10-K405

   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 2000
                                       OR
          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                         Commission file number 1-12584

                         SHEFFIELD PHARMACEUTICALS, INC.
             (Exact name of registrant as specified in its Charter)

                                                                 
        DELAWARE                                                                    13-3808303
(State of Incorporation)                                               (IRS Employee Identification Number)

425 SOUTH WOODSMILL ROAD                     63017                                (314) 579-9899
ST. LOUIS, MISSOURI                        (Zip Code)                        (Registrant's telephone,
(Address of principal executive offices)                                       including area code)



           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

         Title of Class              Name of each exchange on which registered
    Common Stock. $.01 par value             American Stock Exchange

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                      None

                  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 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.
[X]Yes   [ ] No

                  Indicate by check mark if disclosure of delinquent filers to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the 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. [X]

                  The aggregate market value at March 6, 2001 of the voting
stock of the registrant held by non-affiliates (based upon the closing price of
$3.70 per share of such stock on the American Stock Exchange on such date) was
approximately $77,515,000. Solely for the purposes of this calculation, shares
held by the registrant's directors and executive officers and beneficial owners
of 10% or more of the Company's Common Stock of the registrant have been
excluded. Such exclusion should not be deemed a determination or an admission by
the registrant that such persons are, in fact, affiliates of the registrant.

                  Indicate the number of shares outstanding of each of the
registrant's classes of common equity, as of the latest practicable date: At
March 6, 2001, there were outstanding 28,829,276 shares of the registrant's
Common Stock, $.01 par value.



   2


                       DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Company's Annual Report to Stockholders for the year
ended December 31, 2000 are incorporated by reference in Items 6, 7 and 8 of
this Annual Report on Form 10-K and attached as Exhibit 13 hereto.

Certain portions of the Registrant's definitive proxy statement to be filed not
later than April 30, 2001 pursuant to Regulation 14A are incorporated by
reference in Items 10 through 13 of Part III of this Annual Report on Form 10-K.

                                       2
   3


         PART I

         The following contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. All forward-looking statements
involve risks and uncertainty. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this report will
prove to be accurate. The Company's actual results may differ materially from
the results anticipated in the forward-looking statements. See "Business --
Certain Risk Factors that May Affect Future Results, Financial Condition and
Market Price of Securities" included herein for a discussion of factors that
could contribute to such material differences. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.

ITEM 1.  BUSINESS

THE COMPANY

         Sheffield Pharmaceuticals, Inc. (formerly Sheffield Medical
Technologies Inc.) ("Sheffield" or the "Company") was incorporated under
Canadian law in October 1986. In May 1992, the Company became domesticated as a
Wyoming Corporation pursuant to a "continuance" procedure under Wyoming law. In
January 1995, the Company's shareholders approved the proposal to reincorporate
the Company in Delaware, which was effected on June 13, 1995. The Company is a
specialty pharmaceutical company focused on development and commercialization of
later stage pharmaceutical opportunities utilizing proprietary pulmonary
delivery technologies over a range of therapeutic areas. Through our alliances
with Elan Corporation plc ("Elan"), Zambon Group SpA ("Zambon"), and Siemens AG
("Siemens"), Sheffield is currently developing nine respiratory and systemic
(non-respiratory) therapies to be delivered through the Company's Metered
Solution Inhaler, or MSI, and Aerosol Drug Delivery System, or ADDS. Sheffield
believes these pulmonary delivery technologies will allow the Company to
capitalize on the growing drug delivery market by providing both advanced
respiratory treatments and patient-friendly alternatives for therapies that can
currently be administered only by injection or other inconvenient means.

         In 1997, the Company acquired rights to the MSI, a portable
nebulizer-based pulmonary delivery system, through a worldwide exclusive license
and supply arrangement with Siemens. In June 1998, Sheffield sublicensed to
Zambon worldwide marketing and development rights to respiratory products to be
delivered by the MSI. During the second half of 1998, the Company acquired the
rights to an additional pulmonary delivery technology, the ADDS from a
subsidiary of Aeroquip-Vickers, Inc. ("Aeroquip-Vickers"). The ADDS technology
is a new generation propellant-based pulmonary delivery system. Additionally,
during 1998, Sheffield licensed from Elan, the Ultrasonic Pulmonary Drug
Absorption System ("UPDAS(TM)"), a novel disposable unit dose nebulizer system,
and Elan's Absorption Enhancing Technology ("Enhancing Technology"), a
therapeutic agent to increase the systemic absorption of drugs. In October 1999,
the Company licensed Elan's Nanocrystal(TM) dispersion technology to be used in
developing certain steroid products.

BUSINESS STRATEGY

         The Company's business strategy is to seek out opportunities to acquire
and develop commercially attractive pharmaceutical products, primarily in the
area of pulmonary drug delivery. The Company recognizes that no single
technology in the area of pulmonary drug delivery will meet the needs of
patients and providers of the wide variety of compounds (both for respiratory
disease and systemic disease therapy) that may benefit therapeutically and
commercially from pulmonary delivery. As a result, it remains the Company's goal
to acquire or in-license a portfolio of pulmonary delivery technologies to meet
the broadest based market opportunity. The Company intends to selectively enter
into joint ventures or other forms of strategic alliances to defray or reduce
significant development and manufacturing costs associated with these
opportunities that otherwise might be borne by the Company while retaining
certain commercial rights.


                                       3
   4

         The Company will continue to be opportunistic in the acquisition and/or
in-licensing of technologies or products that meet the Company's strategic
objectives. Such opportunities include: (1) technologies or products that meet
the needs of healthcare communities that are not currently served, (2)
technologies or products that can effectively be developed when viewed in light
of the commercial opportunity and competitive environment within the U.S.
market, (3) technologies or products that will be of substantive interest to
other companies with regard to co-development and co-marketing with limited
incremental investment by the Company, and (4) products and technologies with
the potential for marketing to a specialty group or limited physician audience.
The Company plans to pay special attention to platform technologies that can be
developed into multiple applications in varying therapeutic categories.

STRATEGIC ALLIANCES

         The Company believes a less costly, more predictable path to commercial
development of therapeutics can be achieved through the creative use of
collaborations and alliances, combined with state-of-the-art technology and
experienced management. The Company is applying this strategy to the development
of both respiratory and systemic pharmaceutical products to be delivered through
the Company's proprietary pulmonary delivery systems. Using these pulmonary
delivery systems as platforms, the Company has established strategic alliances
for developing its initial products with Elan, Siemens and Zambon.

         In a collaboration with Zambon, the Company is developing a range of
pharmaceutical products delivered by the MSI to treat respiratory diseases.
Under its agreement with Zambon, MSI commercial rights for respiratory products
have been sublicensed to Zambon in return for an equity investment in the
Company (approximately 10%). Zambon has committed to fund the development costs
for respiratory compounds delivered by the MSI, as well as make certain
milestone payments and pay royalties on net sales to the Company resulting from
these MSI products. Initial products for respiratory disease therapy delivered
through the MSI include albuterol, ipratropium, cromolyn and inhaled steroids.
The Company has maintained co-marketing rights for the U.S. The Company's
ability to co-market MSI respiratory products in the U.S. requires no additional
payment to Zambon by the Company. Zambon and the Company are having discussions
regarding the possible modification of their agreement, including the future
marketing arrangements for the MSI respiratory products in the United States.

         As part of a strategic alliance with Elan, a world leader in
pharmaceutical delivery technology, the Company is developing therapies for
systemic diseases to be delivered to the lungs using both the ADDS and MSI. In
1998, the systemic applications of the MSI and ADDS were licensed to Systemic
Pulmonary Delivery, Ltd. ("SPD"), a wholly owned subsidiary of the Company. In
addition, two Elan technologies, UPDAS and the Enhancing Technology, have also
been licensed to SPD. The Company has retained exclusive rights outside of the
strategic alliance to respiratory disease applications utilizing the ADDS
technology and the two Elan technologies. Two systemic compounds for pulmonary
delivery are currently under development. For the treatment of breakthrough
pain, the Company is developing morphine delivered through the MSI. Ergotamine,
a therapy for the treatment of migraine headaches, is currently being developed
for use in the ADDS.

         In addition to the above alliance with Elan, in 1999, the Company and
Elan formed a joint venture, Respiratory Steroid Delivery, Ltd. ("RSD"), a 80.1%
owned subsidiary of the Company and 19.9% owned by Elan, to develop certain
inhaled steroid products to treat certain respiratory diseases using Elan's
NanoCrystal(TM) dispersion technology. The inhaled steroid products to be
developed include a propellant-based steroid formulation for delivery though the
ADDS, a solution-based unit-dose-packaged steroid formulation for delivery using
a conventional tabletop nebulizer, and a solution-based steroid formulation for
delivery using the MSI system.

         Outside of these alliances, the Company owns the worldwide rights to
respiratory disease applications of all of its technologies, subject only to the
MSI respiratory rights sublicensed to Zambon.

         In addition to the above, the Company has several agreements in place
for the manufacture of its delivery systems. Siemens, a multi-national
engineering and electronics conglomerate, serves as the manufacturer of the MSI.
Siemens also provides ongoing technical support in the design and testing of
pharmaceutical products in the MSI. The interchangeable drug-containing
cartridges in the MSI are being assembled and filled by Cheasapeake Biological
Laboratories of Baltimore, Maryland. During 1999, the Company signed an
agreement with an aerosol manufacturer, Medeva Pharmaceuticals MA, Inc., for the
manufacture and supply of certain products to be delivered by the ADDS.

                                       4
   5


         The Company is also currently in discussions with a number of
pharmaceutical and biotechnology companies about potential collaborations for
developing specific compounds (both respiratory and systemic) in the ADDS.
Unlike the MSI, ADDS is a technology that lends itself to individual product
applications in the respiratory market. While the ADDS technology may be
applicable to a wide range of respiratory products, the Company believes that a
full line of products delivered by ADDS is not necessary for commercial success.
The reverse is true with the MSI, since one of the MSI's primary competitive
advantages is the delivery of a range of drugs in interchangeable cartridges
used with the parent nebulizer device.

PULMONARY DELIVERY MARKET ENVIRONMENT

         The Company competes in the pulmonary delivery market. The principal
use of pulmonary delivery has been in the treatment of respiratory diseases such
as asthma, chronic obstructive pulmonary disease ("COPD") and cystic fibrosis.
There is significant advantage in aerosol therapy for respiratory disease.
Pulmonary administration delivers the medication directly onto the lung's
epithelial surfaces. In many cases, this means that drugs can be effective in
very low doses -- reducing the side effects usually associated with systemic
administration. In 1998, industry sources estimate there were approximately 35.5
million asthma patients and 49.5 million COPD patients worldwide. These sources
indicate that the number of newly diagnosed patients is growing at a rate in
excess of 10% annually due to an increase in worldwide air pollution levels and
the overall aging of the population. By the year 2005, the Company expects that
there will be more than 19 million asthma patients in the United States alone.

         In addition, the competitive marketplace has been significantly
affected by the worldwide phase out of clorofluorocarbons ("CFCs") pursuant to
the Montreal Protocol. CFCs are the propellants traditionally used in metered
dose inhalers ("MDIs"), which are the most common form of pulmonary delivery.
Companies in the respiratory market have initiated significant programs to
redevelop existing products using alternative propellants, dry powders or
nebulizers.

         There is considerable interest in applying pulmonary delivery
technology to systemic therapies that would benefit from the relatively easy
administration to the circulatory system through the lungs. Work on pulmonary
delivery of insulin by other pulmonary delivery companies has received
significant public notice. There is a range of therapies that could provide a
significant market opportunity if available in a pulmonarily delivered form.

         Today, three types of devices are widely used in pulmonary drug
administration: metered dose inhalers, dry powder inhalers, and nebulizers.

         Metered Dose Inhalers. Currently, MDIs are the most commonly used
         pulmonary delivery system. It is estimated that in the United States
         80% of pulmonary drug delivery is via MDI, with the majority of this
         use coming from adults with asthma and COPD.

         The main components of an MDI include a canister containing the drug
         mixed with propellant and surfactant, a mouthpiece that acts as the
         delivery conduit and the actuator seat for the release of the drug. The
         initial velocity of particles as they leave an inhaler is very high --
         approximately 2-7 meters per second -- resulting in wasted drug if the
         patient is not able to coordinate his/her breath with the delivery of
         aerosol into the mouth. A number of studies have demonstrated that as
         many as 60% of patients cannot accurately time their inspiration with
         the actuation of their inhaler which results in under medication and
         lack of compliance. Typically, less than 20% of delivered drug actually
         reaches the lungs.

         The primary advantages of an MDI include its small size, portability,
         fast usage time, and its availability for use with most respiratory
         drugs. Disadvantages of an MDI include patient coordination issues and
         efficient dose delivery. Additionally, because the use of CFCs
         traditionally used in MDIs are being phased out by international
         agreement (Montreal Protocol), alternative propellants and formulations
         are being developed. Over time, all current MDI users will be required
         to move to a non-CFC MDI or other alternative delivery systems. The
         majority of U.S. patients favor aerosol MDIs although a sizable
         percentage may not coordinate them properly.

         Dry Powder Inhalers. Dry powder inhalers ("DPIs") were introduced in
         the 1960s as single-dose inhalers. In these devices, the drug is loaded
         as a unit dose that is mechanically released as a powder for inhalation
         prior to each use. To date, these relatively cumbersome systems have
         been the primary form of DPI available in the United States, and
         account for approximately 1% of the total aerosol delivery market.

                                       5
   6

         The inconvenience of the single dose DPI has been overcome outside of
         the U.S. with the development and introduction of multi-dose DPIs that
         can deliver up to 200 doses of medication. However, like the single
         dose systems, they are inspiratory flow rate dependent; that is, the
         amount of drug delivered to the lung depends on the patient's ability
         to inhale.

         Two of the most significant advantages of DPIs include (1) no
         hand-breath coordination is required as with MDIs; and (2) they contain
         no CFCs. However, most require a high inspiratory flow rate, which can
         be problematic in younger patients or patients with compromised lung
         function. In addition, they often present difficulties for those with
         manual disabilities (e.g., arthritis) or limited vision and, depending
         upon the powder load delivered, they may induce acute bronchospasm in
         sensitive individuals. Additionally, multi-dose powder inhalers are
         subject to moisture sensitivity either from the environment or patient
         breath and have had difficulty meeting U.S. regulatory standards for
         dose-to-dose variation.

         Nebulizers. The third widely-used aerosol delivery system is the
         nebulizer. Jet nebulizers, which are the most commonly used nebulizer,
         work on a stream of compressed air or oxygen that is forced through a
         narrow tube lying just above the surface of the liquid to be nebulized.
         It takes approximately 10 to 15 minutes to nebulize this amount of
         liquid. Studies suggest keeping the duration of nebulization below 10
         minutes, as longer durations are associated with poor compliance.
         During nebulization only about 10% of the drug is delivered to the
         lungs; about 80% gets trapped in the reservoir, tubing and mask; the
         rest is exhaled.

         Nebulizers can be used for a wide range of patients, but are especially
         useful for those older and younger patients who cannot manage other
         inhaler devices. Nebulizers also play a key role in emergency room and
         intensive care treatment for patients with acute bronchospasm. Another
         feature exclusive to nebulizers is that a mixture of drugs can be
         administered in one sitting. However, currently approved nebulizers are
         bulky table-top units that are time consuming, have a high initial cost
         (often in excess of the amount reimbursable by managed care) and can be
         noisy during operation.

METERED SOLUTION INHALER

         The MSI pulmonary drug delivery system has been developed to provide
the therapeutic benefit of nebulization with the convenience of pressurized MDIs
in one system. The MSI was developed to meet specific needs within the
respiratory market, particularly for pediatric and geriatric patients suffering
from asthma and COPD.

Description of the MSI

         The MSI is comprised of two main components: (1) a reusable,
pocket-size inhaler unit developed and manufactured for the Company by Siemens;
and (2) drug cartridges containing multiple doses of drug formulation assembled
and filled by Chesapeake Biological Laboratories. The cartridges are an integral
part of the total system. The cartridge plus each drug formulation will be the
subject of a separate drug device combination New Drug Application ("NDA").

         The basic technology of the system involves the rapid nebulization of
therapeutic agents using ultrasonic waves. This produces a concentrated cloud of
medication delivered through the mouthpiece over a two to three second period
for inhalation. The key components of the technology are housed in the inhaler
unit. They are the rechargeable battery-operated motor, ultrasonic horn and drug
cartridge. The pocketsize MSI allows for administration of a range of drugs in a
single, simple-to-use, environmentally friendly delivery system. Each cartridge
contains, depending on formulation, approximately a one to two month supply of
the drug.

         To use the MSI system, a patient simply selects the appropriate
color-coded drug cartridge and places it into the chamber of the inhaler unit.
Pressing the "on" button activates a small electrical motor that transports a
precise dose of drug from the cartridge chamber to the ultrasonic horn --
transforming the solution into an aerosolized cloud. The patient's inspiratory
breath carries this cloud of medication directly to the lungs where it is
needed. The dose delivered by the MSI is very accurate and consistent because:
(1) the MSI is designed to be inspiratory flow rate independent; that is,
delivery of the drug does not depend upon the patient's ability to inhale
forcefully, and (2) the MSI does not require a high level of coordination
between inspiration and actuation of the device. The patient's natural breath
carries the medication directly to the lungs, minimizing the amount of drug
deposited in the mouth and throat.

                                       6
   7

MSI Advantages

         The Company believes that the MSI provides significant advantages over
other drug delivery systems. It is particularly suited for younger and older
asthma patients, as well as for older COPD patients who have difficulty using
MDIs and currently have to depend on larger, more time-consuming tabletop
nebulizers for delivery of their medications. These potential advantages
include:

         Accuracy. The superior engineering and patient-friendly design of the
         MSI is intended to provide minimal dose-to-dose variability. Patients
         can therefore expect to receive the right therapeutic dose
         consistently. Testing of the MSI system has shown that dose-to-dose
         variability with the MSI is significantly better than the current FDA
         requirement.

         Enhanced Patient Compliance. The pocketsize, portable MSI unit is
         designed to combine the therapeutic benefits of nebulization with the
         convenience of pressurized metered dose inhalers. The drug dose is
         precisely measured and delivered in seconds, as compared to 10 to 15
         minutes or more for the typical nebulizer. The device is easy to
         operate, requiring minimal coordination between actuation and
         inhalation for proper drug delivery. These benefits are expected to
         improve patient compliance with the proper administration of their
         respiratory medication. Another expected factor in enhanced patient
         compliance is the broad range of drugs that can be accommodated by the
         MSI, allowing patients on multiple medications to rely on one simple
         delivery system.

         Inspiratory Flow Rate Independence. Unlike most of the DPIs currently
         available (or in development), the MSI is designed to achieve a
         consistent and significant level of drug deposition over a broad range
         of inspiratory flow rates. This is especially important in younger
         patients or patients with compromised lung function (e.g., during an
         asthma attack) who have a difficult time breathing normally.

         Versatility. Many asthma and COPD patients are taking multiple
         inhalation medications. The MSI accommodates drug cartridges to allow
         for the administration of a broad range of frequently used respiratory
         drugs in a single, simple-to-use delivery system. The system includes
         an early warning mechanism that signals when the batteries need
         recharging or when the dosator is not functioning properly and a dose
         counter indicating when a new inhaler unit is required. These
         user-friendly features result in a simplified dosing procedure for both
         patients and their caregivers.

         Pulmonary Targeting. The particle size of the inhaled medication
         affects the effectiveness of drug delivery to the lung. Generally, a
         drug is "respirable" if the particle size is between two and five
         microns. Larger particles tend to deposit in the inhaler or in the
         patient's mouth and throat. Smaller particles tend to be exhaled.
         Within the respirable range, the MSI is designed to deliver particles
         specifically targeted for certain portions of the lungs; for example,
         the central lung for local treatment or the deep lung for enhanced
         absorption into the blood stream for systemic therapies.

         Environmentally Friendly. CFCs, the most commonly used propellant for
         MDI aerosols, are believed to adversely affect the Earth's ozone layer.
         They are subject to worldwide regulations aimed at eliminating their
         production and use within the decade under the Montreal Protocol. The
         MSI does not use CFCs or any other type of ozone depleting propellant.

         Economical. The Company believes that the MSI offers significant value
         to the patient because it is designed to allow a single device to be
         used with a complete family of respiratory medications available in
         cost-effective interchangeable cartridges. The inhaler unit itself is
         expected to have a life of two to three years. The initial cost of the
         inhaler unit is expected to be within the cost range that managed care
         providers will reimburse patients. The Company anticipates the combined
         cost to the patient of the device plus the drug filled cartridges will
         be comparable to the average cost per dose of the standard metered dose
         inhaler.

MSI Product Pipeline in Development

         The Company is implementing a broad development strategy for the MSI.
The Company and Zambon are developing a range of widely used respiratory drugs
for delivery in the MSI. Potential candidates for respiratory disease therapy
include albuterol, ipratropium, cromolyn, inhaled bronchial steroids and
combination products, each of which is described below. Most patients who
experience respiratory disease commonly use multiple medications to treat their
conditions.



                                       7
   8

Among the drugs being developed for respiratory applications in the MSI system
are:

                  ALBUTEROL. Albuterol is a beta agonist used as rescue therapy
         for patients with asthma and COPD. It is the largest selling
         respiratory compound with U.S. sales of over $500 million in all dosage
         forms. It is available in a metered dose inhaler and nebulizer solution
         as well as solid and liquid dosage forms.

                  Status: Zambon initiated a Phase II clinical trial in December
         1999 which compared the MSI to a conventional albuterol-MDI. Findings
         from Phase II studies indicated that MSI-albuterol and MDI-albuterol
         were comparable in improving lung function in the 24 adult patients. An
         end of Phase II meeting has been scheduled with the Food and Drug
         Administration ("FDA").

                  IPRATROPIUM. Ipratropium is a bronchodilator used primarily to
         treat COPD patients. It is useful because of its anticholinergic
         properties, which reduce pulmonary congestion. It is available in a
         metered dose inhaler, nebulizer solution and a combination product with
         albuterol.

                  Status: Zambon initiated a Phase I/II clinical trial in Europe
         in January 2000 assessing the safety and efficacy compared to a
         commercially available ipratropium product delivered by a MDI and
         placebo in patients with COPD. The results of the study indicated that
         both MSI-ipratropium and MDI-ipratropium improved lung function in the
         COPD patients. An Investigational New Drug Application ("IND") was
         filed with the FDA- in May 2000.

                  CROMOLYN. Cromolyn is a non-steroidal, anti-inflammatory drug
         used to reduce the underlying bronchial inflammation associated with
         asthma. It is extremely safe and it is most commonly used to treat
         pediatric patients. It is available in a MDI and nebulizer solution.

                  Status: An IND was filed with the FDA in July 2000.

                  INHALED BRONCHIAL STEROIDS. Inhaled bronchial steroids are
         anti-inflammatory agents. They address the underlying inflammation in
         the lungs of asthma and COPD patients. They are available in a metered
         dose inhaler. Steroids are the fastest growing category in the
         respiratory market, growing at 20% per year.

                  Status: Formulation work is currently underway. An IND is
         being prepared for filing with the FDA.

                  OTHER RESPIRATORY THERAPIES. In addition to the drugs listed
         above, the Company and Zambon are assessing the market potential for
         certain other respiratory therapies. These therapies may include a
         combination of an anti-inflammatory and beta agonist, and an
         anticholinergic and beta agonist, as well as antibiotics, cystic
         fibrosis treatments and a range of early stage biotech compounds that
         target respiratory disease.

         SYSTEMIC APPLICATIONS: Through its development alliance with Elan, the
Company is currently evaluating certain drugs for systemic treatment by
pulmonary delivery through the MSI. The first of these drugs, morphine, is for
the treatment of severe pain. The pain management market includes patients with
cancer, post-operative, migraine headache and chronic persistent pain. Narcotic
analgesics for treatment of these severe forms of pain are estimated to exceed
$1.0 billion in worldwide sales in the year 2000. The Company has identified a
market opportunity for a rapid-acting, non-invasive treatment for breakthrough
pain.

         Status: In July 1999, the Company completed a gamma
scintigraphy/pharmacokinetic trial comparing morphine delivered via the MSI to
subcutaneous injection. The MSI demonstrated good pulmonary deposition and very
rapid absorption, more rapid peak blood levels vs. subcutaneous injection and
low oral and throat deposition. The Company is currently seeking to attract a
partner for the continued development and commercialization of this product.


                                       8
   9
AEROSOL DRUG DELIVERY SYSTEM

         The ADDS, a new generation MDI, was developed to correct major
deficiencies associated with existing MDI technology. MDIs have provided
convenient, safe, self-administered treatment for over 30 years and decrease the
cost of therapy because they can be used by the patient at home with minimal
medical supervision. However, proper use of current MDIs requires training and
precise execution of the delivery technique. For these reasons, many patients do
not use their MDIs in the prescribed manner to coordinate actuation and
inhalation. Incorrect technique has been shown to result in little or no
benefits from MDI use in half of all adult patients and in a greater proportion
of children. Moreover, because of these coordination issues, most children under
age five cannot use a standard MDI.

         Even with correct technique, current MDIs typically deliver less than
20% of the drug to the lungs of the patient. The remainder of the drug is wasted
upon deposition on the back of the mouth, or by completely missing the airway.
This results from: (1) the high linear velocity (two to seven meters/second) of
the aerosol jet as it discharges; (2) incomplete evaporation of the propellant
leading to large size droplets that deposit in the mouth and larynx rather than
reaching the lung; and (3) inadequate mixing resulting in a non-uniform
distribution of drug particles in the inspiratory flow stream. Drug deposited in
the mouth and throat can be swallowed and absorbed systemically or, in the case
of inhaled steroids, may create a local concentration of the drug that causes
immunosuppression response and the development of fungal infections. In
addition, swallowing beta agonist bronchodilators may result in adverse effects
on heart rate, blood pressure, glucose and potassium.

         From a therapeutic view, the most serious problem with MDIs is
inconsistency of delivery. With existing MDIs the actual dose can vary from 0%
to 300% of the intended dose. Patients may not receive sufficient drug to
achieve a therapeutic effect, or they may overdose with undesirable side
effects. These conditions can lead to the need for emergency treatment.

         A major advantage for the ADDS technology is that it uses the same
aerosol canisters and valves as are currently used in existing MDIs. As a
result, existing aerosol facilities will be able to produce canisters with
formulations optimized for use in ADDS. The only additional step required is to
place the aerosol canister in the "device" prior to final packaging. This
results in a cost effective product and provides numerous benefits to patients.
The device along with the canister are disposable when the canister is empty.

         The ADDS technology features two improvements over existing MDIs and
dry powder inhalers. Fluid dynamics modeling, in-vitro and human trials indicate
that up to 50% of drug emitted by the ADDS reaches the lungs with oral
deposition reduced to approximately 10%. Because of this increase in efficiency,
ADDS should require less drug per actuation than existing devices to achieve the
same therapeutic effect. This may result in more unit doses per drug canister
than a conventional MDI, with less potential for adverse reactions.

         ADDS also features a unique proprietary triggering mechanism that
actuates at the correct time during inhalation. It is designed to automatically
adjust to the patient's breathing pattern to accommodate differences in age and
disease state. This synchronous trigger is designed to reduce patient
coordination problems and enhance patient compliance.

Description of the ADDS

         The ADDS technology utilizes a standard aerosol MDI canister, encased
in a compact device that provides an aerosol flow-control chamber and a
synchronized triggering mechanism. Manipulation of the discharged drug-
containing aerosol cloud is key to optimization of the efficiency and
consistency for MDIs.

         The ADDS design uses fluid dynamics to: (1) reduce the velocity of the
drug relative to the inspiratory breath velocity (less than one meter/second);
(2) increase residence time of the aerosol droplets before exiting the device to
allow near complete evaporation of the propellant; (3) increase droplet
dispersion and mixing, thus increasing evaporation and improving vapor fraction
at every point along the flow path; (4) reduce the diameter of the drug
particles at the exit plane of the device; (5) decrease inertia of droplets to
reduce impaction; and (6) improve timing of dose discharge with inspiratory
breath for increased drug deposition in lungs.

                                       9
   10
The unique features of ADDS are:

         Aerosol Flow-Control Chamber. The aerosol flow-control chamber allows
         the patient to inhale through the device at a normal breathing rate,
         instead of a forced breath. The inspiratory breath establishes flow
         fields within the device that mix and uniformly disperse the drug in
         the breath. In the mouthpiece, nearly all the propellant is evaporated
         leaving only drug particles to be inspired, allowing a significant
         increase in the amount of drug delivered to the lungs. Only small
         amounts of drug deposit in the mouth and throat.

         Synchronizing Trigger Mechanism. A triggering and timing mechanism that
         is synchronized with the patient's inspiratory breath controls the
         discharge of the metering valve. ADDS can accommodate different
         inspiratory flowrates, so any patient can activate the triggering
         device. Similarly, the timing mechanism will automatically adjust to
         the flow generated by the patient, delaying or hastening discharge in
         proportion to the total volume passing through the flow control
         chamber. This feature accommodates differences in inspiratory flow
         characteristic of pulmonary disease states in children, adults and the
         infirm.

ADDS Advantages

         The Company believes that the ADDS technology possesses many potential
competitive advantages over other inhalation systems in both local respiratory
and systemic applications. It is applicable to all age categories, eliminating
the most troublesome problems of aerosol metered dose delivery. Increased
efficiency allows for potential application to proteins and peptides formerly
not considered as candidates for aerosol delivery.

         The performance characteristics of the ADDS are expected to translate
into multiple benefits, including:

         Improved Drug Delivery Efficiency. A higher percentage of the drug
         emitted by the ADDS is delivered to the lungs than current inhalation
         systems while approximately 10% is lost through deposition in the mouth
         and throat. The improved delivery efficiency enhances efficacy, reduces
         side effects and provides greater consistency of dose administration.

         Greater Patient Compliance. The ADDS reduces technique dependence for
         simple, consistent dose-to-dose delivery, resulting in improved
         compliance with prescribed therapy.

         Broader Patient Base. The ADDS can be prescribed for a broader patient
         base since it is designed to be self-administered by children and the
         elderly as well as adult patients.

         Pharmacoeconomic Benefit. The ADDS has increased delivery efficiency
         with less waste, so patients can receive more unit doses per standard
         canister. This allows for a lower drug cost per day in addition to
         reducing prescription and payor costs because fewer pharmacy visits are
         required.

ADDS Product Pipeline in Development

         ADDS SYSTEMIC THERAPIES. The development of systemic drugs using ADDS
is being conducted as part of the Company's alliance with Elan. The first
product to be developed is targeted to address migraine headaches. The Company
is utilizing ergotamine tartrate as a proof-of-principle product. Ergotamine, an
alpha adrenergic blocking agent, is a therapy to stop or prevent vascular
headaches such as migraines. Migraine headaches affect 16-18 million Americans.
Worldwide annual sales for the migraine therapy market are in excess of $2.3
billion with many patients unable to get satisfactory relief from currently
available therapies. In fact, it is estimated that absenteeism and medical
expenses resulting from migraine total $50 billion annually. Current oral drug
therapies for the treatment of migraine headaches have slow onset of action,
resulting in a medical need that may be better satisfied through pulmonary
delivery.

         Status: In December 1999, the Company completed a gamma
scintigraphy/pharmacokinetic trial comparing the ADDS to a conventional MDI. The
trial showed successful delivery of the drug to all regions of lung with
significantly reduced mouth and throat deposition, and rapid drug absorption.
The Company is currently seeking to attract a partner for the continued
development and commercialization of this product.


                                       10
   11

         ADDS RESPIRATORY THERAPIES. The ADDS has broad applicability across
respiratory disease therapies since it utilizes basic MDI delivery methods that
are the most popular forms of respiratory delivery. The ADDS technology's
ability to significantly minimize oral deposition makes it especially applicable
to steroids and steroid combinations with which fungal overgrowth side effects
are common. In addition, U.S. patients and physicians have indicated that they
prefer metered dose aerosol delivery. The ADDS technology is positioned to take
advantage of this built-in market preference for MDIs with its potential for
superior performance, reduced adverse reactions and cost-effectiveness. Inhaled
steroids are the fastest growing segment of the respiratory market and the
largest in Europe. The features of the ADDS directly minimize the aspects of
inhaled steroids that remain a concern to patients and physicians. The market
for inhaled steroids on a worldwide basis is approximately $2.0 billion.

         Status: In September 2000, the Company completed a pilot study using
the ADDS to deliver an undisclosed, patented respiratory drug used to treat
asthma. The study measured the distribution of this respiratory drug delivered
by ADDS compared to the distribution of this same drug delivered through a
commercially available MDI in 12 healthy volunteers. Results of this study
demonstrated that ADDS significantly increased drug deposition in all regions of
the lung. ADDS delivered approximately 200% more drug to the lungs, deposited
approximately 75% less drug in the mouth, and increased dosing consistency by
approximately 55% compared to the currently marketed form of this same drug. An
IND is being prepared for filing with the FDA on this respiratory drug.

         As with MSI, there remains opportunities for developing ADDS for a
range of therapies either directly by the Company or in collaboration with
strategic partners. Unlike the MSI, it is potentially advantageous for the
Company to partner on a product-by-product basis, concentrating on prime
partners to launch the system commercially and to aid in subsequent development
with products developed specifically for exclusive commercialization by the
Company.

INHALED STEROID PRODUCTS

         In October 1999, the Company and Elan formed a separate joint venture
to develop three inhaled steroid products to treat certain respiratory diseases
that will utilize Elan's Nanocrystal dispersion technology and Sheffield's
pulmonary delivery systems. Because of the difficulties in formulating steroids
for delivery through a solution-based inhalation system, only one steroid
product is currently available in the United States for delivery through a
nebulizer. The estimated worldwide market for inhaled steroids is $2 billion
annually and growing at 20% per year. The three products being formulated using
Elan's Nanocrystal technology are 1) a propellant-based steroid formulation for
inhalation in the ADDS; 2) a unit-dose packaged steroid formulation for
inhalation delivery in a standard commercial tabletop device; and 3) a steroid
formulation for inhalation delivery using the MSI. Formulation work is currently
underway in all three of these inhaled steroid products.

ULTRASONIC PULMONARY DRUG ABSORPTION SYSTEM

         The UPDAS(TM) is a novel ultrasonic pulmonary delivery system designed
by Elan as a disposable unit dose nebulizer system. UPDAS was designed primarily
for the delivery of proteins, peptides and other large molecules to the lungs
for absorption into the bloodstream. Elan's preliminary research with UPDAS
demonstrated unique atomization that may prevent denaturing of bioactive
molecules and particle size distribution that meets the targets for local and
systemic delivery.

ABSORPTION ENHANCING TECHNOLOGY

         As part of the same transaction in which the Company acquired UPDAS,
the Company also acquired a worldwide exclusive license to Elan's Absorption
Enhancing Technology. While not a delivery system itself, the Enhancing
Technology is a therapeutic agent identified by Elan to increase the systemic
absorption of drugs delivered to the lungs. The Enhancing Technology will be
utilized in conjunction with the Company's other pulmonary delivery systems.

                                       11
   12
EARLY STAGE RESEARCH PROJECTS

         As part of the Company's focus on later stage pharmaceutical
opportunities, the Company is seeking to out-license its portfolio of early
stage medical research projects to companies that are committed to early stage
biotechnology opportunities. The Company has determined that its early stage
technologies do not fit the Company's pulmonary drug delivery strategy.
Consequently, the Company plans to out-license these technologies while
maintaining an interest in the technologies' promise without incurring the
development costs associated with early stage research and development.

         Because the Company is no longer funding these projects, it is at risk
of losing its rights to certain of these technologies. There can be no assurance
that the Company will be able to sell or license its rights to any of its
remaining early stage research projects or realize any milestone payments or
other revenue from those early stage research projects that have been previously
divested.

         In November 1997, the Company entered into a license arrangement for
some of its early stage technologies with Lorus Therapeutics, Inc. (formerly
Imutec Pharma Inc.). The arrangement licenses rights to a series of compounds
for the treatment of cancer, Kaposi's sarcoma and actinic keratosis to a newly
formed company, NuChem Pharmaceuticals, Inc. ("NuChem") for which Lorus
Therapeutics will provide funding and management of the development program. The
Company holds a 20% equity interest in NuChem.

         Work on the lead compounds by NuChem has progressed in the pre-clinical
phase. In 1999, NuChem announced that the U.S. National Cancer Institute has
agreed to undertake additional in vitro screening after initial evaluation of
the compounds. In 2000, NuChem chose NC 381 as its lead anti-cancer drug for
further studies in preparation for clinical trials. Preclinical toxicology
studies are currently underway.

GOVERNMENT REGULATION

         The Company's research and development activities and, ultimately, any
production and marketing of its licensed products, are subject to comprehensive
regulation by numerous governmental authorities in the United States and other
countries. Among the applicable regulations in the United States, pharmaceutical
products are subject to the Federal Food, Drug & Cosmetic Act, the Public Health
Services Act, other federal statutes and regulations, and certain state and
local regulations. These regulations and statutes govern the development,
testing, formulation, manufacture, labeling, storage, record keeping, quality
control, advertising, promotion, sale, distribution and approval of such
pharmaceutical products. Failure to comply with applicable requirements can
result in fines, recall or seizure of products, total or partial suspension of
production, refusal by the government to approve marketing of the product and
criminal prosecution.

         A new drug may not be legally marketed for commercial use in the United
States without FDA approval. In addition, upon approval, a drug may only be
marketed for the indications, in the formulations and at the dosage levels
approved by the FDA. The FDA also has the authority to withdraw approval of
drugs in accordance with applicable laws and regulations. Analogous foreign
regulators impose similar approval requirements relating to commercial marketing
of a drug in their respective countries and may impose similar restrictions and
limitations after approval.

         In order to obtain FDA approval of a new product, the Company and its
strategic partners must submit proof of safety, efficacy, purity and stability,
and the Company must demonstrate validation of its manufacturing process. The
testing and application process is expensive and time consuming, often taking
several years to complete. There is no assurance that the FDA will act favorably
or quickly in reviewing such applications. With respect to patented products,
processes or technologies, delays imposed or caused by the governmental approval
process may materially reduce the period during which the Company will have the
exclusive right to exploit them. Such delays could also affect the commercial
advantages derived from proprietary processes. As part of the approval process,
the FDA reviews the Drug Master File (the "DMF") for a description of product
chemistry and characteristics, detailed operational procedures for product
production, quality control, process and methods validation, and quality
assurance. As process development continues to mature, updates and modifications
of the DMF are submitted.

                                       12
   13
         The FDA approval process for a pharmaceutical product includes review
of (i) chemistry and formulations, (ii) preclinical laboratory and animal
studies, (iii) initial IND clinical studies to define safety and dose
parameters, (iv) well-controlled IND clinical trials to demonstrate product
efficacy and safety, followed by submission and FDA approval of a New Drug
Application (the "NDA"). Preclinical studies involve laboratory evaluation of
the product and animal studies to assess activity and safety of the product.
Products must be formulated in accordance with United States Good Manufacturing
Procedures ("GMP") requirements and preclinical tests must be conducted by
laboratories that comply with FDA regulations governing the testing of drugs in
animals. The results of the preclinical tests are submitted to the FDA as part
of the IND application and are reviewed by the FDA prior to granting the sponsor
permission to conduct clinical studies in human subjects. Unless the FDA objects
to an IND application, the application will become effective 30 days following
its receipt by the FDA. There can be no certainty that submission of an IND will
result in FDA authorization to commence clinical studies.

         Human clinical trials are typically conducted in three sequential
phases with some amount of overlap allowed. Phase I trials normally consist of
testing the product in a small number of normal volunteers for establishing
safety and pharmacokinetics using single and multiple dosing regiments. In Phase
II, the continued safety and initial efficacy of the product are evaluated in a
limited patient population, and appropriate dosage amounts and treatment
intervals are determined. Phase III trials typically involve more definitive
testing of the appropriate dose for safety and clinical efficacy in an expanded
patient population at multiple clinical testing centers. A clinical plan, or
"protocol," accompanied by the approval of the institution participating in the
trials, must be submitted to the FDA prior to commencement of each clinical
trial phase. Each clinical study must be conducted under the auspices of an
Institutional Review Board (the "IRB") at the institution performing the
clinical study. The IRB is charged with protecting the safety of patients in
trials and may require changes in a protocol, and there can be no assurance that
an IRB will permit any given study to be initiated or completed. In addition,
the FDA may order the temporary or permanent discontinuation of clinical trials
at any time. The Company must rely on independent investigators and institutions
to conduct these clinical studies.

         All the results of the preclinical and clinical studies on a
pharmaceutical product are submitted to the FDA in the form of an NDA for
approval to commence commercial distribution. The information contained in the
DMF is also incorporated into the NDA. Submission of an NDA does not assure FDA
approval for marketing. The application review process often requires 12 months
to complete. However, the process may take substantially longer if the FDA has
questions or concerns about a product or studies regarding the product. In
general, the FDA requires two adequate and controlled clinical studies
demonstrating efficacy with sufficient levels of statistical assurance. However,
additional support may be required. The FDA also may request additional
information relating to safety or efficacy, such as long-term toxicity studies.
In responding to an NDA, the FDA may grant marketing approval, require
additional testing and/or information, or deny the application. Accordingly,
there can be no assurance about any specific time frame for approval, if any, of
products by the FDA or foreign regulatory agencies. Continued compliance with
all FDA requirements and conditions relative to an approved application,
including product specifications, manufacturing process, labeling and
promotional material, and record keeping and reporting requirements, is
necessary throughout the life of the product. In addition, failure to comply
with FDA requirements, the occurrence of unanticipated adverse effects during
commercial marketing or the result of future studies, could lead to the need for
product recall or other FDA-initiated actions that could delay further marketing
until the products or processes are brought into compliance.

         The facilities of each pharmaceutical manufacturer must be registered
with and approved by the FDA as compliant with GMP. Continued registration
requires compliance with standards for GMP. In complying with GMP, manufacturers
must continue to expend time, money and effort in production, record keeping and
quality control to ensure technical compliance. In addition, manufacturers must
comply with the United States Department of Health and Human Services and
similar state and local regulatory authorities if they handle controlled
substances, and they must be registered with the United States Drug Enforcement
Administration and similar state and local regulatory authorities if they
generate toxic or dangerous waste streams. Other regulatory agencies such as the
Occupational Safety and Health Administration also monitor a manufacturing
facility for compliance. Each of these organizations conducts periodic
establishment inspections to confirm continued compliance with its regulations.
Failure to comply with any of these regulations could mean fines, interruption
of production and even criminal prosecution.

                                       13
   14
         For foreign markets, a pharmaceutical company is subject to regulatory
requirements, review procedures and product approvals which, generally, may be
as extensive, if not more extensive, as those in the United States. Although the
technical descriptions of the clinical trials are different, the trials
themselves are often substantially the same as those in the United States.
Approval of a product by regulatory authorities of foreign countries must be
obtained prior to commencing commercial product marketing in those countries,
regardless of whether FDA approval has been obtained. The time and cost required
to obtain market approvals in foreign countries may be longer or shorter than
required for FDA approval and may be subject to delay. There can be no assurance
that regulatory authorities of foreign countries will grant approval. The
Company has no experience in manufacturing or marketing in foreign countries nor
in matters such as currency regulations, import-export controls or other trade
laws.

PATENTS AND TRADEMARKS

         MSI System Patents and Trademark

         Under its agreement with Siemens for the technology underlying the MSI
system, the Company is responsible for jointly financing and prosecuting the
U.S. patent applications for the benefit of the owners and licensors of this
technology. To date, three U.S. patents have issued, and two U.S. and European
applications each are pending. The issued U.S. patents provide protection
through 2017 for the MSI device, the dosator cartridges and their combinations.

         Aerosol Drug Delivery System Patents

         As of the December 31, 2000, three U.S. patents have issued and two
U.S. and four foreign applications are pending. The issued U.S. patents cover
the ADDS flow control and triggering mechanism through 2018.

         Early Stage Research Technology Patents

         Under its license agreements for its early stage research projects, the
Company has been responsible for financing and prosecuting patent applications
for the benefit of the owners and licensors of these technologies. While the
Company holds, or has held, several U.S. and foreign patents and patent
applications for these early stage technologies, the Company expects to assign
these patents and applications to future acquirors, if any, of these
technologies. Because the Company does not intend to continue to pay for future
patent fees on these early stage technologies, in the event that no acquirors
are found for these technologies, the Company expects that it will allow some or
all of these patents and patent applications to lapse or the rights may be
returned to the licensors.

COMPETITION

         The Company competes with approximately 25 other companies involved in
developing and selling respiratory products for the U.S. market. Most of these
companies possess financial and marketing resources and developmental
capabilities substantially greater than the Company. Some of the products in
development by other companies may be demonstrated to be superior to the
Company's current or future products. Furthermore, the pharmaceutical industry
is characterized by rapid technological change and competitors may complete
development and reach the marketplace prior to the Company. The Company believes
that competition in the respiratory category will be based upon several factors,
including product efficacy, safety, reliability, availability, and price, among
others.

SUBSIDIARIES

         On January 10, 1996, Ion Pharmaceuticals, Inc. ("Ion"), was formed as a
wholly owned subsidiary of the Company. At that time, Ion acquired the Company's
rights to certain early stage biomedical technologies.

         On April 17, 1997, CP Pharmaceuticals, Inc. ("CP") was formed for the
purpose of acquiring Camelot Pharmacal, LLC ("Camelot"), a privately held
pharmaceutical development company. The Company acquired Camelot on April 25,
1997.

                                       14
   15
         As part of its strategic alliance with Elan, on June 30, 1998, the
Company formed SPD as a wholly owned subsidiary. At that time, SPD acquired the
Company's rights to the systemic applications of the MSI and the ADDS. In
addition, SPD acquired Elan's rights to the UPDAS and the Enhancing Technology.
SPD is responsible for the development of systemic applications in both the MSI
and ADDS.

         In addition to the above alliance with Elan, on October 18, 1999, the
Company and Elan formed a new joint venture, RSD, to develop certain respiratory
steroid products. The Company and Elan made equity investments in RSD
representing an initial 80.1% and 19.9%, respectively, ownership in the joint
venture. The joint venture is responsible for the development of the inhaled
steroid products.

EMPLOYEES

         As of March 6, 2001, the Company employed 17 persons, five of whom are
executive officers.


CERTAIN RISK FACTORS THAT MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION AND
MARKET PRICE OF SECURITIES

         The following are some of the factors that could affect the Company's
future results. They should be considered in connection with evaluating
forward-looking statements contained in this report and otherwise made by the
Company or on the Company's behalf, because these factors could cause actual
results and conditions to differ materially from those projected in
forward-looking statements.

We have experienced significant operating losses throughout our history and
expect these losses to continue for the foreseeable future.

         Our operations to date have consumed substantial amounts of cash and we
have generated to date only limited revenues from contract research and
licensing activities. We have incurred approximately $80.8 million of operating
losses since our inception, including $6.1 million during the year ended
December 31, 2000. Our operating losses and negative cash flow from operations
are expected to continue in the foreseeable future.

We will need additional financing, which if not available, could prevent us from
funding or expanding our operations.

         Cash available for funding our operations as of December 31, 2000 was
$3.0 million. As of such date, we had trade payables and accrued liabilities of
$1.2 million and current research obligations of $.2 million. In addition,
committed and/or anticipated funding of research and development after
December 31, 2000 is estimated at approximately $3.1 million, of which $3.0
million has been committed to be funded by Elan through the issuance of our
Series E cumulative convertible preferred stock. Since December 31, 2000 we have
received $1.0 million as an interest-free advance against future milestone
payments, and anticipate that we have sufficient cash to meet our cash
requirements through December 31, 2001, assuming we do not incur unexpected
costs.

         We need to raise substantial additional capital to fund our operations.
The development of our technologies and proposed products will require a
commitment of substantial funds to conduct costly and time-consuming research,
preclinical and clinical testing, and to bring any such products to market. Our
future capital requirements will depend on many factors, including continued
progress in developing and out-licensing our pulmonary delivery technologies,
our ability to establish and maintain collaborative arrangements with others and
to comply with the terms thereof, receipt of payments due from partners under
research and development agreements, progress with preclinical and clinical
trials, the time and costs involved in obtaining regulatory approvals, the cost
involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims, the need to acquire licenses to new technology and the status of
competitive products.



                                       15
   16
         We intend to seek such additional funding through collaborative or
partnering arrangements, the extension of existing arrangements, or through
public or private equity or debt financings. Additional financing may not be
available on acceptable terms or at all. If we raise additional funds by issuing
equity securities, stockholders may be further diluted and such equity
securities might have rights, preferences and privileges senior to those of our
current stockholders. If adequate funds are not available, we may be required to
delay, reduce the scope of, or eliminate one or more of our research or
development programs or obtain funds through arrangements with collaborative
partners or others that may require us to relinquish rights to certain of our
technologies, product candidates or products that we would otherwise seek to
develop or commercialize. If adequate funds are not available from operations or
additional sources of funding, our business will suffer a material adverse
effect.

Our products are still in development and we may be unable to bring our products
to market.

         We have not yet begun to generate revenues from the sale of products.
Our products will require significant additional development, clinical testing
and investment prior to their commercialization. We do not expect regulatory
approval for commercial sales of any of our products in the immediate future.
Potential products that appear to be promising at early stages of development
may not reach the market for a number of reasons. Such reasons include the
possibility that products will not be proven to be safe and efficacious in
clinical trials, that they will not be able to meet applicable regulatory
standards or obtain required regulatory approvals, that they cannot be produced
in commercial quantities at reasonable costs or that they fail to be
successfully commercialized or fail to achieve market acceptance.

If our products are not accepted by the medical community, our business will
suffer.

         Commercial sales of our products will substantially depend upon the
products' efficacy and on their acceptance by the medical community. Widespread
acceptance of our products will require educating the medical community as to
the benefits and reliability of the products. Our products may not be accepted
and, even if accepted, we are unable to estimate the length of time it would
take to gain such acceptance.

We will be required to make royalty payments on products we may develop,
reducing the amount of revenues with which we could fund ongoing operations.

         The owners and licensors of the technology rights acquired by us are
entitled to receive a certain percentage of all revenues received by us from
commercialization, if any, of products in respect of which we hold licenses.
Accordingly, in addition to our substantial investment in product development,
we will be required to make substantial payments to others in connection with
revenues derived from commercialization of products, if any, developed under
licenses we hold. Consequently, we will not receive the full amount of any
revenues that may be derived from commercialization of products to fund ongoing
operations.

Our dependence on third parties for rights to technology and the development of
our products could harm our business.

         Under the terms of existing license agreements, we are obligated to
make certain payments to our licensors. In the event that we default on the
payment of an installment under the terms of an existing licensing agreement,
our rights thereunder could be forfeited. As a consequence, we could lose all
rights under a license agreement to the related licensed technology,
notwithstanding the total investment made through the date of the default.
Unforeseen obligations or contingencies may deplete our financial resources and,
accordingly, sufficient resources may not be available to fulfill our
commitments. If we were to lose our rights to technology, we may be unable to
replace the licensed technology or be unable to do so on commercially reasonable
terms, which would materially adversely affect our ability to bring products
based on that technology to market. In addition, we depend on our licensors for
assistance in developing products from licensed technology. If these licensors
fail to perform or their performance is not satisfactory, our ability to
successfully bring products to market may be delayed or impeded.

                                       16
   17
We face intense competition and rapid technological changes and our failure to
successfully compete or adapt to changing technology could make it difficult to
successfully bring products to market.

         The medical field is subject to rapid technological change and
innovation. Pharmaceutical and biomedical research and product development are
rapidly evolving fields in which developments are expected to continue at a
rapid pace. Reports of progress and potential breakthroughs are occurring with
increasing frequency. Our success will depend upon our ability to develop and
maintain a competitive position in the research, development and
commercialization of products and technologies in our areas of focus.
Competition from pharmaceutical, chemical, biomedical and medical companies,
universities, research and other institutions is intense and is expected to
increase. All, or substantially all, of these competitors have substantially
greater research and development capabilities, experience, and manufacturing,
marketing, financial and managerial resources. Further, acquisitions of
competing companies by large pharmaceutical or other companies could enhance
such competitors' financial, marketing and other capabilities. Developments by
others may render our products or technologies obsolete or not commercially
viable and we may not be able to keep pace with technological developments.

We are subject to significant government regulation and failure to achieve
regulatory approval for our products would severely harm our business.

         Our ongoing research and development projects are subject to rigorous
FDA approval procedures. The preclinical and clinical testing requirements to
demonstrate safety and efficacy in each clinical indication (the specific
condition intended to be treated) and regulatory approval processes of the FDA
can take a number of years and will require us to expend substantial resources.
We may be unable to obtain FDA approval for our products, and even if we do
obtain approval, delays in such approval would adversely affect the marketing of
products to which we have rights and our ability to receive product revenues or
royalties. Moreover, even if FDA approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections by the FDA, and a later discovery of previously unknown
problems with a product, manufacturer or facility may result in restrictions on
such product or manufacturer. Failure to comply with the applicable regulatory
requirements can, among other things, result in fines, suspensions of regulatory
approvals, product recalls, operating restrictions and criminal prosecution.
Additional government regulation may be established which could prevent or delay
regulatory approval of our products. Sales of pharmaceutical products outside
the United States are subject to foreign regulatory requirements that vary
widely from country to country. Even if FDA approval has been obtained, approval
of a product by comparable regulatory authorities of foreign countries must be
obtained prior to the commencement of marketing the product in those countries.
The time required to obtain such approval may be longer or shorter than that
required for FDA approval. We have no experience in manufacturing or marketing
in foreign countries nor in matters such as currency regulations, import-export
controls or other trade laws. To date, we have not received final regulatory
approval from the FDA or any other comparable foreign regulatory authority for
any of our products or technologies.

Our failure to meet product release schedules would make it difficult to predict
our quarterly results and may cause our operating results to vary significantly.

         Delays in the planned release of our products may adversely affect
forecasted revenues and create operational inefficiencies resulting from
staffing levels designed to support the forecasted revenues. Our failure to
introduce new products on a timely basis could delay or hinder market acceptance
and allow competitors to gain greater market share.

                                       17
   18
If our intellectual property and proprietary rights are infringed, or infringe
upon the rights of others, our business will suffer.

         Our success will depend in part on our ability to obtain patent
protection for our technologies, products and processes and to maintain trade
secret protection and operate without infringing the proprietary rights of
others. The degree of patent protection to be afforded to pharmaceutical,
biomedical or medical inventions is an uncertain area of the law. In addition,
the laws of foreign countries do not protect our proprietary rights to the same
extent as do the laws of the United States. We may not develop or receive
sublicenses or other rights related to proprietary technology that are
patentable, patents that are pending may be not issued, and any issued patents
may not provide us with any competitive advantages and may be challenged by
third parties. Furthermore, others may independently duplicate or develop
similar products or technologies to those developed by or licensed to us. If we
are required to defend against charges of patent infringement or to protect our
own proprietary rights against third parties, substantial costs will be incurred
and we could lose rights to certain products and technologies or be required to
enter into costly royalty or licensing agreements.

We do not have any marketing or manufacturing capabilities and will likely rely
on third parties for these capabilities in order to bring products to market.

         We do not currently have our own sales force or an agreement with
another pharmaceutical company to market all of our products that are in
development. When appropriate, we may build or otherwise acquire the necessary
marketing capabilities to promote our products. However, we may not have the
resources available to build or otherwise acquire our own marketing
capabilities, and we may be unable to reach agreements with other pharmaceutical
companies to market our products on terms acceptable to us, if at all.

         In addition, we do not intend to manufacture our own products. While we
have already entered into two manufacturing and supply agreements related to the
MSI system and one related to the ADDS, these manufacturing and supply
agreements may not be adequate and we may not be able to enter into future
manufacturing and supply agreements on acceptable terms, if at all. Our reliance
on independent manufacturers involves a number of risks, including the absence
of adequate capacity, the unavailability of, or interruptions in, access to
necessary manufacturing processes and reduced control over product quality and
delivery schedules. If our manufacturers are unable or unwilling to continue
manufacturing our products in required volumes, we will have to identify
acceptable alternative manufacturers. The use of a new manufacturer may cause
significant interruptions in supply if the new manufacturer has difficulty
manufacturing products to our specifications. Further, the introduction of a new
manufacturer may increase the variation in the quality of our products.

Healthcare reimbursement policies are uncertain and may adversely impact the
sale of our products.

         Our ability to commercialize human therapeutic and diagnostic products
may depend in part on the extent to which costs for such products and
technologies are reimbursed by private health insurance or government health
programs. The uncertainty regarding reimbursement may be especially significant
in the case of newly approved products. Reimbursement price levels may be
insufficient to provide a return to us on our investment in new products and
technologies. In the United States, government and other third-party payers have
sought to contain healthcare costs by limiting both coverage and the level of
reimbursement for new pharmaceutical products approved for marketing by the FDA,
including some cases refusal to cover such approved products. Healthcare reform
may increase these cost containment efforts. We believe that managed care
organizations may seek to restrict the use of new products, delay authorization
to use new products or limit coverage and the level of reimbursement for new
products. Internationally, where national healthcare systems are prevalent,
little if any funding may be available for new products, and cost containment
and cost reduction efforts can be more pronounced than in the United States.


                                       18
   19
We may become subject to product liability claims and our product liability
insurance may be inadequate.

     The use of our proposed products and processes during testing, and after
approval, may entail inherent risks of adverse effects that could expose us to
product liability claims and associated adverse publicity. Although we currently
maintain general liability insurance, the coverage limits of our insurance
policies may not be adequate. We currently maintain clinical trial product
liability insurance of $2.0 million per event for certain clinical trials and
intend to obtain insurance for future clinical trials of products under
development. However, we may be unable to obtain or maintain insurance for any
future clinical trials. Such insurance is expensive, difficult to obtain and may
not be available in the future on acceptable terms, or at all. A successful
claim brought against us in excess of our insurance coverage would have a
material adverse effect upon us and our financial condition. We intend to
require our licensees to obtain adequate product liability insurance. However,
licensees may be unable to maintain or obtain adequate product liability
insurance on acceptable terms and such insurance may not provide adequate
coverage against all potential claims.

If our common stock is delisted from the American Stock Exchange, the price of
our common stock and its liquidity could decline.

         Our common stock is listed for trading on the American Stock Exchange,
or AMEX, under the symbol "SHM". We do not satisfy discretionary AMEX guidelines
for continued listing, including a guideline that a listed company that has
sustained losses from operations and/or net losses in three of its four most
recent fiscal years, have stockholders' equity of at least $4,000,000. We had
net capital deficiency of $413,720 at December 31, 2000. We also do not satisfy
a guideline against continued losses for each of the issuer's five most recent
fiscal years. Our continued failure to meet the listing guidelines has been
regularly reviewed by AMEX and may ultimately result in our common stock being
delisted from AMEX. If our common stock were delisted from AMEX, trading of our
common stock, if any, would thereafter likely be conducted in the
over-the-counter market, unless we were able to list our common stock on The
Nasdaq Stock Market or another national securities exchange, which cannot be
assured. If our common stock were to trade in the over-the-counter market it may
be more difficult for investors to dispose of, or to obtain accurate quotations
as to the market value of our common stock. In addition, it may become more
difficult for us to raise funds through the sale of our securities.

         In the event of the delisting of our common stock from the AMEX and our
inability to list our common stock on The Nasdaq Stock Market or another
national securities exchange, the regulations of the SEC under the Securities
Exchange Act of 1934, as amended, require additional disclosure relating to the
market for penny stocks. SEC regulations generally define a penny stock to be an
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions. A disclosure schedule explaining the penny stock market and
the risks associated therewith is required to be delivered to a purchaser and
various sales practice requirements are imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, the broker-dealer must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. If our securities become subject to the regulations
applicable to penny stocks, the market liquidity for our securities could be
severely affected. In such an event, the regulations on penny stocks could limit
the ability of broker-dealers to sell our securities.


                                       19
   20
The price of biotechnology/pharmaceutical company stocks has been volatile which
could result in substantial losses to our stockholders.

         The market price of securities of companies in the
biotechnology/pharmaceutical industries has tended to be volatile. Announcements
of technological innovations by us or our competitors, developments concerning
proprietary rights and concerns about safety and other factors may have a
material effect on our business or financial condition. The market price of our
common stock may be significantly affected by announcements of developments in
the medical field generally or our research areas specifically. The stock market
has experienced volatility in market prices of companies similar to us that has
been unrelated to the operating results of such companies. This volatility may
have a material adverse effect on the market price of our common stock.

Our ability to issue "blank check" preferred stock may make it more difficult
for a change in our control.

         Our certificate of incorporation authorizes the issuance of "blank
check" preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors, without shareholder
approval. In the event of issuance, such preferred stock could be utilized,
under certain circumstances, as a method of discouraging, delaying or preventing
a change in our control and preventing shareholders from receiving a premium for
their shares in connection with a change of control. We issued Series A and
Series B cumulative convertible redeemable preferred stock in connection with
private placements in February 1997 and April 1998, respectively. All of the
Series A preferred stock was converted into common stock during 1998. On July
31, 1998, all of the Series B Preferred stock was redeemed for cash. We also
issued shares of our Series C cumulative convertible preferred stock in
connection with the consummation of an agreement with Elan International
Services, Ltd. ("Elan International") in June 1998. In October 1999, in
conjunction with a licensing agreement with Elan International, we issued shares
of our Series D cumulative convertible exchangeable preferred stock and Series F
cumulative convertible preferred stock. In addition, we also have a commitment
from Elan International to purchase shares of Series E cumulative convertible
non-exchangeable preferred stock at our option (subject to satisfaction of
certain conditions). Except for the previously-mentioned purchase commitment for
Series E preferred stock, and additional shares of Series C, D and E preferred
stock that may be payable as dividends to Elan International, as holder of the
outstanding Series C, D and E preferred stock, we have no present intention to
issue any additional shares of our preferred stock; however, we may issue
additional shares of our preferred stock in the future.

We have granted anti-dilutions rights to The Tail Wind Fund Ltd. which may
require us to issue additional shares to Tail Wind, make cash payments to Tail
Wind and may hinder our ability to raise additional funds.

         Pursuant to our December 2000 private placement with The Tail Wind Fund
Ltd., until at least August 29, 2002, if we sell shares of our common stock or
securities convertible into or exercisable for common stock for less than
$3.5888 per share, we are obligated to issue to Tail Wind additional shares so
that the number of shares purchased by Tail Wind in the December 2000 private
placement plus the additional shares issued to Tail Wind equals the number of
shares that Tail Wind could have purchased for $2,250,000 at the price per share
at which the new shares are sold. The presence of these anti-dilution rights may
negatively affect our ability to obtain additional financing. In addition, in
the event that we are required to issue additional shares to Tail Wind, we may
not issue an aggregate of over 5,630,122 shares of our common stock in total to
Tail Wind in connection with the December 2000 private placement. If we would
otherwise be required to issue more than 5,630,122 shares to Tail Wind, we must
instead pay Tail Wind 105% of the cash value of such shares we do not issue.


                                       20
   21
We are obligated to issue additional securities in the future diluting our
stockholders.

         As of December 31, 2000, we had reserved approximately 6,921,629 shares
of our common stock for issuance upon exercise of outstanding options and
warrants convertible into shares of our common stock, including by our officers
and directors. In addition, as of December 31, 2000, we had $2,000,000 principal
amount of a convertible promissory note, 13,712 shares of our Series C preferred
stock, 12,870 shares of our Series D preferred stock, 1,004 shares of our Series
E preferred stock and 5,000 shares of our Series F preferred stock outstanding.
Each of the convertible securities provides for conversion into shares of our
common stock at a discount to the market price at December 31, 2000. Our Series
C, D, E and F preferred stock are convertible into 9,724,823 shares, 2,648,148
shares, 258,098 shares and 1,470,588 shares, respectively, of common stock. The
convertible promissory note, including accrued interest is convertible into
1,362,578 shares of common stock. The exercise of options and outstanding
warrants, the conversion of such other securities and sales of common stock
issuable thereunder could have a significant dilutive effect on the market price
of our common stock and could materially impair our ability to raise capital
through the future sale of our equity securities.


ITEM 2.  PROPERTIES

         The Company's principal executive offices are located at 425 South
Woodsmill Road, St. Louis, Missouri 63017. These premises consist of
approximately 4,521 square feet subject to a lease that expires September 14,
2002. The monthly rent for these premises is $9,419. The Company also maintains
a research facility in Ann Arbor, Michigan, and leases a small office in
Rochester, New York. The Company maintains no other laboratory, research or
other facilities, but primarily conducts research and development in outside
laboratories under contracts with universities or research facilities. The
Company believes that its existing office arrangements will be adequate to meet
its reasonably foreseeable future needs.

ITEM 3.  LEGAL PROCEEDINGS

There are no material legal proceedings against the Company or any of its
subsidiaries.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.



















                                       21
   22
 PART II

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

         The following table sets forth the high and low sale prices of the
Company's Common Stock on the American Stock Exchange (the "AMEX") for the
periods indicated.



2000:                                                                  High     Low
                                                                       ----     ---

                                                                           
        Fourth Quarter..........................................     $6.625      $3.250
        Third Quarter...........................................      6.875       4.250
        Second Quarter..........................................      5.938       3.000
        First Quarter...........................................      7.938       3.375




1999:                                                                  High     Low
                                                                       ----     ---

                                                                           
        Fourth Quarter..........................................     $5.250      $2.438
        Third Quarter...........................................      2.938       2.000
        Second Quarter..........................................      3.063       2.188
        First Quarter...........................................      3.500       2.000


         The closing sale price for the Company's Common Stock on the AMEX on
March 6, 2001 was $3.70 per share. At March 6, 2001, there were approximately
413 holders of record of the Company's Common Stock.

         The Company has never paid dividends on its Common Stock and does not
intend to pay cash dividends on its Common Stock in the foreseeable future. The
terms of the Company's Series C, D and E Preferred Stock generally prohibit the
payment of cash dividends and other distributions on the Company's Common Stock
unless full cumulative stock dividends on shares of such Series C, D and E
Preferred Stock have been paid or declared in full. During 2000, the Company
issued stock dividends totaling 932, 855 and 4 shares and cash dividends for
fractional shares of $2,045, $750, and $750 on Series C, D and E Preferred
Stock, respectively.

         The following unregistered securities were issued by the Company during
the quarter ended December 31, 2000:



                                                           NUMBER OF
                                                             SHARES
                                                           SOLD/ISSUED/      OFFERING/
                                                            SUBJECT TO       EXERCISE
 DATE OF                        DESCRIPTION OF              OPTIONS OR        PRICE
SALE/ISSUANCE                  SECURITIES ISSUED             WARRANTS       PER SHARE ($)    PURCHASER OR CLASS
- -------------                  -----------------           ------------     -------------    ------------------
                                                                                 
                          Warrant to purchase shares of
October 2, 2000           Common Stock, $.01 par value          35,000           $6.125        Accredited Investor

December 29, 2000         Common Stock, $.01 par value         626,950          $3.5888        Accredited Investor

                          Warrant to purchase shares of
December 29, 2000         Common Stock, $.01 par value          18,808          $4.9844        Accredited Investor

                          Warrant to purchase shares of
December 29, 2000         Common Stock, $.01 par value          18,808          $4.9844        Accredited Investor

                          Warrant to purchase shares of
December 29, 2000         Common Stock, $.01 par value         112,500          $4.9844        Accredited Investor



The issuance of these securities are claimed to be exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended, as
transactions by an issuer not involving a public offering. There were no
underwriting discounts or commissions paid in connection with the issuance of
any of these securities.


                                       22
   23
ITEM 6.  SELECTED FINANCIAL DATA

The information required by this Item is incorporated by reference to the
Company's Annual Report to Stockholders for the year ended December 31, 2000,
pertinent portions of which are attached hereto as Exhibit 13.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The information required by this Item is incorporated by reference to the
Company's Annual Report to Stockholders for the year ended December 31, 2000,
pertinent portions of which are attached hereto as Exhibit 13.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company has no material market risk exposure.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Quarterly financial data for 2000 and 1999 is summarized below:



                                                              Three Months Ended
                                                              ------------------
                                            Mar 31            Jun 30            Sep 30           Dec 31
                                            ------            ------            ------           ------
                                                                                     
2000:
Total revenues                              $  121,170        $    124,505      $    46,109      $     214,788
Operating loss                              (1,475,577)         (1,449,671)     (1,367,362)         (1,765,790)
Net loss                                    (1,457,090)         (1,383,810)     (1,318,141)         (1,604,110)
Basic and diluted net loss per share              (.05)               (.05)           (.05)               (.06)

1999:
Total revenues                              $    26,000       $  101,412        $  147,526       $    124,440
Operating loss                              (1,154,642)       (1,468,668)       (1,418,452)      (16,257,730)
Net loss                                    (1,162,656)       (1,487,010)       (1,454,942)      (13,280,180)
Basic and diluted net loss per share              (.04)             (.05)             (.05)             (.49)



The remaining information required by this Item is incorporated by reference to
the Company's Annual Report to Stockholders for the year ended December 31,
2000, pertinent portions of which are attached hereto as Exhibit 13.

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


None.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed no later than April 30, 2001,
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed no later than April 30, 2001,
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934.


                                       23
   24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed no later than April 30, 2001,
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed no later than April 30, 2001,
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934.

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

         (a)(1)   Financial Statements

                  The following Financial Statements are included in Exhibits 13
                  hereto:
                  Report of Independent Auditors
                  Consolidated Balance Sheets as of
                      December 31, 2000 and 1999
                  Consolidated Statements of Operations for the years ended
                      December 31, 2000, 1999 and 1998 and for the period
                      October 17, 1986 (inception) to December, 31 2000
                  Consolidated Statements of Stockholders' Equity (net capital
                     deficiency) for the period from October 17, 1986
                     (inception) to December 31, 2000
                  Consolidated Statements of Cash Flows for the years ended
                      December 31, 2000, 1999 and 1998 and for the period from
                      October 17, 1986 (inception) to December 31, 2000
                  Notes to Financial Statements

         (a)(2)   Financial Statement Schedules

                  All financial statement schedules are omitted because they are
not applicable, or not required, or because the required information is included
in the financial statements or notes thereto.

         (a)(3)   Exhibits:




NO.                                                                                              REFERENCE

                                                                                           
3.1               Certificate of Incorporation of the Company, as amended                          (10)

3.2               By-Laws of the Company                                                            (4)

4.1               Form of Common Stock Certificate                                                  (2)

4.4               Certificate of Designations defining the powers, designations,                   (10)
                  rights, preferences, limitations and restrictions applicable to
                  the Company's Series C Cumulative Convertible Redeemable
                  Preferred Stock.



                                       24
   25



NO.                                                                                              REFERENCE

                                                                                           
4.5               Certificate of Designations defining the powers, designations,                   (15)
                  rights, preferences, limitations and restrictions applicable to
                  the Company's Series D Cumulative Convertible Exchangeable
                  Preferred Stock.

4.6               Certificate of Designations defining the powers, designations,                   (15)
                  rights, preferences, limitations and restrictions applicable
                  to the Company's Series E Convertible Non-Exchangeable
                  Preferred Stock.

4.7               Certificate of Designations defining the powers, designations,                   (15)
                  rights, preferences, limitations and restrictions applicable
                  to the Company's Series F Convertible Non-Exchangeable
                  Preferred Stock.

10.6              Employment Agreement dated as of June 6, 1996 between the                         (3)
                  Company and Thomas M. Fitzgerald*

10.6.5            Employment Agreement dated as of November 16, 1998 between the                   (14)
                  Company and Scott Hoffmann*

10.8              1993 Stock Option Plan, as amended*                                               (1)

10.9              1993 Restricted Stock Plan, as amended*                                           (1)

10.10             1996 Directors Stock Option Plan*                                                 (7)

10.11             Agreement and Plan of Merger among the Company, Camelot                           (6)
                  Pharmacal, L.L.C., David A. Byron, Loren G. Peterson and Carl
                  Siekmann dated April 25, 1997*

10.12             Employment Agreement dated as of April 25, 1997 between the                       (6)
                  Company and David A. Byron*

10.13             Employment Agreement dated as of April 25, 1997 between the                       (6)
                  Company and Loren G. Peterson*

10.14             Employment Agreement dated as of April 25, 1997 between the                       (6)
                  Company and Carl Siekmann*

10.15             Form of the Company's 6% Convertible Subordinated Debentures                      (8)
                  due September 22, 2000.

10.16             Lease dated August 18, 1997 between Corporate Center, L.L.C.                      (5)
                  and the Company relating to the lease of office space in St.
                  Louis, Missouri.

10.17             Assignment and License Agreement dated as of December 3, 1997                     (9)
                  between 1266417 Ontario Limited and Ion Pharmaceuticals, Inc.
                  (portions of this exhibit were omitted and were filed
                  separately with the Securities Exchange Commission pursuant to
                  the Company's application requesting confidential treatment in
                  accordance with Rule 24b-2 as promulgated under the Securities
                  Exchange Act of 1934, as amended).



                                       25
   26





NO.                                                                                              REFERENCE

                                                                                           
10.18             Sub-License Agreement dated as of December 3, 1997 between                        (9)
                  1266417 Ontario Limited and Ion Pharmaceuticals, Inc. (portions
                  of this exhibit were omitted and were filed separately with the
                  Securities Exchange Commission pursuant to the Company's
                  application requesting confidential treatment in accordance
                  with Rule 24b-2 as promulgated under the Securities Exchange
                  Act of 1934, as amended).

10.19             Form of Sublicense and Development Agreement between Sheffield                   (12)
                  Pharmaceuticals, Inc. and Inpharzam International, S.A.
                  (portions of this exhibit were omitted and were filed
                  separately with the Securities and Exchange Commission pursuant
                  to the Company's application requesting confidential treatment
                  in accordance with Rule 24b-2 as promulgated under the
                  Securities Exchange Act of 1934, as amended).

10.20             Securities Purchase Agreement, dated as of June 30, 1998, by                     (13)
                  and between Sheffield pharmaceuticals, Inc. and Elan
                  International Services, Ltd., which includes the Certificate
                  of Designations of Series C Convertible Preferred Stock as
                  Exhibit B. The Company agreed to furnish the disclosure
                  schedules as well as Exhibits A and C, which were omitted from
                  this filing, to the Commission upon request (portions of this
                  exhibit were omitted and were filed separately with the
                  Securities and Exchange Commission pursuant to the Company's
                  application requesting confidential treatment in accordance
                  with Rule 24b-2 as promulgated under the Securities Exchange
                  Act of 1934, as amended).

10.21             Systemic Pulmonary Delivery, Ltd. Joint Development and                          (13)
                  Operating Agreement dated as of June 30, 1998 among Systemic
                  Pulmonary Delivery, Ltd., Sheffield Pharmaceuticals, Inc. and
                  Elan International Services, Ltd. (portions of this exhibit
                  were omitted and were filed separately with the Securities and
                  Exchange Commission pursuant to the Company's application
                  requesting confidential treatment in accordance with Rule
                  24b-2 as promulgated under the Securities Exchange Act of
                  1934, as amended).

10.22             License and Development Agreement dated June 30, 1998 between                 (13)
                  Sheffield Pharmaceuticals, Inc. and Systemic Pulmonary
                  Delivery, Ltd. and Elan Corporation plc. (portions of this
                  exhibit were omitted and were filed separately with the
                  Securities and Exchange Commission pursuant to the Company's
                  application requesting confidential treatment in accordance
                  with Rule 24b-2 as promulgated under the Securities Exchange
                  Act of 1934, as amended).



                                       26
   27




NO.                                                                                              REFERENCE

                                                                                           

10.23             License and Development Agreement dated June 30, 1998 between                 (13)
                  Systemic Pulmonary Delivery, Ltd. and Sheffield
                  Pharmaceuticals, Inc. and Elan Corporation, plc. (portions of
                  this exhibit were omitted and were filed separately with the
                  Securities and Exchange Commission pursuant to the Company's
                  application requesting Rule 24b-2 as promulgated under the
                  Securities Exchange Act of 1934, as amended).

10.24             License and Development Agreement dated June 30, 1998 between                 (13)
                  Elan Corporation, plc and Systemic Pulmonary Delivery, Ltd.
                  and Sheffield Pharmaceuticals, Inc. (portions of this exhibit
                  were omitted and were filed separately with the Securities and
                  Exchange Commission pursuant to the Company's application
                  requesting confidential treatment in accordance with Rule
                  24b-2 as promulgated under the Securities Exchange Act of
                  1934, as amended).

10.25             Securities Purchase Agreement, dated as of October 18, 1999,                  (15)
                  by and between the Company and Elan (portions of this exhibit
                  were omitted and were filed separately with the Securities and
                  Exchange Commission pursuant to the Company's application
                  requesting confidential treatment in accordance with Rule
                  24b-2 as promulgated under the Securities Exchange Act of
                  1934, as amended).

10.26             Subscription, Joint Development and Operating Agreement dated                 (15)
                  as of October 18, 1999 by and among Elan Pharma International
                  Limited, Elan, the Company and Newco. (portions of this
                  exhibit were omitted and were filed separately with the
                  Securities and Exchange Commission pursuant to the Company's
                  application requesting confidential treatment in accordance
                  with Rule 24b-2 as promulgated under the Securities Exchange
                  Act of 1934, as amended).

010.27            License Agreement, dated as of October 19, 1999, by and                       (15)
                  between the Company and Newco (portions of this exhibit were
                  omitted and were filed separately with the Securities and
                  Exchange Commission pursuant to the Company's application
                  requesting confidential treatment in accordance with Rule
                  24b-2 as promulgated under the Securities Exchange Act of
                  1934, as amended).

10.28             License Agreement, dated as of October 19, 1999, by and                       (15)
                  between Elan Pharma International Limited and Newco (portions
                  of this exhibit were omitted and were filed separately with
                  the Securities and Exchange Commission pursuant to the
                  Company's application requesting confidential treatment in
                  accordance with Rule 24b-2 as promulgated under the Securities
                  Exchange Act of 1934, as amended).

10.29             Registration Rights Agreement dated as of October 18, 1999 by                 (15)
                  and between Elan and the Company.



                                       27
   28




NO.                                                                                              REFERENCE

                                                                                           


10.30             Securities Purchase Agreement dated as of December 29, 2000,                   (16)
                  by and between the Company and The Tail Wind Fund Ltd

10.31             Registration Rights Agreement dated as of December 29, 2000,                   (16)
                  by and between the Company and The Tail Wind Fund Ltd

13                Portions of the Company's Annual Report to Stockholders for                    (1)
                  the year ended December 31, 2000 relating to Items 6, 7 and 8.

21                Subsidiaries of Registrant                                                     (1)

23.1              Consent of Ernst & Young LLP                                                   (1)

24                Power of Attorney (Included on page 29 hereof)                                 (1)



* Management contracts or compensatory plans or arrangements.
- -----------------------
(1)      Filed herewith.
(2)      Incorporated by reference to the Company's Annual Report on Form 10-KSB
         for its fiscal year ended December 31, 1995 filed with the Securities
         and Exchange Commission.
(3)      Incorporated by reference to the Company's Quarterly Report on Form
         10-QSB for the quarter ended June 30, 1996 filed with the Securities
         and Exchange Commission.
(4)      Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the quarter ended June 30, 1997 filed with the Securities and
         Exchange Commission.
(5)      Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the quarter ended September 30, 1997 filed with the Securities
         and Exchange Commission.
(6)      Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the quarter ended March 31, 1997 filed with the Securities and
         Exchange Commission.
(7)      Incorporated by reference to the Company's Annual Report on Form 10-KSB
         for the year ended December 31, 1996 filed with the Securities and
         Exchange Commission.
(8)      Incorporated by reference to the Company's Registration Statement on
         Form S-3 (File No. 333-38327) filed with the Securities and Exchange
         Commission on October 21, 1997.
(9)      Incorporated by reference to the Company's Current Report on Form 8-K
         filed with the Securities and Exchange Commission on December 17, 1997.
(10)     Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the quarter ended June 30, 1998 filed with the Securities and
         Exchange Commission.
(11)     Incorporated by reference to Exhibit 3 of the Company's Current Report
         on Form 8-K, dated April 17, 1998, filed with the Securities and
         Exchange Commission.
(12)     Incorporated by reference to Exhibit 2 of the Company's Current Report
         on Form 8-K, dated June 22, 1998, filed with the Securities and
         Exchange Commission.
(13)     Incorporated by reference to exhibits to the Company's Current Report
         on Form 8-K, dated July 16, 1998, filed with the Securities and
         Exchange Commission.
(14)     Incorporated by reference to the Company's Annual Report on Form 10-K
         for the year ended December 31, 1998 filed with the Securities and
         Exchange Commission.
(15)     Incorporated by reference to the Company's Current Report on Form 8-K
         filed with the Securities and Exchange Commission on November 2, 1999.
(16)     Incorporated by reference to the Company's Registration Statement on
         Form S-3 (File No. 333-54446) filed with the Securities and Exchange
         Commission on January 26, 2001.

(b)      Reports on Form 8-K

         (1)    Current Report on Form 8-K filed with Securities and Exchange
                Commission on November 14, 2000.


                                       28
   29
                                   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.

                                     SHEFFIELD PHARMACEUTICALS, INC.

Dated:  March 9, 2001                /S/
                                     --------------------------
                                      Loren G. Peterson
                                     President and Chief Executive Officer

                                POWER OF ATTORNEY

         Sheffield Pharmaceuticals, Inc. and each of the undersigned do hereby
appoint Loren G. Peterson and Thomas Fitzgerald and each of them severally, its
or his or her true and lawful attorney to execute on behalf of Sheffield
Pharmaceuticals, Inc. and the undersigned any and all amendments to this Annual
Report and to file the same with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission; each of such
attorneys shall have the power to act hereunder with or without the other.

         In accordance with the Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.





                 SIGNATURE                                     TITLE                                DATE
                 ---------                                     -----                                ----
                                                                                         
                   /S/                       Chairman and Director                             March 9, 2001
- ----------------------------------------
         Thomas M. Fitzgerald

                   /S/                       Director, President and Chief                     March 9, 2001
- ----------------------------------------     Executive Officer
         Loren G. Peterson

                  /S/                        Director                                          March 9, 2001
- ----------------------------------------
         John M. Bailey

                  /S/                        Director                                          March 9, 2001
- ----------------------------------------
         Digby W. Barrios

                   /S/                       Director                                          March 9, 2001
- ----------------------------------------
         Todd C. Davis

                   /S/                       Vice President, Chief                             March 9, 2001
- ----------------------------------------     Financial Officer,
         Scott A. Hoffmann                   Treasurer and Secretary (Chief Financial
                                             and Chief Accounting Officer)




                                       29

EX-10.8

   1
                                                                    EXHIBIT 10.8


                       SHEFFIELD MEDICAL TECHNOLOGIES INC.

                             1993 STOCK OPTION PLAN
                       (as amended through July 15, 1998)


1.       Purposes of the Plan. The purposes of this 1993 Stock Option Plan are
         to attract and retain the best available personnel for positions of
         responsibility within the Company, to provide additional incentive to
         Employees of the Company, and to promote the success of the Company's
         business through the grant of options to purchase shares of the
         Company's Common Stock. Options granted hereunder may be either
         Incentive Stock or Non-Statutory Stock Options, at the discretion of
         the Board. The type of options granted shall be reflected in the terms
         of written Stock Option agreements. The Company intends that the Plan
         meet the requirements of Rule 16b-3 and that transactions of the type
         specified in subparagraphs (c) to (f) inclusive of Rule 16b-3 by
         officers and directors of the Company pursuant to the Plan will be
         exempt from the operation of Section 16(b) of the Exchange Act.
         Further, the Plan is intended to satisfy the performance-based
         compensation exception to the limitation on the Company's tax
         deductions imposed by Section 162(m) of the Code. In all cases, the
         terms, provisions, conditions and limitations of the Plan shall be
         construed and interpreted consistent with the Company's intent as
         stated in this Section 1.

2.       Definitions. As used herein, the following definitions shall apply:


         (a)      "Board" shall mean the Board of Directors of the Company or,
                  when appropriate, the Committee administering the Plan, if one
                  has been appointed.

         (b)      "Code" shall mean the Internal Revenue Code of 1986, as
                  amended, and the rules and regulations promulgated thereunder.

         (c)      "Common Stock" shall mean the common stock of the Company
                  described in the Company's Certificate of Incorporation, as
                  amended.

         (d)      "Company" shall mean SHEFFIELD MEDICAL TECHNOLOGIES INC., a
                  Delaware corporation, and shall include any parent or
                  subsidiary corporation of the Company as defined in Sections
                  425(e) and (f), respectively, of the Code.

         (e)      "Committee" shall mean the Stock Option Committee composed of
                  two or more directors who are Non-Employee Directors and
                  Outside Directors and who shall be elected by and shall serve
                  at the pleasure of the Board and shall be responsible for
                  administering the Plan in accordance with paragraph (a) of
                  Section 4 of the Plan.

         (f)      "Employee" shall mean key employees, including salaried
                  officers and directors and other key individuals employed by
                  the Company. The payment of a director's fee by the Company
                  shall not be sufficient to constitute "employment" by the
                  Company.

         (g)      "Exchange Act" shall mean the Securities and Exchange Act of
                  1934, as amended.

         (h)      "Fair Market Value" shall mean, with respect to the date a
                  given Option is granted or exercised, the value of the Common
                  Stock determined by the Board in such manner as it may deem
                  equitable for Plan purposes but, in the case of an Incentive
                  Stock Option, no less than is required by applicable laws or
                  regulations; provided, however, that where there is a public
                  market for the Common Stock, the Fair Market Value per Share
                  shall be the mean of the bid and asked prices of the Common
                  Stock on the date of grant, as reported in the Wall Street
                  Journal (or, if not so reported, as otherwise reported in the
                  National Association of Securities Dealers Automated Quotation
                  System) or, in the event the Common Stock is listed on the New
                  York Stock Exchange or the NASDAQ Stock Market, the American
                  Stock Exchange, the NASDAQ/National Market System, the Fair
                  Market Value per Share shall be the closing price on such
                  exchange on the date of grant of the Option, as reported in
                  the Wall Street Journal.


                                       1
   2


         (i)      "Incentive Stock Option" shall mean an Option which is
                  intended to qualify as an incentive stock option within the
                  meaning of Section 422 of the Code.

         (j)      "Non-Employee Director" shall mean a non-employee director as
                  defined in Rule 16b-3.

         (k)      "Non-statutory Stock Option" shall mean an Option which is not
                  an Incentive Stock Option.

         (l)      "Option" shall mean a stock option granted under the Plan.

         (m)      "Optioned Stock" shall mean the Common Stock subject to an
                  Option.

         (n)      "Optionee" shall mean an Employee of the Company who has been
                  granted one or more Options.

         (o)      "Outside Director" shall mean an outside director as defined
                  in Section 162(m) of the Code or the rules and regulations
                  promulgated thereunder.

         (p)      "Parent" shall mean a "parent corporation," whether now or
                  hereafter existing, as defined in Section 425(e) of the Code.

         (q)      "Plan" shall mean this 1993 Stock Option Plan.

         (r)      "Share" shall mean a share of the Common Stock, as adjusted in
                  accordance with Section 11 of the Plan.

         (s)      "Stock Option Agreement" shall mean the written agreement
                  between the Company and the Optionee relating to the grant of
                  an Option.

         (t)      "Subsidiary" shall mean a "subsidiary corporation," whether
                  now or hereafter existing, as defined in Section 425(f) of the
                  Code.

         (u)      "Tax Date" shall mean the date an Optionee is required to pay
                  the Company an amount with respect to tax withholding
                  obligations in connection with the exercise of an option.

3.       Common Stock Subject to the Plan. Subject to the provisions of Section
         11 of the Plan, the maximum aggregate number of shares which may be
         optioned and sold under the Plan is Four Million (4,000,000) Shares of
         Common Stock. The Shares may be authorized, but unissued, or previously
         issued Shares acquired by the Company and held in treasury.

         If an Option should expire or become unexercisable for any reason
         without having been exercised in full, the unpurchased Shares covered
         by such Option shall, unless the Plan shall have been terminated, be
         available for future grants of Options. The maximum number of Shares
         that may be subject to options granted under the Plan to any individual
         in any calendar year shall not exceed 500,000 Shares and the method of
         counting such Shares shall conform to any requirements applicable to
         performance-based compensation under Section 162(m) of the Code or the
         rules and regulations promulgated thereunder.

4.       Administration of the Plan.

         (a)      Procedure.

                  (i)      The Plan shall be administered by the Board in
                  accordance with Rule 16b-3 under the Exchange Act ("Rule
                  16b-3"); provided, however, that the Board may appoint a
                  Committee to administer the Plan at any time or from time to
                  time, and, provided further, that if the Board is not
                  "disinterested" within the meaning of Rule 16b-3, the Plan
                  shall be administered by a Committee in accordance with Rule
                  16b-3.

                  (ii)     Once appointed, the Committee shall continue to serve
                  until otherwise directed by the Board. From time to time the
                  Board may increase the size of the Committee and appoint
                  additional members thereof, remove members (with or without
                  cause), appoint new members in


                                       2
   3

                  substitution therefor, and fill vacancies however caused:
                  provided, however, that at no time may any person serve on the
                  Committee if that person's membership would cause the
                  Committee not to satisfy the "disinterested administration"
                  requirements of Rule 16b-3.

         (b)      Powers of the Board. Subject to the provisions of the Plan,
                  the Board shall have the authority, in its discretion: (i) to
                  grant Incentive Stock Options and Nonstatutory Stock Options;
                  (ii) to determine, upon review of relevant information and in
                  accordance with Section 2 of the Plan, the Fair Market Value
                  of the Common Stock; (iii) to determine the exercise price per
                  Share of Options to be granted, which exercise price shall be
                  determined in accordance with Section 8(a) of the Plan; (iv)
                  to determine the Employees to whom, and the time or times at
                  which, Options shall be granted and the number of Shares to be
                  represented by each Option; (v) to interpret the Plan; (vi) to
                  prescribe, amend and rescind rules and regulations relating to
                  the Plan; (vii) to determine the terms and provisions of each
                  Option granted including, without limitation, the terms of
                  exercise (including the period of exercisability) or
                  forfeiture of Options granted hereunder upon termination of
                  the employment of an Employee; (viii) to accelerate or defer
                  (with the consent of the Optionee) the exercise date of any
                  Option; (ix) to authorize any person to execute on behalf of
                  the Company any instrument required to effectuate the grant of
                  an Option previously granted by the Board; (x) to accept or
                  reject the election made by an Optionee pursuant to Section 17
                  of the Plan; and (xi) to make all other determinations deemed
                  necessary or advisable for the administration of the Plan.

         (c)      Effect of Board's Decision. All decisions, determinations and
                  interpretations of the Board shall be final and binding on all
                  Optionees and any other holders of any Options granted under
                  the Plan.

         (d)      Inability of Committee to Act. In the event that for any
                  reason the Committee is Unable to act or if the Committee at
                  the time of any grant, award or other acquisition under the
                  Plan of options or Shares does not consist of two or more
                  Non-Employee Directors, then any such grant, award or other
                  acquisition may be approved or ratified in any other manner
                  contemplated by subparagraph (d) of Rule 16b-3.

5.       Eligibility.

         (a)      Consistent with the Plan's purposes, Options may be granted
                  only to Employees of the Company as determined by the Board.
                  An Employee who has been granted an Option may, if he is
                  otherwise eligible, be granted an additional Option or
                  Options. Incentive Stock Options may be granted only to those
                  Employees who meet the requirements applicable under Section
                  422 of the Code.

         (b)      Unless otherwise provided in the applicable Stock Option
                  Agreement, all Options granted to Employees of the Company
                  under the Plan will be subject to forfeiture until such time
                  as the Optionee has been continuously employed by the Company
                  for one year after the date of the grant of the Options, and
                  may not be exercised prior to such time. At such time as the
                  Optionee has been continuously employed by the Company for one
                  year, the foregoing restriction shall lapse and the Optionee
                  may exercise the Options at any time otherwise consistent with
                  the Plan.

         (c)      With respect to Incentive Stock Options, the aggregate Fair
                  Market Value (determined at the time the Incentive Stock
                  Option is granted) of the Common Stock with respect to which
                  Incentive Stock Options are exercisable for the first time by
                  the employee during any calendar year (under all employee
                  benefit plans of the Company) shall not exceed One Hundred
                  Thousand Dollars ($100,000).

6.       Stockholder Approval and Effective Dates. The Plan became effective
         upon approval by the Board. No Option may be granted under the Plan
         after August 30, 2003 (ten years from the effective date of the Plan);
         provided, however that the Plan and all outstanding Options shall
         remain in effect until such Options have expired or until such Options
         are canceled.

7.       Term of Option. Unless otherwise provided in the Stock Option
         Agreement, the term of each Option shall be five (5) years from the
         date of grant thereof. In no case shall the term of any Option exceed
         ten (10)


                                       3
   4

         years from the date of grant thereof. Notwithstanding the above, in the
         case of an Incentive Stock Option granted to an Employee who, at the
         time the Incentive Stock Option is granted, owns ten percent (10%) or
         more of the Common Stock as such amount is calculated under Section
         422(b)(6) of the Code ("Ten Percent Stockholder"), the term of the
         Incentive Stock Option shall be five (5) years from the date of grant
         thereof or such shorter time as may be provided in the Stock Option
         Agreement. If an option granted to the Company's chief executive
         officer or to any of the Company's other four most highly compensated
         officers is intended to qualify as "performance-based" compensation
         under Section 162(m) of the Code, the exercise price of such option
         shall not be less than 100% of the Fair Market Value of a Share on the
         date such option is granted.

8.       Exercise Price and Payment.

         (a)      Exercise Price. The per Share exercise price for the Shares to
                  be issued pursuant to exercise of an Option shall be
                  determined by the Board, but in the case of an Incentive Stock
                  Option shall be no less than one hundred percent (100%) of the
                  Fair Market Value per share on the date of grant, and in the
                  case of a Nonstatutory Stock Option shall be no less than
                  eighty-five percent (85%) of the Fair Market Value per share
                  on the date of grant. Notwithstanding the foregoing, in the
                  case of an Incentive Stock Option granted to an Employee who,
                  at the time of the grant of such Incentive Stock Option, is a
                  Ten Percent Stockholder, the per Share exercise price shall be
                  no less than one hundred ten percent (110%) of the Fair Market
                  Value per Share on the date of grant.

         (b)      Payment. The price of an exercised Option and the Employee's
                  portion of any taxes attributable to the delivery of Common
                  Stock under the Plan, or portion thereof, shall be paid:

                  (i)      In United States dollars in cash or by check, bank
                  draft or money order payable to the order of the Company; or

                  (ii)     At the discretion of the Board, through the delivery
                  of shares of Common Stock with an aggregate Fair Market Value
                  equal to the option price and withholding taxes, if any; or

                  (iii)    At the election of the Optionee pursuant to Section
                  17 and with the consent of the Board pursuant to Section
                  4(b)(x), by the Company's retention of such number of shares
                  of Common Stock subject to the exercised Option which have an
                  aggregate Fair Market Value on the exercise date equal to the
                  Employee's portion of the Company's aggregate federal, state,
                  local and foreign tax withholding and FICA and FUTA
                  obligations with respect to income generated by the exercise
                  of the Option by Optionee;

                  (iv)     By a combination of (i), (ii) and (iii) above; or

                  (v)      In the manner provided in subsection (c) below.

                  The Board shall determine acceptable methods for tendering
                  Common Stock as payment upon exercise of an Option and may
                  impose such limitations and prohibitions on the use of Common
                  Stock to exercise an Option as it deems appropriate.

         (c)      Financial Assistance to Optionees. The Board may assist
                  Optionees in paying the exercise price of Options granted
                  under this Plan in the following manner:

                  (i)      The extension of a loan to the Optionee by the
                  Company; or

                  (ii)     Payment by the Optionee of the exercise price in
                  installments; or

                  (iii)    A guaranty by the Company of a loan obtained by the
                  Optionee from a third party.

         The terms of any loans, installment payments or guarantees, including
         the interest rate and terms of repayment, and collateral requirements,
         if any, shall be determined by the Board, in its sole discretion.
         Subject to applicable margin requirements, any loans, installment
         payments or guarantees authorized by the Board pursuant to the Plan may
         be granted without security, but the maximum credit available shall


                                       4
   5

         not exceed the exercise price for the Shares for which the Option is to
         be exercised, plus any federal and state income tax liability incurred
         in connection with the exercise of the Option.

9.       Exercise of Option.

         (a)      Procedure for Exercise; Rights as a Stockholder. Any Option
                  granted hereunder shall be exercisable at such times and under
                  such conditions as determined by the Board, including
                  performance criteria with respect to the Company and/or the
                  Optionee, and as shall be permissible under the terms of the
                  Plan. Unless otherwise determined by the Board at the time of
                  grant, an Option may be exercised in whole or in part. An
                  Option may not be exercised for a fraction of a Share.

                  An Option shall be deemed to be exercised when written notice
                  of such exercise has been given to the Company in accordance
                  with the terms of the Option by the person entitled to
                  exercise the Option and full payment for the Shares with
                  respect to which the Option is exercised has been received by
                  the company. Full payment may, as authorized by the Board,
                  consist of any consideration and method of payment allowable
                  under Section 8(b) of the Plan. Until the issuance (as
                  evidenced by the appropriate entry on the books of the Company
                  or of a duly authorized transfer agent of the Company) of the
                  stock certificate evidencing such Shares, no right to vote or
                  receive dividends or any other rights as a stockholder shall
                  exist with respect to the Optioned Stock, notwithstanding the
                  exercise of the Option. No adjustment will be made for a
                  dividend or other right for which the record date is prior to
                  the date the stock certificate is issued, except as provided
                  in Section 11 of the Plan.

                  Exercise of an Option in any manner shall result in a decrease
                  in the number of Shares which thereafter may be available,
                  both for purposes of the Plan and for sale under the Option,
                  by the number of Shares to which the Option is exercised.

         (b)      Termination of Status as an Employee. Unless otherwise
                  provided in the applicable Stock Option Agreement, if an
                  Employee's employment by the Company is terminated for cause,
                  then any Option held by the Employee shall be immediately
                  canceled upon termination of employment and the Employee shall
                  have no further rights with respect to such Option. Unless
                  otherwise provided in the Stock Option Agreement, if an
                  Employee's employment by the Company is terminated for reasons
                  other than cause, and does not occur due to death or
                  disability, then the Employee may, with the consent of the
                  Board, for ninety (90) days after the date he ceases to be an
                  Employee of the Company, exercise his Option to the extent
                  that he was entitled to exercise it at the date of such
                  termination. To the extent that he was not entitled to
                  exercise the Option at the date of such termination, or if he
                  does not exercise such Option (which he was entitled to
                  exercise) within the time specified herein or in the
                  applicable Stock Option Agreement, the Option shall terminate.

         (c)      Disability. Unless otherwise provided in the applicable Stock
                  Option Agreement, notwithstanding the provisions of Section
                  9(b) above, in the event an Employee is unable to continue his
                  employment with the Company as a result of his permanent and
                  total disability (as defined in Section 22(e)(3) of the Code),
                  he may, but only within twelve (12) months from the date of
                  termination, exercise his Option to the extent he was entitled
                  to exercise it at the date of such termination. To the extent
                  that he was not entitled to exercise the Option at the date of
                  termination, or if he does not exercise such Option (which he
                  was entitled to exercise) within the time specified herein or
                  in the applicable Stock Option Agreement, the Option shall
                  terminate.

         (d)      Death. Unless otherwise provided in the Stock Option
                  Agreement, if an Employee dies during the term of the Option
                  and is at the time of his death an Employee of the Company who
                  shall have been in continuous status as an Employee since the
                  date of grant of the Option, the Option may be exercised at
                  any time within twelve (12) months following the date of death
                  (or such other period of time as is determined by the Board)
                  by the Employee's estate or by a person who acquired the right
                  to exercise the Option by bequest or inheritance, but only to
                  the extent that an Employee was entitled to exercise the
                  Option on the date of death. To the extent the Employee was
                  not entitled to exercise the Option on the date of death, or
                  if the Employee's estate, or person who acquired the right to
                  exercise the Option by bequest or inheritance, does not
                  exercise such


                                       5
   6

                  Option (which he was entitled to exercise) within the time
                  specified herein or in the applicable Stock Option Agreement,
                  the Option shall terminate.

10.      Non-Transferability of Options. An Option may not be sold, pledged,
         assigned, hypothecated, transferred or disposed of in any manner other
         than by will or by the laws of descent or distribution, or pursuant to
         a "qualified domestic relations order" under the Code and ERISA, and
         may be exercised, during the lifetime of the Optionee, only by the
         Optionee.

11.      Adjustments Upon Changes in Capitalization or Merger. Subject to any
         required action by the stockholders of the Company, the number of
         shares of Common Stock covered by each outstanding Option, and the
         number of shares of Common Stock which have been authorized for
         issuance under the Plan but as to which no Options have yet been
         granted or which have been returned to the Plan upon cancellation or
         expiration of an Option, as well as the price per share of Common Stock
         covered by each such outstanding Option, shall be proportionately
         adjusted for any increase or decrease in the number of issued shares of
         Common Stock resulting from a stock split, reverse stock split, stock
         dividend, combination or reclassification of the Common Stock, or any
         other increase or decrease in the number of issued shares of Common
         Stock effected without receipt of consideration by the Company;
         provided, however, that conversion of any convertible securities of the
         Company shall not be deemed to have been "effected without receipt of
         consideration." Such adjustment shall be made by the Board, whose
         determination in that respect shall be final, binding and conclusive.
         Except as expressly provided herein, no issuance by the company of
         shares of stock of any class, or securities convertible into shares of
         stock of any class, shall affect and no adjustment by reason thereof,
         shall be made with respect to the number or price of shares of Common
         Stock subject to an Option.

         In the event of the proposed dissolution or liquidation of the Company,
         the Option will terminate immediately prior to the consummation of such
         proposed action, unless otherwise provided by the Board. The Board may,
         in the exercise of its sole discretion in such instances, declare that
         any Option shall terminate as of a date fixed by the Board and give
         each Optionee the right to exercise his Option as to all or any part of
         the Optioned Stock, including Shares as to which the Option would not
         otherwise be exercisable. In the event of a proposed sale of all or
         substantially all of the assets of the Company, or the merger of the
         Company with or into another corporation, the Option shall be assumed
         or an equivalent option shall be substituted by such successor
         corporation or a parent or subsidiary of such successor corporation,
         unless the Board determines, in the exercise of its sole discretion and
         in lieu of such assumption or substitution, that the Optionee shall
         have the right to exercise the option as to all of the Optioned Stock,
         including Shares as to which the Option would not otherwise be
         exercisable. If the Board makes an Option fully exercisable in lieu of
         assumption or substitution in the event of a merger of`sale of assets,
         the Board shall notify the Optionee that the Option shall be fully
         exercisable for a period of sixty (60) days from the date of such
         notice (but not later than the expiration of the term of the Option
         under the Option Agreement), and the Option will terminate upon the
         expiration of such period.

12.      Time of Granting Options. The date of grant of an Option shall, for all
         purposes, be the date on which the Board makes the determination
         granting such Option. Notice of the determination shall be given to
         each Employee to whom an Option is so granted within a reasonable time
         after the date of such grant.

13.      Amendment and Termination of the Plan.

         (a)      Amendment and Termination. The Board may amend or terminate
                  the Plan from time to time in such respects as the Board may
                  deem advisable; provided, however, that the following
                  revisions or amendments shall require approval of the
                  Stockholders of the Company, to the extent required by law,
                  rule or regulation:

                  (i)      Any material increase in the number of Shares subject
                           to the Plan, other than in connection with an
                           adjustment under Section 11 of the Plan;

                  (ii)     Any material change in the designation of the
                           Employees eligible to be granted Options; or

                  (iii)    Any material increase in the benefits accruing to
                           participants under the Plan.



                                       6
   7

         (b)      Effect of Amendment or Termination. Any such amendment or
                  termination of the Plan shall not affect Options already
                  granted and such Options shall remain in full force and effect
                  as if this Plan had not been amended or terminated, unless
                  mutually agreed otherwise between the Optionee and the Board,
                  which agreement must be in writing and signed by the Optionee
                  and the Company.

14.      Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
         to the exercise of an Option unless the exercise of such Option and the
         issuance and delivery of such Shares pursuant thereto shall comply with
         all relevant provisions of law, including, without limitation, the
         Securities Act of 1933, as amended, the Exchange Act, the rules and
         regulations promulgated thereunder, and the requirements of any stock
         exchange upon which the Shares may then be listed, and shall be further
         subject to the approval of counsel for the Company with respect to such
         compliance.

         As a condition to the exercise of an Option, the Company may require
         the person exercising such Option to represent and warrant at the time
         of any such exercise that the Shares are being purchased only for
         investment and without any present intention to sell or distribute such
         Shares if, in the opinion of counsel for the company, such a
         representation is required by any of the aforementioned relevant
         provisions of law.

         Inability of the Company to obtain authority from any regulatory body
         having jurisdiction, which authority is deemed by the Company's counsel
         to be necessary to the lawful issuance and sale of any Shares
         hereunder, shall relieve the Company of any liability in respect of the
         failure to issue or sell such Shares as to which such requisite
         authority shall not have been obtained.

         In the case of an Incentive Stock Option, any Optionee who disposes of
         Shares of Common Stock acquired upon the exercise of an Option by sale
         or exchange (a) either within two (2) years after the date of the grant
         of the Option under which the Common Stock was acquired or (b) within
         one (1) year after the acquisition of such Shares of Common Stock shall
         notify the Company of such disposition and of the amount realized upon
         such disposition.

15.      Reservation of Shares. The Company will at all times reserve and keep
         available such number of Shares as shall be sufficient to satisfy the
         requirements of the Plan.

16.      Option Agreement. Options shall be evidenced by Stock Option Agreements
         in such form as the Board shall approve.

17.      Withholding Taxes. Subject to Section 4(b)(x) of the Plan and prior to
         the Tax Date, the Optionee may make an irrevocable election to have the
         Company withhold from those Shares that would otherwise be received
         upon the exercise of any Option, a number of Shares having a Fair
         Market Value equal to the minimum amount necessary to satisfy the
         Company's federal, state, local and foreign tax withholding obligations
         and FICA and FUTA obligations with respect to the exercise of such
         Option by the Optionee.

         An Optionee who is also an officer of the Company must make the above
         described election:

         (a)      at least six months after the date of grant of the Option
                  (except in the event of death or disability); and

         (b)      either:

                  (i)      six months prior to the Tax Date, or

                  (ii)     prior to the Tax Date and during the period beginning
                  on the third business day following the date the Company
                  releases its quarterly or annual statement of sales and
                  earnings and ending on the twelfth business day following such
                  date.

18.      Miscellaneous Provisions.

         (a)      Plan Expense. Any expense of administering this Plan shall be
                  borne by the Company.


                                       7
   8

         (b)      Use of Exercise Proceeds. The payment received from Optionees
                  from the exercise of Options shall be used for the general
                  corporate purposes of the Company.

         (c)      Construction of Plan. The place of administration of the Plan
                  shall be in the State of Wyoming, and the validity,
                  construction, interpretation, administration and effect of the
                  Plan and of its rules and regulations, and rights relating to
                  the Plan, shall be determined in accordance with the laws of
                  the State of Wyoming without regard to conflict of law
                  principles and, where applicable, in accordance with the Code.

         (d)      Taxes. The Company shall be entitled if necessary or desirable
                  to pay or withhold the amount of any tax attributable to the
                  delivery of Common Stock under the Plan from other amounts
                  payable to the Employee after giving the person entitled to
                  receive such Common Stock notice as far in advance as
                  practical, and the Company may defer making delivery of such
                  Common Stock if any such tax may be pending unless and until
                  indemnified to its satisfaction.

         (e)      Indemnification. In addition to such other rights of
                  indemnification as they may have as members of the Board, the
                  members of the Board shall be indemnified by the Company
                  against all costs and expenses reasonably incurred by them in
                  connection with any action, suit or proceeding to which they
                  or any of them may be party by reason of any action taken or
                  failure to act under or in connection with the Plan or any
                  Option, and against all amounts paid by them in settlement
                  thereof (provided such settlement is approved by independent
                  legal counsel selected by the Company) or paid by them in
                  satisfaction of a judgment in any such action, suite or
                  proceeding, except a judgment based upon a finding of bad
                  faith; provided that upon the institution of any such action,
                  suit or proceeding a Board member shall, in writing, give the
                  Company notice thereof and an opportunity, at its own expense,
                  to handle and defend the same before such Board member
                  undertakes to handle and defend it on her or his own behalf.

         (f)      Gender. For purposes of this Plan, words used in the masculine
                  gender shall include the feminine and neuter, and the singular
                  shall include the plural and vice versa, as appropriate.

         (g)      No Employment Agreement. The Plan shall not confer upon any
                  Optionee any right with respect to continuation of employment
                  with the Company, nor shall it interfere in any way with his
                  right or the Company's right to terminate his employment at
                  any time.


                                       8

EX-10.9

   1
                                                                    EXHIBIT 10.9

                      SHEFFIELD MEDICAL TECHNOLOGIES, INC.

                           1993 RESTRICTED STOCK PLAN

1.       Purposes of the Plan. The purposes of this Restricted Stock Plan are to
         attract and retain the best available personnel for positions of
         responsibility within the Company, to provide additional incentive to
         employees and others who provide services to the Company, and to
         promote the success of the Company's business through the grant of
         restricted shares of the Company's Common Stock.

2.       Definitions. As used herein, the following definitions shall apply:

         (a)      "Award" shall mean a grant of one or more shares of Restricted
                  Stock.

         (b)      "Board" shall mean the Board of Directors of the Company or,
                  when appropriate, the Committee administering the Plan, if one
                  has been appointed.

         (c)      "Code" shall mean the Internal Revenue Code of 1986, as
                  amended, and the rules and regulations promulgated thereunder.

         (d)      "Common Stock" shall mean the common stock of the Company
                  described in the Company's Certificate of Incorporation, as
                  amended.

         (e)      "Company" shall mean SHEFFIELD MEDICAL TECHNOLOGIES INC., a
                  Wyoming corporation, and shall include any parent or
                  subsidiary corporation of the Company as defined in Sections
                  425(e) and (f), respectively, of the Code.

         (f)      "Committee" shall mean the Committee appointed by the Board in
                  accordance with paragraph (a) of Section 4 of the Plan, if one
                  is appointed.

         (g)      "Employee" shall mean any person, including salaried officers
                  and directors, employed by the Company.

         (h)      "Exchange Act" shall mean the Securities and Exchange Act of
                  1934, as amended.

         (i)      "Fair Market Value" shall mean, with respect to the date a
                  given Award is granted, the value of the Common Stock
                  determined by the Board in such manner as it may deem
                  equitable for Plan purposes; provided. however. that where
                  there is a public market for the Common Stock, the Fair Market
                  Value per Share shall be the mean of the bid and asked prices
                  of the Common Stock on the date of grant, as reported in the
                  Wall Street Journal (or, if not so reported, as otherwise
                  reported in the National Association of Securities Dealers
                  Automated Quotation System) or, in the event the Common Stock
                  is listed on the New York Stock Exchange, the American Stock
                  Exchange, the NASDAQ/National Market System, or the NASDAQ
                  Stock Market, the Fair Market Value per Share shall be the
                  closing price on such exchange on the date of grant of the
                  Award, as reported in the Wall Street Journal.

         (j)      "Grantee" shall mean an employee or other individual who
                  provides services to the Company who has been granted one or
                  more shares of Restricted Stock.

         (k)      "Parent" shall mean a "parent corporation, whether now or
                  hereafter existing, as defined in Section 425(e) of the Code.

         (l)      "Plan" shall mean this 1993 Restricted Stock Plan.

                                       1
   2

         (m)      "Restricted Stock" shall mean Common Stock, issued and
                  outstanding, restricted as to transfer and subject to a
                  substantial risk of forfeiture.

         (n)      "Share" shall mean a share of the Common Stock, as adjusted in
                  accordance with Section 8 of the Plan.


         (o)      "Stock Purchase Agreement" shall mean the written agreement
                  between the Company and the Grantee relating to the grant of
                  an Award.

         (p)      "Subsidiary" shall mean a "subsidiary corporation," whether
                  now or hereafter existing, as defined in Section 425(f) of the
                  Code.

         (q)      "Tax Date" shall mean the date a Grantee is required to pay
                  the Company an amount with respect to tax withholding
                  obligations in connection with an Award.

3.     Common Stock Subject to the Plan. Subject to the provisions of Section 8
       of the Plan, the maximum aggregate number of shares which may be granted
       under the Plan is one hundred fifty thousand (150,000) Shares of Common
       Stock. The Shares may be authorized, but unissued, or previously issued
       Shares acquired by the Company and held in treasury. If Restricted Stock
       is forfeited, the forfeited Shares shall, unless the Plan shall have been
       terminated, be available for future grants under the Plan.

4.       Administration of the Plan.

         (a)      Procedure.


                  (i)      The Plan shall be administered by the Board in
                           accordance with Rule 16b-3 under the Exchange Act
                           ("Rule 16b-3"); provided, however, that the Board may
                           appoint a Committee to administer the Plan at any
                           time or from time to time, and, provided further,
                           that if the Board is not "disinterested" within the
                           meaning of Rule 16b-3, the Plan shall be administered
                           by a Committee in accordance with Rule 16b-3.

                  (ii)     Once appointed, the Committee shall continue to serve
                           until otherwise directed by the Board. From time to
                           time the Board may increase the size of the Committee
                           and appoint additional members thereof, remove
                           members (with or without cause), appoint new members
                           in substitution therefor, and fill vacancies however
                           caused: provided, however, that at no time may any
                           person serve on the Committee if that person's
                           membership would cause the Committee not to satisfy
                           the "disinterested administration" requirements of
                           Rule 16b-3.

5.       Powers of the Board. Subject to the provisions of the Plan, the Board
         shall have the authority, in its discretion: (i) to grant Restricted
         Stock; (ii) to determine, upon review of relevant information and in
         accordance with Section 2 of the Plan, the Fair Market Value of the
         Common Stock; (iii) to determine the Employees and other individuals
         who provide services to the Company to whom, and the time or times at
         which, Restricted Stock shall be granted and the number of Shares to be
         represented by each Award; (iv) to interpret the Plan; (v) to
         prescribe, amend and rescind rules and regulations relating to the
         Plan; (vi) to determine the terms and provisions of each Award granted
         (which need not be identical) and, with the consent of the Grantee
         thereof, modify or amend each Award; (vii) to accelerate or defer (with
         the consent of the Grantee) the date of any Award; (viii) to authorize
         any person to execute on behalf of the Company any instrument required
         to effectuate the grant of an Award previously granted by the Board;
         (ix) to accept or reject the election made by a Grantee pursuant to
         Section 14 of the Plan; and (x) to make all other determinations deemed
         necessary or advisable for the administration of the Plan.

6.       Effect of Board's Decision. All decisions, determinations and
         interpretations of the Board shall be final and binding on all Grantees
         and any other holders of any Restricted Stock granted under the Plan.


                                       2
   3
7.       Eligibility. Consistent with the Plan's purposes, Restricted Stock may
         be granted only to Employees and other individuals who provide services
         to the Company as determined by the Board. An Employee or other
         individual who provides services to the Company who has been granted
         Restricted Stock may, if he is otherwise eligible, be granted
         additional Restricted Stock.

8.       Stockholder Approval and Effective Dates. The Plan became effective
         upon approval by the Board. No Award may be granted under the Plan
         after August 30, 2003 (ten years from the effective date of the Plan).

9.       Restricted Stock.

         (a)      Awards. The Committee may award Restricted Stock to any
                  Employee or other individual who provides services to the
                  Company. Each certificate for Restricted Stock shall be
                  registered in the name of the Grantee and deposited by him,
                  together with a stock power endorsed in blank, with the
                  Company. Restricted Stock shall be awarded by a signed written
                  agreement containing such terms and conditions as the Board
                  may determine. At the time of an award there shall be
                  established a restriction period of such length as shall be
                  determined by the Board. Shares of Restricted Stock shall not
                  be sold, assigned, transferred, pledged or otherwise
                  encumbered, except as hereinafter provided, during the
                  restriction period. Except for such restrictions on transfer,
                  the Grantee as owner of such shares of Restricted Stock shall
                  have all the rights of a holder of Common Stock. At the
                  expiration of the restriction period, the Company shall
                  redeliver to the Grantee (or his legal representative or
                  designated beneficiary) the Restricted Stock deposited
                  pursuant to this paragraph 7.

         (b)      Termination. If a Grantee ceases to be an Employee or to
                  provide services to the Company with the consent of the Board,
                  or upon his death, retirement or total and permanent
                  disability, the restriction imposed under paragraph 7(a) shall
                  lapse with respect to such number of shares of Restricted
                  Stock theretofore awarded to him as shall be determined by the
                  Board.

10.      Adjustments Upon Changes in Capitalization or Merger. Subject to any
         required action by the stockholders of the Company, the number of
         shares of Common Stock which have been authorized for issuance under
         the Plan but as to which no Award has yet been granted or which have
         been returned to the Plan upon cancellation, shall be proportionately
         adjusted for any increase or decrease in the number of issued shares of
         Common Stock resulting from a stock split, reverse stock split, stock
         dividend, combination or reclassification of the Common Stock, or any
         other increase or decrease in the number of issued shares of Common
         Stock effected without receipt of consideration by the Company;
         provided, however, that conversion of any convertible securities of the
         Company shall not be deemed to have been "effected without receipt of
         consideration." Such adjustment shall be made by the Board, whose
         determination in that respect shall be final, binding and conclusive.
         Except as expressly provided herein, no issuance by the Company of
         shares of stock of any class, or securities convertible into shares of
         stock of any class, shall affect and no adjustment by reason thereof,
         shall be made with respect to the number or price of shares of Common
         Stock subject to the Plan.

11.      Time of Granting Restricted Stock. The date of grant of Restricted
         Stock shall, for all purposes, be the date on which the Board makes the
         determination granting such Restricted Stock. Notice of the
         determination shall be given to each Employee or other individual who
         provides services to the Company to whom an Award is so granted within
         a reasonable time after the date of such grant.

12.      Amendment and Termination of the Plan.

         (a)      Amendment and Termination. The Board may amend or terminate
                  the Plan from time to time in such respects as the Board may
                  deem advisable; provided, however, that the following
                  revisions or amendments shall require approval of the
                  shareholders of the Company, to the extent required by law,
                  rule or regulation:


                                       3
   4

                  (i)      Any material increase in the number of Shares subject
                           to the Plan, other than in connection with an
                           adjustment under Section 8 of the Plan;

                  (ii)     Any material change in the designation of the
                           Employees or other individuals who provide services
                           to the Company eligible to be granted Restricted
                           Stock; or

                  (iii)    Any material increase in the benefits accruing to
                           participants under the Plan.

         (b)      Effect of Amendment or Termination. Any such amendment or
                  termination of the Plan shall not affect Restricted Stock
                  already granted and such Restricted Stock shall remain in full
                  force and effect as if this Plan had not been amended or
                  terminated, unless mutually agreed otherwise between the
                  Grantee and the Board, which agreement must be in writing and
                  signed by the Grantee and the Company.

13.      Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
         to this Plan unless the issuance and delivery of such Shares pursuant
         thereto shall comply with all relevant provisions of law, including,
         without limitation, the Securities Act of 1933, as amended, the
         Exchange Act, the rules and regulations promulgated thereunder, and the
         requirements of any stock exchange upon which the Shares may then be
         listed, and shall be further subject to the approval of counsel for the
         Company with respect to such compliance.

         As a condition to the grant of Restricted Stock the Company may require
         the Grantee to represent and warrant at the time of any such grant that
         the Shares are being acquired only for investment and without any
         present intention to sell or distribute such Shares if, in the opinion
         of counsel for the Company, such a representation is required by any of
         the aforementioned relevant provisions of law.

         Inability of the Company to obtain authority from any regulatory body
         having jurisdiction, which authority is deemed by the Company's counsel
         to be necessary to the lawful issuance and sale of any Shares
         hereunder, shall relieve the Company of any liability in respect of the
         failure to issue or sell such Shares as to which such requisite
         authority shall not have been obtained.

14.      Reservation of Shares. The Company will at all times reserve and keep
         available such number of Shares as shall be sufficient to satisfy the
         requirements of the Plan.

15.      Purchase Agreement. Restricted Stock shall be evidenced by Stock
         Purchase Agreements in such form as the Board shall approve.

16.      Withholding Taxes. Subject to Section 4(b)(ix) of the Plan and prior to
         the Tax Date, the Grantee may make an irrevocable election to have the
         Company withhold from those Shares that would otherwise be received
         upon the grant, a number of Shares having a Fair Market Value equal to
         the minimum amount necessary to satisfy the Employee's portion of the
         Company's federal, state, local and foreign tax withholding obligations
         and FICA and FUTA obligations with respect to the grant of Restricted
         Stock to the Grantee.

         A Grantee who is also an officer of the Company must make the above
         described election:

         (a)      at least six months after the date of grant of the Restricted
                  Stock (except in the event of death or disability); and

         (b)      either:

                  (i)      six months prior to the Tax Date, or


                                       4
   5
                  (ii)     prior to the Tax Date and during the period beginning
                           on the third business day following the date the
                           Company releases its quarterly or annual statement of
                           sales and earnings and ending on the twelfth business
                           day following such date.

17.      Miscellaneous Provisions.

         (a)      Plan Expense. Any expense of administering this Plan shall be
                  borne by the Company.

         (b)      Construction of Plan. The place of administration of the Plan
                  shall be in the State of Wyoming, and the validity,
                  construction, interpretation, administration and effect of the
                  Plan and of its rules and regulations, and rights relating to
                  the Plan, shall be determined in accordance with the laws of
                  the State of Wyoming without regard to conflict of law
                  principles and, where applicable, in accordance with the Code.

         (c)      Taxes. The Company shall be entitled if necessary or desirable
                  to pay or withhold the amount of any tax attributable to the
                  delivery of Common Stock under the Plan from other amounts
                  payable to the Grantee after giving the person entitled to
                  receive such Common Stock notice as far in advance as
                  practical, and the Company may defer making delivery of such
                  Common Stock if any such tax may be pending unless and until
                  indemnified to its satisfaction.

         (d)      Indemnification. In addition to such other rights of
                  indemnification as they may have as members of the Board, the
                  members of the Board shall be indemnified by the Company
                  against all costs and expenses reasonably incurred by them in
                  connection with any action, suit or proceeding to which they
                  or any of them may be party by reason of any action taken or
                  failure to act under or in connection with the Plan or any
                  Restricted Stock, and against all amounts paid by them in
                  settlement thereof (provided such settlement is approved by
                  independent legal counsel selected by the Company) or paid by
                  them in satisfaction of a judgment in any such action, suit or
                  proceeding, except a judgment based upon a finding of bad
                  faith; provided that upon the institution of any such action,
                  suit or proceeding a Board member shall, in writing, give the
                  Company notice thereof and an opportunity, at its own expense,
                  to handle and defend the same before such Board member
                  undertakes to handle and defend it on her or his own behalf.

         (e)      Gender. For purposes of this Plan, words used in the masculine
                  gender shall include the feminine and neuter, and the singular
                  shall include the plural and vice versa, as appropriate.

         (f)      No Employment Agreement. The Plan shall not confer upon any
                  Grantee any right with respect to continuation of employment
                  with the Company, nor shall it interfere in any way with his
                  right or the Company's right to terminate his employment at
                  any time.




                                       5

EX-13

   1
                                                                      EXHIBIT 13



SHEFFIELD PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

                         SELECTED FINANCIAL INFORMATION
                   (In dollars, except per share information)




                                                            Years Ended December 31,
                                         2000           1999           1998          1997           1996
                                     -------------- -------------- ------------- -------------- -------------
                                                                                      
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:

Revenues:
   Contract research revenue            $  501,572     $  399,378     $      --        $    --       $    --
   Sublicense revenue                        5,000             --       350,000        500,000       510,000
                                     -------------- -------------- ------------- -------------- -------------

   Total revenues                          506,572        399,378       350,000        500,000       510,000

Expenses:

     Acquisition of research and
        development in-process
        technology                              --     15,000,000    13,325,000      1,650,000            --
     Research and development            3,747,437      3,421,734     2,351,301      3,729,193     3,841,818
     General and administrative          2,817,535      2,277,136     3,043,070      4,627,567     3,831,204
                                     -------------- -------------- ------------- -------------- -------------

     Total expenses                      6,564,972     20,698,870    18,719,371     10,006,760     7,673,022
                                     -------------- -------------- ------------- -------------- -------------

Loss from operations                   (6,058,400)   (20,299,492)  (18,369,371)    (9,506,760)   (7,163,022)

Interest income                            124,908         91,941        60,273         56,914       163,664
Interest expense                         (224,360)      (162,237)     (251,363)       (39,292)       (9,531)
Realized gain on sale of
marketable securities                      239,629             --            --             --            --
Minority interest in loss of
subsidiary                                 155,072      2,985,000            --             --            --
                                     -------------- -------------- ------------- -------------- -------------

Net loss                              $(5,763,151)  $(17,384,788)  $(18,560,461)  $(9,489,138)  $(7,008,889)
                                     ============== ============== ============= ============== =============

Basic and diluted net loss per
share                                       $(.21)         $(.64)        $(.85)         $(.80)        $(.65)

Basic and diluted weighted average
    common shares outstanding           27,956,119     27,236,715    21,931,040     11,976,090    10,806,799


CONSOLIDATED BALANCE SHEET DATA:

Working capital (net deficiency)       $ 3,439,120    $ 3,344,174   $ 1,456,833    $ (837,564)   $ 1,433,773

Total assets                             5,450,657      5,048,655     2,862,521        689,937     2,773,884

Long-term debt & redeemable
preferred stock                          2,000,000      2,000,000     1,000,000      4,019,263        27,206

Accumulated deficit                   (80,967,524)   (73,409,828)  (55,156,763)   (36,157,290)  (26,588,652)

Stockholders' equity (net capital
deficiency)                              (413,720)        671,073       655,205    (4,716,751)     1,695,837


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

No cash dividends have been paid on Common Stock for any of the periods
presented.

Loss per share is based upon the weighted average number of common and certain
common equivalent shares outstanding.

See consolidated financial statements and accompanying footnotes.



                                       1
   2


SHEFFIELD PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

         The following discussion contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. All forward-looking
statements involve risks and uncertainty, including without limitation, risks
set forth in Part I of the Company's Form 10-K for the year ended December 31,
2000.

         The discussion and analysis below should be read in conjunction with
the Financial Statements of the Company and the related Notes to Financial
Statements included on pages 6 - 17 in this Annual Report.

OVERVIEW

         Sheffield Pharmaceuticals, Inc. ("Sheffield" or the "Company") is a
specialty pharmaceutical company focused on development and commercialization of
later stage pharmaceutical products that utilize the Company's unique
proprietary pulmonary delivery technologies. Through its alliances with Elan
Corporation, plc ("Elan"), Zambon Group SpA ("Zambon"), and Siemens AG
("Siemens"), Sheffield is currently developing respiratory and non-respiratory
therapies to be delivered through its proprietary Metered Solution Inhaler
("MSI") and Aerosol Drug Delivery System ("ADDS") to address unmet market needs.

         In 1997, Sheffield acquired the rights to the MSI through a worldwide
exclusive license and supply arrangement with Siemens. In June 1998, Sheffield
sublicensed to Zambon worldwide marketing and development rights to respiratory
products to be delivered by the MSI. During the second half of 1998, the Company
acquired the ADDS from Aeroquip-Vickers, Inc. Additionally, during 1998,
Sheffield licensed from Elan the Ultrasonic Pulmonary Drug Absorption System, a
novel disposable unit dose nebulizer system, and Elan's Absorption Enhancing
Technology, a therapeutic agent to increase the systemic absorption of drugs. In
October 1999, the Company licensed Elan's NanoCrystal(TM) technology to be used
in developing certain steroid products.

         Sheffield's lead drug delivery technology, the MSI, is a patented,
multi-dose nebulizer delivery system. The pocket-sized inhaled drug delivery
system features an ultrasonic nebulizer that emits high-frequency sound waves
that turn liquid medication into a fine cloud or soft mist. The MSI system
combines the therapeutic benefits of nebulization with the convenience of
pressurized metered dose inhalers, or MDIs, in one patient-friendly device. The
MSI is comprised of a hand-held ultrasonic nebulizer and drug-filled cartridges
that are inserted into the inhaler unit. The cartridges provide patients who
must take multiple respiratory medications with a single, easy-to-use system.
The Company believes the soft mist created by the MSI provides multiple drug
administration advantages over the high-velocity MDIs and dry powder inhalers.
Furthermore, the MSI system is fast and portable as compared to conventional
tabletop nebulizers, which are large, cumbersome and more time consuming to use.
The MSI system targets younger and older asthma patients, as well as older
chronic obstructive pulmonary disease patients who have difficulty using MDIs
and currently depend on tabletop nebulizers for delivery of their medications.

         Sheffield's ADDS is a patented, new generation MDI that the Company
believes has significant efficiency and performance advantages over standard
MDIs. The ADDS technology utilizes a standard aerosol MDI canister, encased in a
compact device that provides an aerosol flow-control chamber and a synchronized
triggering mechanism. The aerosol flow-control chamber allows the patient to
inhale through the device at a normal breathing rate, instead of a forced
breath. The inspiratory breath establishes flow fields within the device that
mix and uniformly disperse the drug in the breath. At the mouthpiece, nearly all
the propellant is evaporated leaving only drug particles to be inspired,
allowing a significant increase in the amount of drug delivered to the lungs.
The ADDS system, like the MSI system, is designed to reduce patient coordination
problems and enhance compliance with the prescribed treatment.

                  The Company is in the development stage and to date has been
principally engaged in research, development and licensing efforts. The Company
has generated minimal operating revenue and will require additional capital
which the Company intends to obtain through out-licensing as well as through
equity and debt offerings to continue to operate its business. Even if the
Company is able to successfully develop new products, there can be no assurance
that the Company will generate sufficient revenues from the sale or licensing of
such products to be profitable.

         The consolidated financial statements include the accounts of Sheffield
and its wholly owned subsidiaries, Systemic Pulmonary Delivery, Ltd. ("SPD"),
Ion Pharmaceuticals, Inc., and CP Pharmaceuticals, Inc., and its 80.1% owned
subsidiary, Respiratory Steroid Delivery, Ltd. ("RSD").



                                       2
   3
RESULTS OF OPERATIONS

Revenue

         Contract research revenue primarily represents revenue earned from an
agreement with Zambon relating to the development of respiratory applications of
the MSI. Contract research revenue was $501,572 and $399,378 for the years ended
December 31, 2000 and 1999, respectively. There was no contract research revenue
in 1998. The increase of $102,194 from 1999 to 2000 reflects two additional MSI
respiratory programs in development in 2000 as compared to 1999. The increase
also reflects certain nonrecurring MSI device development work and testing
completed during 2000. Costs of contract research revenue approximate such
revenue and are included in research and development expenses on the
consolidated statement of operations. Future contract research revenues and
expenses are anticipated to fluctuate depending, in part, upon the success of
current clinical studies, and obtaining additional collaborative agreements.

         Sublicense revenue was $5,000, $0, and $350,000 for the years ended
December 31, 2000, 1999, and 1998, respectively. The 1998 sublicense revenue
relates to a sublicense agreement entered into during 1997 with Lorus
Therapeutics, Inc. (formerly Imutec Pharma Inc.) ("Lorus"). The agreement
licensed rights to a series of compounds for the treatment of cancer, Kaposi's
sarcoma and actinic keratosis to a newly formed company, NuChem Pharmaceuticals,
Inc. ("NuChem") for which Lorus will provide funding and management of the
development program. In exchange, the Company received 583,188 shares of Lorus
stock with a value of $350,000. At December 31, 2000 the Company's remaining
investment in Lorus of 283,188 shares had a market value of $327,422.

Acquisition of Research & Development In-Process Technology

         Acquisition of research and development in-process technology for the
years ended December 31, 2000, 1999 and 1998 was $0, $15.0 million, and $13.3
million, respectively. In 1999, the Company licensed certain pulmonary
NanoCrystal technology from Elan for $15.0 million. This entire payment was
expensed as the license agreement restricts the Company's use of the NanoCrystal
technology to certain respiratory steroid products that are currently research
and development projects. In 1998, the Company acquired the ADDS from Aeroquip
Corporation for $.8 million and certain pulmonary delivery technologies from
Elan for $12.5 million. The 1998 acquisitions were expensed in the year acquired
since the technologies had not demonstrated technological feasibility and had no
alternative future uses.

Research and Development

         Research and development expenses were $3.7 million for the year ended
December 31, 2000 compared to $3.4 million and $2.4 million for the years ended
December 31, 1999 and 1998, respectively. The increase of $.3 million, or 9.5%,
from 1999 to 2000 primarily represents costs associated with: (1) the
development by the Company's subsidiary, RSD, of three steroid products
initiated during the fourth quarter of 1999, (2) formulation work begun during
2000 on an undisclosed respiratory product to be delivered via the ADDS, (3)
modifications made to the MSI to enhance its commercial appeal prior to the
start of Phase III-albuterol clinical trials, and (4) two additional MSI
respiratory programs in development in 2000 as compared to 1999. These increases
were partially offset by lower development costs on the Company's two systemic
programs, a therapy for breakthrough pain delivered through the MSI, and a
migraine therapy delivered through the ADDS. The increase of $1.0 million from
1998 to 1999 is due to modifications being made to the MSI and with work
associated with the development of the Company's systemic programs. These
increases were partially offset by the shifting of responsibility for
development expenses of the respiratory applications of the MSI to the Company's
partner, Zambon.

General and Administrative Expenses

         General and administrative expenses were $2.8 million for the year
ended December 31, 2000 compared to $2.3 million and $3.0 million for the years
ended December 31, 1999 and 1998, respectively. The increase of $.5 million, or
23.7%, from 1999 to 2000 primarily reflects higher consulting and legal costs
associated with expanded business development activities. The decrease of $.7
million from 1998 to 1999 was primarily attributable to indirect costs
associated with completing both the Zambon and Elan agreements in 1998. In
addition, the decrease between years resulted from 1998 costs associated with
both the retention of the Company's former investor relations firm and
settlement of a dispute with the innovator of one of the Company's early stage
research projects.




                                       3
   4
Interest

         Interest income was $124,908 for the year ended December 31, 2000 as
compared to $91,941 and $60,273 for the years ended December 31, 1999 and 1998,
respectively. The increase of $32,967, or 35.9%, from 1999 to 2000 is primarily
due to larger balances of cash available for investment and higher average
yields on those investments. The $31,668 increase in interest income in 1999
from 1998 was primarily due to larger balances of cash available for investment.

         Interest expense was $224,360 for the year ended December 31, 2000 as
compared to $162,237 and $251,363 for the years ended December 31, 1999 and
1998, respectively. The increase of $62,123, or 38.3%, from 1999 to 2000
resulted from a higher outstanding balance during 2000 on the Company's
convertible promissory note with Elan, as well as a higher average interest rate
on the note. The decrease of $89,126 in 1999 as compared to 1998 primarily
reflects the 1998 conversion of the Company's Series A Cumulative Convertible
Preferred Stock and 6% Convertible Subordinated Debentures into Common Stock,
partially offset by higher outstanding balances on the convertible promissory
note with Elan.

Realized Gain on Sale of Marketable Securities

         Realized gain on sale of marketable securities of $239,629 for the year
ended December 31, 2000 resulted from the sale of 300,000 shares of the
Company's investment in Lorus common stock. As of December 31, 2000 the
Company's remaining investment in Lorus of 283,188 shares had an unrealized gain
of $157,467.

Minority Interest in Subsidiary

         Minority interest in loss of subsidiary was $.2 million and $3.0
million for the years ended December 31, 2000 and 1999, respectively. RSD, a
consolidated and 80.1% owned subsidiary of the Company, incurred a loss of $.8
million in 2000, resulting from costs incurred on three inhaled steroid products
being developed by the subsidiary. RSD's loss of $15.0 million in 1999 resulted
from the license of certain pulmonary NanoCrystal technology from Elan. The
minority interest in loss of subsidiary represents Elan's portion, or 19.9%, of
RSD's losses. Elan's investment in RSD, shown as minority interest in subsidiary
on the consolidated balance sheets, was $0 at both December 31, 2000 and 1999,
respectively.

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 2000, the Company had $3.0 million in cash and cash
equivalents compared to $3.9 million at December 31, 1999. The decrease of $.9
million reflects $5.6 million of cash disbursements used primarily to fund
operating activities and $.3 million to repurchase and retire 91,043 shares of
the Company's Common Stock. These decreases in cash were partially offset by
$2.0 million in net proceeds from a private placement of 626,950 shares of the
Company's Common Stock completed in December 2000, $1.8 million in net proceeds
from the exercise of Common Stock options and warrants, and $1.0 million from
the issuance of 1,000 shares of the Company's Series E Cumulative Convertible
Preferred Stock.

         In December 2000, the Company entered into a stock purchase agreement
with The Tail Wind Fund Ltd. Under the agreement, Sheffield issued and sold
626,950 shares of Common Stock and a warrant to purchase 112,500 shares of
Common Stock at an exercise price of $4.9844 per share for total cash
consideration of $2.3 million. The net proceeds from the transaction of $2.0
million are to be used for general corporate purposes.

         In October 1999, as part of a licensing agreement with Elan, the
Company received gross proceeds of $17.0 million related to the issuance to Elan
of 12,015 shares of Series D Preferred Stock and 5,000 shares of Series F
Preferred Stock. In turn, the Company made an equity investment of $12.0 million
in a joint venture, RSD, representing an initial 80.1% ownership. The remaining
proceeds from this preferred stock issuance were utilized for general operating
purposes. As part of the agreement, Elan has also committed to purchase, on a
drawdown basis, up to an additional $4.0 million of the Company's Series E
Preferred Stock, of which $3.0 million of such commitment remains outstanding.
The proceeds from the Series E Preferred Stock will be utilized by the Company
to fund its portion of RSD's operating and development costs.

         In May 1999, in conjunction with the completion of its Phase I/II
MSI-albuterol trial, Zambon provided the Company with a $1.0 million
interest-free advance against future milestone payments. At December 31, 2000,
the Company was entitled to receive an additional $1.0 million interest-free
milestone advance resulting from the demonstration of the technical feasibility
of delivering an inhaled steroid formulation in the MSI. In January 2001, the
Company received the funds for this advance from Zambon. Upon the attainment of
certain future milestones, the Company will recognize these advances as revenue.
If the Company does not achieve these future milestones, the advance must be
repaid in quarterly installments of $250,000 commencing January 1, 2002. The
proceeds from these advances are not restricted as to their use by the Company.




                                       4
   5

         On April 15, 1998, the Company issued 1,250 shares of its Series B
Preferred Stock in a private placement for an aggregate purchase price of $1.3
million. The proceeds were used to make a payment to Siemens pursuant to the MSI
license agreement. During 1998, the Company entered into a sublicense agreement
with Zambon that provided the Company $2.2 million in gross proceeds from the
sale of 2.6 million shares of Common Stock. The Company also entered into an
agreement with Elan that provided the Company approximately $17.5 million of
gross proceeds from the sale of 4.6 million shares of Common Stock and 11,500
shares of the Company's Series C Preferred Stock. The proceeds from the Elan
transaction were used to purchase certain pulmonary device delivery technologies
from Elan for $12.5 million, the ADDS for $.8 million from Aeroquip-Vickers
Inc., and to redeem $1.3 million principal amount of Series B Preferred Stock.
The remaining proceeds from the Elan transaction were used for research and
development, working capital and general corporate purposes. Also, as part of
the 1998 Elan agreement, Elan agreed to make available to the Company a
convertible promissory note that provides the Company the right to borrow up to
$2.0 million, subject to satisfying certain conditions. As of December 31, 2000,
$2.0 million was outstanding under this note.

         Since its inception, the Company has financed its operations primarily
through the sale of securities and convertible debentures, from which it raised
an aggregate of approximately $75.5 million through December 31, 2000, of which
approximately $30.0 million has been spent to acquire certain in-process
research and development technologies, and $27.9 million has been incurred to
fund certain ongoing technology research projects. The Company expects to incur
additional costs in the future, including costs relating to its ongoing research
and development activities, and preclinical and clinical testing of its product
candidates. The Company may also bear considerable costs in connection with
filing, prosecuting, defending and/or enforcing its patent and other
intellectual property claims. Therefore, the Company will need substantial
additional capital before it will recognize significant cash flow from
operations, which is contingent on the successful commercialization of the
Company's technologies. There can be no assurance that any of the technologies
to which the Company currently has or may acquire rights can or will be
commercialized or that any revenues generated from such commercialization will
be sufficient to fund existing and future research and development activities.

         Because the Company does not expect to generate significant cash flows
from operations for at least the next few years, the Company believes it will
require additional funds to meet future costs. The Company will attempt to meet
its capital requirements with existing cash balances and through additional
public or private offerings of its securities, debt financing, and collaboration
and licensing arrangements with other companies. There can be no assurance that
the Company will be able to obtain such additional funds or enter into such
collaborative and licensing arrangements on terms favorable to the Company, if
at all. The Company's development programs may be curtailed if future financings
are not completed.

         While the Company does not believe that inflation has had a material
impact on its results of operations, there can be no assurance that inflation in
the future will not impact financial markets which, in turn, may adversely
affect the Company's valuation of its securities and, consequently, its ability
to raise additional capital, either through equity or debt instruments, or any
off-balance sheet refinancing arrangements, such as collaboration and licensing
agreements with other companies.




                                       5
   6


                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)
                           CONSOLIDATED BALANCE SHEETS



                                               ASSETS                                                       December 31,
                                                                                                            ------------
                                                                                                      2000                1999
                                                                                                      ----                ----
                                                                                                                
Current assets:
         Cash and cash equivalents (Note 1)                                                          $3,041,948          $3,874,437
         Marketable equity securities (Notes 1 and 7)                                                   327,422             519,387
         Milestone advance receivable (Note 2)                                                        1,000,000                  --
         Prepaid expenses and other current assets                                                      540,272             145,237
                                                                                                 ---------------      --------------
                  Total current assets                                                                4,909,642           4,539,061
                                                                                                 ---------------      --------------

Property and equipment (Note 1):
         Laboratory equipment                                                                           271,748             407,624
         Office equipment                                                                               211,609             178,797
         Leasehold improvements                                                                          18,320              15,000
                                                                                                 ---------------      --------------
                                Total at cost                                                           501,677             601,421
         Less accumulated depreciation and amortization                                               (235,389)           (311,752)
                                                                                                 ---------------      --------------
                  Property and equipment, net                                                           266,288             289,669
                                                                                                 ---------------      --------------

Patent costs, net of accumulated amortization of $9,287 and $0, respectively (Note 1)                   258,897             204,283
Other assets                                                                                             15,830              15,642
                                                                                                 ---------------      --------------

         Total assets                                                                               $ 5,450,657         $ 5,048,655
                                                                                                 ===============      ==============

                    LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

Current liabilities:
         Accounts payable and accrued liabilities                                                    $1,234,765           $ 773,206
         Sponsored research payable                                                                     235,757             421,681
                                                                                                 ---------------      --------------
                  Total current liabilities                                                           1,470,522           1,194,887

Convertible promissory note (Note 6)                                                                  2,000,000           2,000,000
Unearned revenue (Note 2)                                                                             2,000,000           1,000,000
Other long-term liabilities                                                                             393,855             182,695
Commitments and contingencies                                                                                --                  --
                                                                                                 ---------------      --------------
                        Total liabilities                                                             5,864,377           4,377,582

Minority interest in subsidiary (Note 1)                                                                     --                  --

Stockholders' equity (net capital deficiency)(Notes 4 & 5):
   Preferred stock, $.01 par value, authorized 3,000,000 shares:
      Series C cumulative convertible preferred stock, authorized 23,000 shares; 13,712 and
         12,780 shares issued and outstanding at December 31, 2000 and 1999, respectively                  137                 128
      Series D cumulative convertible exchangeable preferred stock, authorized 21,000 shares;
         12,870 and 12,015 shares issued and outstanding at December 31, 2000  and 1999,
         respectively                                                                                      129                 120
      Series E cumulative convertible non-exchangeable preferred stock, authorized 9,000
         shares; 1,004 and no shares issued and outstanding at December 31, 2000 and 1999,
         respectively                                                                                      10                  --
      Series F convertible non-exchangeable preferred stock, 5,000 shares authorized;
         5,000 shares issued and outstanding at December 31, 2000 and 1999                                 50                  50
   Common stock, $.01 par value, authorized 60,000,000 shares; issued and outstanding
         28,791,643 and 27,308,846 shares at December 31, 2000 and 1999, respectively                 287,916             273,088
   Additional paid-in capital                                                                      80,108,095          73,638,128
   Other comprehensive income                                                                         157,467             169,387
   Deficit accumulated during development stage                                                  (80,967,524)        (73,409,828)
                                                                                               ---------------      --------------
                   Total stockholders' equity (net capital deficiency)                              (413,720)              671,073
                                                                                               ---------------      --------------

Total liabilities and stockholders' equity (net capital deficiency)                                $5,450,657          $5,048,655
                                                                                               ===============      ==============



                 See notes to consolidated financial statements.

                                       6

   7

                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
     For the Years Ended December 31, 2000, 1999 and 1998 and for the Period
             from October 17, 1986 (inception) to December 31, 2000




                                                                                                         October 17,
                                                                                                             1986
                                                               Years ended December 31,                  inception) to
                                                      --------------------------------------------        December 31,
                                                         2000            1999            1998                 2000
                                                         ----            ----            ----                 ----
                                                                                              
Revenues:
   Contract research revenue (Note 1)                 $    501,572    $    399,378    $         --        $    900,950
   Sublicense revenue (Note 7)                               5,000              --         350,000           1,365,000
                                                      ------------    ------------    ------------        ------------
     Total revenues                                        506,572         399,378         350,000           2,265,950

Expenses:
   Acquisition of research and development
     in-process technology (Note 7)                             --      15,000,000      13,325,000          29,975,000
   Research and development                              3,747,437       3,421,734       2,351,301          28,772,861
   General and administrative                            2,817,535       2,277,136       3,043,070          24,335,085
                                                      ------------    ------------    ------------        ------------
        Total expenses                                   6,564,972      20,698,870      18,719,371          83,082,946
                                                      ------------    ------------    ------------        ------------

Loss from operations                                    (6,058,400)    (20,299,492)    (18,369,371)        (80,816,996)

Interest income                                            124,908          91,941          60,273             730,949
Interest expense                                          (224,360)       (162,237)       (251,363)           (797,715)
Realized gain (loss) on sale of marketable
securities                                                 239,629              --              --             (85,286)
Minority interest in loss of subsidiary (Note 1)           155,072       2,985,000              --           3,140,072
                                                      ------------    ------------    ------------        ------------

Loss before extraordinary item                          (5,763,151)    (17,384,788)    (18,560,461)        (77,828,976)
Extraordinary item                                              --              --              --              42,787
                                                      ------------    ------------    ------------        ------------

Net loss                                              $ (5,763,151)   $(17,384,788)   $(18,560,461)       $(77,786,189)
                                                      ============    ============    ============        ============

Accretion of mandatorily redeemable preferred stock             --              --         (23,900)           (103,400)
                                                      ============    ============    ============        ============

Net loss - attributable to common shares              $ (5,763,151)   $(17,384,788)   $(18,584,361)       $(77,889,589)
                                                      ============    ============    ============        ============

Basic and diluted weighted average common shares
outstanding (Note 1)                                    27,956,119      27,236,715      21,931,040           9,331,056

Basic and diluted net loss  per share of common
stock (Note 1):                                       $       (.21)   $       (.64)   $       (.85)       $      (8.35)









                 See notes to consolidated financial statements.



                                       7
   8
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
      For the Period from October 17, 1986 (Inception) to December 31, 2000



                                                                              Notes receivable     Additional
                                                  Preferred      Common         in connection       paid-in
                                                   Stock          Stock       with sale of stock     capital
                                                   -----          -----       ------------------     -------
                                                                                       
Balance at October 17, 1986                         $   --     $        --      $           --     $        --
Common stock issued                                     --      11,340,864              37,400      18,066,219
Reincorporation in Delaware at $.01 par value           --     (11,220,369)                 --      11,220,369
Common stock subscribed                                 --              --           (110,000)              --
Common stock options and warrants issued                --              --                  --         240,868
Issuance of common stock in connection with
     acquisition of Camelot Pharmacal, LLC              --           6,000                  --       1,644,000
Common stock options extended                           --              --                  --         215,188
Accretion of issuance costs for Series A
     preferred stock                                    --              --                  --              --
Comprehensive income (loss):
       Unrealized loss on marketable securities         --              --                  --              --
       Net loss                                         --              --                  --              --
Comprehensive income (loss)                             --              --                  --              --
                                                  ---------    ------------     ---------------    -----------
Balance at December 31, 1997                            --         126,495            (72,600)      31,386,644

Common stock issued                                     --         144,089              62,600      12,472,966
Series C preferred stock issued                        115              --                  --      11,499,885
Series C preferred stock dividends                       4              --                  --         413,996
Accretion of issuance costs for Series A
     preferred stock                                    --              --                  --              --
Comprehensive income (loss):
       Unrealized loss on marketable securities         --              --                  --              --
       Net loss                                         --              --                  --              --
Comprehensive income (loss)                             --              --                  --              --
                                                  ---------    ------------     ---------------    -----------
Balance at December 31, 1998                           119         270,584            (10,000)      55,773,491

Common stock issued                                     --           2,504              10,000          89,059
Series C preferred stock dividends                       9              --                  --         865,991
Series D preferred stock issued                        120              --                  --      12,014,880
Series F preferred stock issued                         50              --                  --       4,691,255
Common stock warrants issued                            --              --                  --         203,452
Comprehensive income (loss):
       Unrealized gain on marketable securities         --              --                  --              --
       Net loss                                         --              --                  --              --
Comprehensive income (loss)                             --              --                  --              --
                                                  ---------    ------------     ---------------    -----------
Balance at December 31, 1999                           298         273,088                          73,638,128
                                                                                            --

Common stock issued                                     --          15,738                  --       3,796,072
Repurchase and retirement of common stock               --           (910)                  --       (312,279)
Series C preferred stock dividends                       9              --                  --         931,991
Series D preferred stock dividends                       9              --                  --         854,991
Series E preferred stock issued                         10              --                  --         999,990
Series E preferred stock dividends                      --              --                  --           4,000
Common stock warrants issued                            --              --                  --         195,202
Comprehensive income (loss):
        Unrealized loss on marketable securities        --              --                  --              --
        Net loss                                        --              --                  --              --
Comprehensive income (loss)                             --              --                  --              --
                                                  ---------    ------------     ---------------    -----------
Balance at December 31, 2000                      $    326     $    287,916     $           --     $80,108,095
                                                  =========    ============     ===============    ===========




                                                     Other       Deficit accumulated      Total stockholders'
                                                 comprehensive   during development       equity (net capital
                                                  income(loss)         stage                 deficiency)
                                                  ------------         -----                 -----------
                                                                                
Balance at October 17, 1986                       $         --     $              --     $             --
Common stock issued                                         --                    --           29,444,483
Reincorporation in Delaware at $.01 par value               --                    --                   --
Common stock subscribed                                     --                    --            (110,000)
Common stock options and warrants issued                    --                    --              240,868
Issuance of common stock in connection with
     acquisition of Camelot Pharmacal, LLC                  --                    --            1,650,000
Common stock options extended                               --                    --              215,188
Accretion of issuance costs for Series A
     preferred stock                                        --              (79,500)             (79,500)
Comprehensive income (loss):
       Unrealized loss on marketable securities             --                    --                   --
       Net loss                                             --          (36,077,790)                   --
Comprehensive income (loss)                                 --                    --         (36,077,790)
                                                  -------------    ------------------    -----------------
Balance at December 31, 1997                                --          (36,157,290)          (4,716,751)

Common stock issued                                         --                    --           12,679,655
Series C preferred stock issued                             --                    --           11,500,000
Series C preferred stock dividends                          --             (415,112)              (1,112)
Accretion of issuance costs for Series A
     preferred stock                                        --              (23,900)             (23,900)
Comprehensive income (loss):
       Unrealized loss on marketable securities      (222,226)                    --                   --
       Net loss                                             --          (18,560,461)                   --
Comprehensive income (loss)                                 --                    --         (18,782,687)
                                                  -------------    ------------------    -----------------
Balance at December 31, 1998                         (222,226)          (55,156,763)              655,205

Common stock issued                                         --                    --              101,563
Series C preferred stock dividends                          --             (868,277)              (2,277)
Series D preferred stock issued                             --                    --           12,015,000
Series F preferred stock issued                             --                    --            4,691,305
Common stock warrants issued                                --                    --              203,452
Comprehensive income (loss):
       Unrealized gain on marketable securities        391,613                    --                   --
       Net loss                                             --          (17,384,788)                   --
Comprehensive income (loss)                                 --                    --         (16,993,175)
                                                  -------------    ------------------    -----------------
Balance at December 31, 1999                           169,387          (73,409,828)              671,073


Common stock issued                                         --                    --            3,811,810
Repurchase and retirement of common stock                   --                    --            (313,189)
Series C preferred stock dividends                          --             (934,045)              (2,045)
Series D preferred stock dividends                          --             (855,750)                (750)
Series E preferred stock issued                             --                    --            1,000,000
Series E preferred stock dividends                          --               (4,750)                (750)
Common stock warrants issued                                --                    --              195,202
Comprehensive income (loss):
        Unrealized loss on marketable securities      (11,920)                    --                   --
        Net loss
Comprehensive income (loss)                                 --           (5,763,151)                   --
Balance at December 31, 2000                                --                    --           (5,775,071)
                                                  -------------    ------------------    -----------------
                                                  $    157,467         $(80,967,524)            $(413,720)
                                                  =============    ==================    =================





                 See notes to consolidated financial statements.


                                       8
   9
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
  For the Years Ended December 31, 2000, 1999 and 1998 and for the Period from
               October 17, 1986 (Inception) to December 31, 2000



                                                                                                                       October 17,
                                                                                                                           1986
                                                                              Years ended December 31,                (inception) to
                                                                              ------------------------                 December 31,
                                                                       2000             1999           1998              2000
                                                                       ----             ----           ----              ----
Cash flows from operating activities:
                                                                                                          
   Net loss                                                        $(5,763,151)     $(17,384,788)  $(18,560,461)      $(77,786,189)
   Adjustments to reconcile net loss to net cash used by
     development stage activities:
        Issuance of common stock, stock options/warrants for
            services                                                    207,202          203,452        359,913           2,692,627
        Depreciation and amortization                                   118,775           86,341         68,794             598,335
        Non-cash acquisition of research and development
            in-process technology                                         --                  --             --           1,650,000
        (Gain) loss realized on sale of marketable securities         (239,629)               --             --              85,286
        (Increase) decrease in prepaid expenses & other current
            assets                                                    (395,035)        (106,202)          8,343           (599,313)
        Increase in milestone advance receivable                    (1,000,000)               --             --         (1,000,000)
        (Increase) decrease in other assets                            (64,089)        (219,925)         25,738           (224,973)
        Increase (decrease) in accounts payable and accrued
            liabilities                                                 615,636          154,418      (279,264)             801,502
        (Decrease) increase in sponsored research payable             (185,924)         (28,124)       (20,963)             812,827
        Increase in unearned revenue                                  1,000,000        1,000,000             --           2,000,000
        Other                                                            59,973          151,396      (285,826)             298,048
                                                                   ------------- -- -------------  -------------    ----------------
Net cash used by development stage activities                       (5,646,242)     (16,143,432)   (18,683,726)        (70,671,850)
                                                                   ------------- -- -------------  -------------    ----------------

Cash flows from investing activities:
     Proceeds from sale of marketable securities                        419,674               --             --             594,759
     Acquisition of laboratory and office equipment, and
            leasehold  improvements                                    (86,107)        (136,588)      (131,772)           (671,819)
     Other                                                                   --           10,000        132,200            (57,087)
                                                                   -------------    -------------  -------------    ----------------
Net cash provided (used) by investing activities                        333,567        (126,588)            428           (134,147)
                                                                   -------------    -------------  -------------    ----------------

Cash flows from financing activities:
     Payments on debt and capital leases                                (6,435)        (709,701)       (54,020)           (842,609)
     Net proceeds from issuance of:
         Debt                                                                --        1,600,000      1,150,000           5,050,000
         Common stock                                                 2,015,625               --      8,150,000          23,433,660
         Preferred stock                                              1,000,000       16,706,305     12,750,000          33,741,117
     Proceeds from exercise of warrants/stock options                 1,784,185           91,563             --          13,277,906
     Repurchase and retirement of common stock                        (313,189)               --             --           (313,189)
     Other                                                                   --               --    (1,250,000)           (500,024)
                                                                   -------------    -------------  -------------    ----------------
Net cash provided by financing activities                             4,480,186       17,688,167     20,745,980          73,846,861

Net (decrease) increase in cash and cash equivalents                  (832,489)        1,418,147      2,062,682           3,040,864
Cash and cash equivalents at beginning of period                      3,874,437        2,456,290        393,608               1,084
                                                                                    -------------  -------------    ----------------
                                                                   -------------
Cash and cash equivalents at end of period                           $3,041,948       $3,874,437     $2,456,290          $3,041,948
                                                                   =============    =============  =============    ================

Noncash investing and financing activities:
     Common stock, stock options and warrants issued for services      $207,202         $203,452       $359,913          $2,692,627
     Common stock redeemed in payment of notes receivable                    --               --         10,400              10,400
     Acquisition of research and development in-process
            technology                                                       --               --             --           1,655,216
     Common stock issued for intellectual property rights                    --               --             --             866,250
     Common stock issued to retire debt                                      --               --             --             600,000
     Common stock issued to redeem convertible securities                    --               --      4,019,263           5,353,368
     Securities acquired under sublicense agreement                          --               --        350,000             850,000
     Equipment acquired under capital lease                                  --               --         49,231             121,684
     Notes payable converted to common stock                                 --               --             --             749,976
     Stock dividends                                                  1,794,545          868,277        596,195           3,441,369

Supplemental disclosure of cash information:  Interest paid              $2,940           $8,919       $186,519            $279,260





                See notes to consolidated financial statements.



                                       9
   10
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - Sheffield Pharmaceuticals, Inc. (formerly Sheffield
Medical Technologies Inc.) ("Sheffield" or the "Company") a Delaware
corporation, is focused on the development and commercialization of later stage,
lower risk pharmaceutical products that utilize the Company's unique proprietary
pulmonary delivery technologies.

The Company is in the development stage and to date has been principally engaged
in research, development and licensing efforts. The Company has generated
minimal operating revenue, sustained significant net operating losses, and
requires additional capital that the Company intends to obtain through
out-licensing as well as through equity and debt offerings to continue to
operate its business. Even if the Company is able to successfully develop new
products, there can be no assurance that the Company will generate sufficient
revenues from the sale or licensing of such products to be profitable.

Principles of Consolidation - The consolidated financial statements include the
accounts of Sheffield and its wholly owned subsidiaries, Systemic Pulmonary
Delivery, Ltd. ("SPD"), Ion Pharmaceuticals, Inc., and CP Pharmaceuticals, Inc.,
and its 80.1% owned subsidiary, Respiratory Steroid Delivery, Ltd. ("RSD"). All
significant intercompany transactions have been eliminated. Investments in
affiliated companies that are 50% owned or less, and where the Company does not
exercise control, are accounted for using the equity method.

Use of Estimates - The preparation of the financial statements in conformity
with generally accepted accounting principles requires 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.

Cash Equivalents - The Company considers all highly liquid instruments with
original maturities of three months or less to be cash equivalents. Cash and
cash equivalents include demand deposits held in banks, interest bearing money
market funds, and corporate commercial paper with A1 or P1 short-term ratings.

Marketable Securities - Marketable securities consist of investments that can be
readily purchased or sold using established markets. The Company's securities,
which are classified as available-for-sale, are carried at market with
unrealized gains and losses reported as a separate component of other
comprehensive income within stockholders' equity.

Property and Equipment - Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over three or five year periods for
office equipment, and five years for laboratory equipment. Assets under capital
leases, consisting of office equipment and leasehold improvements, are amortized
over the lesser of the useful life or the applicable lease terms.

Patent Costs - Costs associated with obtaining patents, principally legal costs
and filing fees, are capitalized and being amortized on a straight-line basis
over the remaining lives of the respective patents. The Company periodically
evaluates the carrying amount of these assets based on current licensing and
future commercialization efforts, and if warranted, impairment would be
recognized.

Contract Research Revenue - Contract revenue from collaborative research
agreements is recorded when earned and as the related costs are incurred.
Payments received which are related to future performance are deferred and
recognized as revenue in the period in which they are earned.

Research and Development Costs - Research and development costs ("R & D costs")
are expensed as incurred, except for fixed assets to which the Company has
title, which are capitalized and depreciated over their estimated useful lives.

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

Fair Value of Financial Instruments - The carrying amounts of cash and cash
equivalents, receivables, accounts payable, sponsored research payable and notes
payable approximate fair value.

Basic Net Loss per Share of Common Stock - Basic net loss per share is
calculated in accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share. Basic net loss per share is based upon the
weighted average common stock outstanding during each year. Potentially dilutive
securities, such as stock options, warrants, convertible debt and preferred
stock, have not been included in any years presented as their effect is
antidilutive.


                                       10
   11

Stock-Based Compensation - SFAS No. 123, Accounting for Stock-Based
Compensation, defines a fair value method of accounting for stock options and
similar equity instruments. As permitted by SFAS 123, the Company continues to
account for employee stock options under Accounting Principal Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25"), and has disclosed in a
note to the financial statements pro forma net loss and earnings per share as if
the Company had applied the fair value method of accounting for its stock-based
awards. Under APB 25, no expense is generally recognized at the time of option
grant because the exercise price of the Company's employee stock option equals
or exceeds the fair market value of the underlying common stock on the date of
grant.

Comprehensive Income (Loss) - Effective January 1, 1998, the Company adopted
SFAS No. 130, Reporting Comprehensive Income, which establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements and applies to all enterprises.
Other comprehensive income or loss shown in the consolidated statements of
stockholders' equity at December 31, 2000, 1999 and 1998 is solely comprised of
unrealized gains or losses on marketable securities. The unrealized gain on
marketable securities during 2000 includes reclassification adjustments of
$239,629 for gains realized in income from the sale of the securities.

Segment Information - Effective January 1, 1998, the Company adopted SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information, which
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
operates in one reportable segment as defined by SFAS No. 131.

2.       UNEARNED REVENUE

             In May 1999, in conjunction with the completion of the Phase I/II
Metered Solution Inhaler ("MSI") albuterol trial, Zambon Group SpA ("Zambon")
provided the Company with a $1.0 million interest-free advance against future
milestone payments. In December 2000, the Company was entitled to receive an
additional $1.0 million interest-free advance against future milestone payments
resulting from the demonstration of the technical feasibility of delivering an
inhaled steroid formulation in the MSI. As such, this receivable was reflected
in the accompanying financial statements as a milestone advance receivable. In
January 2001, the Company collected the funds from Zambon relating to this
receivable. Upon the attainment of certain future milestones, the Company will
recognize both of these advances as revenue. If the Company does not achieve
these future milestones, the advances must be repaid in quarterly installments
of $250,000 commencing on January 1, 2002. The proceeds from these advances are
not restricted as to their use by the Company (see Note 7).

3.     LEASES

            The Company leases its office space and certain equipment under
noncancelable operating and capital leases that expire at various dates through
2003. At December 31, 2000, assets held under capital leases consisting of
office equipment were $21,243, net of accumulated amortization of $27,988.
Future minimum lease payments under capital and operating leases at December 31,
2000 are as follows:




                                                                      Capital          Operating
                                                                       Leases             Leases
                                                                          
                 2001.......................................           $9,375           $146,082
                 2002.......................................            9,375             81,851
                 2003.......................................              774              2,463
                                                                 -------------      -------------
                 Total minimum lease payments...............           19,524           $230,396
                                                                                    =============
                 Less amount representing interest..........          (2,752)
                                                                 -------------
                 Present value of net minimum lease
                   payments.................................           16,772
                 Less current maturities of capital
                   lease obligations........................          (7,429)
                                                                 -------------
                 Capital lease obligations..................           $9,343
                                                                 =============



            Rent expense relating to operating leases for the years ended
December 31, 2000, 1999 and 1998 was $219,859, $174,332, and $143,126,
respectively.


                                       11
   12
4.     STOCKHOLDERS' EQUITY

         Preferred Stock

         In February 1997, 35,700 shares of Series A Cumulative Convertible
Preferred Stock ("Series A Preferred Stock") were issued pursuant to a private
placement. Holders of Series A Preferred Stock had the right, exercisable
commencing May 29, 1997 and ending February 28, 1999, to convert shares of
Series A Preferred Stock into shares of Common Stock. The number of shares of
Common Stock issuable upon conversion of Series A Preferred Stock was determined
by reference to the lesser of (i) $3.31875 and (ii) 85% of the "current market
price" per share of Common Stock, where "current market price" means, with
certain exceptions, the average of the closing bid prices of Common Stock for
the 10 consecutive trading days ending the last trading day before the
applicable conversion date. Each share of Series A Preferred Stock earned a
cumulative dividend payable in shares of Common Stock at a rate per share equal
to 7.0% of the original $100 purchase price per share of the Series A Preferred
Stock payable at the time of conversion. In 1997 and 1998, all of the Company's
outstanding Series A Preferred Stock, plus related dividends payable, were
converted to Common Stock.

         In April 1998, the Company issued 1,250 shares of its Series B
Cumulative Convertible Redeemable Preferred Stock ("Series B Preferred Stock")
in a private placement for an aggregate purchase price of $1.3 million. In
addition, the holder of Series B Preferred Stock was issued warrants to acquire
300,000 shares of Common Stock at any time up until and including April 15, 2001
for a price of $1.00 per share. Each share of Series B Preferred Stock earned a
cumulative dividend payable at a rate per share equal to 6.0% per annum. On July
31, 1998, the Company redeemed all of the Series B Preferred Stock and accrued
dividends for cash.

         In June 1998, the Company issued 4,571,428 shares of Common Stock and
11,500 shares of Series C Cumulative Convertible Preferred Stock ("Series C
Preferred Stock"), convertible into shares of Common Stock of the Company or of
its wholly owned subsidiary, SPD, for $17.5 million pursuant to a definitive
agreement with an affiliate of Elan Corporation, plc ("Elan"), Elan
International Services, Ltd. ("Elan International"). The Series C Preferred
Stock earns cumulative dividends payable in shares of Series C Preferred Stock
at an annual rate of 7.0% on the stated value of each outstanding share of
Series C Preferred Stock on the dividend date. Elan International also received
a warrant to purchase 990,000 shares of Common Stock of the Company exercisable
from December 31, 1998 through January 30, 2005 at an exercise price of $2.00
per share. Under the terms of the agreement, the Company, through SPD, acquired
certain pulmonary delivery technologies for the sum of $12.5 million in cash
(see Note 7). All of the outstanding Common Stock of SPD is pledged to Elan
during the term of the agreement. Subject to certain conditions and the making
of certain payments to the Company, Elan International has the option to acquire
all or a portion of the outstanding stock of SPD. The net book value of SPD is
$.1 million as of December 31, 2000. The Company issued stock dividends totaling
932 and 866 shares of Series C Preferred Stock and cash dividends for fractional
shares of $2,045 and $2,278 for the years ended December 31, 2000 and 1999,
respectively.

         In October 1999, pursuant to a definitive agreement, the Company and
Elan International formed RSD to develop certain respiratory steroid products.
Under the terms of the agreement, the Company issued to Elan International
12,015 shares of Series D Cumulative Convertible Exchangeable Preferred Stock
("Series D Preferred Stock"), convertible into shares of Common Stock of the
Company at $4.86 per Common Share or exchangeable for an additional 30.1%
ownership interest in the new joint venture, for $12.0 million. The Series D
Preferred Stock earns cumulative dividends payable in shares of Series D
Preferred Stock at an annual rate of 7.0% on the stated value of each
outstanding share of Series D Preferred Stock on the dividend date. The Company
issued stock dividends totaling 855 shares of Series D Preferred Stock and cash
dividends for fractional shares of $750 for the year ended December 31, 2000. No
stock dividends were paid in 1999. Elan International also has committed to
purchase, on a drawdown basis, up to $4.0 million of the Company's Series E
Cumulative Convertible Preferred Stock ("Series E Preferred Stock"), convertible
into shares of Common Stock of the Company at $3.89 per Common Share. The Series
E Preferred Stock will be utilized by the Company to fund its portion of RSD's
operating and development costs. During 2000, Elan International purchased $1.0
million of the Series E Preferred Stock. The Series E Preferred Stock earns
cumulative dividends payable in shares of Series E Preferred Stock at an annual
rate of 9.0% on the stated value of each outstanding share of Series E Preferred
Stock on the dividend date. The Company issued stock dividends totaling 4 shares
of Series E Preferred Stock and cash dividends for fractional shares of $750 for
the year ended December 31, 2000. No stock dividends were paid in 1999. In
addition to the above, the Company issued to Elan International 5,000 shares of
Series F Convertible Non-Exchangeable Preferred Stock ("Series F Preferred
Stock"), convertible into shares of Common Stock of the Company at $3.40 per
Common Share, for $5.0 million. The proceeds of the Series F Preferred Stock was
utilized by Sheffield for its own operating purposes. The holders of the Series
F Preferred Stock may be entitled to receive dividends on a pari passu basis
with the holders of Common Stock. As part of the transaction, Elan International
also received a warrant to purchase 150,000 shares of Common Stock of the
Company at an exercise price of $6.00 per share (see Note 7).



                                       12
   13
         Common Stock

         During 1998, the Company entered into an agreement with Zambon for a
sublicense to the Company's proprietary MSI drug delivery system (see Note 7).
Pursuant to an option agreement dated April 15, 1998, the Company issued 800,000
shares of Common Stock for $650,000 in cash. On June 15, 1998, the Company
entered into the definitive agreement, resulting in the issuance of an
additional 1,846,153 shares of Common Stock for $1.5 million.

         In June 1999, the stockholders of Sheffield approved an amendment to
the Company's Certificate of Incorporation to increase the number of shares of
Common Stock that the Company is authorized to issue from 50 million shares to
60 million shares.

         In December 2000, the Company entered into a stock purchase agreement
with The Tail Wind Fund Ltd. ("Tail Wind"). Under the agreement, Sheffield
issued and sold 626,950 shares of Common Stock and a warrant to purchase 112,500
shares of Common Stock at an exercise price of $4.9844 per share for total cash
consideration of $2.3 million. The net proceeds from the transaction of $2.0
million will be used for general corporate purposes. Pursuant to the stock
purchase agreement, until at least August 29, 2002, if Sheffield sells shares of
Common Stock or securities convertible into or exercisable for Common Stock for
less than $3.5888 per share, Sheffield is obligated to issue to Tail Wind
additional shares so that the number of shares purchased by Tail Wind in the
December 2000 private placement plus the additional shares issued to Tail Wind
equals the number of shares that Tail Wind could have purchased for $2.3 million
at the price per share at which the new shares are sold. In addition, in the
event that the Company is required to issue additional shares to Tail Wind,
Sheffield may not issue an aggregate of over 5,630,122 shares of Common Stock in
total to Tail Wind in connection with the December 2000 private placement. If
the Company would otherwise be required to issue more than 5,630,122 shares to
Tail Wind, Sheffield must instead pay Tail Wind 105% of the cash value of such
shares the Company does not issue.

         Convertible Subordinated Debentures

         In September 1997, the Company consummated a private placement of $1.8
million principal amount of its 6.0% Convertible Subordinated Debentures
("Debentures") due September 22, 2000. In addition, the Company granted the
holder of the Debenture warrants to purchase 140,000 shares of the Company's
Common Stock at $2.80 per share. A value of $115,500 was assigned to these
warrants. The Debentures were convertible at the option of the holder from
December 22, 1997 until maturity, subject to certain limitations, into a number
of shares of Common Stock equal to (i) the principal amount of the Debenture
being so converted divided by (ii) 75% of the market price of the Common Stock
as of the date of conversion. For purposes of any conversion of Debentures,
"market price" generally meant the average of the closing prices of the Common
Stock for the five trading day period proceeding the applicable conversion date.
The Debentures also earned interest at a rate of 6.0% per annum that was payable
by the Company, at the option of the holder and subject to certain conditions,
in shares of its Common Stock at a conversion rate generally equal to the
average of the closing prices of the Common Stock for the ten trading days
preceding the applicable interest payment date. During 1998, the Debentures were
converted to Common Stock resulting in the issuance of 2,925,941 shares of
Common Stock.

5.     STOCK OPTIONS AND WARRANTS

Stock Option Plan - The 1993 Stock Option Plan (the "Option Plan") was adopted
by the Board of Directors in August 1992 and approved by the stockholders at the
annual meeting in December 1993. An amendment to the Option Plan increasing the
number of shares of Common Stock available for issuance thereunder from 3
million shares to 4 million shares received stockholder approval on July 15,
1998. The Option Plan permits the grant to employees and officers of the Company
of both incentive stock options and non-statutory stock options. The Option Plan
is administered by the Board of Directors or a committee of the Board, which
determines the persons to whom options will be granted and the terms thereof,
including the exercise price, the number of shares subject to each option, and
the exercisability of each option. The exercise price of all options for Common
Stock granted under the Option Plan must be at least equal to the fair market
value on the date of grant in the case of incentive stock options, and 85% of
the fair market value on the date of grant in the case of non-statutory stock
options. Options generally expire five to ten years from the date of grant and
vest either over time or upon the Company's Common Stock attaining a set market
price for a certain number of trading days. As of December 31, 2000 there are
775,200 shares available for grant under the Option Plan.


                                       13
   14



Restricted Stock Plan - The 1993 Restricted Stock Plan (the "Restricted Plan")
was adopted by the Board of Directors in August 1992 and approved by the
stockholders at the annual meeting in December 1993. The Restricted Plan
authorized the grant of a maximum of 150,000 shares of Common Stock to key
employees, consultants, researchers and members of the Company's Scientific
Advisory Board. The Restricted Plan is administered by the Board of Directors or
a committee of the Board, which determines the person to whom shares will be
granted and the terms of such share grants. As of December 31, 2000, no shares
have been granted under the Restricted Plan.

Directors Stock Option Plan - The 1996 Directors Stock Option Plan (the
"Directors Plan") was adopted by the Board of Directors and approved by the
stockholders on June 20, 1996. Under the Directors Plan, the maximum aggregate
number of shares which may be optioned and sold is 500,000 shares of Common
Stock. The Directors Plan initially granted each eligible director 15,000 stock
options. To the extent that shares remain available, any new directors shall
receive the grant of an option to purchase 25,000 shares. To the extent that
shares remain available under the Directors Plan, on January 1 of each year
commencing January 1, 1997, each eligible director shall be granted an option to
purchase 15,000 shares. The exercise price of all options granted under the
Directors Plan shall be the fair market value at the date of the grant. Options
generally expire five years from the date of grant. As of December 31, 2000,
there are 215,000 shares available for grant under the Directors Plan.

            SFAS No. 123 requires pro forma information regarding net income and
earnings per share as if the Company has accounted for its stock options granted
subsequent to December 31, 1994, under the fair value method of SFAS No. 123.
The fair value of these stock options is estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 2000, 1999, and 1998, risk-free interest rate ranging from 4.39%
to 6.36%; expected volatility ranging from 0.526 to 0.769; expected option life
of one to ten years from vesting and an expected dividend yield of 0.0%.

            For purposes of pro forma disclosures, the estimated fair value of
the stock options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:



                                                                   2000               1999                  1998
                                                                   ----               ----                  ----
                                                                                                
             Pro forma net loss....................             $8,206,316          $17,807,124          $18,983,921
             Pro forma basic net loss per share of
               common stock........................                   $.29                 $.65                 $.87


            Transactions involving stock options and warrants are summarized as
follows:



                                                                         Years Ended December 31,
                                ---------------------------------------------------------------------------------------------------
                                              2000                              1999                                 1998
                                --------------------------------- -----------------------------    ---------------------------------
                                                       Weighted                      Weighted                             Weighted
                                                       Average                       Average                              Average
                                  Common Stock         Exercise     Common Stock     Exercise        Common Stock         Exercise
                                Options/Warrants        Price     Options/Warrants    Price        Options/Warrants        Price
                                ----------------        -----     ----------------    -----        ----------------        -----
                                                                                                      
Outstanding, January 1                  7,782,954          $2.59         7,910,836       $2.55             4,781,290          $3.65
         Granted                        1,041,040           5.34           555,040        2.97             3,162,910           1.81
         Expired                          660,820           2.90           315,422        3.92               283,504           4.48
         Exercised                      1,241,545           2.32           367,500        1.07                    --             --
         Canceled                              --             --                --          --               180,500           5.64
         Revalued(1)                           --             --                --          --               430,640             --
                                ------------------    ----------- ----------------  -----------    ------------------    -----------
Outstanding, December 31                6,921,629          $3.02         7,782,954       $2.59             7,910,836          $2.55
                                ==================    =========== ================  ===========    ==================    ===========
Exercisable at end of year              5,049,613          $2.57         6,358,554       $2.51             5,028,336          $2.71
                                ==================    =========== ================  ===========    ==================    ===========



         (1) Certain warrants issued by the Company during 1995 contain
antidilutive provisions. These warrants total 615,325, and have exercise prices
ranging from $4.00 to $5.00 per share. Pursuant to the antidilutive provisions
of the warrants, the common shares to be purchased under the warrants were
increased to 1,045,965 and the related exercise prices were adjusted to a range
of $2.44 to $2.81 per share.

                                       14
   15
During the period January 1, 1998 through December 31, 2000, the exercise prices
and weighted average fair value of options and warrants granted by the Company
were as follows:



            Year                 Number of Options/Warrants             Exercise Price            Weighted Average Fair Value
            ----                 --------------------------             --------------            ---------------------------
                                                                                         
            1998                          3,162,910                      $1.00 - 3.69                        $0.99
            1999                            555,040                      $0.82 - 6.00                        $1.34
            2000                          1,041,040                      $3.50 - 7.00                        $3.37


At December 31, 2000, outstanding warrants to purchase the Company's Common
Stock are summarized as follows:



          Range of                                                Weighted Average Remaining
       Exercise Prices              Outstanding Warrants           Contractual Life (Years)      Weighted Average Exercise Price
       ---------------              --------------------           ------------------------      -------------------------------
                                                                                        
        $1.03 - $2.00                     1,342,410                          3.74                             $1.82
        $2.25 - $3.91                      756,179                           1.25                             $3.09
        $4.00 - $6.50                      356,640                           5.05                             $5.52
                                          ---------
            Total                         2,455,229                          3.16                             $2.75
                                          =========


            At December 31, 2000, outstanding options to purchase the Company's
Common Stock are summarized as follows:



          Range of                                                Weighted Average Remaining
       Exercise Prices               Outstanding Options           Contractual Life (Years)      Weighted Average Exercise Price
       ---------------               -------------------           ------------------------      -------------------------------
                                                                                        
        $1.24 - $2.69                     1,341,600                          3.95                             $1.90
        $2.75 - $3.19                     1,651,000                          5.60                             $2.79
        $3.25 - $7.00                     1,473,800                          5.44                             $4.76
                                          ---------
            Total                         4,466,400                          5.05                             $3.17
                                          =========


6.       CONVERTIBLE PROMISSORY NOTE

            As part of the 1998 agreement with Elan, Elan agreed to make
available to the Company a Convertible Promissory Note ("Note") that provides
the Company the right to borrow up to $2.0 million, subject to satisfying
certain conditions. No more than $500,000 may be drawn under the Note in any
calendar quarter and at least one-half of the proceeds must be used to fund
SPD's development activities. The principal outstanding under the Note bears
interest at the prime rate plus 1% and, if not previously converted, matures on
June 30, 2005. Prior to repayment, Elan has the right to convert all principal
and accrued interest into shares of the Company's Common Stock at a conversion
price of $1.75 per share. The outstanding principal balance of the Note at
December 31, 2000 and 1999, was $2.0 million, and accrued interest was $.4
million and $.2 million at December 31, 2000 and 1999, respectively.

7.     RESEARCH AND DEVELOPMENT AGREEMENTS

         Pulmonary Delivery Technologies

            In March 1997, the Company entered into exclusive supply and license
agreements for the worldwide rights to the MSI system with Siemens AG
("Siemens"). The agreements call for Siemens to be the exclusive supplier of the
MSI drug delivery system. The Company paid licensing fees of $1.1 million in
both April 1997 and 1998, to Siemens pursuant to these agreements.

            On June 15, 1998, the Company entered into an agreement with Zambon
for a sublicense to the Company's MSI system. Under this transaction, Zambon
received an exclusive world-wide marketing and development sublicense for
respiratory products to be delivered by the MSI system including four drugs that
had been under development by the Company. The Company maintained certain
co-promotion rights in the U.S. for respiratory drugs as well as the worldwide
marketing and development rights for all applications of the MSI delivery system
outside the respiratory products. The Company was paid an up-front fee in the
form of an equity investment and will receive milestone payments upon marketing
approval for each of the four products and royalties upon commercialization (see
Note 2).

            On June 30, 1998, the Company issued certain equity securities
pursuant to an agreement with Elan (see Note 4). Under the terms of the
agreement, the Company, through its wholly owned subsidiary, SPD, acquired
certain pulmonary delivery technologies from Elan for $12.5 million in cash. On
July 15, 1998, SPD acquired from Aeroquip-Vickers, Inc. a new generation metered
dose inhaler system called the Aerosol Drug Delivery System ("ADDS") for $.9
million. The payments for these technologies were expensed during 1998 as
acquired R&D in-process technology since the technologies acquired had not
demonstrated technological feasibility and had no alternative future uses. SPD
holds the rights to all systemic disease applications of the ADDS technology
while Sheffield retains the rights to develop the respiratory disease
applications of ADDS. The Company is responsible for the development of these
technologies. Pursuant to its agreement with Elan, at December 31, 2000, the
Company was committed to fund $.1 million of additional costs related to SPD's
systemic development program.



                                       15
   16

         On October 18, 1999, the Company issued certain equity securities
pursuant to an agreement with Elan (see Note 4). Under the terms of the
agreement, the Company, through its majority owned subsidiary, RSD, licensed
certain pulmonary NanoCrystal(TM) technology from Elan for $15.0 million in
cash. This payment was expensed as acquired R&D in-process technology as the
license agreement restricts the Company's use of the NanoCrystal technology to
certain respiratory steroid products that are currently research and
development. The subsidiary is responsible for the development of certain
respiratory steroid products. Pursuant to its agreement with Elan, at December
31, 2000, the Company was committed to fund $3.0 million to the subsidiary for
the development of these products.

         Early Stage Technologies

         The Company also is party to a number of license and research
agreements, primarily with universities, hospitals, and research facilities,
relating to early stage medical research projects that focus on the development
of new compounds for the treatment of cancer, acquired immune deficiency
syndrome and other diseases. As part of the Company's focus on later stage
opportunities, the Company is seeking to out-license these projects. There can
be no assurance that the Company will receive license fees or other payments
related to these technologies. The Company believes these early stage technology
license and research agreements will have no material impact on the financial
position of the Company. For the year ended December 31, 2000, the Company
funded approximately $.2 million related to these projects.

            On November 20, 1997, the Company entered into a sublicense
agreement with Lorus Therapeutics, Inc. (formerly Imutec Pharma Inc.) ("Lorus").
The agreement licenses rights to a series of clotrimazole-related compounds for
the treatment of cancer, Kaposi's sarcoma and actinic keratosis to a newly
formed company, NuChem Pharmaceuticals, Inc. ("NuChem"). In exchange, Lorus
agreed to manage and fund the remaining development program. The Company
received $500,000 in cash upon signing the agreement, which was recognized as
revenue during the year ended December 31, 1997, and received 583,188 shares of
Lorus stock valued at $350,000 which was recognized as revenue during the year
ended December 31, 1998. In addition, the Company is entitled to receive
additional payments upon the completion of certain milestones in the development
of these compounds and retains a 20% ownership interest in NuChem.


8.     RELATED PARTY TRANSACTIONS

           During 1998, certain stockholders provided funds for use by the
Company comprised of short-term notes totaling $150,000, bearing interest at the
rate of 7.0% per annum. On September 8, 1998, the Company repaid principal of
$50,000 plus accrued interest. The remaining balance of the short-term notes and
accrued interest was repaid on May 12, 1999.

9.     INCOME TAXES

           At December 31, 2000, the Company had available net operating loss
carryforwards for regular federal income tax purposes of approximately $42.9
million, of which $27.5 million will expire between 2007 and 2012, and $15.4
million will expire between 2018 and 2020, if not utilized. Utilization of the
Company's net operating loss carryforwards may be subject to an annual
limitation as a result of the "changes in ownership" provisions of the Internal
Revenue Code Section 382. Future changes in ownership may limit net operating
loss carryforwards generated in the year of change.

           Deferred income taxes reflect the net effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred tax asset at December 31, 2000 and
1999, which are considered noncurrent, are as follows:




           DEFERRED TAX ASSETS                                    2000                   1999
                                                                  ----                   ----
                                                                             
           Net operating loss carryforwards............          $16,289,000           $14,957,000
           Costs capitalized for tax purposes..........            1,975,000            22,027,000
           Deferred tax asset valuation allowance......          (18,264,000)          (36,984,000)
                                                            ------------------     -----------------

              Net deferred tax asset...................         $         --           $        --
                                                            ==================     =================




            The Company has recorded a valuation allowance for the entire
deferred tax asset due to the uncertainty of its realization. The net change in
the total valuation allowance for the year ended December 31, 2000 was a
decrease of $18.7 million. As a result of differences between book and tax
requirements for writing off intangible assets acquired, such as in-process R &
D technology, the Company has capitalized the in-process R & D technology for
tax purposes. The deferred tax asset will be amortized into taxable income over
a useful life of 15 years.





                                       16
   17


                         Report of Independent Auditors





The Board of Directors and Stockholders
Sheffield Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheets of Sheffield
Pharmaceuticals, Inc. and subsidiaries (a development stage enterprise) as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity (net capital deficiency), and cash flows for
each of the three years in the period ended December 31, 2000 and for the period
October 17, 1986 (inception) through December 31, 2000. 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 auditing standards generally accepted
in the United States. 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 consolidated financial position of Sheffield
Pharmaceuticals, Inc. and subsidiaries at December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000 and the period from October
17, 1986 (inception) through December 31, 2000, in conformity with accounting
principles generally accepted in the United States.


/s/ Ernst & Young LLP
St. Louis, Missouri
February 28, 2001





                                       17

EX-21

   1
                                                                      EXHIBIT 21



                 SUBSIDIARIES OF SHEFFIELD PHARMACEUTICALS, INC.




         Name                                                                   Jurisdiction of Incorporation
         ----                                                                   -----------------------------
                                                                         
1.       Ion Pharmaceuticals, Inc. (100% owned subsidiary)                      Delaware

2.       CP Pharmaceuticals, Inc. (100% owned subsidiary)                       Delaware

3.       Systemic Pulmonary Delivery, Ltd. (100% owned subsidiary)              Bermuda

4.       Respiratory Steroid Delivery, Ltd. (80.1% owned subsidiary)            Bermuda

EX-23.1

   1
                                                                    EXHIBIT 23.1

                         CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-95732, Form S-3 No.T 333-27753, Form S-3 No. 333-38327 and Form
S-3 No. 333-54446) of Sheffield Pharmaceuticals, Inc. and in the related
Prospectuses, in the Registration Statement (Form S-8 No. 33-95262) pertaining
to the 1993 Stock Option Plan of Sheffield Pharmaceuticals, Inc., the 1993
Restricted Stock Plan of Sheffield Pharmaceuticals, Inc. and options granted to
directors, officers, employees, consultants and advisors of the Company pursuant
to other employee benefit plans of Sheffield Pharmaceuticals, Inc. and in the
Registration Statement (Form S-8 No. 333-14867) pertaining to the 1993 Stock
Option Plan of Sheffield Pharmaceuticals, Inc., the 1996 Directors Stock Option
Plan of Sheffield Pharmaceuticals, Inc. and options granted to directors,
officers, employees, consultants and advisors of the Company pursuant to other
employee benefit plans of Sheffield Pharmaceuticals, Inc., of our report dated
February 28, 2001, with respect to the consolidated financial statements of
Sheffield Pharmaceuticals, Inc. and subsidiaries incorporated by reference in
this Annual Report (Form 10-K) for the year ended December 31, 2000.



/s/ Ernst & Young LLP
St. Louis, Missouri
March 6, 2001