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

Liquidity and Capital Resources

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

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

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

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

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

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

Year 2000

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

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


                                       27
<PAGE>

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

Certain Factors That May Affect Future Results

Early Stage of Development; Technological Uncertainty

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

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

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

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

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

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

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

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


                                       28
<PAGE>

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

No Assurance of Regulatory Approval; Extensive Government Regulation

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

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

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

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

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


                                       29
<PAGE>

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

Uncertainty of Market Acceptance of Technology and Products

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

Need to Establish Collaborative Commercial Relationships; Dependence On Partners

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

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


                                       30
<PAGE>

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

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

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

Future Capital Needs; Uncertainty of Additional Funding

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

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

Intense Competition and Risk of Technological Obsolescence

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


                                       31
<PAGE>

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

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

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

Uncertainty Regarding Patents and Proprietary Rights

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

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

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


                                       32
<PAGE>

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

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

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

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

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

Absence of Sales and Marketing Experience

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

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

                                       33
<PAGE>

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

Limited Manufacturing Capability; Dependence on Sole Source Supplier

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

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

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

Hazardous Materials

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


                                       34
<PAGE>

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

Potential Product Liability Exposure and Insurance

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

Uncertainty of Pharmaceutical Pricing and Adequate Reimbursement

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

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

Attraction and Retention of Key Management and Qualified Personnel

                                       35
<PAGE>

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

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


                                       36