketing Approval Application (MAA)
with the European Medicines Evaluation Agency (EMEA) on behalf of Diatide for
AcuTect in November of 1997. This centralized procedure is effective for the
Member States of the European Union and certain other countries who have agreed
to be bound by the approval decisions of theEMEA.

At present, pharmaceutical products generally may not be freely exported from
the United States until the FDA has approved the product for marketing in the
United States. However, a company may apply to the FDA for permission to


                                       19
<PAGE>

export finished products to a limited number of countries prior to obtaining FDA
approval for marketing in the United States where the products are covered by an
effective IND or a pending NDA and certain other requirements are met.

Other Regulation

In addition to regulations enforced by the FDA, the Company also is subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and potential future federal, state or local
regulations. The Company's research and development involves the controlled use
of hazardous materials, chemicals, viruses and various radioactive compounds.
Although the Company believes that its safety procedures for storing, handling,
using and disposing of such materials comply with the standards prescribed by
applicable regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could have a material adverse effect on the Company.

Competition

There are many companies, both private and publicly traded, that are conducting
extensive research and development activities on technologies and products
similar to or competitive with the Company's technologies and proposed products.
For example, many other companies are actively seeking to develop nuclear
medicine imaging agents that will compete with the Company's Techtides. There
can be no assurance that the Company's competitors will not succeed in
developing products which are more effective than any that are being developed
by the Company, or which would render Diatide's technologies and products
obsolete and noncompetitive. Certain radiopharmaceuticals already have been
approved for sale for the diagnosis or treatment of the indications targeted by
the Company's products under development. In particular, OctreoScan, a
peptide-based radiopharmaceutical, is available for the diagnosis of
neuroendocrine tumors, Ceretec, a radiopharmaceutical labeled with technetium,
is available for imaging of inflammation due to infection, and Metastron and
Quadramet are available for the reduction of pain due to metastatic cancer to
the bone.

With respect to the Company's diagnostic products, there are several
well-established medical imaging modalities that currently, and will continue
to, compete against nuclear medicine imaging, including x-rays, CT, MRI,
ultrasound and other nuclear medicine imaging approaches, and the Company is
aware of a number of companies which are developing and testing peptide based
radiopharmaceuticals for diagnostic purposes. Furthermore, there are alternative
therapeutics available for the treatment of cancer indications that are the
subject of the Company's therapeutic programs.

Competition among these technologies and products is and will be based, among
other things, on effectiveness, safety, reliability, availability, price and
patent position. Another important factor will be the timing of market
introduction of the Company's or competitive products. Accordingly, the relative
speed with which Diatide can develop products, complete the clinical trials and
approval processes and supply commercial quantities of the products to the
market is expected to be an important competitive factor. The Company's
competitive position will also depend upon its ability to attract and retain
qualified personnel, to obtain patent protection or otherwise develop
proprietary products or processes, and to secure sufficient capital resources
for the often substantial period between technological conception and commercial
sales.

There can be no assurance that the Company's competitors will not succeed in
developing products based on nuclear medicine technology or other existing or
novel technologies that are more effective than any which are being developed by
the Company or which would render the Company's technology and products obsolete
and noncompetitive.

Competitors of the Company engaged in all areas of biotechnology and drug
discovery and development in the United States and other countries are numerous
and include, among others, major pharmaceutical and chemical companies,
biotechnology firms, universities and other research institutions. Many of these
competitors have substantially greater financial, technical and human resources
than the Company. In addition, many of these competitors, including large

                                       20
<PAGE>

pharmaceutical companies such as The Du Pont Merck Pharmaceutical Company ("Du
Pont Merck") and Mallinckrodt Group, Inc. ("Mallinckrodt"), have significantly
greater experience than the Company in researching and developing new products,
undertaking preclinical studies and human clinical trials of new pharmaceutical
products, obtaining FDA and other regulatory approvals of products for use in
health care and marketing and manufacturing medical imaging products.
Accordingly, the Company's competitors may succeed in obtaining FDA or other
regulatory approvals for products more rapidly than the Company. Furthermore, if
the Company is permitted to commence commercial sales of products, it will also
be competing with respect to manufacturing efficiency and marketing
capabilities, areas in which it has limited or no experience.

Employees

As of December 31, 1997, Diatide had 73 full-time employees, of whom 15 hold
Ph.D. degrees, two hold M.D.s and 20 hold other advanced degrees. Fifty-one of
these employees are engaged in research and development activities and 22 are
employed in finance and general and administrative activities. Many of the
Company's management and professional employees have had prior experience with
pharmaceutical, biotechnology or medical products companies, particularly in the
imaging field. None of the Company's employees is covered by a collective
bargaining agreement, and management considers relations with its employees to
be good. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors That May Affect Future
Results -- Attraction and Retention of Key Management and Qualified Personnel."

ITEM 2. PROPERTIES

Facilities

Diatide leases approximately 20,000 square feet of laboratory and office space
in a single facility in Londonderry, New Hampshire. The lease expires in
December 1998.

ITEM 3.  LEGAL PROCEEDINGS

Not applicable.

ITEM 4.  SUBMISSION OF MATTERS to a VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders during the fourth quarter
of 1997.


                                       21
<PAGE>


Executive Officers

The following table provides information concerning the executive officers of
the Company:

                        ---------------------------------

             Name                  Age                  Position
Executive Officers:
Richard T. Dean, Ph.D. . . . . .   50        President, Chief Executive Officer,
                                               and Director
Ronald B. Kinder. . . . . . . . .  49        Executive Vice President,
                                               Chief Operating Officer and
                                               Secretary
Daniel F. Harrington . . . . . .   41        Vice President, Chief Financial
                                               Officer, and Treasurer
Christopher F. Nicodemus. . . . .  40        Vice President of Clinical
                                               Operations



Richard T. Dean, Ph.D., President, Chief Executive Officer, and a Director since
April 1990, is a founder of the Company. Prior to joining the Company, Dr. Dean
served as Director of Radiopharmaceutical Research and Development at Centocor,
Inc., a pharmaceutical company ("Centocor"), from 1986 to 1990, where he was
responsible for cardiovascular radiopharmaceutical imaging agent research and
development. From 1981 to 1986, Dr. Dean served in a variety of positions at
Mallinckrodt, a pharmaceutical and surgical instruments company, most recently
as Associate Director, Diagnostic Chemistry Research and Development. Dr. Dean
received a B.S. in chemical engineering from Cornell University, an M.S. in
chemistry from the University of Michigan and a Ph.D.
in organic chemistry from the University of California, Berkeley.

Ronald B. Kinder, Executive Vice President, Chief Operating Officer and
Secretary, joined the Company in April 1994. Prior to joining the Company, Mr.
Kinder served as Vice President and General Manager of Teledyne Waterpik, Inc.,
a medical products company, from 1989 to 1994. From 1986 to 1989, Mr. Kinder
served as Director of Marketing and Sales for Gambro, Inc., a medical technology
products company, and from 1970 to 1986, Mr. Kinder served in a variety of
positions at Mallinckrodt, most recently as Director of Marketing, Diagnostic
Products Division. Mr. Kinder received a B.A. in zoology from the University of
Missouri and an M.B.A. from St. Louis University.

Daniel F. Harrington, Vice President, Chief Financial Officer and Treasurer,
joined the Company in December 1996. Prior to joining the Company, Mr.
Harrington served as Chief Financial Officer of GenRad, Inc., an electronic
systems and software company, during 1996 and Vice President of Financial
Planning and Analysis during 1995. From 1993 to 1995, Mr. Harrington served as
Director of Operations Finance & Logistics at Waters Corporation, an analytical
instrument company and from 1987 to 1993 served in a variety of positions at
Millipore Corporation, a purification technology company, most recently as
Director of Finance.

Christopher F. Nicodemus, M.D., Vice President of Clinical Operations, joined
the Company in June 1997. Prior to joining the Company, Dr. Nicodemus served as
Vice President of Medical Affairs at ImmuLogic Pharmaceutical Corporation, from
1993 to 1997, and as Senior Director, Medical Affairs at ImmuLogic. From 1990 to
1993 he was an Associate Medical Director at Pfizer Pharmaceuticals. Dr.
Nicodemus received an M.D. from SUNY Upstate Medical Center in Syracuse, NY and
an A.B from Harvard College. He is licensed to practice medicine in
Massachusetts and he is certified by the American Board of Allergy and
Immunology and the American Board of Internal Medicine.


                                       22
<PAGE>

PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Since June 12, 1996, the Company's Common Stock has traded on the Nasdaq
National Market under the symbol "DITI". Prior to June 12, 1996, there was no
established public trading market for the Company's Common Stock. The following
table sets forth the high and low sales prices per share of the Common Stock for
the periods indicated below as reported on the Nasdaq National Market.


                     Period                       High              Low
1996
Second Quarter (from June 12, 1996) . . . . .   $8-3/4            $8
Third Quarter . . . . . . . . . . . . . . . .   $8-3/8            $5-3/4
Fourth Quarter . . . . . . . . . . . . . . .    $8-3/4            $6-1/2
1997
First Quarter . . . . . . . . . . . . . . . .   $7-7/8            $6-1/4
Second Quarter  . . . . . . . . . . . . . . .   $6-7/8            $4-1/2
Third Quarter . . . . . . . . . . . . . . . .   $14-1/8           $5
Fourth Quarter . . . . . . . . . . . . . . .    $12-1/4           $5-7/8
1998
First Quarter (through March 13, 1998). . . .   $10-7/8           $8-7/8

The reported closing price of the Common Stock on the Nasdaq National Market on
March 13, 1998 was $10-1/8. There were approximately 110 stockholders of record
at December 31, 1997.

The Company has not paid cash dividends on its Common Stock and does not intend
to pay cash dividends on its Common Stock in the foreseeable future.

During the three-month period ended December 31, 1997, the Company did not sell
any securities that were not registered under the Securities Act of 1933, as
amended (the "Securities Act").


                                       23
<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                    --------------------------------------------------------
                                                        1997        1996        1995        1994       1993
                                                        ----        ----        ----        ----       ----
                                                             (in thousands, except per share amounts)
<S>                                                    <C>         <C>         <C>        <C>        <C>
 Statement of Operations Data:
 Revenues ..........................................   $  4,140    $  2,606    $ 1,519    $   208    $   301
 Costs and expenses:
     Research and development ......................     12,493      12,628      6,556      4,445      2,989
     General and administrative ....................      3,441       2,515      1,636      1,714      1,217
                                                       --------    --------    -------    -------    -------
 Loss from operations ..............................    (11,794)    (12,537)    (6,673)    (5,951)    (3,905)
 Interest income ...................................        807         721        306        199         33
 Interest expense ..................................         (2)        (18)       (46)   ____(7)       (107)
                                                       --------    --------    -------    -------    -------
 Net loss ..........................................   $(10,989)   $(11,834)   $(6,413)   $(5,759)   $(3,979)
                                                       ========    ========    =======    =======    =======
 Net loss and pro forma net loss per
     share (1)(2) ..................................    $ (1.05)    $ (1.28)   $ (0.92)
                                                        =======     =======    =======
 Shares used in computing
     net loss and pro forma
     net loss per share (1)(2)  ....................     10,487       9,252      6,958

<CAPTION>

                                                                        Year Ended December 31,
                                                    --------------------------------------------------------
                                                        1997        1996        1995        1994       1993
                                                        ----        ----        ----        ----       ----
                                                                           (in thousands)
<S>                                                    <C>         <C>         <C>        <C>        <C>
 Balance Sheet Data:
 Cash, cash equivalents and
    marketable securities ..........................   $ 17,533    $ 16,787    $ 9,078    $ 2,710    $ 7,997
 Working capital ...................................     14,880      13,612      8,227      1,899      7,553
 Total assets ......................................     19,016      18,315     10,652      3,696      8,489
 Long-term debt, net of current
    portion ........................................         10          13         89        286         60
 Deficit accumulated during the
     development stage .............................    (45,170)    (34,181)   (22,347)   (15,934)   (10,175)
 Total stockholders' equity ........................     15,908      14,684      9,281      2,492      7,866
</TABLE>

---------------

(1)  See Note 2 to Notes to Financial Statements for information concerning the
     computation of pro forma net loss per share and shares used in computing
     pro forma net loss per share.
(2)  Net loss and proforma net loss per share and the shares used in so
     computing for 1996 and 1995 have been restated to reflect the requirements
     of Statement No. 128 "Earnings per Share" of the Financial Accounting
     Standards Board and Staff Accounting Bulletin No. 98.


                                       24
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

General

The Company is a biopharmaceutical company engaged in the discovery and
development of proprietary disease-specific radiopharmaceuticals for the
diagnosis and treatment of life threatening conditions such cancer, infection,
and cardiovascular disease. To date, the Company has not received revenue from
the sale of products. In order to commercialize products, the Company will need
to address a number of technological challenges and comply with comprehensive
regulatory requirements. The Company has received a letter from the FDA stating
that the Company's NDA for AcuTect is approvable, subject to Diatide clarifying
certain details and formally agreeing to conduct certain phase 4 clinical
studies. The Company expects to receive final FDA approval and introduce AcuTect
to the market in the U.S. by the end of 1998. However, the FDA has not yet
granted such marketing approval, and there can be no assurance that such
approval in fact will be granted or as to the timing of such approval.
Accordingly, there can be no assurance as to the amount of funds that will be
required or the length of time that will pass before the Company receives
revenues from sales of its products, including AcuTect. All revenues received by
the Company through December 31, 1997 have resulted from research grants from
the National Institutes of Health (the "NIH") and the Department of Defense
(collectively, the "Research Grants"), fees received for entering into option
agreements with a pharmaceutical company, and research and development support
payments and the AcuTect option exercise payments for AcuTect and P829 and the
AcuTect milestone payment from Nycomed under the Company's collaborative
agreements with Nycomed.

The Company has incurred net losses since its inception. No revenues have been
generated from product sales and no product sales revenues are anticipated until
late in 1998. The Company expects to incur additional significant operating
losses over the next 12 to 24 months and expects its cumulative net losses to
increase significantly as the Company's research and development and clinical
trial efforts expand. The Company expects that its research and development
expenses during 1998 will be at approximately the same level as in 1997 as the
Company continues more advanced preclinical studies and late-stage clinical
trials and makes filings for regulatory approvals. The Company expects that its
personnel and patent costs will increase in the future. Patent costs also would
increase if the Company became involved in litigation or administrative
proceedings involving its patents or those of third parties. Beginning in 1998,
the Company will incur manufacturing, marketing, sales, and distribution costs
to support the anticipated commercialization of AcuTect. The Company has
incurred cumulative net losses since inception through December 31, 1997 of
$45,170,000.

Results of Operation

Years Ended December 31, 1997 and 1996

Revenues. The Company had revenues of $4,140,000 and $2,606,000 in 1997 and
1996, respectively. Revenues in 1997 were comprised of $4,000,000 received by
the Company under its collaborative agreements with Nycomed and $140,000 of
contract revenues under the Research Grants. Revenues in 1996 were comprised of
$2,500,000 received by the Company under its collaborative agreements with
Nycomed and $106,000 of contract revenues under the Research Grants. The
$1,534,000 increase in revenues from 1996 to 1997 resulted from the difference
between the $2,000,000 milestone payment from Nycomed for the FDA filing of an
NDA for AcuTect in 1997 and the $500,000 option exercise payment for P829
received in 1996.

Research and Development. During 1997 and 1996, the Company expended $12,493,000
and $12,628,000, respectively, on research and development activities. The
$135,000 decrease in 1997 resulted from reduced clinical trial activity for
AcuTect in 1997 as compared to 1996 and the timing of costs of other clinical
trials, which were offset in part by increases in staffing.

                                       25
<PAGE>

In 1995, the Company recorded deferred compensation of $1,663,000 related to the
grant of stock options to employees involved in research and development, which
is being amortized over the vesting periods of such options (generally five
years). Research and development expenses in 1997 and 1996 included $321,000 and
$334,000, respectively, of amortization expense related to such deferred
compensation.

General and Administrative. The Company's general and administrative expenses
were $3,442,000 and $2,515,000 in 1997 and 1996, respectively. During 1997,
increases in staffing and related costs were required to support the Company's
anticipated increased level of activities for commercial operations.

Interest. Interest income was $807,000 in 1997 compared with $721,000 in 1996,
reflecting a higher level of cash, cash equivalents and marketable securities
during 1997 resulting from the proceeds of the Company's initial public offering
in June 1996 and issuance of Series A convertible preferred stock and common
stock warrants in September 1997. Interest expense in 1997 and 1996 was $2,000
and $19,000, respectively, comprised primarily of interest incurred on
borrowings to finance the purchase of equipment and leasehold improvements.
During the third quarter of 1996, the Company repaid its bank borrowings.

Net Loss. As a result of the above factors, the Company incurred net losses of
$10,989,000 and $11,834,000 in 1997 and 1996, respectively.

Years  Ended December 31, 1996 and 1995

Revenues. The Company had revenues of $2,606,000 and $1,519,000 in 1996 and
1995, respectively. Revenues in 1996 were comprised of $2,500,000 received by
the Company under its collaborative agreements with Nycomed and $106,000 of
contract revenues under the Research Grants. Revenues in 1995 were comprised of
$1,278,000 received by the Company under its collaborative agreements with
Nycomed and $241,000 of contract revenues under the Research Grants. The
increase in 1996 revenue from the Nycomed collaborative agreements was the
result of the full year impact of the agreements in 1996 compared to a partial
year in 1995, as the agreements were entered into in August 1995. In both 1996
and 1995, the Company received option exercise payments of $500,000 from
Nycomed.

Research and Development. During 1996 and 1995, the Company expended $12,628,000
and $6,556,000, respectively, on research and development activities. The
$6,072,000 increase in 1996 resulted primarily from additional expenses
associated with the Phase 3 pivotal trials of AcuTect, increased clinical
activity for P829, preclinical studies of additional compounds, increased
salaries and additional staffing in clinical and regulatory areas and costs and
consulting fees associated with the higher level of research and development
activities.

In 1995, the Company recorded deferred compensation of $1,663,000 related to the
grant of stock options to employees involved in research and development, which
is being amortized over the vesting periods of such options (generally five
years). Research and development expenses in 1996 and 1995 included $334,000 and
$44,000, respectively, of amortization expense related to such deferred
compensation.

General and Administrative. The Company's general and administrative expenses
were $2,515,000 and $1,636,000 in 1996 and 1995, respectively. During 1996,
increases in staffing and related costs were required to support the Company's
anticipated increased level of activities in research and development and
commercial operations.

Interest. Interest expense in 1996 and 1995 was $19,000 and $46,000,
respectively, and was comprised primarily of interest incurred on borrowings to
finance the purchase of equipment and leasehold improvements. These borrowings
were substantially repaid in July 1996 with a portion of the proceeds from the
Company's initial public stock offering. Interest income was $721,000 in 1996
compared with $306,000 in 1995, reflecting an increase in the Company's cash,
cash equivalents and marketable securities in 1996 resulting from the proceeds
of the Company's initial public stock offering.

                                       26
<PAGE>

Net Loss. As a result of the above factors, the Company incurred net losses of
$11,834,000 and $6,413,000 in 1996 and 1995, respectively.

Liquidity and Capital Resources

In September 1997, the Company issued 1,210,256 shares of Series A convertible
preferred stock and warrants to purchase 181,538 shares of Common Stock to three
institutional investors in a private offering, raising $11.6 million of net
proceeds. The Company completed its initial public offering of 2,200,000 shares
of Common Stock in June 1996, raising approximately $16.4 million of net
proceeds. As of December 31, 1997, the Company had $17,533,000 of cash, cash
equivalents and marketable securities and working capital of $14,880,000.

During 1997 and 1996, the Company's capital expenditures totaled $388,000 and
$608,000 , respectively, primarily for the acquisition of laboratory and
computer equipment . The Company expects 1998 capital expenditures to
approximate the 1996 level.

The Company's future capital requirements will depend on many factors, including
continued progress in its research and product development programs, the
magnitude of these programs, the results of preclinical studies and clinical
trials, the time and costs involved in obtaining regulatory approvals, the costs
and success of commercialization activities and arrangements, the costs involved
in filing, prosecuting, enforcing and defending patent claims, competing
technological and market developments, and the ability of the Company to
establish and maintain collaborative academic and commercial research,
development and marketing relationships.

Based upon its current operating plan, the Company anticipates that its existing
capital resources will be adequate to satisfy its capital requirements through
mid-1999. Substantial additional funds may be required from external sources to
support the Company's operations beyond that time, although there can be no
assurance that additional funds will be available, or, if available, that such
funds will be available on acceptable terms.

The Company intends to seek additional equity, debt and lease financing to fund
future operations, depending upon the terms on which such sources of funding may
be available from time to time. In addition, the Company intends to seek
additional collaborative development and commercialization relationships with
potential corporate partners in order to fund certain of its programs, including
the future development and commercialization of Sn-117m DTPA and the Theratide
program.

Except for research and development funding from Nycomed pursuant to its
collaboration with Diatide (which is subject to early termination in certain
circumstances), the Company has no committed external sources of capital, and,
as discussed above, expects to incur additional significant operating losses for
a number of years. If the Company is unable to obtain necessary additional
funds, it would be required to delay, scale back or eliminate certain of its
research and development programs or commercialization efforts or license to
third parties certain technologies which the Company would otherwise pursue on
its own.

Year 2000

The management of the Company has analyzed its computer hardware and software in
connection with potential dating problems that may arise with the year 2000.
Management's determination is that many potential problems can be corrected by
the year 2000, and the related costs are not expected to materially impact the
Company.

This Annual Report on Form 10-K contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," "intends"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual


                                       27
<PAGE>

results to differ materially from those indicated by such forwarding-looking
statements. These factors include, without limitation, those set forth below
under the caption "Certain Factors That May Affect Future Results."

Certain Factors That May Affect Future Results

Early Stage of Development; Technological Uncertainty

Diatide was founded in February 1990 and has not yet introduced any product into
the market. All but one of the Company's potential products are in research or
development and will require additional research and development, extensive
preclinical studies and clinical trials and regulatory approval prior to any
commercial sales. The Company must successfully address a number of
technological challenges to complete certain of its development efforts. In
addition, there can be no assurance that the Company will be permitted to
undertake and complete human clinical trials of any of the Company's potential
products, either in the United States or elsewhere, or, if permitted, that such
products will be demonstrated to be safe and efficacious. In addition, there can
be no assurance that any of the Company's potential products will obtain FDA or
other regulatory approval for any indication or that an approved product will be
capable of being produced in commercial quantities at reasonable cost and
successfully marketed. See "Item 1. Business."

The use of synthetic peptides in radiopharmaceuticals, which is central to the
Company's technology, is new to nuclear medicine. The Company is aware of only
one imaging product and no therapeutics based on this scientific approach that
have been approved for sale by the FDA. The products for which the Company has
submitted or currently plans to submit IND applications and all of the Company's
other potential products in research or development may prove to have
undesirable and unintended side effects in humans or other characteristics that
may prevent or limit their commercial use.

Unproven Safety and Effectiveness of Potential Products; Uncertainties Related
to Clinical Trials

Before obtaining regulatory approvals for the commercial sale of any of its
products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
each indication. The results from preclinical testing and early clinical trials
may not be predictive of results that will be obtained in large-scale clinical
trials, and there can be no assurance that the Company's clinical trials will
demonstrate the safety and effectiveness of any products or will result in
marketable products. A number of companies have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier trials. The
Company, the FDA or other regulatory authorities may suspend or terminate
clinical trials at any time.

The Company relies on scientific, technical and clinical data supplied by its
academic collaborators and licensors in the evaluation and development of
potential products, including Sn-117m DTPA, which was licensed from BNL. BNL
conducted the Phase I and the Phase II clinical trials of the compound. There
can be no assurance that there are no errors or omissions in such data that
would materially adversely affect the development of such products.

The rate of completion of the Company's clinical trials is dependent upon, among
other things, the rate of patient enrollment. Patient enrollment is a function
of many factors, including the size of the patient population, the nature of the
protocol, the proximity of patients to clinical sites and the eligibility
criteria for the study. Delays in planned patient enrollment may result in
increased costs, program delays, or both, which could have a material adverse
effect on the Company.

The Company relies, in part, on clinical research organizations to conduct its
clinical trials. There can be no assurance that such entities will conduct the
clinical trials successfully.

The Company is currently conducting clinical trials with respect to certain of
its Techtides and plans to continue clinical trials of its therapeutic
radiopharmaceutical, Sn-117m DTPA. There can be no assurance that any of these
clinical trials will be successfully completed within any specified time period,
if at all. There also can be no assurance that the results


                                       28
<PAGE>

from any of these clinical trials will warrant the commencement of further
clinical trials or that the Company will not encounter problems in these or
other clinical trials which would cause the Company or the FDA to delay or
suspend the trials. In Phase I clinical trials of one of its Techtides, P483H
for the medical imaging of infection due to inflammation, the compound
concentrated in patients' stomachs at unexpectedly high levels. As a result, the
Company conducted additional preclinical testing of this compound and
alternative compounds in animals to determine the cause of this phenomenon and
recently initiated a new Phase I clinical trial of a new formulation of P483H.
In a pilot study of a compound for medical imaging of atherosclerotic plaque,
the Company determined that the compound did not exhibit sufficient sensitivity
to warrant continuing development of the compound. The Company currently is
synthesizing new compounds for this application and screening them in animal
models. See "Item 1. Business -- Products Under Development" and "-Government
Regulation."

No Assurance of Regulatory Approval; Extensive Government Regulation

The production and the marketing of the Company's products and the Company's
ongoing research and development activities are and will be subject to extensive
regulation by numerous federal, state and local governmental authorities in the
United States. The Company has had only limited experience in filing or pursuing
applications necessary to gain regulatory approvals. Preclinical testing of the
Company's product development candidates is subject to GLP requirements and the
manufacture of any products developed by the Company will be subject to GMP
requirements prescribed by the FDA.

The regulatory process, which includes preclinical studies, clinical trials and
ongoing post-approval testing of each compound to establish or monitor its
safety and effectiveness, takes many years and requires the expenditure of
substantial resources. The Company has limited experience in filing or pursuing
applications necessary to gain regulatory approval. There can be no assurance
that, even after the performance of clinical studies, and the passage of time
and the expenditure of such resources, regulatory approval will be obtained for
any products developed by the Company. The Company's analysis of data obtained
from preclinical and clinical activities is subject to confirmation and
interpretation by regulatory authorities which could delay, limit or prevent FDA
regulatory approval. The Company or the FDA may suspend clinical trials at any
time if the participants in such trials are being exposed to unanticipated or
unacceptable health risks. Moreover, if regulatory approval to market a product
is granted, such approval may entail limitations on the indicated uses for which
it may be marketed. Failure to comply with applicable regulatory requirements
can, among other things, result in fines, suspension or withdrawal of regulatory
approvals, product recalls, seizure of products, operating restrictions and
criminal prosecutions. FDA policy may change and additional government
regulations may be established that could prevent or delay regulatory approval
of the Company's potential products. In addition, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections, and subsequent discovery of previously unknown
problems with a product, manufacturer or facility may result in restrictions on
such product or manufacturer, including withdrawal of the product from the
market. All of the foregoing regulatory matters also will be applicable to
development, manufacturing and marketing undertaken by any strategic partners of
the Company.

There can be no assurance that additional statutes or regulations applicable to
the Company's business will not be adopted, impose substantial additional costs
or otherwise adversely affect the Company's operations.

The use, handling, storage and disposal of products containing radioisotopes,
such as Sn-117m DTPA and sources of technetium, are regulated by the Nuclear
Regulatory Commission and by state authorities. Enforcement of existing laws and
regulations or future amendments or limitations thereto could have a material
adverse effect on the market for radiopharmaceuticals and on the Company's
business, financial condition and results of operations.

The Company is also subject to numerous and varying foreign regulatory
requirements governing the design and conduct of clinical trials and the
manufacturing and marketing of its products. The approval procedure varies among
countries and can involve additional testing, and the time required to obtain
approval may differ from that required to obtain FDA


                                       29
<PAGE>

approval. The foreign regulatory approval process may include all of the risks
associated with obtaining FDA approval set forth above, and there can be no
assurance that foreign regulatory approvals will be obtained on a timely basis,
if at all. Approval by the FDA does not ensure approval by regulatory
authorities in other countries and approval by one foreign regulatory authority
does not ensure approval by regulatory authorities in other foreign countries or
by the FDA. There can be no assurance that the Company or its strategic
marketing partners will file for regulatory approvals or receive necessary
approvals to commercialize its products in any market. Delays in receipt of or
failure to receive regulatory approvals, or the loss of previously received
approvals, would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Item 1. Business --
Government Regulation."

Uncertainty of Market Acceptance of Technology and Products

The commercial success of the Company's products, when and if approved for
marketing by the FDA, will depend upon their acceptance by the medical community
and third party payors as clinically useful, cost-effective and safe. The
synthetic peptide-based radiopharmaceutical technology being developed by the
Company is relatively new. To date, the Company is aware of only one imaging
product and no therapeutic products based on this scientific approach that has
been approved for sale by the FDA. Peptide-based radiopharmaceuticals have not
been extensively tested in humans. Market acceptance and thus, sales of the
Company's products, will depend on several factors, including the receipt of
regulatory approval in the United States, Europe, the Far East and elsewhere,
safety, price, ease of administration and effectiveness and extensive physician
education. There can be no assurance that the Company's products will gain
market acceptance. Failure to achieve market acceptance would have a material
adverse effect on the Company's business, financial condition and results of
operations. The MIDAC recommendation and the FDA's approvable letter are not
guarantees of final approval for AcuTect. While the Company expects to be able
to commercially market AcuTect in 1998, final marketing approval of the
Company's products, including AcuTect, is beyond the Company's control, and
there is no guarantee that the Company will, in fact, be able to market the
product in the U.S. or Europe within any previously stated time frame. See "Item
1. Business -- Government Regulation."

Need to Establish Collaborative Commercial Relationships; Dependence On Partners

Diatide's business strategy includes entering into strategic alliances or
marketing and distribution arrangements with corporate partners, primarily
pharmaceutical companies, for the development, commercialization and marketing
and distribution of certain of its potential products worldwide. To date, the
Company is a party to a collaborative arrangement with only one corporate
partner, Nycomed. There can be no assurance that the arrangement with Nycomed
will be scientifically or commercially successful. In the event that this
arrangement is terminated, such action might adversely affect the Company's
ability to develop, commercialize, market and distribute certain of its
potential products. In addition, the Company does not plan to conduct extensive
Phase 3 clinical trials of Sn-117m DTPA unless it enters into a corporate
collaboration for the completion of the development and the commercialization of
Sn-117m DTPA. There can be no assurance that the Company will be able to
negotiate any additional collaborative or marketing and distribution
arrangements, that such arrangements will be available to the Company on
acceptable terms or that any such relationships, if established, will be
scientifically or commercially successful. The Company's product candidates will
only generate milestone payments and royalties from collaborators upon the
occurrence of significant preclinical and clinical development, requisite
regulatory approvals, the establishment of manufacturing capabilities and
successful marketing.

There can be no assurance that the Company's collaborative partners will not be
pursuing alternative technologies or developing alternative products either on
their own or in collaboration with others, including the Company's competitors,
as a means for developing imaging agents or treatments for the diseases targeted
by these collaborative programs. For example, Nycomed manufactures and
distributes a wide variety of imaging agents for other modalities that may
compete against the products that Nycomed licenses from Diatide or co-markets
with Diatide. The Company's business also will


                                       30
<PAGE>

be affected by the success of its corporate partners in marketing any
successfully developed products within the geographic areas in which such
partners are granted marketing rights. A reduction in sales efforts or a
discontinuance of sales of the Company's products by collaborative or corporate
partners, who are not within the control of the Company, may result in reduced
revenues and have a material adverse effect on the Company's business, financial
condition and results of operations. See "Certain Factors That May Affect Future
Results -- Attraction and Retention of Key Management and Qualified Personnel"
and "Item 1. Business -- Products Under Development," "-- Corporate
Collaborations" and "-- Marketing and Distribution."

History of Operating Losses and Accumulated Deficit; Uncertainty of Future
Profitability

Diatide has incurred net losses since its inception. At December 31, 1997, the
Company's accumulated deficit was approximately $45.2 million. No revenues have
been generated from product sales, and no product sales revenues are anticipated
until late in 1998. The Company expects to incur additional significant
operating losses over the next 12 to 24 months and expects cumulative losses to
increase significantly as the Company's research and development and clinical
trial efforts expand. The Company expects that losses will fluctuate from
quarter to quarter and that such fluctuations may be substantial. The Company's
ability to achieve profitability is dependent in part on obtaining regulatory
approvals for its products, entering into satisfactory agreements with
pharmaceutical corporate partners for research and development and
commercialization of its products and developing the capacity to manufacture,
market and sell its products or entering into satisfactory arrangements for such
manufacture, marketing and sale with third parties. There can be no assurance
that the Company will obtain required regulatory approvals, enter into any
additional agreements for drug discovery, development and commercialization,
develop the capacity to manufacture and sell its products (or enter into
arrangements therefor with third parties) or ever achieve sales or
profitability. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General."

Future Capital Needs; Uncertainty of Additional Funding

The Company's future capital requirements will depend on many factors, including
continued progress in its research and product development programs, the
magnitude of these programs, the results of preclinical studies and clinical
trials, the time and costs involved in obtaining regulatory approvals, the costs
involved in filing, prosecuting, enforcing and defending patent claims,
competing technological and market developments, the ability of the Company to
establish and maintain collaborative academic and commercial research,
development and marketing relationships, and the costs and success of
commercialization activities and arrangements.

Based upon its current operating plan, the Company anticipates that its existing
capital resources, will be adequate to satisfy its capital requirements through
mid-1999. It is possible that in the future the Company may be required to raise
additional funds, including through collaborative relationships and public or
private financings. No assurance can be given that additional financing will be
available, or, if available, that it will be available on acceptable terms. If
additional funds are raised by issuing equity securities, further dilution to
then existing stockholders will result. Additionally, the terms of the financing
may adversely affect the holdings or the rights of the then existing
stockholders. If adequate funds are not available, the Company may be required
to significantly curtail one or more of its research or product development
programs, or obtain funds through arrangements with collaborative partners or
others that may require the Company to relinquish rights to certain of its
technologies, product candidates or products which the Company would otherwise
pursue on its own. See "Item 1. Business -- Products Under Development" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."

Intense Competition and Risk of Technological Obsolescence

There are many companies, both private and publicly traded, that are conducting
extensive research and development activities on technologies and products
similar to or competitive with the Company's technologies and proposed products.
For example, many other companies are actively seeking to develop nuclear
medicine imaging agents that will compete


                                       31
<PAGE>

with the Company's Techtides. There can be no assurance that the Company's
competitors will not succeed in developing technology similar to the Company's
proprietary process of radiolabeling peptides with technetium used in the
Company's Techtides.

The pharmaceutical industry is characterized by rapid and substantial
technological change and there can be no assurance that the Company's
competitors will not succeed in developing products which are more effective
than any that are being developed by the Company, or which would render
Diatide's technologies and products obsolete and noncompetitive. For example,
diagnostic imaging tests may be developed that are more cost-effective and have
superior imaging quality than the Company's tests or new radiopharmaceuticals
may be developed that have superior targeting and binding qualities than the
Company's Techtides. Certain radiopharmaceuticals already have been approved for
sale for the diagnosis or treatment of the indications targeted by the Company's
products under development. In particular, OctreoScan(R), a peptide-based
radiopharmaceutical, is available for the diagnosis of neuroendocrine tumors,
Ceretec(R), a radiopharmaceutical labeled with technetium, is available for
imaging inflammation due to infection, and Metastron(R) and Quadramet(R) are
available for the reduction of pain due to metastatic cancer to the bone. There
are several well-established medical imaging modalities that currently, and will
continue to, compete against nuclear medicine imaging, including x-rays, CT, MRI
and ultrasound, and there are alternative therapeutics available for the
treatment of the cancer indications that are the subject of the Company's
therapeutic programs.

The Company has numerous competitors in the United States and internationally,
which include, among others, pharmaceutical and chemical companies,
biotechnology firms, universities and other research institutions. Large
pharmaceutical companies with significant research, development, marketing and
manufacturing operations in the nuclear medicine field include Du Pont Merck and
Mallinckrodt. Many of the Company's competitors have substantially greater
financial, technical and human resources than the Company. In addition, many of
these competitors have significantly greater experience than the Company in
undertaking preclinical studies and human clinical trials of new pharmaceutical
products and obtaining FDA and other regulatory approvals of products for use in
health care. Accordingly, the Company's competitors may succeed in obtaining FDA
or other regulatory approvals for products more rapidly than the Company.
Furthermore, if the Company is permitted to commence commercial sales of
products, it will also be competing with respect to manufacturing efficiency and
marketing capabilities, areas in which it has limited or no experience. See
"Item 1. Business- Competition."

Uncertainty Regarding Patents and Proprietary Rights

The Company's success will depend in part on its ability to develop patentable
products, enforce its patents and obtain patent protection for its products both
in the United States and in other countries. The Company intends to file
applications as appropriate for patents covering both its products and
processes. However, the patent positions of pharmaceutical and biotechnology
firms, including Diatide, are generally uncertain and involve complex legal and
factual questions. No assurance can be given that patents will issue from any
patent applications owned by or licensed to Diatide or that, if patents do
issue, the claims allowed will be sufficiently broad to protect the Company's
technology. In addition, no assurance can be given that any issued patents owned
by or licensed to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company.

The commercial success of the Company will also depend in part on its neither
infringing patents issued to competitors or others nor breaching the technology
licenses upon which the Company's products might be based. The Company's
licenses of patents and patent applications impose various commercialization,
sublicensing, royalty and other payment, insurance and other obligations on the
Company. Failure of the Company to comply with these requirements could result
in conversion of the licenses from being exclusive to nonexclusive in nature or
termination of the licenses.

The Company is aware of patents and patent applications belonging to
competitors, and it is uncertain whether these patents and patent applications
will require the Company to alter its products or processes, pay licensing fees
or cease


                                       32
<PAGE>

certain activities. Competitors of the Company and other third parties hold
issued patents and pending patent applications which may result in claims of
infringement against the Company or other patent litigation. In particular, the
Company is aware of one European patent issued to a pharmaceutical company
which, if valid, may be infringed by P748. The holder of this patent has
indicated to the Company that it is not prepared to offer a license under the
patent to the Company. In addition, the Company is aware of one U.S. patent
assigned to another company that claims the same invention as a pending Diatide
patent application and may apply to an element of AcuTect. The Company has
requested that the PTO declare an interference with respect to such patent.

There can be no assurance that the Company will be able to successfully obtain a
license to any technology that it may require or that, if obtainable, such
technology can be licensed at a reasonable cost or on an exclusive basis.
Failure by the Company to obtain a license to any technology that it may require
to commercialize its products could have a material adverse effect on the
Company. See "Item 1. Business -- Patents, Trade Secrets and Licenses."

The pharmaceutical and biotechnology industries have been characterized by
extensive litigation regarding patents and other intellectual property rights.
Litigation, which could result in substantial cost to the Company, may be
necessary to enforce any patents issued or licensed to the Company and/or to
determine the scope and validity of others' proprietary rights. The Company also
may have to participate in interference proceedings declared by the PTO, which
could result in substantial cost to the Company, to determine the priority of
inventions. Furthermore, the Company may have to participate at substantial cost
in International Trade Commission proceedings to abate importation of products
which would compete unfairly with products of the Company.

Diatide engages in collaborations, sponsored research agreements and other
agreements with academic researchers and institutions and United States
government agencies. Under the terms of such agreements, third parties may have
rights in certain inventions developed during the course of the performance of
such collaborations and agreements.

The Company relies on trade secrets and proprietary know-how which it seeks to
protect, in part by confidentiality agreements with its employees, consultants,
members of its Scientific Advisory Board, outside scientific collaborators and
sponsored researchers and other advisors. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach or that the Company's trade secrets will not otherwise become
known or be independently developed by competitors. Failure to obtain or
maintain patent and trade secret protection, for any reason, could have a
material adverse effect on the Company. See "Item 1. Business -- Patents, Trade
Secrets and Licenses."

Absence of Sales and Marketing Experience

Although Diatide plans to rely significantly on collaborative partners for the
marketing and distribution of its products through co-marketing or other
licensing or distribution arrangements, the Company expects to market and sell
certain of its products directly and to engage in certain other marketing
activities in collaboration with its collaborative partners. The Company has no
experience in sales, marketing or distribution. However, the Company is actively
developing its sales and marketing organization to support the anticipated FDA
approval of AcuTect in 1998.

To the extent the Company enters into marketing or distribution arrangements
with collaborative partners, any revenues the Company receives will depend upon
the efforts of third parties. There can be no assurance that any third party
will market the Company's products successfully or that any third-party
collaboration will be on terms favorable to the Company. If any marketing
partner does not market a product successfully, the Company's business would be
materially adversely affected. If Diatide's plan to rely on corporate partners
for significant aspects of marketing and selling the Company's products is
unsuccessful for any reason, Diatide may need to recruit and train a far larger
marketing and sales force than it currently anticipates doing, which would
entail the incurrence of significant additional costs.

                                       33
<PAGE>

There can be no assurance that the Company would be able to attract and build a
sufficient marketing staff or sales force, that the cost of establishing such a
marketing staff or sales force will be justifiable in light of any product
revenues or that the Company's direct sales and marketing efforts will be
successful. In addition, if the Company succeeds in bringing one or more
products to market, it may compete with other companies that currently have
extensive and well-funded marketing and sales operations. There can be no
assurance that the Company's marketing and sales efforts would enable it to
compete successfully against such other companies. See "Item 1. Business --
Marketing and Distribution" and "-- Corporate Collaborations."

Limited Manufacturing Capability; Dependence on Sole Source Supplier

The Company lacks commercial-scale facilities to manufacture its products in
accordance with current GMP requirements prescribed by the FDA. To date, the
Company has relied on a large third party pharmaceutical company for the
manufacture of its peptides for clinical trials and has entered into an
arrangement with a GMP-qualified third party manufacturer for the supply of
Sn-117m for clinical trials. The Company expects to be dependent on third party
manufacturers or collaborative partners for all of its commercial production of
peptides. There are a limited number of manufacturers that operate under GMP
regulations capable of manufacturing the Company's products. In the event that
the Company is unable to obtain contract manufacturing, or obtain such
manufacturing on commercially reasonable terms, it may not be able to
commercialize its products as planned. Where third-party arrangements are
established, the Company will depend upon such third parties to perform their
obligations in a timely manner. There can be no assurance that third parties
depended upon by the Company will perform and any failures by third parties may
delay clinical trial development or the submission of products for regulatory
approval, impair the Company's ability to commercialize its products as planned
and deliver products on a timely basis, or otherwise impair the Company's
competitive position, which could have a material adverse effect on the
Company's business, financial condition or results of operations.

The Company purchases its synthetic peptides from a sole source supplier and may
enter into similar arrangements with respect to other components of its
products. While the Company is aware of alternative sources for its peptides,
the establishment of additional or replacement suppliers could be time consuming
and result in a supply interruption and significant additional regulatory delays
and expense. The establishment of an alternative source of supply or any
significant supply interruption could have a materially adverse effect on the
Company's ability to develop and manufacture its potential products and,
therefore, upon its business, financial condition and results of operations. See
"Item 1. Business -- Manufacturing."

If the Company determines to develop its own manufacturing capabilities, it will
need to recruit qualified personnel and build or lease the requisite facilities
and equipment because it has no experience in manufacturing on a commercial
scale and no facilities or equipment therefor. There can be no assurance that
Diatide will be able to successfully develop its own manufacturing capabilities
or as to the cost thereof or the time required. In addition, the manufacture of
any products by the Company is subject to regulation by the FDA and comparable
agencies in foreign countries. Delay in complying or failure to comply with such
manufacturing requirements could materially adversely affect the marketing of
the Company's products and the Company's business, financial condition and
results of operations.

Hazardous Materials

The Company's research and development involves the controlled use of hazardous
materials, chemicals and various radioactive compounds. Although the Company
believes that its safety procedures for handling, storing and disposing of such
materials and the safety procedures of the third parties who ship such materials
for the Company comply with the standards prescribed by federal, state and local
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, the Company
could be held liable for


                                       34
<PAGE>

significant damages and any such liability could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Item 1. Business -- Government Regulation."

Potential Product Liability Exposure and Insurance

The use of any of the Company's potential products in clinical trials and the
commercial sale of any products may expose the Company to potential product
liability risks which are inherent in the testing, manufacturing, marketing and
sale of human diagnostic and therapeutic products. Product liability claims
might be made directly by consumers, health care providers or by pharmaceutical
companies or others selling such products. There can be no assurance that
product liability claims, if made, would not result in a recall of the Company's
products or a change in the indications for which they may be used. Diatide has
limited product liability insurance coverage, and such coverage is subject to
various deductibles. Such coverage is expensive, and no assurance can be given
that the Company will be able to maintain or obtain such insurance at reasonable
cost or in sufficient amounts to protect the Company against losses due to
liability claims that could have a material adverse effect on the Company's
business, financial condition and results of operations.

Uncertainty of Pharmaceutical Pricing and Adequate Reimbursement

The Company's ability to commercialize its products successfully will depend in
part on the extent to which appropriate reimbursement levels for the cost of
such products and related treatment are obtained from government authorities,
private health insurers and other organizations, such as health maintenance
organizations ("HMOs"). Third-party payors are increasingly challenging the
prices charged for medical products and services. Also the trend towards managed
health care in the United States and the concurrent growth of organizations such
as HMOs, which could control or significantly influence the purchase of health
care services and products, as well as legislative proposals to reduce
government insurance programs, may all result in lower prices for the Company's
products. The cost containment measures that health care providers are
instituting could affect the Company's ability to sell its products and may have
a material adverse effect on the Company.

There can be no assurance that reimbursement in the United States or foreign
countries will be available for any of the Company's products, or if available,
will not be decreased in the future, or that reimbursement amounts will not
reduce the demand for, or the price of, the Company's products. The
unavailability or inadequacy of third-party reimbursement for the Company's
products would have a material adverse effect on the Company.

Attraction and Retention of Key Management and Qualified Personnel

                                       35
<PAGE>

The Company is highly dependent on the principal members of its management and
scientific staff, particularly Dr. Dean, the Company's President and Chief
Executive Officer, the loss of whose services could have a material adverse
effect on the Company. The Company is a party to an employment agreement with
Dr. Dean that extends through April 2, 1999, subject to automatic extension for
additional one-year periods unless either Dr. Dean or the Company provides
written notice to the contrary to the other party at least six months prior to
the expiration period. Also, recruiting and retaining qualified scientific
personnel to perform research and development work in the future will be
critical to the Company's success. There can be no assurance that the Company
will be able to attract and retain such highly skilled personnel on acceptable
terms given the competition for experienced scientists among numerous
pharmaceutical, biotechnology and health care companies, universities and
non-profit research institutions. The Company does not carry key-man insurance
with respect to any of its executive officers.

The Company's anticipated growth and expansion into areas and activities
requiring additional expertise, such as clinical trials, governmental approvals,
production and marketing, are expected to require the addition of new management
personnel and the development of additional expertise by existing management
personnel. The failure to acquire such services or to develop such expertise
could have a material adverse effect on the Company.


                                       36
<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

All financial statements required to be filed hereunder are filed as Appendix A
hereto, are listed under Item 14 (a) and are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is contained in part in the Company's
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 12, 1998 (the "Definitive Proxy Statement") under the caption "Proposal 1 -
Election of Directors," which section is incorporated herein by this reference.
The information required by this item is also contained in part under the
caption "Executive Officers and Significant Employees" in Part I of this Annual
Report on Form 10-K, following Item 4.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is contained in the Definitive Proxy
Statement under the caption "Proposal 1 - Election of Directors," which section
is incorporated herein by this reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is contained in the Definitive Proxy
Statement under the caption "Stock Ownership of Certain Beneficial Owners and
Management," which section is incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is contained in the Definitive Proxy
Statement under the caption "Certain Relationships and Related Transactions,"
which section is incorporated herein by this reference.


                                       37
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

The following documents are filed as Appendix A hereto and are included as part
of this Annual Report on Form 10-K:

(a)(1) Financial Statements:
                                                                            Page
-------------------------------------------------------------------------------
    Balance Sheets at December 31, 1997 and 1996                             F-3

    Statements of Operations for the years ended December 31, 1997,
    1996 and 1995 and the period February 6, 1990 (date of inception)
    to December 31, 1997                                                     F-4

    Statements of Stockholders' Equity for the period of February 6,
    1990 (date of inception) to December 31, 1997                            F-5

    Statements of Cash Flows for the years ended December 31, 1997,
    1996 and 1995 and the period February 6, 1990 (date of inception)
    to December 31, 1997                                                     F-6

    Notes to Financial Statements                                            F-7


(a)(2) Financial Statement Schedules:

All schedules have been omitted because they are not required or because the
required information is provided in the Financial Statements or Notes thereto.

(a)(3) Exhibits:

The list of Exhibits filed as a part of this Annual Report on Form 10-K are set
forth on the Exhibits Index immediately preceding such exhibits, and is
incorporated herein by this reference.

(b) Reports on Form 8-K:

On October 1, 1997, the Company filed a Current Report on Form 8-K to report the
sale of $11.8 million of convertible preferred stock and the issuance of common
stock purchase warrants on September 23, 1997.


                                       38
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this twenty-fifth
day of March, 1998.

DIATIDE, INC.

By:                          /s/ RICHARD T. DEAN
--------------------------------------------------------------------------------
                                 Richard T. Dean
                 President, Chief Executive Officer and Director

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

        Signature                    Title                   Date
        ---------                    -----                   ----

  /s/ RICHARD T. DEAN          President, Chief Executive    March 25, 1998
  -------------------------     Officer, and Director
      Richard T. Dean           (Principal Executive
                                Officer)


  /s/ DANIEL F. HARRINGTON     Vice President, Chief         March 25, 1998
  -------------------------     Financial Officer, and
      Daniel F. Harrington      Treasurer (Principal
                                Financial and Accounting
                                Officer)


  /s/ JOSEPH F. LOVETT         Director                      March 25, 1998
      Joseph F. Lovett

  /s/ DONALD L. MURFIN         Director                      March 25, 1998
      Donald L. Murfin

  /s/ GUSTAV A. CHRISTENSEN    Director                      March 25, 1998
      Gustav A. Christensen

  /s/ ROBERT E. CURRY          Director                      March 25, 1998
      Robert E. Curry

  /s/ ROBERT S. LEES           Director                      March 25, 1998
      Robert S. Lees

  /s/ DANIEL L. PETERS         Director                      March 25, 1998
      Daniel L. Peters

  /s/ HIRSCH HANDMAKER         Director                      March 25, 1998
      Hirsch Handmaker


                                       39
<PAGE>

                                   APPENDIX A



                                  DIATIDE, INC.

                           ANNUAL REPORT ON FORM 10-K

                          YEAR ENDED DECEMBER 31, 1997

                              FINANCIAL STATEMENTS





INDEX TO FINANCIAL STATEMENTS

                                                                        Page
                                                                        ----
    Report of Independent Auditors.....................................  F-2

    Balance Sheets at December 31, 1997 and 1996.......................  F-3

    Statements of Operations for the years ended
       December 31, 1997, 1996 and 1995 and the period
       February 6, 1990 (date of inception) to
       December 31, 1997 .............................................   F-4

    Statements of Stockholders' Equity for the period
       February 6, 1990 (date of inception)
       to December 31, 1997 ..........................................   F-5

    Statements of Cash Flows for the years ended
       December 31, 1997, 1996 and 1995 and the
       period February 6, 1990 (date of inception)
       to December  31, 1997 .........................................   F-6

    Notes to Financial Statements......................................  F-7


<PAGE>


                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Diatide, Inc.

     We have audited the accompanying balance sheets of Diatide, Inc. (a company
in the development stage) as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997, and for the period February
6, 1990 (date of inception) to December 31, 1997. 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 audits.

     We conducted our audits 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
misstatement. 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 audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Diatide, Inc. (a company in
the development stage) at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 and for the period February 6, 1990 (date of inception) to
December 31, 1997 in conformity with generally accepted accounting principles.

                                                               ERNST & YOUNG LLP

Manchester, New Hampshire
February 6, 1998
    except for Note 12, as to
    which the date is February 20, 1998



                                       F-2
<PAGE>


                                  DIATIDE, INC.
                      (A Company in the Development Stage)

               BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                December 31,
                                                                     -------------------------------
                                                                          1997              1996
                                                                          ----              ----
<S>                                                                  <C>              <C>
Assets
Current assets:
    Cash and cash equivalents......................................  $    3,857,973   $    6,004,207
    Marketable securities (Note 2).................................      13,674,629       10,782,632
    Other current assets...........................................         445,612          443,776
                                                                     --------------   --------------
Total current assets...............................................      17,978,214       17,230,615
Property and equipment, at cost:
    Laboratory equipment...........................................       1,438,119        1,243,177
    Office equipment, furniture and fixtures.......................         811,429          641,225
    Leasehold improvements.........................................         511,685          489,138
                                                                     --------------   --------------
                                                                          2,761,233        2,373,540
    Less accumulated depreciation and amortization.................       1,734,562        1,300,051
                                                                     --------------   --------------
                                                                          1,026,671        1,073,489

Other assets.......................................................          10,783           10,783
                                                                     --------------   --------------
Total assets.......................................................  $   19,015,668   $   18,314,887
                                                                     ==============   ==============

Liabilities and Stockholders' Equity
Current liabilities:
    Accounts payable and accrued expenses (Note 3).................  $    1,571,870   $    1,514,905
    Accrued clinical expenses                                             1,522,675        1,783,297
    Accrued clinical expenses - related party (Note 10)                          --          316,529
    Current portion of long-term debt (Note 4).....................           3,460            3,460
                                                                     --------------   --------------
Total current liabilities..........................................       3,098,005        3,618,191
Long-term debt, less current portion (Note 4)......................           9,716           12,878
Commitments and Contingencies......................................               --              --
Stockholders' equity (Note 5): Preferred stock, $0.01 par
    value:
      Authorized shares -- 10,591,874 Series A convertible
      preferred stock:
        Authorized shares --  1,300,000
        Issued and outstanding shares -- 1,210,256 (none in 1996)
        (liquidation value of $11,800,000 in 1997).................          12,103               --
    Common stock, $0.001 par value:
      Authorized shares -- 50,000,000
      Issued shares-- 10,539,783 (10,404,248)  in 1996)............          10,540           10,404
    Additional paid-in capital.....................................      61,433,218       50,140,186
    Deferred compensation..........................................        (377,928)      (1,285,483)
    Deficit accumulated during the development stage...............     (45,169,962)     (34,181,265)
                                                                     --------------   --------------
                                                                         15,907,971       14,683,842
    Less: 4,800 shares of Common Stock in treasury, at cost........             (24)             (24)
                                                                     ---------------  --------------
Total stockholders' equity.........................................      15,907,947       14,683,818
                                                                     --------------   --------------
Total liabilities and stockholders' equity.........................  $   19,015,668   $   18,314,887
                                                                     ==============   ==============
</TABLE>

                             See accompanying notes.


                                       F-3
<PAGE>


                                  DIATIDE, INC.
                      (A Company in the Development Stage)

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                                      Period from
                                                                                                     Feb. 6, 1990
                                                           Year Ended                                  (Date of
                                                           December 31,                              Inception) to
                                                           ------------                               December 31,
                                               1997              1996              1995                   1997
                                               ----              ----              ----              -------------
<S>                                       <C>            <C>                 <C>                 <C>
        Revenues:
            License fees...............   $  2,000,000   $      500,000      $    500,000         $    3,300,000
            Research grants............        140,000          106,073           240,673                695,498
            Sponsored research.........      2,000,000        2,000,000           778,388              4,778,388
                                          ------------     ------------      ------------         --------------
        Total revenues.................      4,140,000        2,606,073         1,519,061              8,773,886
                                          ------------     ------------      ------------         --------------
         Cost and expenses:
            Research and
              development..............     12,492,569       12,627,662         6,555,628             43,879,881
            General and
              administrative...........      3,441,670        2,515,113         1,636,486             12,065,357
                                          ------------     ------------      ------------         --------------
        Total costs and expenses.......    (15,934,239)     (15,142,775)       (8,192,114)           (55,945,238)
                                          ------------     ------------      ------------         --------------
        Loss from operations...........    (11,794,239)     (12,536,702)       (6,673,053)           (47,171,352)
        Other income (expense):
            Interest income............        807,161          721,365           305,629              2,243,661
            Interest expense...........         (1,619)         (18,549)          (45,768)              (242,271)
                                          ------------     ------------      ------------         --------------
        Total other income
          (expense)....................        805,542          702,816           259,861              2,001,390
                                          ------------     ------------      ------------         --------------
        Net loss.......................   $(10,988,697)    $(11,833,886)     $ (6,413,192)        $  (45,169,962)
                                          ============     ============      ============         ==============

         Net loss per common share
        (Pro forma net loss per
        common share in 1996 and 1995)
        (Note 2).......................        $ (1.05)         $ (1.28)          $ (0.92)
                                               ========         =======           =======

        Shares used in computing  net
          loss per common share or pro
          forma net loss per common
          share
        (Note 2).......................     10,487,457        9,251,615         6,958,262
</TABLE>


                             See accompanying notes.

                                       F-4
<PAGE>

                                  DIATIDE, INC.
                      (A Company in the Development Stage)

                       STATEMENTS OF STOCKHOLDERS' EQUITY
    For the period February 6, 1990 (date of inception) to December 31, 1997

<TABLE>
<CAPTION>
                                                                        Convertible Preferred Stock
                                                                        ---------------------------
                                                       Series A                 Series B               Series C
                                                  ------------------        ---------------         ---------------
                                                  Shares      Amount        Shares   Amount         Shares   Amount
                                                  ------      ------        ------   ------         ------   ------
 Sale of preferred stock for cash, April and
  September 1990 (net of issuance costs of
<S>                                             <C>         <C>        <C>          <C>         <C>          <C>
  $7,000) ...................................   2,000,000   $  20,000          --   $      --           --   $      --
 Sale of common stock for cash, September
   and December 1990 ........................
 Net loss ...................................
                                                -----------------------------------------------------------------------
 Balance at December 31, 1990 ...............   2,000,000      20,000          --          --           --          --
 Sale of common stock for cash, May, July,
  August, September and November 1991 .......
 Sale of preferred stock for cash, December
  1991 (net of issuance costs of $31,300) ...                           1,861,514      18,615
 Conversion of convertible notes and accrued
  interest to preferred stock, December 1991                              688,505       6,885
 Net loss ...................................
                                                -----------------------------------------------------------------------
 Balance at December 31, 1991 ...............   2,000,000      20,000   2,550,019      25,500           --          --
 Sale of preferred stock for cash, January
  1992 ......................................                              52,200         522
 Issuance of common stock through exercise
   of stock options .........................
 Net loss ...................................
                                                -----------------------------------------------------------------------
 Balance at December 31, 1992 ...............   2,000,000      20,000   2,602,219      26,022           --          --
  Sale of preferred stock for cash, November
   1993 (net of issuance costs of $234,268)..                                                    3,669,944      36,699
 Conversion of convertible notes and accrued
  interest to preferred stock, November
  1993 ......................................                                                      772,199       7,722
 Issuance of common stock through exercise
   of stock options .........................
 Repurchase of common stock, at cost ........
 Net loss ...................................
                                                -----------------------------------------------------------------------
 Balance at December 31, 1993 ...............   2,000,000      20,000   2,602,219      26,022    4,442,143      44,421
 Sale of preferred stock for cash, January
  1994 ......................................                                                      147,512       1,476
 Issuance of common stock through exercise
   of stock options .........................
 Net loss ...................................
                                                -----------------------------------------------------------------------
 Balance at December 31, 1994 ...............   2,000,000      20,000   2,602,219      26,022    4,589,655      45,897
  Sale of preferred stock for cash, May 1995
   (net of issuance costs of $17,449) .......
  Sale of preferred stock for cash, August
    1995
    (net of issuance costs of $268,740) .....
 Issuance of common stock through exercise
   of stock options .........................
 Deferred compensation associated with stock
  option grants .............................
 Amortization of deferred compensation ......
 Net loss ...................................
                                                -----------------------------------------------------------------------
 Balance at December 31, 1995 ...............   2,000,000      20,000   2,602,219      26,022    4,589,655      45,897
 Conversion of preferred stock to common
   stock ....................................  (2,000,000)    (20,000) (2,602,219)    (26,022)  (4,589,655)    (45,897)
 Issuance of common stock, net of issuance
   costs of $2,329,097 ......................
 Issuance of common stock through exercise
   of stock options .........................
 Issuance of common stock upon exercise of
   warrants .................................
 Compensation associated with stock option
   grants ...................................
 Amortization of deferred compensation ......
 Net loss ...................................
                                                -----------------------------------------------------------------------
 Balance at December 31, 1996 ...............          --          --          --          --           --          --
 Issuance of convertible preferred stock
 and warrants, net of issuance costs of
 $246,219 ...................................   1,210,256      12,103

Issuance of common stock under stock plans ..
 Compensation associated with stock option
   grants ...................................
Reversal of deferred compensation associated
   with cancellation of stock option
   grants ...................................
 Amortization of deferred compensation ......
 Net loss ...................................
                                                -----------------------------------------------------------------------
 Balance at December 31, 1997 ...............   1,210,256   $  12,103          --          --          --          --
                                                =======================================================================

<CAPTION>
                                                       Convertible Preferred Stock
                                                       ---------------------------
                                                      Series D                Series E                    Common Stock
                                                 -------------------      ---------------------       ---------------------
                                                 Shares       Amount      Shares         Amount       Shares         Amount
                                                 ------       ------      ------         ------       ------         ------
<S>                                            <C>         <C>        <C>           <C>          <C>             <C>
Sale of preferred stock for cash, April and
 September 1990 (net of issuance costs of
 $7,000).....................................        --    $   --             --    $     --             --      $       --
Sale of common stock for cash, September
  and December 1990..........................                                                       224,142             224
Net loss.....................................
                                                -------------------------------------------------------------------------------
Balance at December 31, 1990.................        --        --             --                    224,142             224
Sale of common stock for cash, May, July,
 August, September and November 1991.........                                                       190,393             190
Sale of preferred stock for cash, December
 1991 (net of issuance costs of $31,300).....
Conversion of convertible notes and accrued
 interest to preferred stock, December 1991
Net loss.....................................
                                                -------------------------------------------------------------------------------
Balance at December 31, 1991.................        --        --             --          --        414,535             414
Sale of preferred stock for cash, January
  1992 ......................................
Issuance of common stock through exercise
  of stock options...........................                                                         2,400               3
Net loss.....................................
                                                -------------------------------------------------------------------------------
Balance at December 31, 1992.................        --        --             --          --        416,935             417
Sale of preferred stock for cash, November
 1993 (net of issuance costs of $234,268)....
Conversion of convertible notes and accrued
 interest to preferred stock, November
 1993........................................
Issuance of common stock through exercise
  of stock options...........................                                                            30
Repurchase of common stock, at cost..........
Net loss.....................................
                                                -------------------------------------------------------------------------------
Balance at December 31, 1993.................        --        --             --          --        416,965             417
Sale of preferred stock for cash, January
 1994........................................
Issuance of common stock through exercise
  of stock options...........................                                                        48,300              48
Net loss.....................................
                                                -------------------------------------------------------------------------------
Balance at December 31, 1994.................        --        --             --          --        465,265             465
Sale of preferred stock for cash, May 1995
  (net of issuance costs of $17,449).........   860,054     8,601
Sale of preferred stock for cash, August
  1995 (net of issuance costs of $268,740)...                          2,500,000      25,000
Issuance of common stock through exercise
  of stock options...........................                                                        13,650              14
Deferred compensation associated with stock
 option grants...............................
Amortization of deferred compensation........
Net loss.....................................
                                                -------------------------------------------------------------------------------
Balance at December 31, 1995.................   860,054     8,601      2,500,000      25,000        478,915             479
Conversion of preferred stock to common        (860,054)   (8,601)    (2,500,000)    (25,000)     7,531,140           7,531
  stock .....................................
Issuance of common stock, net of issuance
  costs of $2,329,097 .......................                                                     2,200,000           2,200
Issuance of common stock through exercise
  of stock options ..........................                                                        74,195              74
Issuance of common stock upon exercise of
  warrants ..................................                                                       119,998             120
Compensation associated with stock option
  grants ....................................
Amortization of deferred compensation........
Net loss.....................................
                                                -------------------------------------------------------------------------------
Balance at December 31, 1996.................        --        --             --          --     10,404,248          10,404
Issuance of convertible preferred stock
  and warrants, net of issuance costs of
  $246,219 ..................................
Issuance of common stock under stock plans ..                                                       135,535             136
Compensation associated with stock option
  grants ....................................
Reversal of deferred compensation
  associated with cancellation of stock
  option grants .............................
Amortization of deferred compensation .......
Net loss ....................................
                                                -------------------------------------------------------------------------------
Balance at December 31, 1997 ................        --        --             --          --     10,539,783      $   10,540
                                                ===============================================================================



<CAPTION>
                                                                                  Deficit
                                               Additional                       Accumulated                          Total
                                                 Paid-In           Deferred      During the          Treasury     Stockholders'
                                                 Capital         Compensation  Development Stage       Stock         Equity
                                               ----------        ------------  -----------------      -------     -------------
<S>                                            <C>               <C>             <C>                   <C>        <C>
Sale of preferred stock for cash, April and
 September 1990 (net of issuance costs of
 $7,000).....................................  $ 1,973,000       $         --    $         --          $   --     $  1,993,000
Sale of common stock for cash, September
 and December 1990 ...........................       1,502                                                               1,726
Net loss......................................                                     (1,035,107)                      (1,035,107)
                                                -------------------------------------------------------------------------------
Balance at December 31, 1990..................   1,974,502                 --      (1,035,107)             --          959,619
Sale of common stock for cash, May, July,
 August, September and November 1991..........       1,260                                                               1,450
Sale of preferred stock for cash, December
 1991 (net of issuance costs of $31,300)......   3,675,718                                                           3,694,333
Conversion of convertible notes and accrued
 interest to preferred stock, December 1991      1,367,520                                                           1,374,405
Net loss......................................                                     (1,812,256)                      (1,812,256)
                                                -------------------------------------------------------------------------------
Balance at December 31, 1991..................   7,019,000                 --      (2,847,363)             --        4,217,551
Sale of preferred stock for cash, January
 1992 ........................................     103,878                                                             104,400
Issuance of common stock through exercise
 of stock options.............................         797                                                                 800
Net loss......................................                                     (3,348,827)                      (3,348,827)
                                                -------------------------------------------------------------------------------
Balance at December 31, 1992..................   7,123,675                 --      (6,196,190)                         973,924
Sale of preferred stock for cash, November
 1993 (net of issuance costs of $234,268).....   8,903,893                                                           8,940,592
Conversion of convertible notes and accrued
 interest to preferred stock, November
 1993.........................................   1,922,775                                                           1,930,497
Issuance of common stock through exercise
 of stock options.............................          10                                                                  10
Repurchase of common stock, at cost...........                                                            (24)             (24)
Net loss......................................                                     (3,979,105)                      (3,979,105)
                                                -------------------------------------------------------------------------------
Balance at December 31, 1993..................  17,950,353                 --     (10,175,295)            (24)       7,865,894
Sale of preferred stock for cash, January
 1994.........................................     367,305                                                             368,781
Issuance of common stock through exercise
 of stock options.............................      16,052                                                              16,100
Net loss......................................                                     (5,758,892)                      (5,758,892)
                                                -------------------------------------------------------------------------------
Balance at December 31, 1994..................  18,333,710                 --     (15,934,187)            (24)       2,491,883
Sale of preferred stock for cash, May 1995
 (net of issuance costs of $17,449)...........   3,414,166                                                           3,422,767
Sale of preferred stock for cash, August
1995 (net of issuance costs of $268,740)......   9,706,260                                                           9,731,260
Issuance of common stock through exercise
 of stock options.............................       4,544                                                               4,558
Deferred compensation associated with stock
 option grants................................   1,663,000       $ (1,663,000)                                              --
Amortization of deferred compensation.........                         44,000                                           44,000
Net loss......................................                                     (6,413,192)                      (6,413,192)
                                                -------------------------------------------------------------------------------
Balance at December 31, 1995..................  33,121,680         (1,619,000)    (22,347,379)            (24)       9,281,276
Conversion of preferred stock to common
  stock ......................................     117,989                                                                  --
Issuance of common stock, net of issuance
  costs of $2,329,097 ........................  16,370,101                                                          16,372,301
Issuance of common stock through exercise
  of stock options ...........................      54,983                                                              55,057
Issuance of common stock upon exercise of
  warrants ...................................     399,473                                                             399,593
Compensation associated with stock option
  grants .....................................      75,960                                                              75,960
Amortization of deferred compensation.........                        333,517                                          333,517
Net loss......................................                                    (11,833,886)                     (11,833,886)
                                                -------------------------------------------------------------------------------
Balance at December 31, 1996..................  50,140,186         (1,285,483)    (34,181,265)            (24)      14,683,818
Issuance of convertible preferred stock
 and warrants, net of issuance costs of
 $246,219 ....................................  11,541,678                                                          11,553,781
Issuance of common stock under stock plans ...     155,460                                                             155,596
Compensation associated with stock option
 grants ......................................     182,925                                                             182,925
Reversal of deferred compensation
 associated with cancellation of stock
 option grants ...............................    (587,031)           587,031                                               --
Amortization of deferred compensation ........                        320,524                                          320,524
Net loss .....................................                                    (10,988,697)                     (10,988,697)
                                                -------------------------------------------------------------------------------
Balance at December 31, 1997 ................. $61,433,218       $   (377,928)   $(45,169,962)         $  (24)    $ 15,907,947
                                               ================================================================================
</TABLE>



See accompanying notes.



                                       F-5
<PAGE>



                                  DIATIDE, INC.
                      (A Company in the Development Stage)

                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                                     Period from
                                                                                                                     Feb. 6, 1990
                                                                                 Year Ended                            (Date of
                                                                                 December 31,                       Inception) to
                                                                                 ------------                        December 31,
                                                                        1997         1996             1995                1997
                                                                  --------------  -------------   -------------     --------------
<S>                                                                <C>            <C>              <C>              <C>
      Operating Activities
      Net loss                                                    $ (10,988,697)  $(11,833,886)    $(6,413,192)     $(45,169,962)

      Adjustments to reconcile net loss to cash
       used in operating activities:
          Depreciation and amortization                                 434,511        417,353         374,677         1,773,417
          Cancellation of accrued interest                                   --             --              --           111,438
          Amortization of deferred compensation                         320,524        333,517          44,000           698,041
          Compensation associated with stock option grants              182,925         75,960              --           258,885
          Changes in operating assets and liabilities:
            Other current assets                                         (1,836)       (12,602)       (323,332)         (445,612)
            Other assets                                                     --          5,809          (6,963)          (49,638)
            Accounts payable and accrued expenses                        56,965      1,110,455        (239,099)        1,571,870
            Accrued clinical expenses                                  (260,622)     1,377,038         406,259         1,522,675
            Accrued clinical expenses - related party                  (316,529)       226,529          90,000                --
            Deferred revenue                                                 --       (166,666)        166,666                --
                                                                  --------------  -------------    -----------      ------------
      Cash used in operating activities                             (10,572,759)    (8,466,493)     (5,900,984)      (39,728,886)

      Investing activities
      Additions to property and equipment                              (387,693)      (608,352)       (369,135)       (2,741,875)
      Purchases of marketable securities                            (17,991,856)   (12,134,381)     (4,493,345)      (34,619,582)
      Sales of marketable securities                                 15,099,859      5,345,094         500,000        20,944,953
                                                                  --------------  -------------     -----------      ------------
      Cash used in investing activities                              (3,279,690)    (7,397,639)     (4,362,480)      (16,416,504)

      Financing activities
      Sale of preferred stock                                        11,553,781             --      13,154,027        39,808,914
      Issuance of convertible notes                                          --             --              --         3,508,464
      Repayment of convertible notes                                         --             --              --          (315,000)
      Issuance of long-term debt                                                            --              --           900,518
      Repayment of long-term obligations                                 (3,162)      (306,592)       (256,901)         (906,700)
      Sale of common stock, net of issuance costs                       155,596     16,826,951           4,558        17,007,191
      Capitalized financing costs                                            --        263,783        (263,783)               --
      Repurchase of common stock                                             --             --              --               (24)
                                                                  --------------  -------------     -----------      ------------
      Cash provided by financing activities                          11,706,215     16,784,142      12,637,901        60,003,363
                                                                  --------------  -------------     -----------      ------------

      Net (decrease) increase in cash and cash equivalents           (2,146,234)       920,010       2,374,437         3,857,973

           Cash and cash equivalents at beginning of period           6,004,207      5,084,197       2,709,760                --
                                                                  --------------  -------------     -----------      ------------

           Cash and cash equivalents at end of period             $   3,857,973   $  6,004,207     $ 5,084,197      $  3,857,973
                                                                  =============   =============     ===========      ============

      Non-cash transactions:
          Acquisition of equipment through capital lease
            obligation                                                       --   $     19,358     $        --      $     19,358
          Conversion of convertible notes and
            accrued interest to preferred
            stock                                                            --   $         --     $        --      $  3,304,902
          Deferred compensation associated with
            stock options issued (cancelled) at less than
            fair value                                             $   (587,031)  $         --     $ 1,663,000      $  1,075,969
</TABLE>

                             See accompanying notes.



                                       F-6
<PAGE>



                                  DIATIDE, INC.
                      (A Company in the Development Stage)
                          NOTES TO FINANCIAL STATEMENTS

1.  Nature of Business and Organization

     Diatide, Inc. (the "Company") was founded in February 1990 and is a
development stage company engaged in the discovery and development of
proprietary radiopharmaceuticals for use in nuclear medicine imaging procedures.
Since inception, principal activities have been to develop business plans,
obtain financing, perform research and development, and recruit and train
personnel. Accordingly, the ultimate completion of the Company's planned
operations is contingent upon the successful completion of technology
development, obtaining financing and, ultimately, achieving profitable
operations. Effective January 26, 1996, the Company changed its name from
Diatech, Inc. to Diatide, Inc.

2.  Significant Accounting Policies


Cash and Cash Equivalents

     The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents. Substantially all cash
and cash equivalents at December 31, 1997 and 1996 are invested in money market
investment accounts, short-term government-backed securities, or commercial
paper. These cash and cash equivalents are maintained with high credit quality
financial institutions.

Marketable Securities

     The Company's marketable securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses, if any, reported in a separate component of stockholders' equity.
The following is a summary of available-for-sale securities as of December 31:

                                                     1997               1996
                                                     ----               ----
Cash Equivalents:
           Cash management investment fund        $ 1,746,624        $ 3,249,311
           Commercial paper                         1,995,425          2,490,515
                                                  -----------        -----------
                                                  $ 3,742,049        $ 5,739,826
                                                  ===========        ===========
Marketable Securities:
           Corporate bonds                        $13,174,629        $ 9,798,982
           Certificate of deposit                     500,000                 --
           Commercial paper                                --            983,650
                                                  -----------        -----------
                                                  $13,674,629        $10,782,632
                                                  ===========        ===========


     The fair value of these investments approximates their cost, and therefore,
there are no unrealized gains or losses as of December 31, 1997 and 1996. As of
December 31, 1997, the contract maturities of all marketable securities are one
year or less.



                                       F-7
<PAGE>


Property and Equipment

     Property and equipment are stated at cost and are being depreciated using
the straight-line method over the estimated useful lives of three to five years.
Leasehold improvements are stated at cost and are being amortized over the
lesser of the term of the lease or estimated useful life of the asset. Equipment
under capital lease has a cost of $19,358 and accumulated amortization of $
6,049 as of December 31, 1997. Amortization of equipment under the capital lease
is included in depreciation expense in the accompanying financial statements.

Income Taxes

     The liability method is used to account for income taxes. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted rates and laws that will be in
effect when the differences are expected to be reversed.

Revenue Recognition

     Revenues from license fees are recognized as the fees are earned based upon
the occurrence of certain events or the achievement of specified milestones in
accordance with the underlying license arrangements. Revenues from research
grants are recognized as reimbursable expenses are incurred. Revenue from
sponsored research is recognized ratably over the term of the underlying
research arrangement. For collaborative arrangements which include both revenue
received from license fees and sponsored research and funds received associated
with the purchase of the Company's equity, the Company accounts for the
respective revenue and equity components in accordance with the substance of the
underlying agreements. The Company accounts for the equity component based on
the estimated fair value of the Company's securities issued at the date upon
which the Company reached agreement on the significant terms of the respective
agreements.

Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

Fair Value of Financial Instruments

     The carrying amounts reported in the Company's balance sheets for other
current assets and long-term debt approximate their fair value. The fair value
of the Company's long-term debt is estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.



                                       F-8
<PAGE>


Stock Compensation

     The Company follows the intrinsic value method of accounting for stock
option grants to employees and directors under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). The Company
follows the fair value method of accounting for stock option grants to
individuals other than employees and directors under FAS statement No. 123,
"Accounting for Stock-Based Compensation" (FAS No. 123).

Net Loss and Pro Forma Net Loss Per Share

    In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share (FAS No. 128), which the Company adopted for the year ended
December 31, 1997. Under FAS No. 128, common stock equivalents, such as
outstanding stock options and convertible preferred stocks are excluded in
calculating diluted earnings per share since the effect would be anti-dilutive.
Accordingly, basic earnings per share and diluted earnings per share are the
same for the Company. The adoption of FAS No. 128 had no material impact on the
net loss or pro forma net loss per share for the years ended December 31, 1997,
1996 and 1995.

     Pro forma net loss per share for the years ended December 31, 1996 and 1995
is computed using the weighted average number of outstanding shares of Common
Stock and Common Stock equivalents, assuming the conversion of Series A, B, C, D
and E Convertible Preferred Stock into common shares (as of their original date
of issuance), which occurred upon completion of the initial public offering.

     In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 98 (SAB No. 98), "Earnings Per Share". SAB no. 98
eliminated the requirement that common shares issued by the Company and common
equivalent shares relating to stock options (using the treasury stock method and
the mid-point of the initial public offering range) issued during the twelve
months prior to the initial public offering be included in the computation of
net loss per share whether or not they are anti-dilutive. Under the provisions
of SAB No. 98, the Company has restated the pro forma net loss per share for the
years ended December 31, 1996 and 1995. Historical earnings per share have not
been presented for the years ended December 31, 1996 and 1995 since such amounts
are not deemed meaningful due to the significant change in the Company's capital
structure that occurred in connection with the offering in June 1996.


Recent Accounting Pronouncements

    In June 1997, the FAS issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." Both SFAS No. 130 and SFAS No. 131 are effective for fiscal years
beginning after December 15, 1997. The Company believes that the adoption of
these new accounting standards will not have a material impact on the Company's
financial statements.


3. Accounts Payable and Accrued Expenses

   Accounts payable and accrued expenses consist of the following at
   December 31:

                                                   1997          1996
                                               -----------    -----------
Accounts payable.............................  $   410,296    $   782,297
Accrued research and development expenses....      120,868        162,825
Accrued professional fees....................      350,097        157,400
Accrued other................................      690,609        412,383
                                               -----------    -----------
                                               $ 1,571,870    $ 1,514,905
                                               ===========    ===========


                                       F-9
<PAGE>

4.  Long-Term Debt

     Long-term debt consists of the following at December 31:

                                                            1997        1996
                                                         ----------  -----------
Capital lease payable in monthly installments of $397,
beginning March 1996 through March 2001................      13,176       16,338
Less current portion...................................       3,460        3,460
                                                         ----------  -----------
                                                         $    9,716  $    12,878
                                                         ==========  ===========


Aggregate maturities on capital lease obligations are $4,762 in 1998, 1999, and
2000 and $873 in 2001. These minimum payments total $15,159, of which $1,983
represents interest and the remaining $13,176 reflects the present value of the
minimum payments. Cash paid for interest was approximately $1,327 in 1997,
$19,000 in 1996 and $43,000 in 1995.

5.  Stockholders' Equity

Convertible Preferred Stock

    On September 23, 1997, the Company completed the sale of 1,210,256 shares of
the Company's Series A convertible preferred stock (the "Preferred Stock") to
three of the Company's existing investors in a private transaction for $11.6
million, net of issuance costs. The Preferred Stock is convertible into the
Company's Common Stock on a one-for-one basis, subject to adjustment for certain
events. Each share of Preferred Stock is entitled to the same number of votes as
each share of common stock into which it is convertible and will vote together
with the common stock. Dividends on the Common Stock, if and when declared by
the Board of Directors, are payable to the holders of the Preferred Stock based
on the number of shares of Common Stock into which the Preferred Stock is
convertible before any distribution to the holders of the Common Stock. The
Preferred Stock holders are entitled to priority liquidation rights of an amount
equal to $9.75 per share, as adjusted for certain events, plus any declared but
unpaid dividends.

    The Company also issued Common Stock Purchase Warrants (the "Warrants") to
the investors to purchase in the aggregate 181,538 shares of Common Stock at an
exercise price of $11.70 per share. The Warrants will expire on September 23,
1999. The Company has allocated $21,785 of the net proceeds to the Warrants to
reflect the fair value of such warrants relative to the fair value of the
Preferred Stock. This amount is included in additional paid-in capital in the
accompanying financial statements.

    Under the terms of a Registration Rights Agreement, dated as of September
23, 1997, the investors holding in the aggregate at least 51% of the Stockholder
Registrable Shares (as defined) have the right to require the Company to
register the Common Stock issuable upon the conversion of the Preferred Stock or
the exercise of the Warrants at any time after October 1, 1998. The Preferred
Stock is redeemable solely at the Company's option after September 23, 2000 and,
accordingly, is classified as equity in the accompanying condensed financial
statements.

     In connection with the Company's initial public offering in June 1996, all
shares of Series A, Series B, Series C, Series D and Series E Convertible
Preferred Stock outstanding as of June 12, 1996 (collectively, the "Convertible
Preferred Stock") were automatically converted on a 6-for-10 basis into
7,531,140 shares of the Company's Common Stock.



                                      F-10
<PAGE>


Common Stock

     Common stockholders are entitled to one vote per share and to dividends
when declared by the Board of Directors. In January 1996, the Company's Board of
Directors approved an increase in the number of authorized shares of common
stock to 50,000,000.

Stock Purchase Warrants

     In November 1991, the Company issued warrants for 119,998 shares of common
stock to holders of the then outstanding 6.75% convertible subordinated notes.
Each warrant allowed the holder to purchase one share of common stock at $3.33,
subject to adjustment. In November 1996, all of the outstanding warrants were
exercised.


Stock Option Agreement

     In October 1991, the Company granted a common stockholder and consultant an
option to purchase 27,225 shares of Series A Convertible Preferred Stock at a
price of $1.13 per share. The shares subject to the option are exercisable at a
rate of 20% per year, beginning on October 2, 1992. The entire option can be
exercised on or after October 2, 1996. In 1993, this consultant's relationship
with the Company was terminated. The option agreement was amended to give the
consultant the right to exercise his options exercisable at such date within
three years of the date of termination, which was September 28, 1993. In August
1996, this option was fully exercised.

Stock Option Plans

        1992 Stock Option Plan

            In April 1992, the Board of Directors established the 1992 Stock
        Option Plan (the "Plan"). The Plan provides for the issuance or award of
        incentive and nonqualified stock options at prices to be determined by
        the Board of Directors. In January 1996, the Board of Directors
        authorized an increase in the number of shares of common stock available
        for issuance under the Plan from 720,000 to 2,000,000. All employees
        and, in the case of awards other than incentive stock options, directors
        and consultants to the Company are eligible for awards under the Plan.
        The term of all stock options granted may not exceed ten years. Options
        granted under the Plan generally vest in annual increments over five
        years. Certain options granted in 1997 vest in increments as the Company
        achieves certain corporate milestones or vest in their entirety after
        five years, whichever is earlier.

            During 1995, the Company issued stock options to purchase shares of
        common stock at exercise prices below the deemed fair value of the
        common stock at the date of grant. The Company recorded an increase to
        additional paid-in-capital and a corresponding charge to deferred
        compensation in the amount of $1,663,000 to recognize the aggregate
        difference between the deemed fair value and the option exercise price.
        During 1997, certain of the options were cancelled and $587,031 of the
        deferred compensation was reversed against additional paid-in capital.
        The deferred compensation continues to be amortized over the option
        vesting period of five years. Amortization expense of $320,524,
        $333,517, and $44,000 was recorded in 1997, 1996 and 1995.

        1996 Director Stock Option Plan

            In January 1996, the Company's Board of Directors adopted the 1996
        Director Stock Option Plan (the "Director Plan"), which became effective
        upon the closing of the initial public offering of the Company's common
        stock in June 1996. Under the Director Plan, options to purchase 5,000
        shares of common stock were granted to each


                                      F-11
<PAGE>

        existing non-employee director at the closing of the initial public
        offering in June 1996. Thereafter, options to purchase 5,000 shares of
        common stock will be granted to each new director upon his or her
        initial election to the Board of Directors. Annual options to purchase
        2,500 shares of common stock are granted to each non-employee director
        on May 1 of each year commencing in 1997. The exercise price of options
        granted under the Director Plan is the fair market value of the shares
        on the date of grant. All options vest on the first anniversary of the
        date of grant, although the exercisability of these options will be
        accelerated upon the occurrence of a change of control of the Company,
        as defined. A total of 250,000 shares of common stock are available for
        grant under the Director Plan. Options to purchase 22,500 and 35,000
        shares of common stock were granted in 1997 and 1996, respectively,
        under this plan, 35,000 of which were exercisable at December 31, 1997.


        1996 Employee Stock Purchase Plan

            In January 1996, the Company's Board of Directors adopted the 1996
        Employee Stock Purchase Plan (the "Purchase Plan"). All individuals
        employed a minimum of 20 hours per week and five months in any calendar
        year are eligible to participate in the Purchase Plan. Participants in
        the plan are entitled to purchase common stock during specified
        semi-annual periods through the accumulation of payroll, at the lower of
        85% of the fair market value of the stock at the beginning or end of the
        offering period. At December 31, 1997, 18,766 shares had been issued
        under the plan and 481,234 shares were available for future issuance.

The Company follows FAS No. 123 in accounting for stock options granted to
individuals other than employees and directors. During 1997, the Company granted
options to purchase 100,000 shares under its stock plans to consultants. The
fair value of these options granted was approximately $434,000. The fair value
of these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions: risk-free
interest rate of 6.09%; dividend yield of 0.0%; volatility factor of the
expected market price of the Company's common stock of .72; and a
weighted-average expected life of the options of 4.3 years. The fair value is
being amortized over the option vesting period of five years.
Amortization expenses of $182,925 was recorded in 1997.

The Company has elected to follow APB 25 in accounting for its stock options
granted to employees and directors because, as discussed below, the alternative
fair value accounting provided for under FAS No. 123, requires the use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's stock options
generally equals the market price of the underlying stock on the date of grant,
no compensation is recognized.

Pro forma information regarding net loss and net loss per share is required by
FAS No. 123, and has been determined as if the Company had accounted for all
stock option grants under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997,
1996 and 1995, respectively: risk-free interest rates of 6.15%, 6.06% and 6.13%;
dividend yields of 0.0% for all periods; volatility factors of the expected
market price of the Company's common stock of .69, .75 and .74; and a
weighted-average expected life of the options of 5.8, 3.5 and 4.3 years.

The company has also elected to follow APB 25 in accounting for its Purchase
Plan, because, as discussed below, the alternative fair value accounting
provided for under FAS No. 123 requires the sue of valuation models that were
not developed for use in valuing employee stock purchase plans. Because the
Purchase Plan's provisions meet the criteria required by APB 25, no compensation
is recognized.

To meet the pro forma information requirements of FAS No. 123, the fair value of
the purchases under the purchase plan was estimated at the beginning of each
offering period using a Black-Scholes pricing model with the following
weighted-average assumptions for 1997: risk-free interest rate of 6.01%;
dividend yield of 0.0%; volatility factor of


                                      F-12
<PAGE>

the expected market price of the Company's common stock of .69; and expected
term of the offering period of 0.5 years. The weighted-average fair value of
shares purchased in 1997 was $2.06 per share.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options and purchase plan offerings have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock plans. Also, the valuation model
has only been applied to options granted since January 1, 1995 , as permitted
under the provisions of FAS No. 123; therefore, the pro forma net loss and net
loss per share reported below do not reflect the impact of all options granted
and are not indicative of the effect of recording amortization expense under FAS
No. 123 in future periods. The pro forma effect of FAS No. 123 will not be fully
reflected until 1999.

For purposes of pro forma disclosures, the estimated fair value of the options
and stock purchases is amortized to expense over the options' vesting period and
stock purchase offering period, respectively. The Company's pro forma net loss
for 1997, 1996, and 1995 is $11,546,513, $12,125,241 and $6,436,501,
respectively; pro forma net loss per share for 1997, 1996 and 1995 is $1.10,
$1.31 and $0.93, respectively.

         A summary of activity under the Company's stock option plans for the
years ended December 31 follows:

<TABLE>
<CAPTION>
                                                1997                        1996                         1995
                                                ----                        ----                         ----
                                                      Weighted-                  Weighted-                       Weighted-
                                                       Average                   Average                          Average
                                                      Exercise                  Exercise                         Exercise
                                      Options           Price        Options      Price           Options          Price
                                      -------           -----        -------      -----           -------          -----
<S>                                   <C>             <C>            <C>          <C>              <C>           <C>
Outstanding - beginning of year
                                        699,577       $  2.21        627,247      $   0.64         475,057       $   0.37
Granted- exercise price equals
   market price                         556,984          6.41        161,090          7.44         142,050           0.99
Granted- exercise price is less
   than market price                         --                           --                        60,000           1.67
Exercised                              (116,769)        (0.60)       (57,860)        (0.42)        (13,650)         (0.33)
Forfeited                               (48,028)        (2.03)       (30,900)        (0.95)        (36,210)         (0.37)
                                      ---------                      -------                       -------

Outstanding - end of year             1,091,764       $  4.53        699,577      $   2.21         627,247       $   0.64
                                      =========       =======        =======      ========         =======       ========

Exercisable at end of year              385,341       $  2.60        315,235      $   0.83         262,243       $   0.35
</TABLE>


                                               1997         1996            1995
                                               ----         ----            ----
Weighted-average fair value of
   options granted


                                      F-13
<PAGE>

   during the year
   for options which:
   Exercise price equals market
      price                                $   4.13     $  4.02        $  0.60
   Exercise price is less than
      market price                         $     --     $    --        $  8.21


    The following table summarizes exercise prices and remaining contractual
lives of options outstanding and exercisable at December 31, 1997:

<TABLE>
<CAPTION>
                                                Options Outstanding                                 Options Exercisable
                                                -------------------                                 -------------------
                                                                     Weighted-Average           Number of
                          Number of Options    Weighted-Average    Remaining Contractual         Options       Weighted-Average
Range of Exercise Prices     Outstanding        Exercise Price              Life               Exercisable      Exercise Price
------------------------     -----------        --------------              ----               -----------      --------------
<S>                           <C>                <C>                      <C>                   <C>              <C>
$0.33 - $0.42                   260,977          $   0.37                 5.2 years             220,771          $   0.36
$0.67 - $1.67                   119,850          $   1.08                 7.5 years              39,720          $   1.32
$4.88 - $6.25                   294,317          $   5.40                 9.5 years              26,180          $   5.06
$6.38 - $6.88                   121,220          $   6.78                 9.1 years              24,172          $   6.78
$7.06 - $14.13                  295,400          $   7.82                 9.0 years              74,498          $   7.69
                              ---------                                                         -------
                              1,091,764                                                         385,341
</TABLE>


Reserved Shares

     At December 31, 1997, there were 3,884,019 shares of common stock reserved
for issuance under the Company's stock plans and warrant agreement and upon
conversion of Series A Convertible Preferred Stock.

6.  Income Taxes

     At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $41.4 million and general business
credit carryforwards of approximately $2.1 million which expire through 2012.
The future utilization of net operating loss and general business credit
carryforwards may be subject to limitation under the change in stock ownership
rules of the Internal Revenue Code. For financial reporting purposes, a
valuation allowance of $16,593,000 ($12,100,000 in 1996) has been recognized to
offset the deferred tax assets related to these carryforwards since uncertainty
exists with respect to future realization of such carryforwards.

     The significant components of the Company's deferred tax liabilities and
assets are as follows at December 31:

                                                      1997            1996
                                                      ----            ----
   Deferred tax assets:
     Net operating loss carry forwards.........  $  14,020,000   $  11,058,000
     General business tax credits..............      2,073,000         824,000
     Depreciation..............................         50,000           5,000
     Accrued expenses..........................        401,000         213,000
                                                 -------------   -------------
        Total deferred tax assets..............     16,593,000      12,100,000
   Valuation allowance for deferred tax assets.    (16,593,000)    (12,100,000)
                                                 --------------  -------------
        Net deferred tax assets................  $           0              --



7.  Leases



                                      F-14
<PAGE>

     The Company leases its facility under an operating lease which calls for
base monthly rental payments plus a pro-rata share of common area maintenance
costs. In March 1996, the Company amended this agreement to add additional space
and extend the expiration of the lease to December 1998 with the option to renew
for an additional year. Rent expense was approximately $96,000 in 1997, $80,000
in 1996 and $56,000 in 1995. Future minimum lease payments will be approximately
$92,000 in 1998.


8.  Employee Benefit Plan

     During 1992, the Company established a defined contribution plan pursuant
to Section 401(k) of the Internal Revenue Code. The plan covers substantially
all employees of the Company and provides for discretionary Company
contributions. The amount expensed under the plan was $20,000 in 1997, $23,900
in 1996 and $37,200 in 1995.

9.  Nycomed Agreements

     In August 1995, the Company and Nycomed Imaging AS (Nycomed), a shareholder
of the Company, entered into a series of agreements for multiple product
development and joint marketing involving certain of the Company's peptide-based
imaging agents for nuclear medicine and giving Nycomed the option for five years
to an exclusive license for such products for Europe, South Africa and certain
countries in the Middle East, as well as an exclusive co-promotion agreement for
products in the United States. Under the terms of the agreements, Nycomed will
pay the Company over the five year term for research and development support.
Under certain circumstances, Nycomed may terminate the agreement, although not
prior to August 1998. In addition, Nycomed will pay option fees, milestone fees
for certain achievements and royalties on product sales. During 1997, 1996 and
1995, the Company received $4,000,000, $2,500,000, and $1,278,000, respectively,
under these agreements.

10. Related Parties

      The Company is a party to a number of clinical trial agreements with the
Arizona Institute of Nuclear Medicine, an organization for which a director and
a scientific advisor of the Company serves as Executive Director. Each of these
agreements provides for the Arizona Institute to act as a site for clinical
trials of the Company's products and provides that the director will serve as
principal investigator in connection with the conduct of the clinical trials at
the site. During 1997 and 1996, the Company paid to the Arizona Institute a
total of $261,462 and $134,400, respectively, under those agreements. Under the
terms of a scientific advisory consulting agreement, the Company paid Healthcare
Technology Group, an entity of which the director is the principal, a total of
$48,579 and $48,214, in 1997 and 1996, respectively, and in January 1997 granted
Healthcare Technology Group options under the Company's 1992 Stock Option Plan
to purchase 30,000 shares of Common Stock at an exercise price of $7.375 per
share. Such options will become exercisable in five equal annual installments in
arrears commencing in January 1998.

      The Company has several clinical services agreements with Certus
International, an affiliate of a former officer of the Company. Under these
agreements Certus provides clinical services and data management services
relating to clinical trials for several of the Company's products. Additionally,
the Company has retained Certus to perform certain other consulting services,
including review of clinical trial protocols, in connection with certain of the
Company's other clinical trials. On July 31, 1997, the officer terminated his
employment with the Company. During 1997, 1996 and 1995, the Company incurred
expenses of $566,000, $1,261,000 and $289,000, respectively, for services
rendered by Certus.

11. Other Matters



                                      F-15
<PAGE>

      Diatide has recently become aware of a United States patent assigned to
another company that claims the same invention as a pending Diatide application
and may apply to an element of its lead Techtide(R), AcuTect(TM). Diatide's
pending application is intended to provide protection for this element of
AcuTect and is believed by Diatide to deserve an earlier priority date than the
other company's patent. Diatide is aggressively seeking to protect its
proprietary rights and has requested that the U.S. Patent and Trademark Office
declare an interference between the Diatide patent application and the issued
patent. Diatide intends to challenge the validity of the patent granted to the
other company if the patent is asserted against Diatide, and Diatide will seek
to enforce its own patents if any product of any other company infringes
Diatide's patent claims.

12. Subsequent Event

      On February 20, 1998, the Company received an "approvable letter" from the
U.S. Food and Drug Administration (FDA) for AcuTect, for the imaging of acute,
venous thrombosis in the lower extremities. The FDA's letter indicated that the
New Drug Application for AcuTect will be approved once the Company clarifies
certain details and formally agrees to specific post-approval requirements.



                                      F-16
<PAGE>



                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
  No.                                   Description
-------    --------------------------------------------------------------------------------------------
<S>        <C>
**1        -- Securities Purchase Agreement dated as of September 23, 1997 among Chase Venture Capital
                   Associates, L.P., Medsource S.A., Neomed Fund Limited and the Company
*3.1       -- Certificate of Incorporation, as amended, of the Registrant, including form of
                   Certificate of Amendment to be filed prior to consummation of the public
                   offering
*3.2       -- Amended and Restated By-Laws of the Registrant
**3.3      -- Certificate of Designations of the Preferred Stock of Diatide, Inc. to be Designated Series A
                   Convertible Preferred Stock
*4         -- Specimen Certificate for shares of Common Stock, $0.001 par value, of the
                   Registrant
*+10.1     -- License Agreement effective as of May 31, 1994 between the Registrant and
                   Associated Universities, Inc
*+10.2     -- License Agreement dated March 2, 1990 between the Registrant and New England
                   Deaconess Hospital
*+10.3     -- Patent License Agreement dated June 16, 1993 between National Institutes of
                   Health and the Registrant as licensee
*+10.4     -- Distribution and License Agreement effective as of August 11, 1995 between the
                   Registrant and Nycomed Imaging AS
*+10.5     -- Agreement for Co-Promotion of Optioned Product(s) in the United States effective
                   as of August 11, 1995 between the Registrant and Nycomed Inc
*+10.6     -- Option and Development Agreement dated August 11, 1995 between the Registrant
                   and Nycomed Imaging AS, as amended
*+10.7     -- License Agreement dated January 16, 1996 between the Registrant and Centocor,
                   Inc
*+10.8     -- License Agreement dated February 27, 1996 between the Registrant and Merck &
                   Co., Inc
*10.9      -- Lease dated March 14, 1996 between the Registrant and Cottage Street Trust
                   for offices and laboratory space located at 9 Delta Drive, Londonderry,
                   New Hampshire
*10.10     -- Series D Convertible Preferred Stock and Warrant Purchase Agreement dated
                   May 17, 1995 between the Registrant and Certain Stockholders of the Company, as
                   amended
*10.11     -- Registration Rights Agreement dated August 19, 1992 between the Registrant and
                   Silicon Valley Bank
*10.12     -- Registration Rights Agreement dated December 19, 1990 between the Registrant and
                   Richard T. Dean, as amended
*10.13     -- Registration Rights Agreement dated December 23, 1990 between the Registrant and
                   Robert S. Lees
*++10.14   -- 1992 Stock Option Plan, as amended
*++10.15   -- 1996 Employee Stock Purchase Plan
*++10.16   -- 1996 Director Stock Option Plan
*10.17     -- Form of Warrants to purchase Common Stock issued on November 11, 1991
*++10.18   -- Employment Agreement dated March 16, 1990 between the Registrant and Richard T.
                   Dean, as amended
*++10.19   -- Consulting Agreement dated April 2, 1990 between the Registrant and Robert S. Lees
*+10.20    -- Clinical Services Agreement effective as of September 22, 1995 between the
                   Registrant and Certus International, Inc. (formerly known as The Aten Group,
                   Inc.)
*+10.21    -- Data Management Agreement dated as of February 14, 1996 between the Registrant
                   and Certus International, Inc. (formerly known as The Aten Group, Inc.)
*+10.22    -- Clinical Services Agreement effective as of April 11, 1996 between the
                   Registrant and Certus International, Inc. (formerly known as The Aten Group,
                   Inc.)
**10.23    -- Registration Rights Agreement dated as of  September 23, 1997 among Chase Venture
                   Capital Associates, L.P., Medsource S.A., Neomed Fund Limited and the Company
**10.24    -- Form of Common Stock Purchase Warrant dated as of September 23, 1997 and executed by the
 .........          Company
10.25      -- Consulting Agreement dated January 1, 1998 between the Registrant and Healthcare Technology Group
11         -- Computation of net loss and pro forma net loss per common share
23.2       -- Consent of Ernst & Young LLP
23.3       -- Consent of Dr. Volker Vossius
23.4       -- Consent of McDonnell Boehnen Hulbert & Berghoff
27.1       -- Financial Data Schedule for the year ended December 31, 1997
27.2       -- Financial Data Schedule (Restated) for the six months ended
              June 30, 1996
27.3       -- Financial Data Schedule (Restated) for the nine months ended
              September 30, 1996
27.4       -- Financial Data Schedule (Restated) for the year ended
              December 31, 1996
</TABLE>
----------

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<PAGE>

*  Incorporated by reference to Exhibits to the Registrant's Registration
   Statement on Form S-1 (File No. 333-3326).

** Incorporated by reference to Exhibits to the Current Report on Form 8-K
   (File No. 000-28434).

+  Confidential treatment granted as to certain portions, which portions are
   omitted and filed separately with the Commission.

++ Management contract or compensatory plan or arrangement required to be filed
   as an Exhibit to this Annual Report on Form 10-K.



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