<PAGE>   1

================================================================================
                       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, 1996

                                       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. 0-28434

                                 DIATIDE, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                       <C>
                      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 offices)            (Zip Code)

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

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

        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 14, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $8,315,136 based on the last
reported sales price of the Common Stock on the Nasdaq National Market. There
were 10,440,048 shares of $0.001 par value Common Stock outstanding as of March
14, 1997.

                      DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<CAPTION>
                   DOCUMENT DESCRIPTION                       10-K PART INTO WHICH INCORPORATED
-----------------------------------------------------------  -----------------------------------
<S>                                                          <C>
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 21,
  1997.....................................................  Items 10, 11, 12 and 13 of Part III
</TABLE>

================================================================================
<PAGE>   2

                                     PART I

ITEM 1.  BUSINESS

     Diatide, Inc. (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 as cancer,
infection and cardiovascular disease. The Company is applying its proprietary
peptide and radiolabelling 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 has four Techtides currently undergoing clinical trials for
multiple indications: (i) P280 is in Phase 3 clinical trials for imaging deep
vein thrombosis ("DVT") and is in Phase 2 clinical trial for imaging carotid
thrombus. (The Company completed pivotal Phase 3 trials for DVT imaging in
December of 1996 and data is expected to be available in the second quarter of
1997); (ii) P829 is in separate Phase 3 clinical trials for imaging lung cancer
tumors, neuroendocrine tumors, and metastasis of malignant melanoma; (iii) P748
is in Phase 2 clinical trials for imaging pulmonary emboli; and (iv) P483H is in
Phase 2 clinical trials for imaging inflammation due to infection. The Company
is conducting preclinical studies of additional Techtides for imaging
atherosclerotic plaque and 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"), which completed a Phase 2
clinical trial of Sn-117m DTPA. 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).

DIATIDE TECHNOLOGY

     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. Diatide believes that it was the first
company to engage in the development of receptor-binding peptides that can be
easily labeled with technetium. The Company's technology builds on recent
advances in molecular biology 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.

                      [SCHEMATIC PRESENTATION OF TECHTIDE]

     Diatide's Techtides contain the following elements: (i) a peptide sequence
that binds to a target, such as a cell receptor; (ii) a peptide-based unit
linking the receptor-binding region of the Techtide to the technetium-

                                        2
<PAGE>   3

binding group; (iii) a technetium-binding group, called a chelate, composed of
specialized proprietary peptides that bind to the technetium (Tc); and (iv)
additional peptide or amino acid units that improve biodistribution and
clearance from the body. A gamma ray (v) is emitted from the technetium to
produce an image through a gamma camera.

     The Company develops Techtides by applying its proprietary technologies in
the areas of peptide engineering and radiolabelling 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
five 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:

     -  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.

     -  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. The Company believes that the low
        cost of production of Techtides may permit it to offer Techtide products
        at price levels that will be attractive if Techtides exhibit the
        performance and safety characteristics expected by the Company.

                                        3
<PAGE>   4

     -  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 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.

     -  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 1,200 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.

     -  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 radiolabelling 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:

     -  Establish Clinical Utility and Advantages of Techtides.  The Company
        plans to develop 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.

     -  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 that 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.

     -  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.

                                        4
<PAGE>   5

     The Company plans to further exploit its proprietary peptide technology and
understanding of radiolabelling 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 technology. The Company expects to distribute this compound
through the same channels as the Company's other products.

PRODUCTS UNDER DEVELOPMENT

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

<TABLE>
<CAPTION>
                                                       CLINICAL
  PRODUCT NAME                    INDICATION           STATUS(1)    COLLABORATOR(2)
----------------             -----------------------    ---------    -------------
<S>                          <C>                        <C>          <C>
Imaging Products (Techtides)
P280                         Deep Vein Thrombosis       Phase 3         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        Phase 2         Nycomed
                             Infection

P773                         Atherosclerotic Plaque     Preclinical     Nycomed

Therapeutic Product
Sn-117m                      Reduction of Pain          Phase 2           --
DTPA                         due to Metastatic
                               Cancer to the Bone
</TABLE>

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

(1) 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
    labelling.

    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.

    Pilot Study.  The product is administered to a limited patient population to
    determine whether further clinical trials are warranted based on preliminary
    indications of efficacy.

    Phase 1 Clinical Trial.  The product is administered to healthy human
    subjects and tested for safety, dosimetry, tolerance, metabolism,
    distribution, excretion and pharmacokinetics.

    Preclinical.  A compound is undergoing testing and being evaluated by the
    Company in relevant assays and/or animal models to assess potential product
    characteristics, safety and utility.

(2) Nycomed is providing research and development support and has an option to
    co-market Techtides in the United States 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
    P280 and P829. See "Item 1. Business -- Corporate Collaborations."

     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,

                                        5
<PAGE>   6

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

  P280 for Deep Vein Thrombosis

     The Company is conducting Phase 3 clinical trials of the Techtide P280 for
medical imaging of DVT. P280 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 United States
Food and Drug Administration ("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 and
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, posing little or
no risk of producing a pulmonary embolus, and, as a result would not normally
require aggressive treatment. No existing imaging modality is able to accurately
differentiate chronic clots from acute clots.

     There are approximately 5,000,000 episodes of DVT in the United States each
year, of which approximately 500,000 to 600,000 result in pulmonary embolism.
Approximately 200,000 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 1994, approximately 990,000 ultrasound procedures for imaging of
DVT were performed in the United States. 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.

     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 high percentage of cases, it is
painful, more expensive than ultrasound and can result in serious adverse side
effects, including the triggering of thrombosis. In 1994, approximately 310,000
contrast venography procedures for imaging of DVT were performed in the United
States.

     The Company believes that nuclear medicine imaging with P280 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 P280 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 P280 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 P280 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

                                        6
<PAGE>   7

clot. If P280 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 December 1996, the Company completed two pivotal Phase 3 clinical trials
of P280 for the diagnosis of DVT, which compared P280 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 Company
is currently analyzing the data from these pivotal Phase 3 clinical trials and
expects to report the results of these trials in the second quarter of 1997.

     In December 1995, the Company completed a non-pivotal Phase 3 clinical
trial of P280 for the diagnosis of DVT, which compared P280 to ultrasound. The
non-pivotal study was conducted at 14 sites in the United States and involved
137 patients. Although widely used to diagnose DVT, ultrasound is operator
dependent and not FDA-validated for the diagnosis of DVT. Thus, data comparing
P280 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 non-pivotal study of P280, the test results with P280 showed
only moderate correlation with ultrasound. The Company performed subsequent
analyses of the non-pivotal Phase 3 DVT results. In a subgroup consisting of 87
patients with "acute DVT symptoms," the correlation of P280 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 P280 of activated platelets associated with
acute clots and the inability of ultrasound to differentiate accurately between
acute and chronic clots. There can be no assurance that the Company's
interpretation of these results reflects the ability of P280 to detect acute
clots or that efficacy will be demonstrated in the pivotal Phase III clinical
trials, the results of which are still being analyzed.

  P280 for Carotid Thrombus

     The Company is conducting Phase 2 clinical trials of the Techtide P280 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. Carotid thrombi pose a two-fold threat to a patient. First, it
indicates the presence of unstable plaque underlying the thrombi because stable
plaque does not cause 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. In 1994 there were approximately 400,000 to
500,000 incidents of stroke in the United States.

     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 1994, approximately 310,000 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 1994, approximately 1,700,000 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 initiated Phase 2 clinical trials of P280 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, P280 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 P280 may provide a more valuable diagnosis than existing
modalities if this procedure can be shown to enable physicians to identify the

                                        7
<PAGE>   8

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 P280 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 P280 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 P280 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 P280 for imaging of carotid thrombus in February 1997. In this study
P280 is compared to pathology. This study involves 40 patients at four sites in
the United States and Canada.

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

     The Company is conducting Phase 3 clinical trials of the Techtide P829 for
medical imaging lung cancer tumors, neuroendocrine tumors, and metastasis of
melanoma. P829 targets and binds to the somatostatin receptor. Detection of
overexpression of the somatostatin receptor has been found to be useful for
locating certain cancerous tumors, staging these tumors to determine the extent
of disease involvement and monitoring treatment. Such information is important
for determining the appropriate patient therapy and the effectiveness of such
therapy. Tumors associated with the overexpression of the somatostatin receptor
include lung cancer tumors, neuroendocrine tumors and tumors caused by
metastatic melanomas. Lung cancer includes small-cell and non-small-cell tumors.
Neuroendocrine tumors include certain tumors of the thyroid gland, pituitary
gland, pancreas, gastrointestinal tract and central nervous system.

     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 178,100 new cases of lung cancer in 1997
in the United States, of which 135,000 will be cases of non-small-cell lung
cancer, making lung cancer the most common malignancy in men and women, with
about an equal number occurring in Europe. Additionally, the American Cancer
Society estimates that 40,300 patients in the U.S. will be newly diagnosed with
melanoma in 1997.

     The detection and staging of cancer and monitoring of its treatment rely on
all major imaging modalities. Once localized, imaging procedures are usually
followed by a surgical biopsy and, possibly, removal of the tumor and/or
chemotherapy or radiation therapy. In June 1994, a peptide-based
radiopharmaceutical labelled with indium-111, OctreoScan, was introduced into
the market as a nuclear medicine imaging agent for neuroendocrine tumors. As
with P829, OctreoScan targets and binds with neuroendocrine tumors that
overexpress the somatostatin receptor.

     The Company believes that P829 may compare favorably with OctreoScan
because P829 is radiolabelled with technetium, which is less expensive than
indium-111, is more readily available, provides better image quality and permits
imaging more quickly following administration. The Company further believes that
P829 may be more sensitive than a CT procedure in detecting metastases and small
neuroendocrine tumors. If P829 demonstrates such sensitivity in these
applications, the additional information that it would provide would affect the
physician's decision as to the appropriate course of therapy, such as whether or
not to perform surgery.

     The Company is conducting three separate Phase 3 clinical trials of P829
for the diagnosis of lung cancer, neuroendocrine tumors and metastasis of
melanomas, respectively. The lung cancer trials, which were initiated in
December 1996, compare P829 against CT and biopsy and are expected to involve
approximately 260 patients at approximately 20 sites in the United States,
Europe and Canada. The neuroendocrine tumor trials, which were initiated in
February 1996, compare P829 and OctreoScan with CT, MRI, biopsy and other

                                        8
<PAGE>   9

standard institutional procedures and are expected to involve approximately 240
patients, 179 of whom had been imaged through February 28, 1997, at
approximately 20 sites in the United States and Europe. The melanomas trials,
which were initiated in October 1996, compare P829 with CT and biopsy and will
involve approximately 260 patients at approximately 20 sites in the United
States and Europe.

     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 P280, 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 500,000 to 600,000 annual episodes of pulmonary emboli in the
United States. Approximately 200,000 deaths occur each year in the United States
as a result of pulmonary emboli.

     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-labelled albumin and a radio-labelled
gas, typically xenon-133. This dual procedure is minimally invasive, but
frequently gives inconclusive results. In 1994, approximately 840,000 perfusion
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 1994,
approximately 55,000 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 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 II 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.

                                        9
<PAGE>   10

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

  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, radiolabelling 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 radiolabelled white blood cells are highly specific, this imaging
procedure is expensive, difficult to administer and often fails to yield good
image quality quickly.

     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.

     In September 1996, the Company initiated Phase 2 clinical trials of P483H.
These trials involve approximately 30 patients, 25 of whom had been imaged as of
February 28, 1997. The Company expects that these Phase 2 clinical trials will
be completed in the second quarter of 1997.

     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.

     The Company previously conducted a Phase 1 clinical trial of an earlier
formulation of P483H. This clinical trial was conducted at one site in the
United States and involved ten normal volunteers. Although the compound was well
tolerated by all subjects with no clinically significant adverse side effects,
the compound concentrated in subjects' stomachs at unexpectedly high levels,
which the Company believed could result in lower sensitivity of the compound in
abdominal imaging.

  P773 for Atherosclerotic Plaque

     The Company is conducting preclinical studies of the Techtide P773 for
medical imaging of unstable atherosclerotic plaque. 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 400,000 to 500,000 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 1,500,000 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 5,600,000 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

                                       10
<PAGE>   11

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 and breast 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 example, based on preclinical and clinical results
to date, the Company believes that, because they target the GP IIb/IIIa platelet
receptor, P280 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 PRODUCT

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

     The Company is developing 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 50% to 80% of patients. In 1994, there were
approximately 240,000 new cases of prostate cancer, 180,000 new cases of breast
cancer and 170,000 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. Metastron has 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 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.

     A dose-escalating Phase 2 clinical trial of Sn-117m DTPA was completed by
BNL 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. The Company is currently writing a protocol for Phase 3 clinical trials
of Sn-117m DTPA and may initiate these Phase 3 clinical trials in mid-1997,
although the Company does not plan to conduct extensive Phase 3 clinical trials
of Sn-117m DTPA

                                       11
<PAGE>   12

unless it enters into a corporate collaboration for the completion of the
development and the commercialization of Sn-117m DTPA.

  Other Potential Therapeutic Applications

     The Company believes that combinations of its synthetic peptides with
certain radioisotopes may have potential applications as tumor therapies. The
Company may initiate research and development programs in this area in the
future, particularly if it can secure funding from a collaborator. The Company
may also license 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 worldwide revenues from medical imaging operations of approximately
$800 million in 1995.

     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 investigational new drug ("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 III
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 P280 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 or in the event that Dr. Richard T. Dean, President, Chief
Executive Officer and Director of the Company, is not employed by Diatide
through August 11, 1997 other than as a result of death, disability or
termination for cause.

     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 III clinical trials required with
respect to such additional indications. Diatide retains the right to 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

                                       12
<PAGE>   13

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 in respect of Techtides that Nycomed exercises its option
to distribute and license. 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 75% of all
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 plans to establish this sales
capability when the first of its products approaches marketing approval.

     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 an 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 peptides in accordance with the FDA's requirements for Good
Manufacturing Practice ("GMP"). The Company currently intends to continue to
contract with third-party manufacturers for the manufacture, assembly and
shipment of its Techtide products.

                                       13
<PAGE>   14

     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 seven United States patents. Five of these patents cover
technology relating to labelling peptides with technetium. The sixth was
acquired from Receptor Laboratories and covers a method of generating and
screening peptide libraries, and the seventh covers the composition of matter of
P280. The Company also has over 60 pending United States patent applications for
a wide variety of technologies relating to labelling 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 16 patents in South Africa and one patent in Australia.
All of the Company's United States and foreign patents expire between 2010 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 P280. See "Item 1. Business -- Products Under Development." 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.

     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 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.

                                       14
<PAGE>   15

     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.

     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.

GOVERNMENT REGULATION

     The research, testing, manufacture, labelling, 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 a New
Drug Application ("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

                                       15
<PAGE>   16

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.

     The Company has not completed clinical trials nor submitted an NDA, and no
assurance can be given that the Company's clinical trials with respect to any of
its products will be completed on a timely basis, if at all, that the clinical
results will demonstrate safety or effectiveness, that the clinical results will
be accepted for consideration by the FDA, that the FDA will find the data
submitted adequate or that an NDA will be ultimately approved.

     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 GMP 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 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

                                       16
<PAGE>   17

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.

     Certain imaging products of the Company's competitors, such as nuclear
medicine imaging products using MAbs, may be regulated as biologics by the FDA.
As a result, instead of submitting an NDA to the FDA, the sponsors of such
products will have to submit to the FDA and obtain its approval of a Product
License Application for the product and an Establishment License Application for
the manufacturing facilities used to produce the biologic product before
marketing may begin.

  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. Although there are some procedures for unified filing
for certain European countries, in general, each country has its own procedures
and requirements.

     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
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

                                       17
<PAGE>   18

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 labelled with technetium, is available for
imaging of inflammation due to infection, and Metastron is 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
pharmaceutical companies such as The Du Pont Merck Pharmaceutical Company ("Du
Pont Merck"), Mallinckrodt Group, Inc. ("Mallinckrodt") and Amersham
International PLC ("Amersham"), 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, 1996, Diatide had 59 full-time employees, of whom eleven
hold Ph.D. degrees and three hold other advanced degrees. Forty-three of these
employees are engaged in research and development activities and 16 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."

                                       18
<PAGE>   19

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 1996.

EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES

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

<TABLE>
<CAPTION>
             NAME                AGE                           POSITION
             ----                ----                          --------
<S>                              <C>    <C>
Executive Officers:
Richard T. Dean, Ph.D.........    49    President, Chief Executive Officer, and Director
Ronald B. Kinder..............    48    Executive Vice President, Marketing, Sales and Business
                                        Development and Secretary
Daniel F. Harrington..........    40    Vice President, Chief Financial Officer, and Treasurer
Edward M. Aten, M.D...........    48    Vice President of Medical Affairs
Significant Employees:
John Lister-James, Ph.D.......    44    Senior Director of Research and Development
John Kris Piper...............    48    Senior Director of Clinical and Regulatory Affairs
Victor J. Becker..............    50    Director of Operations
</TABLE>

     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, Marketing, Sales and Business
Development 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 of 1996. Prior to joining the company,
Mr. Harrington served as Vice President and 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 and Logistics at Waters
Corporation, an analytical instrument company. From 1987 to 1993 Mr. Harrington
served in a variety of positions at Millipore Corporation, a purification
technology company, most recently as Director of Finance.

                                       19
<PAGE>   20

     Edward M. Aten, M.D., Vice President of Medical Affairs, joined the Company
in January 1996. Prior to joining the Company, Dr. Aten served as President of
Certus, Inc. ("Certus"), a clinical and regulatory consulting company (formerly
known as The Aten Group), from 1995 to 1996, and as President of Medical
MicroSystems, Inc., a research and development company, from 1990 to 1996. From
1985 to 1995, Dr. Aten served in a variety of positions at Mallinckrodt, most
recently as Vice President, Medical and Regulatory Affairs from 1988 to 1995.
Dr. Aten received a B.S. in business administration/accounting from the
University of Kansas and an M.D. from University of Health Sciences, Chicago
Medical School.

     John Lister-James, Ph.D., Senior Director of Research and Development,
joined the Company in May 1990. Prior to joining the Company, Dr. Lister-James
served in a variety of positions at Centocor, most recently as Associate
Director of Radiopharmaceutical Research and Development from 1987 to 1990. Dr.
Lister-James received a B.S. (Honors) in chemistry from Imperial College,
University of London and a Ph.D. in organic chemistry from the University of
London.

     John Kris Piper, Senior Director of Clinical and Regulatory Affairs, joined
the Company in August 1995. Prior to joining the Company, Mr. Piper served as
Director of Regulatory Affairs at Mallinckrodt from 1986 to 1995. Mr. Piper
received a B.S. in animal science and chemistry and an M.S. in physiology from
the University of California, Davis.

     Victor J. Becker, Director of Operations, joined the Company in February
1995. Prior to joining the Company, Mr. Becker served as Operations Manager of
Secure Medical, Inc., a medical products company, from 1990 to 1993. From 1985
to 1990, Mr. Becker served as Manager of Technical Operations at Amersham and
from 1978 to 1985 was Plant Manager at Medi-Physics, Inc., a radiopharmaceutical
manufacturer. Mr. Becker received a B.S. and an M.S. in nuclear inorganic
chemistry from the University of Missouri.

                                    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.

<TABLE>
<CAPTION>
                                   PERIOD                  HIGH         LOW
                                   ------                  ----         ---
        <S>                                                <C>          <C>
        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 (through March 14, 1997)...........   $7 7/8      $6 5/8
</TABLE>

     The reported closing price of the Common Stock on the Nasdaq National
Market on March 14, 1997 was $7 3/8. There were approximately 89 stockholders of
record at December 31, 1996.

     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.

                                       20
<PAGE>   21

     During the three-month period ended December 31, 1996, the Company sold the
following securities that were not registered under the Securities Act of 1933,
as amended (the "Securities Act"):

          1. During November 1996 the Company sold a total of 119,998 shares of
     Common Stock to Five entities (Venture Capital Firms) upon the exercise of
     warrants previously granted to such entities for an aggregate purchase
     price of $399,593. The Company issued these shares in reliance upon the
     exemption from registration under Section 4(2) of the Securities Act.

ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                           -------------------------------------------------------
                                             1996        1995        1994        1993       1992
                                           --------    --------    --------    --------    -------
                                                  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                        <C>         <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................  $  2,606    $  1,519    $    208    $    301    $    --
Costs and expenses:
  Research and development...............    12,628       6,556       4,445       2,989      2,600
  General and administrative.............     2,515       1,636       1,714       1,217        838
                                           --------    --------    --------    --------    -------
Loss from operations.....................   (12,537)     (6,673)     (5,951)     (3,905)    (3,438)
Interest income..........................       721         306         199          33        102
Interest expense.........................       (18)        (46)         (7)       (107)       (13)
                                           --------    --------    --------    --------    -------
Net loss.................................  $(11,834)   $ (6,413)   $ (5,759)   $ (3,979)   $(3,349)
                                           ========    ========    ========    ========    =======
Pro forma net loss per share(1)..........  $  (1.27)   $  (0.90)
                                           ========    ========
Shares used in computing pro forma net
  loss per share(1)......................     9,299       7,149
</TABLE>

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                           -------------------------------------------------------
                                             1996        1995        1994        1993       1992
                                           --------    --------    --------    --------    -------
                                                               (IN THOUSANDS)
<S>                                        <C>         <C>         <C>         <C>         <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
  securities.............................  $ 16,787    $  9,078    $  2,710    $  7,997    $ 1,088
Working capital..........................    13,612       8,227       1,899       7,553        615
Total assets.............................    18,315      10,652       3,696       8,489      1,716
Long-term debt, net of current portion...        13          89         286          60        138
Deficit accumulated during the
  development stage......................   (34,181)    (22,347)    (15,934)    (10,175)    (6,196)
Total stockholders' equity...............    14,684       9,281       2,492       7,866        974
</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.

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

GENERAL

     The Company is engaged in the discovery and development of proprietary
radiopharmaceuticals for use in nuclear medicine imaging procedures. 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.
Accordingly, it is not possible to predict 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. All revenues received by the Company
through December 31, 1996 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
P280 and the P829 option exercise payment from Nycomed under the Company's
collaborative agreements with Nycomed.

                                       21
<PAGE>   22

     The Company has incurred net losses since its inception. No revenues have
been generated from product sales and no product sales revenues are anticipated
for the next 18 to 24 months. The Company expects to incur additional
significant operating losses over the next 24 to 36 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 1997 will be consistent with 1996 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. The Company has
incurred cumulative net losses since inception through December 31, 1996 of
$34,181,265.

RESULTS OF OPERATIONS

  Years Ended December 31, 1996 and 1995

     Revenues.  The Company had revenues of $2,606,073 and $1,519,061 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 $106,073 of
contract revenues under the Research Grants. Revenues in 1995 were comprised of
$1,278,388 received by the Company under its collaborative agreements with
Nycomed and $240,673 of contract revenues under the Research Grants. The
increase in 1996 revenue from the Nycomed collaborative agreements is 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.

     Research and Development.  During 1996 and 1995, the Company expended
$12,627,662 and $6,555,628, respectively, on research and development
activities. The $6,072,034 increase in 1996 resulted primarily from additional
expenses associated with the initiated and completed Phase 3 pivotal trials of
P280, 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
$333,517 and $44,000, respectively, of amortization expense related to such
deferred compensation.

     General and Administrative.  The Company's general and administrative
expenses were $2,515,113 and $1,636,486 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.

     Interest.  Interest expense in 1996 and 1995 was $18,549 and $45,768,
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 $721,365 in 1996
compared with $305,629 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.

     Net Loss.  As a result of the above factors, the Company incurred net
losses of $11,833,886 and $6,413,192 in 1996 and 1995, respectively.

  Years Ended December 31, 1995 and 1994

     Revenues.  The Company had revenues of $1,519,061 in 1995 and $207,546 in
1994. Revenues in 1995 were comprised of $1,278,388 received by the Company
under its collaborative agreements with Nycomed and $240,673 of contract
revenues under the Research Grants. Revenues in 1994 were comprised of $100,000
received by the Company under an option agreement with a pharmaceutical company
and $107,546 of contract revenues under the Research Grants.

                                       22
<PAGE>   23

     Research and Development.  During 1995 and 1994, the Company expended
$6,555,628 and $4,444,662, respectively, on research and development activities.
The $2,110,966 increase in 1995 resulted from additional expenses associated
with ongoing clinical trials of P280, P829 and P748, preclinical studies of
additional compounds and increased salaries and related costs and consulting
fees associated with the higher level of research and development activities.
Research and development expenses in 1995 included $44,000 of amortization
expense related to the deferred compensation recorded in 1995.

     General and Administrative.  The Company's general and administrative
expenses were $1,636,486 in 1995 and $1,714,366 in 1994. In 1995, increases in
staffing and related costs associated with increases in personnel required to
manage the Company's growth were offset by a decrease in outside services and
other expenses.

     Interest.  Interest expense was $45,768 in 1995 and $6,607 in 1994
reflecting the higher level of long-term debt that was outstanding throughout
1995. Interest expense in 1995 and 1994 was comprised primarily of interest
incurred on borrowings to finance the purchase of equipment and leasehold
improvements. Interest income was $305,629 in 1995 compared with $199,197 in
1994, reflecting the Company's increased cash balances in 1995.

     Net Loss.  As a result of the above factors, the Company incurred net
losses of $6,413,192 and $5,758,892 in 1995 and 1994, respectively.

  Liquidity and Capital Resources

     Since its inception, the Company has financed its operations and capital
expenditures primarily through private placements of equity securities, and in
June 1996, an initial public offering of 2,200,000 shares of Common Stock. The
initial public offering resulted in approximately $16.4 million of net proceeds.
As of December 31, 1996, the Company had $16,786,839 of cash, cash equivalents
and marketable securities and working capital of $13,612,424.

     During 1996 and 1995, the Company's capital expenditures totaled $608,352
and $369,135, respectively, primarily for the acquisition of certain equipment
and leasehold improvements. The Company expects 1997 capital expenditures to
approximate 1996 expenditures.

     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-1998. 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 continued development and commercialization of Sn-117m DTPA.

     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 no product revenues 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

                                       23
<PAGE>   24

its research and development programs or commercialization efforts or license to
third parties certain technologies which the Company would otherwise pursue on
its own.

     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 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 is at an early stage of
development. All 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.

                                       24
<PAGE>   25

     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 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 "Item 1. Business -- 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 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

                                       25
<PAGE>   26

material adverse effect on the market for radiopharmaceuticals and on the
Company's business, financial condition and results of operations. See "Item 1.
Business -- Government Regulation."

     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 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."

  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 II/III 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 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, 1996,
the Company's accumulated deficit was approximately $34.2 million. No revenues
have been generated from product sales, and no product sales revenues are
anticipated for the next 18 to 24 months. The Company expects to incur
additional significant operating losses over the next 24 to 36 months and
expects cumulative losses to increase significantly as the Company's research
and development and clinical trial efforts expand. The Company

                                       26
<PAGE>   27

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 "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-1998. The Company anticipates that it may be required to raise
substantial 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 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
radiolabelling 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 labelled with technetium, is available for
imaging inflammation due to infection, and Metastron(R) is available for the
reduction of pain due to metastatic cancer to the bone. There are several

                                       27
<PAGE>   28

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, Mallinckrodt and Amersham . 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.

  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 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. 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 United
States Patent and Trademark Office, 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.

                                       28
<PAGE>   29

     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."

  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. See "Item 1. Business -- Government Regulation."

  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. The Company does not expect to
establish a direct sales capability until such time as one or more of its
products in development approaches marketing approval. The Company has not
developed a specific sales and marketing plan with respect to any of its
potential products. Although Diatide plans to have only a small, specialized in
house sales group, it will need to recruit and train appropriate personnel and
develop a supporting distribution capability.

     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
thirdparty 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.

     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."

                                       29
<PAGE>   30

  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 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

                                       30
<PAGE>   31

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.

  Uncertainty of Health Care Reform Measures

     Federal, state and local officials and legislators (and certain foreign
government officials and legislators) have proposed or are reportedly
considering proposing a variety of reforms to the health care systems in the
United States and abroad. The Company cannot predict what health care reform
legislation, if any, will be enacted in the United States or elsewhere.
Significant changes in the health care system in the United States or elsewhere
are likely to have a substantial impact over time on the manner in which the
Company conducts its business. Such changes could have a material adverse effect
on the Company. The existence of pending health care reform proposals could have
a material adverse effect on the Company's ability to raise capital. Further, to
the extent that proposals have a material adverse effect on other pharmaceutical
companies that are prospective corporate partners for the Company, the Company's
ability to establish collaborative commercial relationships may be adversely
affected. Furthermore, the Company's ability to commercialize its potential
products may be adversely affected to the extent that such proposals have a
material adverse effect on the business, financial condition and profitability
of other companies that are prospective corporate partners with respect to
certain of the Company's proposed products. See "Item 1. Business -- Government
Regulation."

  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

     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, 1998, 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. In the event Dr. Dean ceases to be employed by Diatide
through August 11, 1997, other than as a result of his death or disability or
termination for cause, Nycomed may terminate its collaboration with the Company,
which would result in a material loss of research and development revenues to
the Company and might adversely affect the Company's ability to develop,
commercialize, market and distribute certain of its potential products. 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

                                       31
<PAGE>   32

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.

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 21, 1997 (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 Transactions," which section is
incorporated herein by this reference.

                                       32
<PAGE>   33

                                    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:

<TABLE>
<CAPTION>
                                                                               PAGE
                                                                               ----
          <S>                                                                  <C>
          Balance Sheets at December 31, 1996 and 1995.......................  F-3

          Statements of Operations for the years ended December 31, 1996,
            1995 and 1994 and the period February 6, 1990 (date of inception)
            to December 31, 1996.............................................  F-4

          Statements of Stockholders' Equity for the period February 6, 1990
            (date of inception) to December 31, 1996.........................  F-5

          Statement of Cash Flows for the years ended December 31, 1996, 1995
            and 1994 and the period February 6, 1990 (date of inception) to
            December 31, 1996................................................  F-6

          Notes to Financial Statements......................................  F-7
</TABLE>

     (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:

     None.

                                       33
<PAGE>   34

                                   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 25th day of
March, 1997.

                                          DIATIDE, INC.

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

     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.

<TABLE>
<CAPTION>
                SIGNATURE                                 TITLE                     DATE
                ---------                                 -----                     ----

<C>                                         <C>                                <S>
           /s/ RICHARD T. DEAN                 President, Chief Executive      March 25, 1997
------------------------------------------  Officer, and Director (Principal
             Richard T. Dean                       Executive Officer)

         /s/ DANIEL F. HARRINGTON            Vice President, Chief Financial   March 25, 1997
------------------------------------------  Officer, and Treasurer (Principal
           Daniel F. Harrington             Financial and Accounting Officer)

                                                        Director
------------------------------------------
             Joseph F. Lovett

             /s/ JEAN DELEAGE                           Director               March 25, 1997
------------------------------------------
               Jean Deleage

           /s/ DONALD L. MURFIN                         Director               March 25, 1997
------------------------------------------
             Donald L. Murfin

        /s/ GUSTAV A. CHRISTENSEN                       Director               March 25, 1997
------------------------------------------
          Gustav A. Christensen

           /s/ ROBERT E. CURRY                          Director               March 25, 1997
------------------------------------------
             Robert E. Curry

            /s/ ROBERT S. LEES                          Director               March 25, 1997
------------------------------------------
              Robert S. Lees

           /s/ DANIEL L. PETERS                         Director               March 25, 1997
------------------------------------------
             Daniel L. Peters
</TABLE>

                                       34
<PAGE>   35

                                                                      APPENDIX A

                                 DIATIDE, INC.

                           ANNUAL REPORT ON FORM 10-K
                          YEAR ENDED DECEMBER 31, 1996

                              FINANCIAL STATEMENTS

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                               PAGE
                                                                               ----
          <S>                                                                  <C>
          Report of Independent Auditors.....................................  F-2

          Balance Sheets at December 31, 1996 and 1995.......................  F-3

          Statements of Operations for the years ended December 31, 1996,
            1995 and 1994 and the period February 6, 1990 (date of inception)
            to December 31, 1996.............................................  F-4

          Statements of Stockholders' Equity for the period February 6, 1990
            (date of inception) to December 31, 1996.........................  F-5

          Statement of Cash Flows for the years ended December 31, 1996, 1995
            and 1994 and the period February 6, 1990 (date of inception) to
            December 31, 1996................................................  F-6

          Notes to Financial Statements......................................  F-7
</TABLE>

                                       F-1
<PAGE>   36

                         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, 1996 and 1995, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996, and for the period February
6, 1990 (date of inception) to December 31, 1996. 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, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 and for the period February 6, 1990 (date of inception) to
December 31, 1996 in conformity with generally accepted accounting principles.

                                            ERNST & YOUNG LLP

Manchester, New Hampshire
February 5, 1997

                                       F-2
<PAGE>   37
<TABLE>

                                              DIATIDE, INC.
                                   (A COMPANY IN THE DEVELOPMENT STAGE)

                                             BALANCE SHEETS

<CAPTION>
                                                                                      DECEMBER 31,
                                                                                -------------------------
                                                                                   1996          1995
                                                                                   ----          ----
<S>                                                                             <C>           <C>
Assets
Current assets:
  Cash and cash equivalents...................................................  $ 6,004,207   $ 5,084,197
  Marketable securities (Note 2)..............................................   10,782,632     3,993,345
  Other current assets........................................................      443,776       431,174
                                                                                -----------   -----------
Total current assets..........................................................   17,230,615     9,508,716
Property and equipment, at cost:
  Laboratory equipment........................................................    1,243,177     1,045,396
  Office equipment, furniture and fixtures....................................      641,225       453,547
  Leasehold improvements......................................................      489,138       246,887
                                                                                -----------   -----------
                                                                                  2,373,540     1,745,830
Less accumulated depreciation and amortization................................    1,300,051       882,698
                                                                                -----------   -----------
                                                                                  1,073,489       863,132
Capitalized financing costs (Note 2)..........................................           --       263,783
Other assets..................................................................       10,783        16,592
                                                                                -----------   -----------
Total assets..................................................................  $18,314,887   $10,652,223
                                                                                ===========   ===========
Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable and accrued expenses (Note 3)..............................  $ 1,514,905   $   404,450
  Accrued clinical expenses...................................................    1,783,297       406,259
  Accrued clinical expenses-related party (Note 3)............................      316,529        90,000
  Deferred revenue............................................................           --       166,666
  Current portion of long-term debt(Note 4)...................................        3,460       214,286
                                                                                -----------   -----------
Total current liabilities.....................................................    3,618,191     1,281,661
Long-term debt, less current portion (Note 4).................................       12,878        89,286
Commitments...................................................................           --            --
Stockholders' equity (Note 5):
  Preferred stock, $0.01 par value:
  Authorized shares -- 23,725,973
  Series A convertible preferred stock:
  Authorized shares -- 2,027,225 Issued and outstanding shares -- none in 1996           --        20,000
    (2,000,000 in 1995) (liquidation value of $2,960,000 in 1995).............
  Series B convertible preferred stock:
  Authorized shares -- 2,617,219 Issued and outstanding shares -- none in 1996           --        26,022
    (2,602,219 in 1995) (liquidation value of $6,947,925 in 1995).............
  Series C convertible preferred stock:
  Authorized shares -- 4,589,655 Issued and outstanding shares -- none in 1996           --        45,897
    (4,589,655 in 1995) (liquidation value of $26,252,827 in 1995)............
  Series D convertible preferred stock:
  Authorized shares -- 1,400,000 Issued and outstanding shares -- none in 1996           --         8,601
    (860,054 in 1995) (liquidation value of $3,440,216 in 1995)...............
  Series E convertible preferred stock:
  Authorized shares -- 2,500,000 Issued and outstanding shares -- none in 1996           --        25,000
    (2,500,000 in 1995) (liquidation value of $10,000,000 in 1995)............
  Common stock, $0.001 par value:
  Authorized shares -- 50,000,000 Issued shares -- 10,404,248 (478,915 in            10,404           479
    1995).....................................................................
  Additional paid-in capital..................................................   50,140,186    33,121,680
  Deferred compensation.......................................................   (1,285,483)   (1,619,000)
  Deficit accumulated during the development stage............................  (34,181,265)  (22,347,379)
                                                                                -----------   -----------
                                                                                 14,683,842     9,281,300
  Less: 4,800 shares of Common Stock in treasury, at cost.....................          (24)          (24)
                                                                                -----------   -----------
Total stockholders' equity....................................................   14,683,818     9,281,276
                                                                                -----------   -----------
Total liabilities and stockholders' equity....................................  $18,314,887   $10,652,223
                                                                                ===========   ===========
</TABLE>

                            See accompanying notes.

                                       F-3
<PAGE>   38
<TABLE>

                                          DIATIDE, INC.
                              (A COMPANY IN THE DEVELOPMENT STAGE)

                                     STATEMENTS OF OPERATIONS

<CAPTION>
                                                                                        PERIOD FROM
                                                                                       FEB. 6, 1990
                                                           YEAR ENDED                    (DATE OF
                                                          DECEMBER 31,                 INCEPTION) TO
                                                --------------------------------        DECEMBER 31,
                                                1996          1995          1994           1996
                                                ----          ----          ----           ----
<S>                                         <C>            <C>           <C>            <C>
Revenues:
  License fees............................  $    500,000   $   500,000   $   100,000    $  1,300,000
  Research grants.........................       106,073       240,673       107,546         555,498
  Sponsored research......................     2,000,000       778,388            --       2,778,388
                                            ------------   -----------   -----------    ------------
Total revenues............................     2,606,073     1,519,061       207,546       4,633,886
                                            ------------   -----------   -----------    ------------
Cost and expenses:
  Research and development................    12,627,662     6,555,628     4,444,662      31,387,312
  General and administrative..............     2,515,113     1,636,486     1,714,366       8,623,687
                                            ------------   -----------   -----------    ------------
Total costs and expenses..................   (15,142,775)   (8,192,114)   (6,159,028)    (40,010,999)
                                            ------------   -----------   -----------    ------------
Loss from operations......................   (12,536,702)   (6,673,053)   (5,951,482)    (35,377,113)
Other income (expense):
  Interest income.........................       721,365       305,629       199,197       1,436,500
  Interest expense........................       (18,549)      (45,768)       (6,607)       (240,652)
                                            ------------   -----------   -----------    ------------
Total other income (expense)..............       702,816       259,861       192,590       1,195,848
                                            ------------   -----------   -----------    ------------
Net loss..................................  $(11,833,886)  $(6,413,192)  $(5,758,892)   $(34,181,265)
                                            ============   ===========   ===========    ============
Pro forma net loss per share (Note 2).....  $      (1.27)  $     (0.90)
                                            ============   ===========
Shares used in computing pro forma net
  loss per share (Note 2).................     9,298,938     7,148,593
</TABLE>

                            See accompanying notes.

                                       F-4
<PAGE>   39

                                 DIATIDE, INC.
                      (A COMPANY IN THE DEVELOPMENT STAGE)

                       STATEMENTS OF STOCKHOLDERS' EQUITY
    FOR THE PERIOD FEBRUARY 6, 1990 (DATE OF INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
                                                                           CONVERTIBLE PREFERRED STOCK
                                                ----------------------------------------------------------------------------------
                                                      SERIES A                SERIES B                SERIES C           SERIES D
                                                ---------------------   ---------------------   ---------------------   ----------
                                                  SHARES      AMOUNT      SHARES      AMOUNT      SHARES      AMOUNT      SHARES
                                                ----------   --------   ----------   --------   ----------   --------   ----------
<S>                                             <C>          <C>        <C>          <C>        <C>          <C>        <C>
Sale of preferred stock for cash, April and
 September 1990 (net of issuance costs of
 $7,000).......................................  2,000,000   $ 20,000           --   $     --           --   $     --           --
Sale of common stock for cash, 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)...........                                                                            860,054
Sales 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      860,054
Conversion of preferred stock to common
 stock......................................... (2,000,000)   (20,000)  (2,602,219)   (26,022)  (4,589,655)   (45,897)    (860,054)
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...................         --   $     --           --   $     --           --   $     --           --
                                                 =========   ========    =========   ========    =========   ========      =======

<CAPTION>

                                                                 SERIES E
                                                           ---------------------
                                                 AMOUNT      SHARES      AMOUNT
                                                 -------   ----------   --------
<S>                                             <<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, December 1990...
Net loss.......................................
                                                 -------    ---------   --------
Balance at December 31, 1990...................      --            --         --
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)............
Conversion of convertible notes and accrued
 interest to preferred stock, December 1991....
Net loss.......................................
                                                 -------    ---------   --------
Balance at December 31, 1991...................      --            --         --
Sale of preferred stock for cash, January
 1992..........................................
Issuance of common stock through exercise of
 stock options.................................
Net loss.......................................
                                                 -------    ---------   --------
Balance at December 31, 1992...................      --            --         --
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.................................
Repurchase of common stock, at cost............
Net loss.......................................
                                                 -------    ---------   --------
Balance at December 31, 1993...................      --            --         --
Sale of preferred stock for cash, January
 1994..........................................
Issuance of common stock through exercise of
 stock options.................................
Net loss.......................................
                                                 -------    ---------   --------
Balance at December 31, 1994...................      --            --         --
Sale of preferred stock for cash, May 1995
 (net, of issuance costs of $17,449)...........   8,601
Sales 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.................................
Deferred compensation associated with stock
 option grants.................................
Amortization of deferred compensation..........
Net loss.......................................
                                                 -------    ---------   --------
Balance at December 31, 1995...................   8,601     2,500,000     25,000
Conversion of preferred stock to common
 stock.........................................  (8,601)   (2,500,000)   (25,000)
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...................  $   --            --   $     --
                                                 =======    =========   ========
</TABLE>

                                       F-5
<PAGE>   40

                                 DIATIDE, INC.
                      (A COMPANY IN THE DEVELOPMENT STAGE)

                       STATEMENTS OF STOCKHOLDERS' EQUITY
    FOR THE PERIOD FEBRUARY 6, 1990 (DATE OF INCEPTION) TO DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                                                                             DEFICIT
                                                                                           ACCUMULATED
                                            COMMON STOCK        ADDITIONAL                  DURING THE                  TOTAL
                                        ---------------------     PAID-IN      DEFERRED    DEVELOPMENT   TREASURY   STOCKHOLDERS'
                                          SHARES      AMOUNT      CAPITAL    COMPENSATION     STAGE        STOCK       EQUITY
                                        ----------   --------   -----------  ------------  ------------  ---------  -------------
<S>                                     <C>          <C>        <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,
 December 1990........................     224,142        224         1,502                                                1,726
Net loss..............................                                                       (1,035,107)              (1,035,107)
                                        ----------   --------   -----------  -----------   ------------    -----    ------------
Balance at December 31, 1990..........     224,142        224     1,974,502           --     (1,035,107)      --         959,619
Sale of common stock for cash, May,
 July, August, September and November
 1991.................................     190,393        190         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..........     414,535        414     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............       2,400          3           797                                                  800
Net loss..............................                                                       (3,348,827)              (3,348,827)
                                        ----------   --------   -----------  -----------   ------------    -----    ------------
Balance at December 31, 1992..........     416,935        417     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............          30                       10                                                   10
Repurchase of common stock, at cost...                                                                       (24)            (24)
Net loss..............................                                                       (3,979,105)              (3,979,105)
                                        ----------   --------   -----------  -----------   ------------    -----    ------------
Balance at December 31, 1993..........     416,965        417    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............      48,300         48        16,052                                               16,100
Net loss..............................                                                       (5,758,892)              (5,758,892)
                                        ----------   --------   -----------  -----------   ------------    -----    ------------
Balance at December 31, 1994..........     465,265        465    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
Sales 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............      13,650         14         4,544                                                4,558
Deferred compensation associated with
 stock option gains...................                            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..........     478,915        479    33,121,680   (1,619,000)   (22,347,379)     (24)      9,281,276
Conversion of preferred stock to
 common stock.........................   7,531,140      7,531       117,989                                                   --
Issuance of common stock, net of
 issuance costs of $2,329,097.........   2,200,000      2,200    16,370,101                                           16,372,301
Issuance of common stock through
 exercise of stock options............      74,195         74        54,983                                               55,057
Issuance of common stock upon exercise
 of warrants..........................     119,998        120       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..........  10,404,248   $ 10,404   $50,140,186  $(1,285,483)  $(34,181,265)   $ (24)   $ 14,683,818
                                        ==========   ========   ===========  ===========   ============    =====    ============
</TABLE>

                                       F-6
<PAGE>   41

                                 DIATIDE, INC.
                      (A COMPANY IN THE DEVELOPMENT STAGE)

                            STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                       PERIOD FROM
                                                                                       FEB. 6, 1990
                                                                                         (DATE OF
                                                    YEAR ENDED DECEMBER 31,           INCEPTION) TO
                                           -----------------------------------------   DECEMBER 31,
                                               1996           1995          1994           1996
                                           ------------   ------------   -----------   ------------
<S>                                        <C>             <C>           <C>           <C>
OPERATING ACTIVITIES:
Net loss.................................. $(11,833,886)   $(6,413,192)  $(5,758,892)  $(34,181,265)
Adjustments to reconcile net loss to cash
  used in operating activities:
  Depreciation and amortization...........      417,353        374,677       207,886      1,338,906
  Cancellation of accrued interest........           --             --            --        111,438
  Amortization of deferred compensation...      333,517         44,000            --        377,517
  Compensation associated with stock
     option grants........................       75,960             --            --         75,960
  Changes in operating assets and
     liabilities:
     Other current assets.................      (12,602)      (323,332)        9,857       (443,776)
     Other assets.........................        5,809         (6,963)       (4,046)       (49,638)
     Accounts payable and accrued
       expenses...........................    1,110,455       (239,099)      164,487      1,514,905
     Accrued clinical expenses............    1,377,038        406,259            --      1,783,297
     Accrued clinical expenses -- related
       party..............................      226,529         90,000            --        316,529
     Deferred revenue.....................     (166,666)       166,666            --             --
                                           ------------    -----------   -----------   ------------
Cash used in operating activities.........   (8,466,493)    (5,900,984)   (5,380,708)   (29,156,127)
INVESTING ACTIVITIES:
Additions to property and equipment.......     (608,352)      (369,135)     (708,583)    (2,354,182)
Purchases of marketable securities........  (12,134,381)    (4,493,345)           --    (16,627,726)
Sales of marketable securities............    5,345,094        500,000            --      5,845,094
                                           ------------    -----------   -----------   ------------
Cash used in investing activities.........   (7,397,639)    (4,362,480)     (708,583)   (13,136,814)
FINANCING ACTIVITIES:
Sale of preferred stock...................           --     13,154,027       368,781     28,255,133
Issuance of convertible notes.............           --             --            --      3,508,464
Repayment of convertible notes............           --             --            --       (315,000)
Issuance of long-term debt................           --             --       500,000        900,518
Repayment of long-term obligations........     (306,592)      (256,901)      (83,109)      (903,538)
Sale of common stock, net of issuance
  costs...................................   16,826,951          4,558        16,100     16,851,595
Capitalized financing costs...............      263,783       (263,783)           --             --
Repurchase of common stock................           --             --            --            (24)
                                           ------------    -----------   -----------   ------------
Cash provided by financing activities.....   16,784,142     12,637,901       801,772     48,297,148
                                           ------------    -----------   -----------   ------------
Net increase (decrease) in cash and cash
  equivalents.............................      920,010      2,374,437    (5,287,519)     6,004,207
Cash and cash equivalents at beginning of
  period..................................    5,084,197      2,709,760     7,997,279             --
                                           ------------    -----------   -----------   ------------
Cash and cash equivalents at end of
  period.................................. $  6,004,207    $ 5,084,197   $ 2,709,760   $  6,004,207
                                           ============    ===========   ===========   ============
NONCASH 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 at less than
     fair value........................... $         --    $ 1,663,000   $        --   $  1,663,000
</TABLE>

                            See accompanying notes.

                                       F-7
<PAGE>   42

                                 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

  Basis of Presentation

     On January 25, 1996, the Company's Board of Directors authorized a 6-for-10
reverse stock split effective June 6, 1996. All references to common share
amounts and per share dollar amounts have been adjusted for all periods
presented to reflect the effect of the split.

     All convertible preferred share amounts and per share dollar amounts have
not been adjusted to reflect the conversion of the convertible preferred shares
and the effect of the 6-for-10 reverse common stock split. All convertible
preferred shares were converted to common stock upon the closing date of the
Company's initial public offering on June 19, 1996.

  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, 1996 and 1995 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 adopted Financial Accounting Standards Board Statement No. 115
(FAS 115), "Accounting for Certain Investments in Debt and Equity Securities,"
effective January 1, 1994. 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 securites
as of December 31:

<TABLE>
<CAPTION>
                                                             1996             1995
                                                          -----------      ----------
          <S>                                             <C>              <C>
          Cash Equivalents:
               Cash management investment fund..........  $ 3,249,311      $4,969,950
               Commercial paper.........................    2,490,515              --
                                                          -----------      ----------
                                                          $ 5,739,826      $4,969,950
                                                          ===========      ==========
          Marketable Securities, principally Corporate
               Bonds in 1996............................  $10,782,632      $3,993,345
                                                          ===========      ==========
</TABLE>

     The fair value of these investments approximates their cost, and therefore,
there are no unrealized gains or losses as of December 31, 1996 and 1995. As of
December 31, 1996, marketable securities of $10,012,360 have original maturities
of one year or less and marketable securities of $770,272 have original
maturities of more than one year but less than two years.

                                       F-8
<PAGE>   43

                                 DIATIDE, INC.
                      (A COMPANY IN THE DEVELOPMENT STAGE)

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

  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 $4,840
as of December 31, 1996. Amortization of equipment under the capital lease is
included in depreciation expense in the accompanying financial statements.

  Capitalized Financing Costs

     In connection with the initial public offering of the Company's common
stock, the Company had capitalized at December 31, 1995 certain professional
fees and other costs related to this offering. These costs were offset against
the proceeds of the initial public offering upon its completion in June 1996.

  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 values
of the Company's long-term debt are estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.

  Accounting for Long-Lived Assets

     In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ",
which establishes criteria for the recognition and measurement of impairment
loss

                                       F-9
<PAGE>   44

                                 DIATIDE, INC.
                      (A COMPANY IN THE DEVELOPMENT STAGE)

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

associated with long-lived assets. The Company adopted this standard in the
first quarter of 1996. The adoption did not have a material impact on the
Company's financial position or results of operation.

  Stock Compensation

     The Company follows the intrinsic value method of accounting for stock
option grants under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25).

  Pro Forma Net Loss Per Share

     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 and
the exercise of stock options and warrants (using the treasury stock method).
Common Stock equivalent shares are excluded from the computation if their effect
is anti-dilutive; however, pursuant to the requirements of the Securities and
Exchange Commission, 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 are included whether or not they are
anti-dilutive. Historical earnings per share have not been presented 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.

     The common share amounts and per share dollar amounts have been adjusted
for all periods presented to reflect the effect of the 6-for-10 reverse stock
split effective June 19, 1996.

  Reclassifications

     Certain balances reported in previous years have been reclassified to
conform to the 1996 presentation.

3.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

<TABLE>
<CAPTION>
                                                           1996          1995
                                                           ----          ----
       <S>                                              <C>            <C>
       Accounts payable...............................  $  782,297     $ 67,013
       Accrued research and development expenses......     162,825       65,000
       Accrued license fees...........................      50,001           --
       Accrued professional fees......................     157,400       86,000
       Accrued vacation...............................      58,149       70,000
       Accrued bonus..................................      56,427       31,417
       Accrued moving and relocation expenses.........      71,268       18,000
       Accrued other..................................     176,538       67,020
                                                        ----------     --------
                                                        $1,514,905     $404,450
                                                        ==========     ========
</TABLE>

     The Company has several clinical services agreements with Certus
International, an affiliate of an 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. During 1996 and 1995, the Company incurred expenses of
$1,261,000 and $289,000, respectively, for services rendered by Certus.

                                      F-10
<PAGE>   45

                                 DIATIDE, INC.
                      (A COMPANY IN THE DEVELOPMENT STAGE)

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4.  LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                                 1996         1995
                                                                -------     --------
          <S>                                                   <C>         <C>
          Term loan payable to a bank in monthly installments
            of $17,857 plus interest, beginning January 1995
            through April 1997................................  $    --     $303,572
          Capital lease payable in monthly installments of
            $397, beginning March 1996 through March 2001.....   16,338           --
                                                                -------     --------
                                                                 16,338      303,572
          Less current portion................................    3,460      214,286
                                                                -------     --------
                                                                $12,878     $ 89,286
                                                                =======     ========
</TABLE>

     The bank term loan above was repaid in July 1996 from the proceeds of the
Company's initial public stock offering.

     Aggregate maturities on capital lease obligations are as follows:

<TABLE>
          <S>                                                               <C>
          1997..........................................................    $ 4,762
          1998..........................................................      4,762
          1999..........................................................      4,762
          2000..........................................................      4,762
          2001..........................................................        477
                                                                            -------
          Total minimum payments........................................     19,525
          Less amounts representing interest............................      3,187
                                                                            -------
          Present value of minimum payments.............................    $16,338
                                                                            =======
</TABLE>

     Cash paid for interest was approximately $19,000 in 1996, $43,000 in 1995
and $9,000 in 1994.

5.  STOCKHOLDERS' EQUITY

CONVERTIBLE PREFERRED STOCK

     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.

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.

     The Company has issued restricted shares of common stock to certain
employees and consultants, at prices equal to the then fair market value as
determined by the Board of Directors. These shares of common stock are
restricted by terms of stock vesting agreements, in which the shares generally
vest at a rate of 20% per year. Upon termination of the services of the employee
or consultant, the Company has the right to repurchase any unvested shares at
the original purchase price of the shares. At December 31, 1996, there were
409,735 vested and no unvested shares pursuant to these agreements.

                                      F-11
<PAGE>   46

                                 DIATIDE, INC.
                      (A COMPANY IN THE DEVELOPMENT STAGE)

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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.

     In August 1992, the Company issued a warrant to purchase 8,888 shares of
Series B convertible preferred stock, at a price of $2.25 per share, subject to
certain adjustments. At the initial public offering, this warrant was converted
to a warrant to purchase 5,332 shares of Common Stock at a price of $3.75 per
share. The warrant expires on August 19, 1997.

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.

     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. The deferred compensation is being amortized over the
option vesting period of five years. Amortization expense of $333,517 was
recorded in 1996 and $44,000 in 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 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
will be 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

                                      F-12
<PAGE>   47
\
                                 DIATIDE, INC.
                      (A COMPANY IN THE DEVELOPMENT STAGE)

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

stock are available for grant under the Director Plan. Options to purchase
35,000 shares of common stock were granted in 1996 under this plan, none of
which were exercisable at December 31, 1996.

     The Company has elected to follow APB 25 in accounting for its stock
options plans because, as discussed below, the alternative fair value accounting
provided for under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (Statement 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 Statement 123, and has been determined as if the Company had accounted for
its stock option plans 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 1996
and 1995, respectively: risk-free interest rates of 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 .75 and .74; and a weighted-average expected
life of the options of 3.5 and 4.3 years.

     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 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 options. Also, the valuation model
has only been applied to options granted in 1995 and 1996, as permitted under
the provisions of Statement 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
Statement 123 in future periods. The pro forma effect of Statement 123 will not
be fully reflected until 1999.

     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net loss for 1996 and 1995 is $12,125,241 and $6,436,501,
respectively; pro forma net loss per share for 1996 and 1995 is $1.30 and $0.90,
respectively.

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

<TABLE>
<CAPTION>
                                          1996                     1995                     1994
                                  --------------------     --------------------     --------------------
                                             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..........................  627,247      $ 0.64      475,057      $ 0.37      362,347      $ 0.33
Granted -- exercise price equals
  market price..................  161,090        7.44      142,050        0.99      197,910        0.42
Granted -- exercise price is
  less than market price........       --                   60,000        1.67           --
Exercised.......................  (57,860)      (0.42)     (13,650)      (0.33)     (48,300)      (0.33)
Forfeited.......................  (30,900)      (0.95)     (36,210)      (0.37)     (36,900)      (0.33)
                                  -------                  -------                  -------
Outstanding -- end of year......  699,577      $ 2.21      627,247      $ 0.64      475,057      $ 0.37
                                  =======                  =======                  =======
Exercisable at end of year......  315,235      $ 0.83      262,243      $ 0.35      217,699      $ 0.34
</TABLE>

                                      F-13
<PAGE>   48

                                 DIATIDE, INC.
                      (A COMPANY IN THE DEVELOPMENT STAGE)

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                     1996      1995
                                                                     -----     -----
          <S>                                                        <C>       <C>
          Weighted-average fair value of options granted during the
            year for options which:
               Exercise price equals market price..................  $4.02     $0.60
               Exercise price is less than market price............  $  --     $8.21
</TABLE>

     The following table summarizes exercise prices and remaining contractual
lives of options outstanding and exercisable at December 31, 1996:

<TABLE>
<CAPTION>
                                             OPTIONS OUTSTANDING
                             ----------------------------------------------------         OPTIONS EXERCISABLE
                                                                    WEIGHTED-        ------------------------------
                              NUMBER OF        WEIGHTED-             AVERAGE          NUMBER OF        WEIGHTED-
                               OPTIONS          AVERAGE             REMAINING          OPTIONS          AVERAGE
RANGE OF EXERCISE PRICES     OUTSTANDING     EXERCISE PRICE     CONTRACTUAL LIFE     EXERCISABLE     EXERCISE PRICE
------------------------     -----------     --------------     -----------------    -----------     --------------
<S>                          <C>             <C>                <C>                  <C>             <C>
     $ 0.33 - $0.42            347,057           $ 0.37             6.2 years          272,897           $ 0.36
     $ 0.67 - $1.67            192,750           $ 1.20             8.6 years           22,290           $ 1.04
     $ 6.38 - $9.33            159,770           $ 7.42             9.8 years           20,048           $ 7.07
                               -------                                                 -------
                               699,577                                                 315,235
</TABLE>

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. Eligible employees may purchase common stock
at a price per share equal to 85% of the lower of the fair market value of the
common stock at the beginning or end of each offering period. A total of 500,000
shares of common stock has been reserved for issuance under the Purchase Plan.

RESERVED SHARES

     At December 31, 1996, there were 2,633,092 shares of common stock reserved
for issuance under the Company's stock plans and warrant agreement.

6.  INCOME TAXES

     At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $32.5 million and general business
credit carryforwards of approximately $824,000 which expire through 2011. 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 $12,228,000 ($8,099,000 in 1995) has been recognized to
offset the deferred tax assets related to these carryforwards since uncertainty
exists with respect to future realization of such carryforwards.

                                      F-14
<PAGE>   49

                                 DIATIDE, INC.
                      (A COMPANY IN THE DEVELOPMENT STAGE)

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                                             1996            1995
                                                         ------------     -----------
          <S>                                            <C>              <C>
          Deferred tax assets:
          Net operating loss carryforwards.............  $ 11,058,000     $ 7,230,000
          General business tax credits.................       824,000         814,000
          Deferred compensation........................       128,000              --
          Depreciation.................................         5,000              --
          Accrued expenses.............................       213,000         117,000
                                                         ------------     -----------
               Total deferred tax assets...............    12,228,000       8,161,000
          Valuation allowance for deferred tax
            assets.....................................   (12,228,000)     (8,099,000)
                                                         ------------     -----------
               Net deferred tax assets.................            --          62,000
          Deferred tax liabilities:
               Accelerated depreciation................            --         (62,000)
                                                         ------------     -----------
                    Total deferred tax liabilities.....            --         (62,000)
                                                         ------------     -----------
          Net deferred tax liabilities and assets......  $         --     $        --
                                                         ============     ===========
</TABLE>

7.  LEASES

     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 $80,000 in 1996, $56,000
in 1995 and $41,000 in 1994. Future minimum lease payments will be approximately
$87,000 in 1997 and $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 $23,900 in 1996, $37,200
in 1995, and $15,300 in 1994.

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 1996 and 1995,
the Company received $2,500,000 and $1,278,388, respectively, under these
agreements.

                                      F-15
<PAGE>   50

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.                                            DESCRIPTION                                      PAGE
-----------        -----------------------------------------------------------------------------------  ----
<C>           <S>  <C>                                                                                  <C>
      *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.
      *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.)
      11      --   Computation of pro forma net loss per common share.
      23.2    --   Consent of Ernst & Young LLP.
      23.3    --   Consent of Dr. Volker Vossius.
      27      --   Financial Data Schedule.
</TABLE>

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

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

 + 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.