10-K405

                       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, 2001
                                       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)

14528 SOUTH OUTER FORTY ROAD
STE 205                                      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 25, 2002 of the voting
stock of the registrant held by non-affiliates (based upon the closing price of
$2.27 per share of such stock on the American Stock Exchange on such date) was
approximately $48,072,000. 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 25, 2002, there were outstanding 29,068,712 shares of the registrant's
Common Stock, $.01 par value.

                       DOCUMENTS INCORPORATED BY REFERENCE

                  Certain portions of the Registrant's definitive proxy
statement to be filed not later than April 30, 2002 pursuant to Regulation 14A
are incorporated by reference in Items 10 through 13 of Part III of this Annual
Report on Form 10-K.



                                      -1-



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, 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
provides innovative, cost-effective pharmaceutical therapies by combining
state-of-the-art pulmonary drug delivery technologies with existing and emerging
therapeutic agents. The Company is developing a range of products to treat
respiratory and systemic diseases in its proprietary pulmonary delivery systems,
including the Premaire(R) Delivery System ("Premaire") and Tempo(TM) Inhaler
("Tempo"). The Company is in the development stage and, as such, has been
principally engaged in the development of its pulmonary delivery systems.
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 the Premaire, a portable nebulizer-based
pulmonary delivery system, through a worldwide exclusive license and supply
arrangement with Siemens AG ("Siemens"). During the second half of 1998, the
Company acquired the rights to a new generation propellant-based pulmonary
delivery system, Tempo, from a subsidiary of Aeroquip-Vickers, Inc.
("Aeroquip-Vickers"). Additionally, during 1998, Sheffield licensed from Elan
Corporation, plc ("Elan") the Ultrasonic Pulmonary Drug Absorption System
("UPDAS"), 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) technology to be used in developing certain inhaled 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 access technology
and compounds as well as defray or reduce significant development and
manufacturing costs associated with these opportunities that otherwise might be
borne by the Company. The Company will also retain certain commercial rights to
these products.

         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 providers and patients 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.


                                      -2-



         The Company is developing a range of pharmaceutical products delivered
by the Premaire to treat respiratory diseases. Products initially developed for
respiratory disease therapy delivered through the Premaire include albuterol
sulfate, ipratropium bromide, sodium cromoglycate and inhaled steroids. In June
1998, the Company sublicensed to Zambon Group SpA ("Zambon") worldwide marketing
and development rights to respiratory products to be delivered by the Premaire
in return for an equity investment in the Company (approximately 10%). From June
1998 to September 2001, Zambon funded the costs for the respiratory compounds
being developed for delivery in the Premaire. In September 2001, the Company
amended its 1998 agreement with Zambon whereby Sheffield regained the rights to
the Premaire previously granted to Zambon. As part of the amended agreement,
Zambon provided a low-interest, $2.5 million loan to Sheffield to progress the
development of the Premaire respiratory program. Upon commercialization, Zambon
will be entitled to certain royalties on payments received by Sheffield for
albuterol sulfate, ipratropium bromide and sodium cromoglycate sales for
specified periods.

         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 Premaire and
Tempo. In 1998, the systemic applications of the Premaire and Tempo 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 Tempo technology and the two Elan technologies.

         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 being
developed include a unit-dose-packaged steroid dispersion formulation for
delivery using a conventional tabletop nebulizer, and a steroid dispersion
formulation for delivery using the Premaire system.

         Outside of these alliances, the Company owns the worldwide rights to
respiratory disease applications of all of its technologies.

         The Company is also currently in discussions with a number of
pharmaceutical and biotechnology companies concerning potential collaborations
for developing specific compounds (both respiratory and systemic) in the Tempo.
Unlike the Premaire, Tempo is a technology that lends itself to individual
product applications in the respiratory market. While the Tempo technology may
be applicable to a wide range of respiratory products, the Company believes that
a full line of products delivered by Tempo is not necessary for commercial
success. The reverse is true with the Premaire, since one of the Premaire'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 often 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
pressurized metered dose inhalers ("pMDIs"), 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 aqueous-based 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 an inhaled delivered form.

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

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

         The main components of a pMDI include a canister containing the drug
         mixed with propellant and surfactant, a mouthpiece that acts as the
         delivery conduit and the metering valve for the release of precise
         quantities of the drug. The initial velocity of particle


                                      -3-



         and propellant droplets 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 80% 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 metered drug actually
         reaches the lungs.

         The primary advantages of a pMDI include its excellent storage and
         metering capability, small size, portability, fast usage time, and its
         availability for use with most respiratory drugs. Disadvantages of a
         pMDI include patient coordination issues and efficient dose delivery.
         Additionally, because the use of CFCs traditionally used in pMDIs are
         being phased out by international agreement (Montreal Protocol),
         alternative propellants and formulations are being developed. Over
         time, all current pMDI users will be required to move to a non-CFC pMDI
         or other alternative delivery systems. The majority of U.S. patients
         favor aerosol pMDIs 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.

         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 pMDIs; 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 short, 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, mask or the patients
         mouth and throat; 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 tabletop 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.

PREMAIRE(R) DELIVERY SYSTEM

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

Description of the Premaire

         The Premaire 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, called Dosators(TM), 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 atomization of
therapeutic agents using ultrasonic energy. This produces a concentrated soft
mist of medication delivered through the mouthpiece over a one to two 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 Premaire 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-month
supply of the drug.

         To use the Premaire 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 Premaire is very accurate and consistent
because: (1) the Premaire 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 Premaire 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.


                                      -4-



Premaire Advantages

         The Company believes that the Premaire 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 pMDIs 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
         Premaire is intended to provide minimal dose-to-dose variability.
         Patients can therefore expect to receive the right therapeutic dose
         consistently. Testing of the Premaire delivery system has shown that
         dose-to-dose variability with the Premaire is significantly better than
         the current FDA requirement.

         Enhanced Patient Compliance. The pocketsize, portable Premaire 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 a minute, 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
         Premaire, 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 Premaire 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) that have a difficult time breathing normally.

         Versatility. Many asthma and COPD patients are taking multiple
         inhalation medications. The Premaire 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 Premaire 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
         pMDI 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 Premaire does not use CFCs or any other type of ozone depleting
         propellant.

         Economical. The Company believes that the Premaire offers significant
         value to the patient because it is designed to allow a single device to
         be used with a variety of respiratory medications available in
         cost-effective interchangeable cartridges. The inhaler unit itself is
         expected to have a life of up to two 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.

Premaire Product Pipeline in Development

         The Company is implementing a broad development strategy for the
Premaire. The Company is developing a range of widely used respiratory drugs for
delivery in the Premaire. Initial drugs being developed for respiratory disease
therapy include albuterol sulfate, ipratropium bromide, sodium cromoglycate, and
budesonide, an inhaled bronchial steroid, each of which is described below.

         As previously discussed, in June 1998, the Company sublicensed to
Zambon worldwide marketing and development rights to respiratory products to be
delivered by the Premaire. From June 1998 to September 2001, Zambon developed
and funded the costs for the respiratory compounds being developed for delivery
in the Premaire. In September 2001, the Company amended its 1998 agreement with
Zambon whereby Sheffield regained the rights to the Premaire previously granted
to Zambon. As a result, the sponsorship of the Premaire respiratory development
programs was transferred from Zambon to the Company with the Food and Drug
Administration ("FDA") being notified accordingly. Sheffield has reviewed all of
the development work completed-to-date, identifying a number of deficiencies in
the Zambon development program. To address these issues, Sheffield has made a
number of internal management changes and moved the program to a group of highly
experienced pulmonary clinical and regulatory experts. The Premaire device is
currently in a to-be-marketed form and fully industrialized.

The following details the status of the respiratory applications being developed
in the Premaire system:

                  ALBUTEROL SULFATE. Albuterol sulfate, a beta agonist, is a
         bronchodilator 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.


                                      -5-



                  Status: Zambon initiated a Phase II clinical trial in December
         1999 that compared the Premaire-albuterol sulfate to a conventional
         albuterol-pMDI. Findings from Phase II studies indicated that
         Premaire-albuterol and pMDI-albuterol were comparable in improving lung
         function in the 24 adult patients. An end of Phase II meeting was held
         in February 2002 with the FDA where the results of the development
         activities-to-date, specifically the results of the Phase II trial,
         were reviewed. The Company is currently reviewing the FDA's comments
         and recommendations, integrating the information into the plans for the
         Phase III trial and NDA submission. The Company expects to begin
         pivotal clinical trials for the albuterol sulfate program by the end of
         2002.

                  BUDESONIDE. Budesonide is a corticosteroid, anti-inflammatory
         agent that treats the underlying inflammation in the lungs of asthma
         and COPD patients. It is currently available in a DPI, nebulizer
         respule and pMDI in Europe. Steroids are the fastest growing category
         in the respiratory market, growing at 20% per year.

                  Status: Preclinical formulation development work is currently
         underway. A formulation developed by Nanosystems has proven a feasible
         candidate for delivery in the Premaire. The formulation is dependent on
         a proprietary nanocrystaline dispersion of budesonide in an aqueous
         carrier. Tow other alternative formulation approaches are also under
         evaluation. Upon scale-up and production of clinical batches released
         under CMC protocol, an IND will be prepared for filing with the FDA,
         which is currently planned for the first half of 2003.

                  IPRATROPIUM BROMIDE. Ipratropium bromide 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 bromide product delivered by a pMDI
         and placebo in patients with COPD. The results of the study indicated
         that both Premaire-ipratropium bromide and pMDI-ipratropium were
         tolerated and improved lung function in the COPD patients. An
         Investigational New Drug Application ("IND") was filed by Zambon with
         the FDA in May 2000. During 2001, the IND was transferred to the
         Company. The Company does not intend to further develop this product on
         its own as the program has progressed to the point where a potential
         licensing partner would be in a position to take the product into
         clinical studies.

                  SODIUM CROMOGLYCATE. Sodium cromoglycate 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
         pMDI and nebulizer solution.

                  Status: An IND was filed by Zambon with the FDA in July 2000.
         No further development work is anticipated to be completed on this
         product, as the projected market opportunity for sodium cromoglycate is
         currently deemed too small to justify further progression.

                  OTHER RESPIRATORY THERAPIES. In addition to the drugs listed
         above, the Company continues to assess the market potential for certain
         other respiratory therapies. These therapies may include a combination
         of an anti-inflammatory and beta agonist, an anticholinergic and beta
         agonist, as well as antibiotics for cystic fibrosis treatments.

         SYSTEMIC APPLICATIONS: Through its development alliance with Elan, the
Company evaluated certain drugs for systemic treatment by pulmonary delivery
through Premaire. By identifying a market opportunity for a rapid-acting,
non-invasive treatment for breakthrough pain, the first drug to be tested for
delivery in Premaire was morphine. 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.

         Status: In July 1999, the Company completed a gamma
scintigraphy/pharmacokinetic trial comparing morphine delivered using the
Premaire to subcutaneous injection. The Premaire demonstrated good pulmonary
deposition and very rapid absorption, more rapid peak blood levels vs.
subcutaneous injection and low oral and throat deposition. As part of the
development alliance with Elan, Elan has the first right of refusal on the
development of any product developed by the joint venture. Elan has chosen not
to license this product from the joint venture. As such, the joint venture
continues to seek to attract a partner for the continued development and
commercialization of this product.

TEMPO(TM) INHALER

         Tempo, a new generation pMDI, was developed to correct major
deficiencies associated with existing pMDI technology. pMDIs have provided
convenient, safe, self-administered treatment for over 30 years and decreased
the cost of therapy because the patient at home can use them with minimal
medical supervision. However, proper use of current pMDIs requires training and
precise execution of the delivery technique. For these reasons, many patients do
not use their pMDIs in the prescribed manner to coordinate actuation and
inhalation. Incorrect technique has been shown to result in little or no
benefits from pMDI 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 pMDI.

         Even with correct technique, current pMDIs 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


                                      -6-



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 pMDIs is
inconsistency of delivery. With existing pMDIs 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 Tempo technology is that it uses the same
aerosol canisters and valves as are currently used in existing pMDIs. As a
result, existing aerosol facilities will be able to produce canisters with
formulations optimized for use in Tempo. 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 is disposable when the canister is empty.

         The Tempo technology features two improvements over existing pMDIs and
dry powder inhalers. Fluid dynamics modeling, in-vitro and human trials indicate
that up to 60% of drug emitted by the Tempo reaches the lungs with oral
deposition reduced to approximately 15%. Because of this increase in efficiency,
Tempo 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 pMDI, with less potential for adverse reactions.

         Tempo 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 Tempo

         The Tempo technology utilizes a standard aerosol pMDI canister and
metering valve, 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 pMDIs.

         The Tempo 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.

The unique features of Tempo 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. Tempo can accommodate different
         inspiratory flow rates, 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.

Tempo Advantages

         The Company believes that the Tempo 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 Tempo are expected to translate
         into multiple benefits, including:

         Improved Drug Delivery Efficiency. A higher percentage of the drug
         emitted by the Tempo is delivered to the lungs than current inhalation
         systems while approximately 15% 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 Tempo reduces technique dependence for
         simple, consistent dose-to-dose delivery, resulting in improved
         compliance with prescribed therapy.


                                      -7-



         Broader Patient Base. The Tempo 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 Tempo 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 payer costs because fewer pharmacy visits are
         required.

Tempo Product Pipeline in Development

         TEMPO SYSTEMIC THERAPIES. The development of systemic drugs using Tempo
is being conducted as part of the Company's alliance with Elan. The initial
product developed was targeted to address migraine headaches. The Company
utilized 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 up to 30 million
Americans. Worldwide annual drug sales for the migraine therapy market are in
excess of $2.4 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 Tempo to a conventional pMDI.
The trial showed successful delivery of the drug to all regions of lung with
significantly reduced mouth and throat deposition, and rapid drug absorption. As
part of the development alliance with Elan, Elan has the first right of refusal
on the development of any product developed by the joint venture. Elan has
chosen not to license this product from the joint venture. As such, the joint
venture continues to seek to attract a partner for the continued development and
commercialization of this product.

         As a result of the work performed on the ergotamine product noted
above, Sheffield initiated a new development program for a novel formulation of
dyhydroergotamine ("DHE") for pulmonary delivery in the Tempo for the treatment
of specific types of migraines. Formulation work for this program is currently
underway. The Company is also currently in discussions with a pharmaceutical
company for the development and manufacturing of this product.

         TEMPO RESPIRATORY THERAPIES. The Tempo has broad applicability across
respiratory disease therapies since it utilizes basic pMDI delivery methods that
are the most popular forms of respiratory delivery. The Tempo 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 Tempo technology is positioned to take
advantage of this built-in market preference for pMDIs 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 Tempo 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 Tempo to deliver a patented respiratory drug used to treat asthma. The study
measured the distribution of this respiratory drug delivered by Tempo compared
to the distribution of this same drug delivered through a commercially available
pMDI in 12 healthy volunteers. Results of this study demonstrated that Tempo
significantly increased drug deposition in all regions of the lung. Tempo
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. The Company is using
the results of this study as a basis for conducting discussions for feasibility
work and/or clinical studies with potential collaboration partners.

         As with Premaire, there remain opportunities for developing Tempo for a
range of therapies either directly by the Company or in collaboration with
strategic partners. Unlike the Premaire, 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 certain inhaled steroid products to treat certain respiratory
diseases that will utilize Elan's Nanocrystal(TM) 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 products being
formulated using Elan's Nanocrystal technology and the status of each are as
follows:

Unit-dose nebulizer program - This product is for inhalation delivery in a
standard commercial tabletop device using the steroid budesonide, formulated
using the NanoCrystal technology. A Phase I, double-blind safety and
pharmacokinetic study of nebulized nanobudesonide in 16 healthy volunteers was
satisfactorily completed at Thomas Jefferson University Hospital in February
2002. This study compared single doses of Pulmicort Respules, nanobudesonide and
placebo. Data from the study is currently undergoing final data and statistical
analysis.

Premaire nanobudesonide program - This product is for inhalation delivery using
the Company's Premaire device. The joint venture is currently conducting
formulation work on this product. See "Premaire Delivery System" above for
further discussion of this product.


                                      -8-


OTHER TECHNOLOGIES AND PROJECTS

         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. The Company is not conducting any development work related to
this technology.

         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 may be
utilized in conjunction with the Company's other pulmonary delivery systems. The
Company is not conducting any development work related to this technology.

         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.

         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


                                      -9-



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.

         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

         Premaire System Patents and Trademark

         Under its agreement with Siemens for the technology underlying the
Premaire 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, nine U.S. patents have issued, and five
corresponding foreign patents have been published. The issued U.S. patents
provide protection through 2017 for the Premaire device, the dosator cartridges
and their combinations. Also, a U.S. trademark was granted in 2001 registering
the Premaire brand name, as well as Dosator(TM), and Misthaler(TM).


                                      -10-



         Tempo System Patents

         As of the December 31, 2001, three U.S. patents have issued and one has
been allowed. Three corresponding foreign patents have been published. One U.S.
and three foreign applications are in prosecution. The issued U.S. patents cover
the Tempo flow control and triggering mechanism through 2018. The Company also
received trademark protection in 2001 for the Tempo(TM) brand name.

         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 acquirers, 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 acquirers
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.

         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 Premaire and the Tempo. 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
Premaire and Tempo.

         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 25, 2002, the Company employed 16 persons, four 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 $90.5 million of operating
losses since our inception, including $9.7 million during the year ended
December 31, 2001. Our operating losses and negative cash flow from operations
are expected to continue in the foreseeable future.  The Company expects that it
will continue to have a high level of operating expenses, negative cash flow
from operations and will be required to make significant up-front expenditures
in connection with its product development activities. As a result, the Company
anticipates additional operating losses for 2002 and that such losses will
continue thereafter until such time, if ever, as the Company is able to generate
sufficient revenues to sustain its operations. The independent auditors' report
dated February 12, 2002, on the Company's consolidated financial statements
stated that the Company has incurred recurring operating losses and has a
working capital deficiency and that these conditions raise substantial doubt
about its ability to continue as a going concern.

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, 2001 was
$.9 million. As of such date, we had trade payables and accrued liabilities of
$1.3 million, current research obligations of $.2 million and a note payable to
Elan of $4 million. In addition,


                                      -11-



committed and/or anticipated funding of research and development after December
31, 2001 is estimated at approximately $2.4 million, of which $2.0 million has
been committed to be funded by Elan through the issuance of our Series E
cumulative convertible preferred stock, which funds are required to be used by
the Company to fund its portion of RSD's operating and development costs. Since
December 31, 2001 we have received $1.0 million as a borrowing on the Loan and
Security Agreement with Zambon, with an additional $.5 million available on
April 1, 2002. We have also received $1.0 million from the issuance of 1,000
shares of Series E cumulative convertible preferred stock to fund our portion of
RSD's costs. As of March 25, 2002, cash available for funding our operations was
$1.2 million.

         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.

         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.

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 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 a net capital
deficiency of $9.1 million at December 31, 2001. 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.

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.


                                      -12-



         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 there under 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.

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.


                                      -13-



         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.

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
Premaire system and one related to the Tempo, 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 of 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.

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.

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


                                      -14-



         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. As we are currently
investigating raising additional equity financing, we may issue additional
shares of our preferred stock in the near 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.

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

         As of December 31, 2001, we had reserved approximately 6,185,469 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, 2001, we had $2,000,000 principal
amount of a convertible promissory note, 14,708 shares of our Series C preferred
stock, 13,779 shares of our Series D preferred stock, 2,124 shares of our Series
E preferred stock and 5,000 shares of our Series F preferred stock outstanding.
Except for Series D Preferred Stock, each of the convertible securities provides
for conversion into shares of our common stock at a discount to the market price
at December 31, 2001. Our Series C, D, E and F preferred stock are convertible
into 10,431,206 shares, 2,839,300 shares, 546,015 shares and 1,470,588 shares,
respectively, of common stock. The convertible promissory note, including
accrued interest is convertible into 1,487,291 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.



                                      -15-



ITEM 2.  PROPERTIES

         The Company's principal executive offices are located at 14528 South
Outer Forty Road, Suite 205, St. Louis, Missouri 63017. These premises consist
of approximately 6,193 square feet subject to a lease that expires December 14,
2002. The monthly rent for these premises is $10,838. 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.

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.




2001:                                                           High        Low
                                                               ------     ------
                                                                    
           Fourth Quarter ................................     $4.750     $3.000
           Third Quarter .................................      4.110      2.680
           Second Quarter ................................      4.900      3.500
           First Quarter .................................      4.625      3.000

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


         The closing sale price for the Company's Common Stock on the AMEX on
March 25, 2002 was $2.27 per share. At March 25, 2002, there were approximately
401 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 2001, the Company
issued stock dividends totaling 996, 929, and 120 shares and cash dividends for
fractional shares of $3,278, $603, and $1,422 on Series C, D and E Preferred
Stock, respectively.

         The following unregistered securities were issued by the Company during
the quarter ended December 31, 2001:




                                                   NUMBER OF
                                                    SHARES
                                                  SOLD/ISSUED/
                                                  SUBJECT TO             OFFERING/
   DATE OF               DESCRIPTION OF           OPTIONS OR          EXERCISE PRICE
SALE/ISSUANCE           SECURITIES ISSUED          WARRANTS            PER SHARES($)        PURCHASER OR CLASS
- -------------           -----------------         -- --------         --------------        ------------------
                                                                                
October 9, 2001    Common Stock, $.01 par value     14,367                $1.1206            Advisors in lieu of
                                                                                             cash consideration


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.


                                      -16-




ITEM 6.  SELECTED FINANCIAL DATA

SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

                         SELECTED FINANCIAL INFORMATION
                     (In dollars, except share information)




                                                                       Years Ended December 31,

                                                  2001            2000              1999               1998             1997
                                              ------------    ------------       ------------       ------------    ------------
                                                                                                     
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:

Revenues:
    Contract research revenue                 $    869,095    $    501,572       $    399,378       $         --    $         --
    Sublicense revenue                               5,000           5,000                 --            350,000         500,000
                                              ------------    ------------       ------------       ------------    ------------

    Total revenues                                 874,095         506,572            399,378            350,000         500,000

Expenses:

     Acquisition of research and
        development in-process technology               --              --         15,000,000         13,325,000       1,650,000
     Research and development                    5,999,693       3,747,437          3,421,734          2,351,301       3,729,193
     General and administrative                  4,551,661       2,817,535          2,277,136          3,043,070       4,627,567
                                              ------------    ------------       ------------       ------------    ------------

     Total expenses                             10,551,354       6,564,972         20,698,870         18,719,371      10,006,760
                                              ------------    ------------       ------------       ------------    ------------

Loss from operations                            (9,677,259)     (6,058,400)       (20,299,492)       (18,369,371)     (9,506,760)

Interest income                                     58,438         124,908             91,941             60,273          56,914
Interest expense                                  (318,642)       (224,360)          (162,237)          (251,363)        (39,292)
Realized gain on sale of marketable
securities                                          79,706         239,629                 --                 --              --
Minority interest in loss of subsidiary            378,620         155,072          2,985,000                 --              --
                                              ------------    ------------       ------------       ------------    ------------

Net loss                                      $ (9,479,137)   $ (5,763,151)      $(17,384,788)      $(18,560,461)   $ (9,489,138)
                                              ============    ============       ============       ============    ============

Basic and diluted net loss per common share   $       (.40)   $       (.27)(1)   $       (.68)(1)   $       (.85)   $       (.80)

Basic and diluted weighted average
    common shares outstanding                   28,963,562      27,956,119         27,236,715         21,931,040      11,976,090


CONSOLIDATED BALANCE SHEET
DATA:

Working capital (net deficiency)              $ (4,160,823)   $  3,439,120       $  3,344,174       $  1,456,833    $   (837,564)

Total assets                                     2,056,278       5,450,657          5,048,655          2,862,521         689,937

Long-term debt & redeemable preferred
stock                                            5,000,000       4,000,000          3,000,000          1,000,000       4,019,263

Accumulated deficit                            (92,496,964)    (80,967,524)       (73,409,828)       (55,156,763)    (36,157,290)

Stockholders' equity (net capital
deficiency)                                   $ (9,086,276)   $   (413,720)      $    671,073       $    655,205    $ (4,716,751)


- ----------

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

Basic net loss per share is based on net loss available to common stockholders
divided by the weighted average common stock outstanding during the year.

See consolidated financial statements and accompanying footnotes.

(1) As discussed in Note 1 ("Summary of Significant Accounting Policies - Basic
Net Loss per Share of Common Stock") to the consolidated financial statements,
basic and diluted net loss per share for the years ended December 31, 2000 and
1999 have been restated to properly reflect cumulative preferred stock dividends
payable in kind in calculating the net loss available to common stockholders.



                                      -17-


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

SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(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,
2001.

         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 24-35 in this Form 10-K.

OVERVIEW

         Sheffield Pharmaceuticals, Inc. ("Sheffield" or the "Company") provides
innovative, cost-effective pharmaceutical therapies by combining
state-of-the-art pulmonary drug delivery technologies with existing and emerging
therapeutic agents. The Company is developing a range of products to treat
respiratory and systemic diseases in its proprietary Premaire(R) Delivery System
("Premaire") and Tempo(TM) Inhaler ("Tempo"). The Company is in the development
stage and, as such, has been principally engaged in the development of its
pulmonary delivery systems.

         In 1997, the Company acquired the Premaire, a portable nebulizer-based
pulmonary delivery system, through a worldwide exclusive license and supply
arrangement with Siemens AG ("Siemens"). During the second half of 1998, the
Company acquired the rights to an additional pulmonary delivery technology,
Tempo, from a subsidiary of Aeroquip-Vickers, Inc. ("Aeroquip-Vickers"). The
Tempo technology is a new generation propellant-based pulmonary delivery system.
Additionally, during 1998, Sheffield licensed from Elan Corporation, plc
("Elan") the Ultrasonic Pulmonary Drug Absorption System ("UPDAS"), 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) technology to be used in developing certain inhaled steroid
products.

         Sheffield's lead drug delivery technology, the Premaire, 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 Premaire
combines the therapeutic benefits of nebulization with the convenience of
pressurized metered dose inhalers, or pMDIs, in one patient-friendly device. The
Premaire 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 Premaire
provides multiple drug administration advantages over the high-velocity pMDIs
and dry powder inhalers. Furthermore, the Premaire system is fast and portable
as compared to conventional tabletop nebulizers, which are large, cumbersome and
more time consuming to use. The Premaire system targets younger and older asthma
patients, as well as older chronic obstructive pulmonary disease patients who
have difficulty using pMDIs and currently depend on tabletop nebulizers for
delivery of their medications.

         Sheffield's Tempo is a patented, new generation pMDI that the Company
believes has significant efficiency and performance advantages over standard
pMDIs. The Tempo technology utilizes a standard aerosol pMDI 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 Tempo system, like the Premaire system, is designed to reduce patient
coordination problems and enhance compliance with the prescribed treatment.

         In June 1998, the Company sublicensed to Zambon Group SpA ("Zambon")
worldwide marketing and development rights to respiratory products to be
delivered by the Premaire in return for an equity investment in the Company
(approximately 10%). From June 1998 to September 2001, Zambon funded the
development costs for the respiratory compounds delivered by Premaire. In
September 2001, the Company amended its 1998 agreement with Zambon whereby
Sheffield regained the rights to the Premaire previously granted to Zambon. As
part of the amended agreement, Zambon provided a low-interest, $2.5 million loan
to Sheffield to progress the development of the Premaire respiratory program.
Upon commercialization, Zambon will be entitled to certain royalties on payments
received by Sheffield for albuterol, ipratropium and cromolyn sales for
specified periods.

         As part of a strategic alliance with Elan, the Company is developing
therapies for non-respiratory diseases to be delivered to the lungs using both
Tempo and Premaire. In 1998, the systemic applications of Premaire and Tempo
were licensed to Systemic Pulmonary


                                      -18-



Delivery, Ltd. ("SPD"), a wholly owned subsidiary of the Company. In addition,
two Elan technologies, UPDAS(TM) and the Enhancing Technology, were also
licensed to SPD. The Company retained exclusive rights outside of the strategic
alliance to respiratory disease applications utilizing the Tempo technology and
the two Elan technologies.

         In addition to the above alliance with Elan, in 1999, the Company and
Elan formed a joint venture, Respiratory Steroid Delivery, Ltd. ("RSD"), to
develop certain inhaled steroid products to treat respiratory diseases using
Elan's NanoCrystal technology. Currently, RSD is developing 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 Premaire.

CRITICAL ACCOUNTING POLICIES

Basis of Presentation

         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 of rights to its
technology, as well as through equity and debt offerings, to continue to operate
its business. The Company's ability to meet its obligations as they become due
and to continue as a going concern must be considered in light of the expenses,
difficulties and delays frequently encountered in developing a new business,
particularly since the Company will focus on research, development and unproven
technology that may require a lengthy period of time and substantial
expenditures to complete. 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. Management believes that the Company's ability to meet its
obligations as they become due and to continue as a going concern through
December 2002 is dependent upon obtaining additional funding. The Company's
consolidated financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and satisfaction of liabilities and
commitments in the normal course of business. Should the Company not be
successful in obtaining sufficient funding, some of the assets and liabilities
may not be satisfied at the current carrying values.

         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").

Deferred Tax Assets

         As of December 31, 2001, the Company has approximately $21.2 million of
deferred tax assets, the majority of which relates to net operating loss
carryforwards that expire at various dates from 2007 to 2021 if not utilized.
The realization of these assets is dependent upon the Company generating future
taxable income. Due to the uncertainty of the amount, if any, of future taxable
income that may be generated, the Company has recorded a valuation allowance for
the entire deferred tax asset. Should the Company generate sufficient future
taxable income before the net operating loss carryforwards expire, the benefit
of the deferred tax asset will be realized at that time.


RESULTS OF OPERATIONS

Revenue

         Contract research revenues primarily represented revenues earned from a
collaborative research agreement with Zambon relating to the development of
respiratory applications of Premaire. Contract research revenue was $869,095,
$501,572 and $399,378 for the years ended December 31, 2001, 2000 and 1999,
respectively. The increase of $367,523, or 73.3% from 2000 to 2001 reflects
higher revenues associated with Premaire device development work and testing as
the Company finalizes the to-be-marketed device prior to the start of Phase III
Premaire-albuterol clinical trials. These higher revenues were partially offset
by the Company no longer performing development work for Zambon in the third and
fourth quarters of 2001, resulting from Sheffield regaining the Premaire
respiratory rights in the third quarter of 2001. The increase of $102,194, or
25.6% from 1999 to 2000 reflects two additional Premaire respiratory programs in
development in 2000 as compared to 1999 and certain nonrecurring Premaire device
development work and testing completed during 2000. Costs of contract research
revenue approximated such revenues and were included in research and development
expenses. Future contract research revenues and expenses are dependent on
obtaining additional collaborative agreements.

         The Company's ability to generate material revenues is contingent on
the successful commercialization of its technologies and other technologies and
products that it may acquire, followed by the successful marketing and
commercialization of such technologies through licenses, joint ventures and
other arrangements.

Acquisition of Research & Development In-Process Technology


                                      -19-



         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.

Research and Development

         Research and development expenses were $6.0 million for the year ended
December 31, 2001 compared to $3.7 million and $3.4 million for the years ended
December 31, 2000 and 1999, respectively. The increase of $2.3 million, or
60.1%, primarily reflects higher expenses associated with the development of the
Company's unit-dose inhaled steroid product reflecting increased formulation
work and the start of a Phase I clinical trial during the fourth quarter ($1.2
million), costs associated with the Company's feasibility work associated with
new product development in the area of polypeptides ($.5 million), higher costs
related to the industrialization of the Tempo Inhaler ($.4 million), and
increased design and development costs associated with finalizing the
to-be-marketed Premaire device prior to the start of a Phase III
albuterol-clinical trial ($.2 million). The increase of $.3 million, or 9.5%,
from 1999 to 2000 primarily represents costs associated with the development by
the Company's subsidiary, RSD, of three steroid products initiated during the
fourth quarter of 1999 ($.7 million), formulation work begun during 2000 on a
respiratory product to be delivered via the Tempo ($.5 million), modifications
made to the Premaire to enhance its commercial appeal prior to the start of
Phase III-albuterol clinical trials ($.3 million), and two additional Premaire
respiratory programs in development in 2000 as compared to 1999 ($.1 million).
These increases were partially offset by lower development costs on the
Company's two systemic programs, a therapy for breakthrough pain delivered
through the Premaire ($.3 million), and a migraine therapy delivered through the
Tempo ($1.0 million).

         The following details the status of each of the Company's development
         programs as of December 31, 2001:

         Premaire Respiratory Program:

                  As a result of the Company regaining from Zambon the rights to
         the respiratory applications to the Premaire in September 2001, the
         sponsorship of the Premaire respiratory development programs was
         transferred from Zambon to the Company with the Food and Drug
         Administration ("FDA") being notified accordingly. In the fourth
         quarter of 2001, Sheffield reviewed all of the development work
         completed-to-date, identifying a number of deficiencies in the Zambon
         development program. To address these issues, Sheffield has made a
         number of internal management changes and moved the program to a group
         of highly experienced pulmonary clinical and regulatory experts. The
         Premaire device is currently in a to-be-marketed form and fully
         industrialized. As of December 31, 2001, the Company had spent $3.1
         million on developing the respiratory products discussed below.

                  The Company's strategy is to out license the U.S. rights to
         the Premaire respiratory products to a third party which the Company
         anticipates concluding in 2003. As a result, the Company estimates a
         U.S. commercial launch of its first products in Premaire to occur in
         the last half of 2005 or first half of 2006. Sheffield will fund the
         continued development work for the Premaire respiratory products up
         through the period of outlicensing, currently estimated at
         approximately $10 million, after which time the licensee will assume
         funding responsibility for further development work.

                  Albuterol Sulfate. Zambon initiated a Phase II clinical trial
         in December 1999 that compared the Premaire-albuterol sulfate to a
         conventional albuterol-pMDI. Findings from Phase II studies indicated
         that Premaire-albuterol and pMDI-albuterol were comparable in improving
         lung function in the 24 adult patients. An end of Phase II meeting was
         held in February 2002 with the FDA where the results of the development
         activities-to-date, specifically the results of the Phase II trial,
         were reviewed. The Company is currently reviewing the FDA's comments
         and recommendations, integrating the information into the plans for the
         Phase III trial and NDA submission. The Company expects to begin
         pivotal clinical trials for the albuterol sulfate program by the end of
         2002.

                  Budesonide. Preclinical formulation development work is
         currently underway. A formulation developed by Nanosystems has proven a
         feasible candidate for delivery in the Premaire. The formulation is
         dependent on a proprietary nanocrystaline dispersion of budesonide in
         an aqueous carrier. Two other alternative formulation approaches are
         also under evaluation. Upon scale-up and production of clinical batches
         released under CMC protocol, an IND will be prepared for filing with
         the FDA, which is currently planned for the first half of 2003.


                  Ipratropium Bromide. Zambon initiated a Phase I/II clinical
         trial in Europe in January 2000 assessing the safety and efficacy
         compared to a commercially available ipratropium bromide product
         delivered by a pMDI and placebo in patients with COPD. The results of
         the study indicated that both Premaire-ipratropium bromide and
         pMDI-ipratropium were tolerated and improved lung function in the COPD
         patients. An Investigational New Drug Application ("IND") was filed by
         Zambon with the FDA in May 2000. During 2001, the IND was transferred
         to the Company. The Company does not intend to further develop this
         product on its own as the program has progressed to the point where a
         potential licensing partner would be in a position to take the product
         into clinical studies.

                  Sodium Cromoglycate. An IND was filed by Zambon with the FDA
         in July 2000. No further development work is anticipated to be
         completed on this product as the projected market opportunity for
         sodium cromoglycate is currently deemed too small to justify further
         progression.



                                      -20-



         Premaire Systemic Program:

                  Through its development alliance with Elan, SPD, the Company
         evaluated certain drugs for systemic treatment by pulmonary delivery
         through Premaire. By identifying a market opportunity for a
         rapid-acting, non-invasive treatment for breakthrough pain, the first
         drug to be tested for delivery in Premaire was morphine. In July 1999,
         the Company completed a gamma scintigraphy/pharmacokinetic trial
         comparing morphine delivered using the Premaire to subcutaneous
         injection. The Premaire demonstrated good pulmonary deposition and very
         rapid absorption, more rapid peak blood levels vs. subcutaneous
         injection and low oral and throat deposition. As part of the
         development alliance with Elan, Elan has the first right of refusal on
         the development of any product developed by the joint venture. Elan has
         chosen not to license this product from the joint venture. As such, the
         joint venture continues to seek to attract a partner for the continued
         development and commercialization of this product. The Company has
         spent $.4 million to date to develop this product and does not
         anticipate incurring any future costs for further development until
         such time as a licensing partner is secured.

         Tempo Respiratory Program:

                  In September 2000, the Company completed a pilot study using
         the Tempo to deliver an undisclosed, patented respiratory drug used to
         treat asthma. The study measured the distribution of this respiratory
         drug delivered by Tempo compared to the distribution of this same drug
         delivered through a commercially available pMDI in 12 healthy
         volunteers. Results of this study demonstrated that Tempo significantly
         increased drug deposition in all regions of the lung. Tempo 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. As of December 31, 2001, the Company has incurred approximately
         $.9 million to-date on this study. The Company is using the results of
         this study as a basis for conducting discussions for feasibility work
         and/or clinical studies with potential collaboration partners.

         Tempo Systemic Program:

                  The development of systemic drugs using Tempo is being
         conducted as part of the Company's alliance with Elan. The initial
         product developed was targeted to address migraine headaches. The
         Company utilized ergotamine tartrate as a proof-of-principle product.
         In December 1999, the Company completed a gamma
         scintigraphy/pharmacokinetic trial comparing the Tempo to a
         conventional pMDI. The trial showed successful delivery of the drug to
         all regions of lung with significantly reduced mouth and throat
         deposition, and rapid drug absorption. As part of the development
         alliance with Elan, Elan has the first right of refusal on the
         development of any product developed by the joint venture. Elan has
         chosen not to license this product from the joint venture. As such, the
         joint venture continues to seek to attract a partner for the continued
         development and commercialization of this product. As of December 31,
         2001, the Company has spent $1.0 million to date to develop this
         product and does not anticipate incurring any future costs for further
         development until such time as a licensing partner is secured.

                  As a result of the work performed on the ergotamine product
         noted above, during 2001 Sheffield initiated a new development program
         for a novel formulation of dyhydroergotamine ("DHE") for pulmonary
         delivery in the Tempo for the treatment of specific types of migraines.
         Formulation work for this program is currently underway. As of December
         31, 2001, the Company has incurred approximately $.1 million to-date
         related to this project. The Company is currently in discussions with a
         pharmaceutical company for the development and manufacturing of this
         product. Future costs related to this project are dependent, among
         other factors, the timing of securing a development partner. The
         Company estimates incurring approximately $3 million in 2002 related to
         the development of the DHE project.

         Unit Dose Nebulizer Program:

                  As part of an alliance with Elan, RSD is developing a product
         for inhalation delivery in a standard commercial tabletop device using
         the steroid budesonide, formulated using the NanoCrystal technology. A
         Phase I, double-blind safety and pharmacokinetic study of nebulized
         nanobudesonide in 16 healthy volunteers was satisfactorily completed at
         Thomas Jefferson University Hospital in February 2002. This study
         compared single doses of Pulmicort Respules, nanobudesonide and
         placebo. Data from the study is currently undergoing final data and
         statistical analysis. After such data has been analyzed, the Company
         plans on initiating discussions with potential partners regarding the
         outlicensing of this opportunity. As of December 31, 2001, the Company
         incurred approximately $2.1 million to-date on this project. Sheffield
         will fund the continued development work for this program up through
         the period of outlicensing, currently estimated at approximately $2.5
         million, after which time it is anticipated that the licensee will
         assume funding responsibility for further development work.

General and Administrative Expenses

         General and administrative expenses were $4.6 million for the year
ended December 31, 2001 compared to $2.8 million and $2.3 million for the years
ended December 31, 2000 and 1999, respectively. The increase of $1.8 million, or
61.5%, from 2000 to 2001 was primarily due to higher consulting costs and legal
fees associated with expanded business development and merger and acquisition
activities


                                      -21-



in the area of licensing and partnering of the Company's delivery systems, as
well as potential acquisitions of complementary pulmonary delivery technologies
and companies. 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.

Interest

         Interest income was $58,438 for the year ended December 31, 2001 as
compared to $124,908 and $91,941 for the years ended December 31, 2000 and 1999,
respectively. The decrease of $66,470, or 53.2%, from 2000 to 2001 is primarily
due to less cash available for investment and lower yields on those investments.
The $32,967 increase in interest income in 1999 from 1998 was primarily due to
larger balances of cash available for investment and higher average yields on
those investments.

         Interest expense was $318,642 for the year ended December 31, 2001 as
compared to $224,360 and $162,237 for the years ended December 31, 2000 and
1999, respectively. The increase of $94,282, or 42.0%, from 2000 to 2001
resulted primarily from higher short-term borrowings reflecting the August 2001
$4.0 million promissory note with Elan Pharma International Ltd. ("Elan
Pharma"). The increase of $62,123 from 2000 to 1999 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.

Realized Gain on Sale of Marketable Securities

         Realized gain on sale of marketable securities was $79,706 and $239,629
for the years ended December 31, 2001 and 2000, respectively. These gains
resulted from the sale of 283,188 and 300,000 shares for 2001 and 2000,
respectively, of the Company's investment in Lorus Therapeutics, Inc. ("Lorus").
As of December 31, 2001, the Company had no remaining investment in Lorus.

Minority Interest in Subsidiary

         Minority interest in loss of subsidiary was $.4 million for the year
ended December 31, 2001 compared to $.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 $1.9 million and $.8 million
in 2001 and 2000, respectively. The $1.1 million increase from 2000 to 2001
resulted primarily from costs associated with initiation of a Phase I/II
clinical study of the inhaled steroid product delivered using a tabletop
nebulizer. 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, 2001 and 2000, respectively.

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 2001, the Company had $.9 million in cash and cash
equivalents compared to $3.0 million at December 31, 2000. The decrease of $2.1
million reflects $9.1 million of cash disbursements used primarily to fund
operating activities and $.6 million to repurchase and retire 214,997 shares of
the Company's Common Stock. These decreases in cash were partially offset by the
receipt of a $1.0 million milestone advance from Zambon, $1.0 million from the
issuance of 1,000 shares of the Company's Series E Cumulative Convertible
Preferred Stock, $4.0 million from the proceeds of an unsecured promissory note
from Elan Pharma, $1.0 million from the proceeds of a secured loan from Zambon,
and $.5 million in net proceeds from the exercise of common stock options and
warrants.

         In September 2001, in connection with the amendment of its 1998
agreement with Zambon, the Company entered into a Loan and Security Agreement
("Loan Agreement") with Zambon, pursuant to which Zambon agreed to lend the
Company $2.5 million. The Company received $1.0 million upon signing of the Loan
Agreement, with additional borrowings of $1.0 million and $.5 million to be made
on January 1, 2002 and April 1, 2002, respectively. The Loan Agreement provides
for interest on principal and annually compounded interest at a fixed rate of 2%
per annum and is secured by certain security interests in respiratory products
developed in the Premaire. One third of the principal balance, together with
interest, is payable by the Company upon the Company's execution of an agreement
with one or more third parties to develop, co-promote and/or sell certain
products in North America, with all remaining unpaid principal and interest due
on December 31, 2005. As part of the amendment of its 1998 agreement with
Zambon, on October 17, 2001 the Company repurchased from Zambon 214,997 shares
of common stock for $3.0233 per share ("Repurchase Price"). In addition, the
Company received an option, expiring December 31, 2002, to repurchase the
remaining shares of the Company's common stock held by Zambon at the Repurchase
Price. In the event the Company completes a sublicense for the North American
rights or a sublicense for the non-North American rights to certain Premaire
respiratory products prior to December 31, 2002, the Company will be required to
repurchase from Zambon 882,051 shares of the Company's common stock on each of
the events.

         In August 2001, the Company entered into a Note Purchase Agreement with
Elan Pharma, pursuant to which Elan Pharma agreed to lend the Company $4
million. All borrowings under the Note Purchase Agreement are evidenced by an
unsecured promissory note of the Company that provides for interest on principal
and semi-annually compounded interest at a fixed rate of 10% per annum and a
maturity of November 14, 2002, or upon the earlier occurrence of one or more
specified events.


                                      -22-



         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 Cumulative Convertible Exchangeable Preferred Stock
and 5,000 shares of Series F Convertible Non-Exchangeable 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 available for general operating purposes. As part
of the agreement, Elan 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 $2.0
million of such commitment remains outstanding. The proceeds from the Series E
Preferred Stock are required to 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
Premaire-albuterol trial, Zambon provided the Company with a $1.0 million
interest-free advance against future milestone payments. In January 2001, the
Company received an additional $1.0 million interest-free milestone advance
resulting from the demonstration of the technical feasibility of delivering an
inhaled steroid formulation in Premaire. The proceeds from these advances were
not restricted as to their use by the Company. As part of the amendment of its
1998 agreement with Zambon, the terms of the milestone advances were modified in
that the Company agreed to repay $1.0 million of the advance milestone payments
upon the earlier of December 31, 2003, or upon the first regulatory approval for
either albuterol or an inhaled steroid delivered in the Premaire. The remaining
$1.0 million advance shall be repaid by the Company on the earlier of December
31, 2005, or the regulatory approval of the second product (albuterol or an
inhaled steroid) delivered in the Premaire. Due to the modification in the
repayment terms, the advances have been reclassified in the Company's balance
sheet as long-term debt.

         Since its inception, the Company has financed its operations primarily
through the sale of securities and convertible debentures, from which it has
raised an aggregate of approximately $84.0 million through December 31, 2001, of
which approximately $30.0 million has been spent to acquire certain in-process
research and development technologies, and $34.8 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.

         As of March 25, 2002, the Company had $1.2 million in cash available to
fund its operations. As stated above, the Company is to receive $.5 million on
April 1, 2002 pursuant to its Loan Agreement with Zambon and the Company has an
agreement to receive $1.0 million from Elan to fund the Company's portion of
RSD's operating and development costs. Because the Company does not currently
have, and does not expect to generate, significant cash flows from operations
for at least the next few years, the Company will require additional funds to
meet the costs of its development programs for 2002 and beyond. In an effort to
meet its capital requirements, the Company is currently pursuing various
financing alternatives including 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
will 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.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company has no material market risk exposure.



                                      -23-



ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                         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, 2001 and 2000, 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, 2001 and for the period
October 17, 1986 (inception) through December 31, 2001. 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, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 and the period from October
17, 1986 (inception) through December 31, 2001, in conformity with accounting
principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that Sheffield
Pharmaceuticals, Inc. and Subsidiaries will continue as a going concern. As more
fully described in Note 1, the Company has incurred recurring operating losses
and has a working capital deficiency. Those conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.

As discussed in Note 1, the computation of basic and diluted net loss per share
of common stock for the years ended December 31, 2000 and 1999 has been
restated.



/s/ Ernst & Young LLP
St. Louis, Missouri
February 12, 2002




                                      -24-




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





                               ASSETS                                                           December 31,
                                                                                                ------------
                                                                                             2001           2000
                                                                                         ------------    ------------
                                                                                                   
Current assets:
   Cash and cash equivalents (Note 1)                                                    $    859,298    $  3,041,948
   Marketable equity securities (Notes 1 and 6)                                                    --         327,422
   Milestone advance receivable (Note 5)                                                           --       1,000,000
   Clinical supplies                                                                          427,550         236,000
   Prepaid expenses and other current assets                                                   86,080         304,272
                                                                                         ------------    ------------
            Total current assets                                                            1,372,928       4,909,642
                                                                                         ------------    ------------

Property and equipment (Note 1):
   Laboratory equipment                                                                       431,920         271,748
   Office equipment                                                                           245,019         211,609
   Leasehold improvements                                                                      25,309          18,320
                                                                                         ------------    ------------
            Total at cost                                                                     702,248         501,677
   Less accumulated depreciation and amortization                                            (355,014)       (235,389)
                                                                                         ------------    ------------
            Property and equipment, net                                                       347,234         266,288
                                                                                         ------------    ------------

Patent costs, net of accumulated amortization of
   $20,216 and $9,287, respectively (Note 1)                                                  308,203         258,897
Other assets                                                                                   27,913          15,830
                                                                                         ------------    ------------

   Total assets                                                                          $  2,056,278    $  5,450,657
                                                                                         ============    ============

                  LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

Current liabilities:
   Accounts payable                                                                      $    856,216    $    791,722
   Accrued liabilities                                                                        441,778         443,043
   Sponsored research payable                                                                 235,757         235,757
   Note payable (Note 5)                                                                    4,000,000              --
                                                                                         ------------    ------------
            Total current liabilities                                                       5,533,751       1,470,522

Convertible promissory note (Note 5)                                                        2,000,000       2,000,000
Long-term debt (Note 5)                                                                     3,000,000       2,000,000
Other long-term liabilities                                                                   608,803         393,855
Commitments and contingencies                                                                      --              --
                                                                                         ------------    ------------
               Total liabilities                                                           11,142,554       5,864,377

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

Stockholders' equity (net capital deficiency) (Notes 3 & 4):
   Preferred stock, $.01 par value, authorized 3,000,000 shares:
      Series C cumulative convertible preferred stock, authorized
         23,000 shares; 14,708 and 13,712 shares issued and outstanding
         at December 31, 2001 and 2000, respectively                                              147             137
      Series D cumulative convertible exchangeable preferred stock,
         authorized 21,000 shares; 13,799 and 12,870 shares
         issued and outstanding at December 31, 2001 and 2000, respectively                       138             129
      Series E cumulative convertible non-exchangeable preferred stock,
         authorized 9,000 shares; 2,124 and 1,004 shares issued and
         outstanding at December 31, 2001 and 2000, respectively                                   21              10
      Series F convertible non-exchangeable preferred stock, 5,000 shares
         authorized; 5,000 shares issued and outstanding at December 31, 2001 and 2000             50              50
   Common stock, $.01 par value, authorized 100,000,000 shares; issued and
         outstanding 29,001,602 and 28,791,643 shares at December 31, 2001
         and 2000, respectively                                                               290,016         287,916
   Additional paid-in capital                                                              83,120,316      80,108,095
   Other comprehensive income                                                                      --         157,467
   Deficit accumulated during development stage                                           (92,496,964)    (80,967,524)
                                                                                         ------------    ------------
               Total stockholders' equity (net capital deficiency)                         (9,086,276)       (413,720)
                                                                                         ------------    ------------

Total liabilities and stockholders' equity (net capital deficiency)                      $  2,056,278    $  5,450,657
                                                                                         ============    ============



                 See notes to consolidated financial statements.



                                      -25-



                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
     For the Years Ended December 31, 2001, 2000 and 1999 and for the Period
             from October 17, 1986 (inception) to December 31, 2001




                                                                                                         October 17,
                                                                                                            1986
                                                                 Years ended December 31,               (inception) to
                                                                 ------------------------               December 31,
                                                            2001            2000           1999             2001
                                                        ------------    ------------    ------------    ------------
                                                                                            
Revenues:
   Contract research revenue (Note 1)                   $    869,095    $    501,572    $    399,378    $  1,770,045
   Sublicense revenue (Note 6)                                 5,000           5,000              --       1,370,000
                                                        ------------    ------------    ------------    ------------
      Total revenues                                         874,095         506,572         399,378       3,140,045

Expenses:
   Acquisition of research and development in-process
         technology (Note 6)                                      --              --      15,000,000      29,975,000
   Research and development                                5,999,693       3,747,437       3,421,734      34,772,555
   General and administrative                              4,551,661       2,817,535       2,277,136      28,886,746
                                                        ------------    ------------    ------------    ------------

        Total expenses                                    10,551,354       6,564,972      20,698,870      93,634,301
                                                        ------------    ------------    ------------    ------------

Loss from operations                                      (9,677,259)     (6,058,400)    (20,299,492)    (90,494,256)

Interest income                                               58,438         124,908          91,941         789,387
Interest expense                                            (318,642)       (224,360)       (162,237)     (1,116,357)
Realized gain (loss) on sale of marketable securities         79,706         239,629              --          (5,580)
Minority interest in loss of subsidiary (Note 1)             378,620         155,072       2,985,000       3,518,693
                                                        ------------    ------------    ------------    ------------

Loss before extraordinary item                            (9,479,137)     (5,763,151)    (17,384,788)    (87,308,113)
Extraordinary item                                                --              --              --          42,787
                                                        ------------    ------------    ------------    ------------

Net loss                                                $ (9,479,137)   $ (5,763,151)   $(17,384,788)   $(87,265,326)
                                                        ============    ============    ============    ============

Preferred stock dividends                                 (2,084,392)     (1,830,094)     (1,036,487)     (5,729,520)
Accretion of mandatorily redeemable preferred stock               --              --              --        (103,400)
                                                        ------------    ------------    ------------    ------------

Net loss - attributable to common shares                $(11,563,529)   $ (7,593,245)   $(18,421,275)   $(93,098,246)
                                                        ============    ============    ============    ============

Basic and diluted weighted average common shares
         outstanding (Note 1)                             28,963,562      27,956,119      27,236,715      10,621,036

Basic and diluted net loss per share of common stock
         (Note 1):                                      $       (.40)   $       (.27)   $       (.68)   $      (8.77)



                 See notes to consolidated financial statements.


                                      -26-




                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, 2001





                                                                                               Notes receivable
                                                                                             in connection with     Additional
                                                               Preferred       Common             sale of            paid-in
                                                                 Stock          Stock              stock             capital
                                                              ------------   ------------    ------------------    ------------
                                                                                                       
Balance at October 17, 1986                                   $         --   $         --       $         --       $         --
   Common stock issued                                                  --     11,484,953            100,000         30,539,185
   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             --             --                 --                 --
   Series C preferred stock issued                                     115             --                 --         11,499,885
   Series C preferred stock dividends                                    4             --                 --            413,996
   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
   Common stock issued                                                  --          4,251                 --            481,201
   Repurchase and retirement of common stock                            --         (2,151)                --           (640,691)
   Series C preferred stock dividends                                   10             --                 --            995,990
   Series D preferred stock dividends                                    9             --                 --            928,991
   Series E preferred stock issued                                      10             --                 --            999,990
   Series E preferred stock dividends                                    1             --                 --            119,999
   Common stock warrants issued                                         --             --                 --            126,741
   Comprehensive income (loss):
           Unrealized loss on marketable securities                     --             --                 --                 --
           Net loss                                                     --             --                 --                 --
   Comprehensive income (loss)                                          --             --                 --                 --
                                                              ------------   ------------       ------------       ------------
Balance at December 31, 2001                                  $        356   $    290,016       $         --       $ 83,120,316
                                                              ============   ============       ============       ============



                                                                                 Deficit         Total
                                                                               accumulated    stockholders'
                                                                  Other          during        equity (net
                                                              comprehensive   development       capital
                                                              income(loss)       stage         deficiency)
                                                              -------------   ------------    ------------
                                                                                     
Balance at October 17, 1986                                   $         --    $         --    $         --
   Common stock issued                                                  --              --      42,124,138
   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             --        (103,400)       (103,400)
   Series C preferred stock issued                                      --              --      11,500,000
   Series C preferred stock dividends                                   --        (415,112)         (1,112)
   Comprehensive income (loss):
          Unrealized loss on marketable securities                (222,226)             --              --
          Net loss                                                      --     (54,638,251)             --
   Comprehensive income (loss)                                          --              --     (54,860,477)
                                                              ------------    ------------    ------------
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                                                     --      (5,763,151)             --
   Comprehensive income (loss)                                          --              --      (5,775,071)
                                                              ------------    ------------    ------------
Balance at December 31, 2000                                       157,467     (80,967,524)       (413,720)
   Common stock issued                                                  --              --         485,452
   Repurchase and retirement of common stock                            --              --        (642,842)
   Series C preferred stock dividends                                   --        (999,278)         (3,278)
   Series D preferred stock dividends                                   --        (929,603)           (603)
   Series E preferred stock issued                                      --              --       1,000,000
   Series E preferred stock dividends                                   --        (121,422)         (1,422)
   Common stock warrants issued                                         --              --         126,741
   Comprehensive income (loss):
           Unrealized loss on marketable securities               (157,467)             --              --
           Net loss                                                     --      (9,479,137)             --
   Comprehensive income (loss)                                          --              --      (9,636,604)
                                                              ------------    ------------    ------------
Balance at December 31, 2001                                  $         --    $(92,496,964)   $ (9,086,276)
                                                              ============    ============    ============



                 See notes to consolidated financial statements.



                                      -27-




                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
  For the Years Ended December 31, 2001, 2000 and 1999 and for the Period from
                October 17, 1986 (Inception) to December 31, 2001





                                                                                                               October 17, 1986
                                                                             Years ended December 31,           (inception) to
                                                                             ------------------------           December 31,
                                                                   2001            2000            1999             2001
                                                                ------------    ------------    ------------   ----------------
                                                                                                   
Cash flows from operating activities:
   Net loss                                                     $ (9,479,137)   $ (5,763,151)   $(17,384,788)   $(87,265,326)
   Adjustments to reconcile net loss to net cash used by
     development stage activities:
        Issuance of common stock, stock
            options/warrants for services                            126,741         207,202         203,452       2,819,368
        Depreciation and amortization                                130,554         118,775          86,341         728,890
        Non-cash acquisition of research and
            development in-process technology                             --              --              --       1,650,000
        (Gain) loss realized on sale of marketable securities        (79,706)       (239,629)             --           5,580
        Decrease (increase) in clinical supplies, prepaid
            expenses & other current assets                           26,642        (395,035)       (106,202)       (572,671)
        Decrease (increase) in milestone advance receivable        1,000,000      (1,000,000)             --              --
        Increase in other assets                                     (72,320)        (64,089)       (219,925)       (297,292)
        Increase in accounts payable and accrued liabilities         352,646         615,636         154,418       1,154,148
        (Decrease) increase in sponsored research payable                 --        (185,924)        (28,124)        812,827
        Other                                                        (72,343)         59,973         151,396         225,703
                                                                ------------    ------------    ------------    ------------
Net cash used by development stage activities                     (8,066,923)     (6,646,242)    (17,143,432)    (80,738,773)
                                                                ------------    ------------    ------------    ------------
Cash flows from investing activities:
     Proceeds from sale of marketable securities                     249,661         419,674              --         844,420
     Acquisition of laboratory and office equipment,
         and leasehold improvements                                 (200,570)        (86,107)       (136,588)       (872,390)
     Other                                                                --              --          10,000         (57,087)
                                                                ------------    ------------    ------------    ------------
Net cash provided (used) by investing activities                      49,091         333,567        (126,588)        (85,057)
                                                                ------------    ------------    ------------    ------------

Cash flows from financing activities:
     Payments on debt and capital leases                              (7,428)         (6,435)       (709,701)       (850,036)
     Net proceeds from issuance of:
         Debt                                                      5,000,000       1,000,000       2,600,000      12,050,000
         Common stock                                                     --       2,015,625              --      23,433,660
         Preferred stock                                           1,000,000       1,000,000      16,706,305      34,741,117
     Proceeds from exercise of warrants/stock options                485,452       1,784,185          91,563      13,763,358
     Repurchase and retirement of common stock                      (642,842)       (313,189)             --        (956,031)
     Other                                                                --              --              --        (500,024)
                                                                ------------    ------------    ------------    ------------
Net cash provided by financing activities                          5,835,182       5,480,186      18,688,167      81,682,044

Net (decrease) increase in cash and cash equivalents              (2,182,650)       (832,489)      1,418,147         858,214
Cash and cash equivalents at beginning of period                   3,041,948       3,874,437       2,456,290           1,084
                                                                ------------    ------------    ------------    ------------
Cash and cash equivalents at end of period                      $    859,298    $  3,041,948    $  3,874,437    $    859,298
                                                                ============    ============    ============    ============

Noncash investing and financing activities:
     Common stock, stock options and warrants
         issued for services                                    $    126,741    $    207,202    $    203,452    $  2,819,368
     Common stock redeemed in payment of notes receivable                 --              --              --          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                 --              --              --       5,353,368
     Securities acquired under sublicense agreement                       --              --              --         850,000
     Equipment acquired under capital lease                               --              --              --         121,684
     Notes payable converted to common stock                              --              --              --         749,976
     Stock dividends                                               2,050,305       1,794,545         868,277       5,491,674

Supplemental disclosure of cash information:  Interest paid     $      7,060    $      2,940    $      8,919    $    286,320







                 See notes to consolidated financial statements.



                                      -28-




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. ("Sheffield" or the
"Company") a Delaware corporation, is focused on the development and
commercialization of later stage pharmaceutical products that utilize the
Company's unique proprietary pulmonary delivery technologies.

The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and satisfaction of
liabilities and commitments in the normal course of business. 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 of rights to
its technology, as well as through equity and debt offerings, to continue to
operate its business. The Company's ability to meet its obligations as they
become due and to continue as a going concern must be considered in light of the
expenses, difficulties and delays frequently encountered in developing a new
business, particularly since the Company will focus on product development that
may require a lengthy period of time and substantial expenditures to complete.
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. Management believes that the
Company's ability to meet its obligations as they become due and to continue as
a going concern through December 2002 is dependent upon obtaining additional
funding. In an effort to meet its capital requirement, the Company will be
evaluating various financing alternatives including private offerings of its
securities, debt financing, and collaboration and licensing arrangements with
other companies. However, the accompanying financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

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 that 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.


                                      -29-



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 on net
loss available to common stockholders divided by the weighted average common
stock outstanding during the 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. The net loss
available to common stockholders and basic and diluted net loss per share for
the years ended December 31, 2000 and 1999 have been restated from amounts
previously reported to properly reflect cumulative preferred stock dividends
payable in kind. Such amounts may differ from dividends declared as reflected in
the Statement of Stockholders' Equity. The effect of this restatement was to
increase basic and diluted net loss per share from $.21 to $.27 and from $.64 to
$.68 for the years ended December 31, 2000 and 1999, respectively.

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) - SFAS No. 130, Reporting Comprehensive Income,
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, 2001, 2000 and 1999 is solely
comprised of unrealized gains or losses on marketable securities. The unrealized
loss on marketable securities during 2001 and 2000 includes reclassification
adjustments of $79,706 and $239,629, respectively, for gains realized in income
from the sale of the securities.

Segment Information - SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, 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.

Reclassifications - Certain amounts in the prior year financial statements and
notes have been reclassified to conform to the current year presentation.

2.        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, 2001, assets held under capital leases consisting of
office equipment were $11,397, net of accumulated amortization of $37,834.
Future minimum lease payments under capital and operating leases at December 31,
2001 are as follows:





                                                            Capital    Operating
                                                             Leases      Leases
                                                            --------    --------
                                                                  
2002 ....................................................   $  9,375    $168,478
2003 ....................................................        774       2,463
                                                            --------    --------
Total minimum lease payments ............................     10,149    $170,941
                                                                        ========
Less amount representing interest .......................       (806)
                                                            --------
Present value of net minimum lease payments .............      9,343
Less current maturities of capital lease obligations ....     (8,578)
                                                            --------
Capital lease obligations ...............................   $    765
                                                            ========



                                      -30-



         Rent expense relating to operating leases for the years ended December
31, 2001, 2000 and 1999 was $226,759, $219,859, and $174,332, respectively.

3.       STOCKHOLDERS' EQUITY

         Preferred Stock

         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 6). 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, 2001. The Company issued stock dividends totaling
996 and 932 shares of Series C Preferred Stock and cash dividends for fractional
shares of $3,278 and $2,045 for the years ended December 31, 2001 and 2000,
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 929 and 855 shares of Series D Preferred Stock
and cash dividends for fractional shares of $603 and $750 for the years ended
December 31, 2001 and 2000, respectively. 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. During
2001 and 2000, Elan International purchased a total of $2.0 million of the
Series E Preferred Stock. The Series E Preferred Stock will be utilized by the
Company to fund its portion of RSD's operating and development costs. 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 120 and 4 shares of Series E Preferred Stock and
cash dividends for fractional shares of $1,422 and $750 for the years ended
December 31, 2001 and 2000, respectively. 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 were 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 6).

         Common Stock

         During 1998, the Company entered into an agreement with Zambon Group,
SpA ("Zambon") for a sublicense to the Company's proprietary Premaire(R)
Delivery System ("Premaire"), a portable nebulizer-based pulmonary delivery
system (see Note 6). Pursuant to an option agreement dated April 15, 1998, the
Company issued 800,000 shares of Common Stock to Zambon 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 to Zambon for
$1.5 million. On October 17, 2001, as part of the September 28, 2001 amendment
of the Company's 1998 agreement with Zambon, the Company repurchased from
Zambon, 214,997 shares of common stock for $3.0233 per share ("Repurchase
Price"). In addition, the Company received an option, expiring December 31,
2002, to repurchase the remaining shares of the Company's common stock held by
Zambon at the Repurchase Price. In the event the Company completes a sublicense
for the North American rights or a sublicense for the non- North American rights
to the Premaire respiratory products prior to December 31, 2002, the Company
will be required to repurchase from Zambon 882,051 shares of the Company's
common stock on each of the events.

         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


                                      -31-



were available to 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.

4.       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. Certain employment agreements
provide for an immediate vesting of all unvested options held by the employee
upon a change of control of the Company. Upon such a change of control,
recognition of compensation expense may be triggered, the amount of which cannot
be determined at this time. As of December 31, 2001, there are 709,700 shares
available for grant under the Option Plan.

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, 2001, 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 that 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, 2001,
there are 170,000 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 2001, 2000, and 1999, risk-free interest rate ranging from 4.39%
to 6.36%; expected volatility ranging from 0.628 to 0.874; 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:





                                                     2001             2000              1999
                                                --------------    --------------    --------------
                                                                           
Pro forma net loss ..........................   $  (12,479,299)   $  (10,036,410)   $  (18,843,611)
Pro forma basic net loss per share of
  common stock ..............................   $         (.43)   $         (.36)   $         (.69)


As discussed in Note 1, the net loss available to common stockholders and basic
and diluted net loss per share for the years ended December 31, 2000 and 1999
have been restated to properly reflect cumulative preferred stock dividends
payable in kind. As a result, the 2000 and 1999 pro forma basic net loss per
share of common stock above have also been restated.


                                      -32-



         Transactions involving stock options and warrants are summarized as
follows:




                                                               Years Ended December 31,
                             ---------------------------------------------------------------------------------------------
                                          2001                              2000                            1999
                             ----------------------------     ---------------------------    -----------------------------
                                                 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           6,921,629       $   3.02        7,782,954       $   2.59         7,910,836       $   2.55
            Granted                156,940           4.44        1,041,040           5.34           555,040           2.97
            Expired                250,000           2.99          660,820           2.90           315,422           3.92
            Exercised              558,100           1.73        1,241,545           2.32           367,500           1.07
            Canceled                85,000           3.21               --             --                --             --
                                 ---------       --------        ---------       --------         ---------       --------
Outstanding, December 31         6,185,469       $   3.18        6,921,629       $   3.02         7,782,954       $   2.59
                                 =========       ========        =========       ========         =========       ========
Exercisable at end of year       4,525,969       $   2.77        5,049,613       $   2.57         6,358,554       $   2.51
                                 =========       ========        =========       ========         =========       ========


During the period January 1, 1999 through December 31, 2001, 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
                    ----     --------------------------     --------------        ---------------------------
                                                                      
                    1999               555,040              $0.82 - 6.00              $       1.34
                    2000             1,041,040              $3.50 - 7.00              $       3.37
                    2001               156,940              $3.58 - 5.25              $       3.03



At December 31, 2001, 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
- ---------------             --------------------    ------------------------       -------------------------------
                                                                          
$1.38 - $2.00                    1,054,910                     3.37                           $    1.97
$2.50 - $3.65                      521,179                     0.30                           $    3.30
$4.00 - $6.13                      384,080                     4.04                           $    5.46
                                 ---------
    Total                        1,960,169                     2.68                           $    3.01
                                 =========



At December 31, 2001, 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              1,036,000                  3.82                            $    1.74
 $2.75 - $3.25              1,681,000                  4.67                            $    2.80
 $3.50 - $7.00              1,508,300                  5.24                            $    4.79
                            ---------
     Total                  4,225,300                  4.66                            $    3.25
                            =========




5.       NOTES PAYABLE AND LONG-TERM DEBT

         Note Payable

         In August 2001, the Company entered into a Note Purchase Agreement
("Note") with Elan Pharma International Ltd. ("Elan Pharma"), pursuant to which
Elan Pharma agreed to lend the Company up to $4 million. All borrowings under
the Note are evidenced by an unsecured promissory note of the Company providing
for interest on principal and semi-annually compounded at a fixed rate of 10%
per annum and a maturity of November 14, 2002, or upon the earlier occurrence of
one or more specified events. The outstanding principal balance of the Note was
$4.0 million at December 31, 2001.

         Convertible Promissory Note

         As part of the 1998 agreement with Elan, Elan agreed to make available
to the Company a Convertible Promissory Note ("Convertible 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 Convertible
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
Convertible 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 Convertible


                                      -33-



Note at December 31, 2001 and 2000 was $2.0 million, and accrued interest was
$.6 million and $.4 million at December 31, 2001 and 2000, respectively.

         Long-Term Debt

         In September 2001, in connection with the amendment of its 1998
agreement with Zambon, the Company entered into a Loan and Security Agreement
(the "Loan") with Zambon, pursuant to which Zambon agreed to lend the Company
$2.5 million. The Company received $1.0 million upon signing of the Loan, with
additional borrowings of $1.0 million and $.5 million to be made on January 1,
2002 and April 1, 2002, respectively. The Loan provides for interest on
principal and annually compounded interest at a fixed rate of 2% per annum and
is secured by certain security interests in respiratory products developed in
the Premaire. One third of the principal balance, together with interest, is
payable by the Company upon the Company's execution of an agreement with one or
more third parties to develop, co-promote and/or sell certain products in North
America, with all remaining unpaid principal and interest due on December 31,
2005. The outstanding principal balance of the Loan was $1.0 million at December
31, 2001. On January 1, 2002, the Company received the additional borrowing of
$1.0 million as provided by the Loan.

         In conjunction with the completion of the Phase I/II Premaire albuterol
trial in 1999 and the demonstration of the technical feasibility of delivering
an inhaled steroid formulation in the Premaire in 2000, Zambon provided the
Company with two $1.0 million interest-free advances against future milestone
payments. The second advance was received in January 2001 and was reflected in
the accompanying financial statements as a milestone advance receivable at
December 31, 2000. The proceeds from these advances were not restricted as to
their use by the Company (see Note 6). As part of the amendment of its 1998
agreement with Zambon, the terms of all milestone advances received from Zambon
were modified in that the Company shall repay $1.0 million of the advance
milestone payments upon the earlier of December 31, 2003, or upon the first
regulatory approval for either albuterol or an inhaled steroid delivered in the
Premaire. The remaining $1.0 million advance shall be repaid by the Company on
the earlier of December 31, 2005, or the regulatory approval of the second
product (albuterol or an inhaled steroid) delivered in the Premaire. Due to the
modification in the repayment terms, the advances, totaling $2.0 million at both
December 31, 2001 and 2000, have been reclassified in the Company's balance
sheet as long-term debt.


6.       RESEARCH AND DEVELOPMENT AGREEMENTS

         Pulmonary Delivery Technologies

         In June 1998, the Company sublicensed to Zambon worldwide marketing and
development rights to respiratory products to be delivered by the Premaire in
return for an equity investment in the Company (approximately 10%). From June
1998 to September 2001, Zambon funded the development costs for the respiratory
compounds delivered by Premaire. In September 2001, the Company amended its 1998
agreement with Zambon whereby Sheffield regained the rights to the Premaire
previously granted to Zambon. Upon commercialization, Zambon will be entitled to
certain royalties on payments received by Sheffield for albuterol, ipratropium
and cromolyn sales for specified periods.

         In June 1998, the Company issued certain equity securities pursuant to
an agreement with Elan (see Note 3). 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. In July 1998, SPD
acquired from Aeroquip-Vickers, Inc. a new generation propellant-based pulmonary
delivery system called the Tempo(TM) Inhaler 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 Tempo technology while Sheffield retains
the rights to develop the respiratory disease applications of Tempo. The Company
is responsible for the development of these technologies. Pursuant to its
agreement with Elan, at December 31, 2001, the Company was not committed to fund
any additional costs related to SPD's systemic development programs.

         In October 1999, the Company issued certain equity securities pursuant
to an agreement with Elan (see Note 3). 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, 2001, the Company was
committed to fund $2.0 million to the subsidiary for the development of these
products, which the Company will fund by the issuance of its Series E Preferred
Stock.


                                      -34-



         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.

         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 is entitled to
receive payments upon the completion of certain milestones in the development of
these compounds and retains a 20% ownership interest in NuChem.


7.       INCOME TAXES

         At December 31, 2001, the Company had available net operating loss
carryforwards for regular federal income tax purposes of approximately $50.9
million, of which $27.5 million will expire between 2007 and 2012, and $23.4
million will expire between 2018 and 2021, 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, 2001 and 2000, which are
considered noncurrent, are as follows:





DEFERRED TAX ASSETS                                       2001                   2000
                                                       ------------           ------------
                                                                        
Net operating loss carryforwards ............          $ 19,348,000           $ 16,289,000
Costs capitalized for tax purposes ..........             1,810,000              1,975,000
Deferred tax asset valuation allowance ......           (21,158,000)           (18,264,000)
                                                       ------------           ------------
   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 deferred tax asset will
be amortized into taxable income over a useful life of 15 years.




                                      -35-




ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)

Quarterly financial data for 2001 and 2000 is summarized below:




                                                                                 Three Months Ended
                                                                                 ------------------
                                                       Mar 31                Jun 30               Sep 30                Dec 31
                                                     -----------           -----------           ---------             ---------
                                                                                                           
2001:
Total revenues                                       $   180,747           $   693,348           $        --           $        --
Operating loss                                        (1,623,295)           (2,360,545)           (2,717,608)           (2,975,811)
Net loss                                              (1,580,410)           (2,279,410)           (2,592,821)           (3,026,496)
Basic and diluted net loss per common share                 (.07)                 (.10)                 (.11)                 (.12)

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 common share                 (.07)                 (.07)                 (.06)                 (.07)



Basic net loss per share is based on net loss available to common stockholders
divided by the weighted average common stock outstanding during the quarter. The
net loss available to common stockholders and basic and diluted net loss per
share for the quarters ended September 30, 2001, June 30, 2001, and March 31,
2001, and for each of the quarters in 2000 have been restated from amounts
previously reported to properly reflect cumulative preferred stock dividends
payable in kind as discussed in Note 1 to the financial statements. The effect
of this restatement was to increase basic and diluted net loss per share from
$.09 to $.11, from $.08 to $.10 and from $.05 to $.07 for the quarters ended
September 30, 2001, June 30, 2001, and March 31, 2001, respectively, and from
$.06 to $.07, from $.05 to $.06, from $.05 to $.07, and from $.05 to $.07 for
the quarters ended December 31, 2000, September 30, 2000, June 30, 2000, and
March 31, 2000, respectively.


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, 2002,
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, 2002,
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934.

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, 2002,
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, 2002,
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934.


                                      -36-





ITEM14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

        (a)(1) Financial Statements

               The following Financial Statements are included in Item 8 hereto:
               Report of Independent Auditors
               Consolidated Balance Sheets as of
                  December 31, 2001 and 2000
               Consolidated Statements of Operations for the years
                  ended December 31, 2001, 2000 and 1999 and for the
                  period October 17, 1986 (inception) to December, 31
                  2001
               Consolidated Statements of Stockholders' Equity (net
                  capital deficiency) for the period from October 17,
                  1986 (inception) to December 31, 2001
               Consolidated Statements of Cash Flows for the years
                  ended December 31, 2001, 2000 and 1999 and for the
                  period from October 17, 1986 (inception) to December
                  31, 2001
               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              (9)

          3.2        By-Laws of the Company                                               (4)

          4.1        Form of Common Stock Certificate                                     (2)

          4.4        Certificate of Designations defining the powers,                     (9)
                     designations, rights, preferences, limitations and
                     restrictions applicable to the Company's Series C
                     Cumulative Convertible Redeemable Preferred Stock.

          4.5        Certificate of Designations defining the powers,                    (14)
                     designations, 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,                    (14)
                     designations, 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,                    (14)
                     designations, 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*

          10.6A      Amendment dated October 1, 2002 to Employment Agreement              (1)
                     between the Company and Thomas M. Fitzgerald.*




                                      -37-



          NO.                                                                                REFERENCE
                                                                                       
          10.6.5     Employment Agreement dated as of November 16, 1998 between                 (13)
                     the Company and Scott Hoffmann*

          10.6.5A    Amendment dated October 1, 2001 to Employment Agreement                     (1)
                     between the Company and Scott Hoffmann.*

          10.6.6     Employment Agreement dated as of August 3, 1998 between the                 (1)
                     Company and Thomas A. Armer*

          10.6.6A    Amendment dated October 1, 2001 to Employment Agreement                     (1)
                     between the Company and Thomas A. Armer.*

          10.8       1993 Stock Option Plan, as amended*                                        (17)

          10.9       1993 Restricted Stock Plan, as amended*                                    (17)

          10.10      1996 Directors Stock Option Plan*                                           (6)

          10.11      Agreement and Plan of Merger among the Company, Camelot                     (5)
                     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                 (5)
                     Company and David A. Byron*

          10.13      Employment Agreement dated as of April 25, 1997 between the                 (5)
                     Company and Loren G. Peterson, as amended*

          10.13A     Amendment dated October 1, 2001 to Employment Agreement                     (1)
                     between the Company and Loren G. Peterson.*

          10.14      Employment Agreement dated as of April 25, 1997 between the                 (5)
                     Company and Carl Siekmann*

          10.19      Form of Sublicense and Development Agreement between                       (11)
                     Sheffield 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,                  (12)
                     by 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                    (12)
                     Operating Agreement dated as of June 30, 1998 among
                     Systemic Pulmonary Delivery, Ltd., Sheffield
                     Pharmaceuticals,



                                       38




          NO.                                                                                REFERENCE
                                                                                       
                     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                      (12)
                     between 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).

          10.23      License and Development Agreement dated June 30, 1998                      (12)
                     between 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                      (12)
                     between 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,                     (14)
                     1999, 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                    (14)
                     dated as of October 18, 1999 by and among Elan Pharma
                     International Limited, Elan, the Company and Respiratory
                     Steroid Delivery, 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).

          10.27      License Agreement, dated as of October 19, 1999, by and                    (14)
                     between the Company and Respiratory Steroid Delivery,
                     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).



                                       39




          NO.                                                                                REFERENCE
                                                                                       

          10.28      License Agreement, dated as of October 19, 1999, by and                    (14)
                     between Elan Pharma International Limited and
                     Respiratory Steroid Delivery, 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).

          10.29      Registration Rights Agreement dated as of October 18, 1999                 (14)
                     by and between Elan and the Company.

          10.30      Securities Purchase Agreement dated as of December 29,                     (15)
                     2000, by and between the Company and The Tail Wind
                     Fund Ltd

          10.31      Registration Rights Agreement dated as of December 29,                     (15)
                     2000, by and between the Company and The Tail Wind
                     Fund Ltd

          10.32      Amendment to Sublicense and Development Agreement dated                    (16)
                     September 29, 2001, between Sheffield Pharmaceuticals,
                     Inc. and Inpharzam International S.A.

          10.33      Loan and Security Agreement dated September 29, 2001,                      (16)
                     between Sheffield Pharmaceuticals, Inc. and Inpharzam
                     International, S.A.

          10.34      Promissory Note dated September 29, 2001 issued to                         (16)
                     Inpharzam International, S.A.

          10.35      Note Purchase Agreement dated August 14, 2001 between                      (16)
                     Sheffield Pharmaceuticals, Inc. and Elan Pharma
                     International Ltd. (portions of this exhibit are 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).

          10.36      Promissory Note dated September 29, 2001 issued to Elan                    (16)
                     Pharma International Ltd. (portions of this exhibit
                     are 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).

          10.37      Separation Agreement dated as of February 18, 2002 between                  (1)
                     the Company and Carl Siekmann*

          10.38      Separation Agreement dated as of February 18, 2002 between                  (1)
                     the Company and David A. Byron*

          10.39      Indemnification Agreement dated January 23, 2002 between
                     the Company and certain officers and directors.                             (1)

          21         Subsidiaries of Registrant                                                  (1)

          23.1       Consent of Ernst & Young LLP                                                (1)

          24         Power of Attorney (Included on page 42 hereof)                              (1)



                                       40


* 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 March 31, 1997 filed with the Securities and
         Exchange Commission.

(6)      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.

(7)      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.

(8)      Incorporated by reference to the Company's Current Report on Form 8-K
         filed with the Securities and Exchange Commission on December 17, 1997.

(9)      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.

(10)     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.

(11)     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.

(12)     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.

(13)     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.

(14)     Incorporated by reference to the Company's Current Report on Form 8-K
         filed with the Securities and Exchange Commission on November 2, 1999.

(15)     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.

(16)     Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the quarter ended September 30, 2001 filed with the Securities
         and Exchange Commission.

(17)     Incorporated by reference to the Company's Annual Report on Form 10-K
         for the year ended December 31, 2000 filed with the Securities and
         Exchange Commission.

(b)      Reports on Form 8-K

         (1)      Current Report on Form 8-K filed with Securities and Exchange
                  Commission on October 11, 2001 to announce the filing of a
                  press release under Item 5, and Current Report on Form 8-K
                  filed with the Securities and Exchange Commission on December
                  21, 2001 to announce under Item 5 the filing of exhibits.


                                       41


                                   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 28, 2002                         /s/ Loren G. Peterson
                                      -----------------------------------------
                                      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.

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



                        SIGNATURE                                          TITLE                                      DATE
                        ---------                                          -----                                      ----
                                                                                                            
             /s/ Thomas M. Fitzgerald                       Chairman and Director                                 March 28, 2002
- ------------------------------------------------------
            Thomas M. Fitzgerald

            /s/ Loren G. Peterson                           Director, President and Chief                         March 28, 2002
- ------------------------------------------------------      Executive Officer (Principal Executive Officer)
            Loren G. Peterson

            /s/ John M. Bailey                              Director                                              March 28, 2002
- ------------------------------------------------------
            John M. Bailey

            /s/ Digby W. Barrios                            Director                                              March 28, 2002
- ------------------------------------------------------
            Digby W. Barrios

            /s/ Todd C. Davis                               Director                                              March 28, 2002
- ------------------------------------------------------
            Todd C. Davis

            /s/ Scott A. Hoffmann                           Vice President, Finance and Administration,           March 28, 2002
- ------------------------------------------------------      Treasurer and Secretary (Principal Financial and
            Scott A. Hoffmann                               Principal Accounting Officer)



                                       42

EX-10.6A

                                                                  EXHIBIT 10.6A


            THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT ("First Amendment") is
made this first day of October, 2001 (the "Effective Date"), by and between
Sheffield Pharmaceuticals, Inc. (the "Corporation") and Thomas M. Fitzgerald
(the "Executive").

            WHEREAS, the Compensation Committee of the Board of Directors has
determined that a possibility of a Change in Control of the Corporation exists
and appropriate steps should be taken to reinforce and encourage the continued
attention and dedication of certain management to their assigned duties.

            NOW, THEREFORE, in consideration of the covenants and agreements
contained herein, intending to be legally bound, the Corporation and Executive
hereby agree, effective as of the Effective Date, as follows:

1.   Paragraph 3 of the Employment Agreement by and between the Corporation and
     Executive dated June 6, 1996 (the "Employment Agreement") is hereby amended
     by deleting the third sentence in its entirety and adding to the second
     sentence the following:

            "; provided that, no such notice by the Corporation shall be
            effective and the term of this Agreement shall be extended for an
            additional year if a Potential Change in Control shall have occurred
            or occurs at any time prior to the date of such notice or within the
            twelve month period beginning on the date of such notice. Further,
            if a Change in Control shall have occurred at any time during the
            term of this Agreement, then notwithstanding any provision hereof to
            the contrary, the term shall continue in effect for: (i) the
            remainder of the month in which the Change in Control occurred, and
            (ii) a term of twenty-four months beyond the month in which such
            Change in Control occurred; provided that, if any obligations of the
            Corporation hereunder shall not have been fully and finally
            discharged at the end of such twenty-four month period, the term
            shall continue until such obligations shall have been finally
            discharged in full. The period commencing on the earlier of a
            Potential Change in Control (if applicable) or Change in Control and
            ending with the conclusion of such twenty-four month period shall be
            referred to hereinafter as the "Protection Period."

2.   Paragraph 11(c) of the Employment Agreement is hereby deleted in its
     entirety.

3.   Paragraph 13 of the Employment Agreement is hereby amended by deleting
     Paragraph 13 in its entirety and replacing it with the following:

                        "13. Termination for Cause. The Corporation may at any
time upon written notice to Executive terminate Executive's employment for
Cause. For purposes of this Agreement, the following shall constitute Cause: (a)
the Executive's gross misconduct which is materially and demonstrably injurious
to the Corporation; (b) the Executive's willful and continued failure to perform
substantially his duties with the Corporation (other than a failure resulting
from the Executive's incapacity due to bodily injury or physical or mental
illness) after a demand for substantial performance is delivered to the
Executive by the Board which specifically identifies the manner in which the
Board believes that the Executive has not substantially performed his duties and
provides for a reasonable period of time within which the Executive may take
corrective measures; or (c) the Executive's conviction (including a plea of nolo
contendere) of willfully engaging in illegal conduct constituting a felony or a
gross misdemeanor involving an intentional act of fraud, misrepresentation,
theft, embezzlement or dishonesty under federal or state law (or comparable
illegal conduct under the laws of any foreign jurisdiction) which is materially
and demonstrably injurious to the Corporation or which impairs the Executive's
ability to perform substantially his duties with the Corporation. An act or
failure to act will be considered "gross" or "willful" for this purpose only if
done, or omitted to be done, by the Executive in bad faith and without
reasonable belief that it was in, or not opposed to, the best interests of the
Corporation. Any act, or failure to act, based upon authority given pursuant to
a resolution duly adopted by the Board or governing body of the Corporation (or
a committee thereof) or based upon the advice of counsel for the Corporation
will be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Corporation.
Executive's attention to matters not directly related to the business of the
Corporation will not provide a basis for termination for Cause so long as the
Board did not expressly disapprove in writing of his engagement in such
activities either before or within a reasonable period of time after the Board
knew or could reasonably have known that the Executive engaged in those
activities. Notwithstanding the foregoing, the Executive may not be terminated
for Cause unless and until there has been delivered to Executive a


                                       1


copy of a resolution duly adopted by the affirmative vote of not less than
two-thirds of the entire membership of the Board (excluding such Executive) at a
meeting of the Board called and held for such purpose (after reasonable notice
to such Executive and an opportunity for such Executive, together with his
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board such Executive engaged in the conduct set forth in paragraphs (a),
(b) or (c) above and specifying the particulars thereof in detail."

4.   Paragraph 20 of the Employment Agreement is hereby amended by adding to the
     end of the first sentence the following:

            "and the Corporation hereby irrevocably consents to the jurisdiction
            of the federal and state courts sitting in the State of New York for
            purposes of enforcing this Agreement."

5.   Paragraph 25 of the Employment Agreement is hereby amended by deleting
     Paragraph 25 in its entirety and replacing it with the following:

                        "25. Disputes. (a) If the Executive so elects, any
dispute, controversy or claim arising under or in connection with this Agreement
will be settled exclusively by binding arbitration in Rochester, New York in
accordance with the Employee Benefit Plan Claims Arbitration Rules of the
American Arbitration Association, incorporated by referenced herein. Judgment
may be entered on the arbitrator's award in any court having jurisdiction;
provided that, the Executive may seek specific performance of his right to
receive benefits until the Termination Date during the pendency of any dispute
or controversy arising under or in connection with this Agreement.

                        (b) If the Executive does not elect arbitration to
resolve a dispute, claim or controversy, he may pursue all other available legal
remedies.

                        (c) Any review by an arbitrator or a court of competent
jurisdiction of a decision made by the Board at any time after a Change in
Control shall be de novo, and any such Board determination shall not be entitled
to deference.

                        (d) The Corporation will not assert in any dispute or
controversy with the Executive arising under or in connection with this
Agreement the Executive's failure to exhaust administrative remedies.

                        (e) In the event of any dispute, claim or controversy
arising out of or in connection with this Agreement, if the Executive prevails
on any of the material issues involved in any such dispute, claim or
controversy, the Corporation shall pay to the Executive immediately upon demand
all reasonable expenses (including without limitation attorneys' fees) incurred
by the Executive in connection therewith.

                        (f) If the Corporation refuses or otherwise fails to
make a payment when due under this Agreement and it is ultimately determined
that the Executive is entitled to such payment, such payment shall be increased
to reflect an interest factor, compounded annually, equal to the prime rate in
effect as of the date the payment was first due plus five points. For this
purpose, the prime rate shall be based on the rate identified by Chase Manhattan
Bank as its prime rate in New York City."

6.   The Employment Agreement is further amended by adding the following as new
     Paragraphs 26 through 31:


                        "26. Definitions. For purposes of this Agreement, the
capitalized terms set forth herein and not otherwise defined shall have the
meanings set forth in Appendix A attached hereto which shall have the same force
and effect as if included as a Paragraph in this Amendment and shall apply when
interpreting the terms of this Agreement.

                         27. Termination Employment in Connection with a Change
in Control.

                             (a) Eligibility. If the Executive's employment is
terminated during the Protection Period either: (i) by the Corporation without
Cause, or (ii) by the Executive for Good Reason, the Corporation will provide
the Executive with the payments and benefits set forth in Paragraph 28 below
(collectively, the "Enhanced


                                       2

Severance Benefits"), accelerated vesting and exercisability of stock based
compensation under Paragraph 29 and a Gross-Up Payment for "Excise Tax" (as
defined in Paragraph 30) under Paragraph 30. If the Executive terminates
employment with the Corporation under any other circumstances, he shall not be
entitled to Enhanced Severance Benefits under Paragraph 28, but may be entitled
to (c) benefits under Paragraph 11 hereunder, and (d) accelerated vesting and
exercisability of stock based compensation under Paragraph 29 and a Gross-Up
Payment for Excise Tax under Paragraph 30 by remaining employed with the
Corporation as of a Change in Control. In no event shall Executive be entitled
to Enhanced Severance Benefits under Paragraph 28 and to benefits under
Paragraph 11.

                             (b) Process for Termination of Employment. During
the Protection Period, any termination of the Executive's employment by the
Executive for Good Reason or by the Corporation for Cause shall be communicated
by written Notice of Termination from the party terminating employment hereunder
to the other party hereto in accordance with Paragraph 17. A "Notice of
Termination" shall mean, for purposes of this Agreement, a written notice given
in good faith and with a reasonable belief that Good Reason or Cause, as the
case may be, has occurred, which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated. Any Notice of
Termination must specify a Termination Date and any Notice of Termination for
Cause shall include a copy of the relevant resolution of the Board action taken
in accordance with the terms of this Agreement to terminate the Executive's
employment for Cause.

                             (c) Compensation and Benefits before Termination
Date. During the period beginning on the date the Executive or the Corporation,
as the case may be, receives Notice of Termination and ending on the Termination
Date, the Corporation will continue to pay the Executive his Base Pay and cause
his continued participation in all Benefit Plans in accordance with the terms of
such Benefit Plans.

                             (d) Rights Under Other Plans, Policies, Practices
and Agreements. Other than to the extent expressly provided herein, this
Agreement does not supersede any other plans, policies, and/or practices of the
Corporation. To the extent that any provision of any Benefit Plan limits,
qualifies or is inconsistent with any of the benefits provided under this
Agreement, then, for purposes of this Agreement, while such other Benefit Plans
remains in force, the provisions of this Agreement will control and such
provision of such other Benefit Plan will be deemed to have been superseded and
to be of no force or effect, as if such other agreement had been formally
amended to the extent necessary to accomplish such purpose. Nothing in this
Agreement prevents or limits the Executive's continuing or future participation
in any Benefit Plan provided by the Corporation and nothing in this Agreement
limits or otherwise affects the rights the Executive may have under any Benefit
Plans with the Corporation. Amounts that are vested benefits or which the
Executive is otherwise entitled to receive under any Benefit Plan with the
Corporation at or subsequent to the Termination Date will be payable in
accordance with such Benefit Plan.

         28. Enhanced Severance Benefits.

             (a) Cash Payment. The Executive will be entitled to a cash payment
equal to two (2) times Base Pay (disregarding any change in Base Pay that
constitutes Good Reason). The benefit provided under this Paragraph 28(a) will
be distributed in a single lump sum within ten business days after the
Termination Date or, if later, within ten business days following the effective
date of the Change in Control.

             (b) Continuation of Certain Welfare Benefits.

                 (i) During the period described in Paragraph 28(b)(ii) below,
the Corporation will maintain, or continue to reimburse or pay on behalf of the
Executive, as the case may be, medical, dental and life insurance plans which by
their terms cover the Executive and his family members and dependents under the
same terms and at the same cost to the Executive and his family members and
dependents as similarly situated executives who continue to be employed by the
Corporation (without regard to any reduction in such benefits that constitutes
Good Reason). The continuation period under applicable federal and state
continuation laws will begin to run from the date on which coverage under this
Paragraph ends.

                 (ii) For purposes of Paragraph 28(b)(i) above, the continuation
period with respect to any particular plan is the period beginning on the
Termination Date and ending on the earlier of: (x) the last day of the twelfth
month that begins after the Termination Date, (y) the date after Termination
Date on which the


                                       3

Executive first becomes eligible to participate in the plan of another employer
providing comparable benefits to the Executive and his eligible family members
and dependents which plan does not contain any exclusion or limitation with
respect to any pre-existing condition of the Executive or any eligible family
member or dependent who would otherwise be covered under the Corporation's plan
but for this clause (y), or (z) the date of the Executive's death.

                 (iii) To the extent the Executive incurs a liability for Taxes
in connection with a benefit provided pursuant to Paragraph 28(b) which he would
not have incurred had he been an active employee of the Corporation
participating in one of the Corporation's Benefit Plans, the Corporation shall
make a Gross-Up Payment for any such Taxes to the Executive. For purposes of
applying the foregoing, the Executive's tax rate will be deemed to be the
highest statutory marginal state and federal tax rate (on a combined basis) then
in effect. The payment pursuant to this subparagraph will be made within ten
days after the Executive's remittal of a written request therefor, accompanied
by a statement indicating the basis for and amount of the liability.

             (c) Extended Exercise Period for Stock Options. Any stock options
issued by the Corporation and held by the Executive shall remain exercisable
until thirty-six months following the Termination Date, but in no event beyond
the stock option's maximum exercise period (without regard to any provisions
that shortens the exercise period in connection with termination of employment
or otherwise).

         29. Accelerated Vesting and Exercisability. If a Change in Control
occurs while the Executive is employed by the Corporation or after the Executive
has terminated employment with the Corporation under circumstances entitling him
to Enhanced Severance Benefits, (a) all stock options previously granted to the
Executive by the Corporation shall become fully vested and exercisable as of the
date of the Change in Control, whether or not otherwise exercisable and vested
as of that date, and (b) shares of restricted Corporation stock previously
awarded to the Executive shall become fully vested.

         30. Excise Tax Equalization. The Corporation will cause its independent
auditors promptly to review, at the Corporation's sole expense, the
applicability of Paragraph 4999 of the Code to any payment or distribution of
any type by the Corporation or its Affiliates to or for the benefit of the
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement, any Benefit Plan or otherwise (the "Total
Payments"). The Corporation shall engage the auditor so that its review is
completed no later than the Change in Control. If the auditor determines that
the Total Payments result in an excise tax imposed by Paragraph 4999 of the Code
or any comparable state or local law, or any interest or penalties with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are collectively referred to as the "Excise Tax") and if the
Executive is entitled to Enhanced Severance Benefits or accelerated vesting or
exercisability of equity compensation under Paragraph 29, or both, the
Corporation shall make a Gross-Up Payment for any Excise Taxes to the Executive
within ten business days after the Termination Date, but in no event later than
the due date for the payments of any excise tax. For purposes of the foregoing
determination, the Executive's tax rate will be deemed to be the highest
statutory marginal state and federal tax rate (on a combined basis) then in
effect. If any tax authority determines that a greater Excise Tax should be
imposed upon the Total Payments than is determined by the Corporation's
independent auditors pursuant to this Paragraph 30, the Executive is entitled to
receive from the Corporation the full Gross-Up Payment calculated on the basis
of the amount of Excise Tax determined to be payable by such tax authority
within ten business days after he notifies the Corporation of such
determination.

         31. Miscellaneous.

             (a) Successors and Assigns.

                 (i) The Corporation will require any Successor to expressly
assume and agree to perform the obligations of this Agreement in the same manner
and to the same extent that the Corporation would be required to perform if no
such succession had taken place except as specifically required to the contrary
hereunder. Failure of the Corporation to obtain such assumption and agreement at
least three business days prior to the time a Person becomes a Successor (or
where the Corporation does not have at least three business days' advance notice
that a Person may become a Successor, within one business day after having
notice that such Person may become or has become a Successor) will constitute
Good Reason for termination of the Executive's employment. The date on which any
such succession becomes effective will be deemed the Termination Date and Notice
of Termination will be deemed to have been timely given by the Executive. A
Successor has no rights, authority or power with respect to this Agreement prior
to a Change in Control.


                                       4


                 (ii) This Agreement is for the benefit of, and is enforceable
by, the Executive, his personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees; provided
that, the Executive may not otherwise assign any of his rights or delegate any
of his obligations under this Agreement. If the Executive dies after becoming
entitled to, but before receiving, any amounts payable under this Agreement, all
such amounts, unless otherwise specifically provided to the contrary in this
Agreement, will be paid in accordance with the terms of this Agreement to the
Executive's devisee, legatee or other designee or, if there be no such designee,
to the Executive's estate.

             (b) No Mitigation or Set-Off. The Executive will not be required to
mitigate the amount of any benefits the Corporation becomes obligated to provide
in connection with this Agreement by seeking other employment or otherwise. The
Corporation has no right to set-off benefits owed under this Agreement against
amounts owed or claimed to be owed by the Executive to the Corporation under
this Agreement or otherwise.

             (c) Taxes. All benefits to be provided to the Executive in
connection with the this Agreement will be subject to required withholding of
federal, state and local income, excise and employment-related taxes.

             (d) Survival. The respective obligations of, and benefits afforded
to, the Corporation and the Executive which, by their express terms or clear
meaning, survive termination of the Executive's employment with the Corporation
or termination of this Agreement, as the case may be, will remain in full force
and effect according to their terms notwithstanding the termination of the
Executive's employment with the Corporation or termination of this Agreement, as
the case may be.

             (e) Benefits as Eligible Compensation under Other Benefit Plans.
Unless otherwise expressly provided therein, benefits paid or payable under this
Agreement will not be deemed to be salary or compensation for purposes of
determining the benefits to which the Executive may be entitled under any other
Benefit Plan sponsored, maintained or contributed to by the Corporation."

7.   Except as amended as set forth in this First Amendment, the Employment
     Agreement shall remain in full force and effect in accordance with its
     terms.

            IN WITNESS WHEREOF, this First Amendment has been executed by the
Corporation, by its duly authorized representative, and by Executive, as of the
Effective Date.

EXECUTIVE                                       CORPORATION


/s/ Thomas M. Fitzgerald                        /s/ Loren G. Peterson
- ------------------------------                  -----------------------------
                                                By: Loren G. Peterson
                                                Title: President and CEO


                                       5




                                   APPENDIX A

                                   DEFINITIONS


Whenever the following capitalized terms are used in the Agreement, they shall
have the meaning specified below.

Affiliate

            "Affiliate" shall mean: (a) any corporation at least a majority of
whose outstanding securities ordinarily having the right to vote at elections of
directors is owned directly or indirectly by the Corporation; or (b) any other
form of business entity in which the Corporation, by virtue of a direct or
indirect ownership interest, has the right to elect a majority of the members of
such entity's governing body.

Base Pay

            "Base Pay" shall mean the Executive's base salary at the highest
annual rate in effect immediately prior to the Change in Control or at the time
Notice of Termination is given, whichever is greater, disregarding any decrease
which constitutes Good Reason for the Executive's termination of employment.
Base Pay includes only regular cash salary and wages and is determined before
any reduction for deferrals pursuant to any nonqualified deferred compensation
plan or arrangement, qualified cash or deferred arrangement or cafeteria plan.

Beneficial Owner

            "Beneficial Owner" shall have the meaning ascribed to such term in
Rule 13d-3 of the General Rules and Regulations under the Exchange Act.

Benefit Plan

            "Benefit Plan" is (a) employee benefit plan as defined in Paragraph
3(3) of ERISA, (b) a cafeteria plan described in Paragraph 125 of the Code, (c)
a plan, policy or practice providing for paid vacation, other paid time off or
short- or long-term profit sharing, bonus or incentive payments, or (d) stock
option, stock purchase, restricted stock, phantom stock, stock appreciation
right or other equity-based compensation plan that is sponsored, maintained or
contributed to by the Corporation or its Affiliates for the benefit of employees
(and/or their families and dependents) generally or the Executive (and/or the
Executive's family and dependents) in particular.

Board

            "Board" is the board of directors of the Corporation duly qualified
and acting at the time in question. On and after the date of a Change in
Control, any duty of the Board in connection with this Agreement is
non-delegable and any attempt by the Board to delegate any such duty is
ineffective.

Change in Control

            A "Change in Control" shall mean the first of the following events
to occur:

            (a) Any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Corporation representing at least thirty
percent or, in the case of Elan Corporation and its Affiliates in the aggregate
(collectively, the "Elan Group"), at least fifty percent, of the combined voting
power of the Corporation's then outstanding securities;

            (b) During any twenty-four month consecutive period beginning on or
after October 1, 2001, individuals who at the beginning of such period
constituted a majority of the Board of Directors cease for any reason during any
day during any such period to constitute a majority thereof; provided, however,
that any director who is not in office at the beginning of such twenty-four
month period, but whose election by the Board or whose nomination for election
by the Company's shareholders was to fill a vacancy caused by death or
retirement and was


                                       6

approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of such period or whose election or
nomination for election was previously so approved shall be deemed to have been
in office at the beginning of such period for purposes of this definition;

            (c) the stockholders of the Corporation approve a merger or
consolidation of the Corporation with any other Corporation or agreement of
exchange involving the Corporation ("Merger"), other than (1) a Merger which
would result in the voting securities of the Corporation outstanding as of
October 1, 2001 continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) more than fifty
percent of the combined voting power of the voting securities of the Corporation
or such surviving entity outstanding immediately after the Merger, or (2) a
Merger effected to implement a recapitalization of the Corporation (or similar
transaction) in which no Person acquires thirty percent or more, or in the case
of Elan Group in the aggregate, fifty percent or more, of the combined voting
power of the Corporation's then outstanding securities; or

            (d) the stockholders of the Corporation approve a plan of complete
liquidation of the Corporation or an agreement for the sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) or
disposition by the Corporation of all or substantially all of the Corporation's
assets.

Code

            "Code" shall mean the Internal Revenue Code of 1986, as amended. Any
reference to a specific provision of the Code includes a reference to such
provision as it may be amended from time to time and to any successor provision.

Effective Date

            "Effective Date" shall mean the Effective Date of the First
Amendment.

ERISA

            "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended. Any reference to a specific provision of ERISA includes a
reference to such provision as it may be amended from time to time and to any
successor provision.

Exchange Act

            The "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended. Any reference to a specific provision of the Exchange Act or to any
rule or regulation thereunder includes a reference to such provision as it may
be amended from time to time and to any successor provision.

Good Reason

            "Good Reason" shall mean the occurrence of one or more of the
following events (regardless of whether any other reason, other than Cause, for
such termination exists or has occurred, including without limitation other
employment):

            (a) failure to elect or reelect or otherwise maintain the Executive
in the offices or positions that the Executive held immediately prior to the
Change in Control;

            (b) a change in the nature or scope of the authorities, powers,
functions, duties or responsibilities attached to the position with the
Corporation that the Executive held immediately prior to the Change in Control,
as reasonably determined by the Executive;

            (c) a reduction by the Corporation in the Executive's Base Pay or an
adverse change in the form or timing of the payment thereof, as in effect
immediately prior to the Potential Change in Control or as thereafter increased;


                                       7


            (d) the failure by the Corporation to cover the Executive under
Benefit Plans that, in the aggregate, provide substantially similar benefits to
the Executive and/or his family and dependents at a substantially similar total
cost to the Executive (e.g., premiums, deductibles, co-pays, out of pocket
maximums, required contributions, Taxes and the like) relative to the highest
benefits and lowest total costs under the Benefit Plans in which the Executive
(and/or his family or dependents) is participating at any time during the period
between the Potential Change in Control and the Change in Control;

            (e) the Corporation's requiring the Executive to be based more than
fifty miles from where his office is located immediately prior to the Change in
Control, except for required travel on the Corporation's business, and then only
to the extent substantially consistent with the business travel obligations
which the Executive undertook on behalf of the Corporation during the ninety day
period ending on the date of the Potential Change in Control (without regard to
travel related to or in anticipation of the Change in Control);

            (f) the failure of the Corporation to obtain from any Successor the
assent to this Agreement as required under Paragraph 32(a)(i);

            (g) any purported termination by the Corporation of the Executive's
employment which is not properly effected pursuant to a Notice of Termination
and pursuant to any other requirements of this Agreement and, for purposes of
this Agreement, no such purported termination will be effective; or

            (h) any refusal by the Corporation to continue to allow the
Executive to attend to matters or engage in activities not directly related to
the business of the Corporation which, at any time prior to the Potential Change
in Control, the Executive was not expressly prohibited by the Corporation from
attending to or engaging in.

The Executive's continued employment does not constitute consent to, or waiver
of any rights arising in connection with, any circumstance constituting Good
Reason. Notwithstanding the foregoing, the occurrence of an event that would
otherwise constitute Good Reason hereunder shall cease to be an event
constituting Good Reason if the Executive does not provide a Notice of
Termination to the Corporation within one hundred eighty days of the date that
the Executive first becomes aware of the occurrence of such event. Termination
by the Executive of his employment for Good Reason as defined hereunder will
constitute Good Reason for all purposes of this Agreement, even if the Executive
may also thereby be deemed to have "retired" under any applicable retirement
programs of the Corporation.

Gross-Up Payment

            "Gross-Up Payment" shall mean an amount payable to the Executive
such that, after the payment of all Taxes attributable to any item of
compensation subject to gross-up under this Agreement by the Corporation, there
remains a balance sufficient to pay the Taxes being reimbursed.

Person

            A "Person" shall mean any individual, corporation, partnership,
group, association or other "person," as such term is used in Paragraph 14(d) of
the Exchange Act, other than the Corporation, any Affiliate or any benefit plan
sponsored by the Corporation or an Affiliate.


                                       8


Potential Change in Control

            A "Potential Change in Control" shall be the first of the following
events to occur:

            (a) the Corporation enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control;

            (b) any Person (including the Corporation) publicly announces an
intention to take or to consider taking actions which, if consummated, would
constitute a Change in Control; or

            (c) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Corporation representing fifteen percent or
more of the combined voting power of the Corporation's then outstanding
securities, increases its beneficial ownership of such securities by one
percentage point or more over the percentage so owned by such Person on the
Effective Date, other than an increase in ownership percentage due to the
payment of dividends by the issuance of additional securities of the
Corporation; or

            (d) the Board adopts a resolution to the effect that, for purposes
of this Agreement, a Potential Change in Control has occurred.

The Board shall not be precluded from adopting a resolution to the effect that,
for purposes of this Agreement, it is the good faith opinion of the Board that a
Potential Change in Control has been abandoned and that a Potential Change in
Control no longer exists.

An event shall not be a Potential Change in Control for purposes of this
Agreement if a Change in Control does not occur within twelve months of such
event.

Successor

            A "Successor" shall mean any Person that succeeds to, or has the
practical ability to control (either immediately or solely with the passage of
time), the Corporation's business directly, by merger, consolidation or other
form of business combination, or indirectly, by purchase of the Corporation's
outstanding securities ordinarily having the right to vote at the election of
directors, all or substantially all of its assets or otherwise.

Taxes

            "Taxes" shall mean the incremental federal, state and local income,
excise and other taxes (including Excise Taxes), penalties and interest payable
by the Executive with respect to any applicable item of income.

Termination Date

            "Termination Date" shall mean: (1) in the case of an employment
termination by the Corporation for Cause or by the Executive for Good Reason,
the date specified as the Executive's last day of employment in the Notice of
Termination, which shall not be less than ten business days after the date such
Notice of Termination is deemed given in accordance with Paragraph 18, or (2) in
any other case, the last day worked by the Executive as reflected on the
Corporation's payroll records. Notwithstanding the foregoing, if the Corporation
terminates the Executive's employment for Cause and the Executive has not
previously expressly agreed in writing to the termination, then within the
thirty day period after the Executive's receipt of the Notice of Termination,
the Executive may notify the Corporation that a dispute exists concerning the
termination, in which event the Termination Date will be the date set either by
mutual written agreement of the parties or by the arbitrators or a court under
the dispute resolution provisions in Paragraph 25. During the pendency of any
such dispute, the Executive will continue to make himself available to provide
services to the Corporation and the Corporation will continue to pay the
Executive his full compensation and benefits in effect immediately prior to the
date on which the Notice of Termination is given (without regard to any changes
to such compensation or benefits which constitute Good Reason) and until the
dispute is resolved in accordance with Paragraph 25. The Executive will be
entitled to retain the full amount of any such compensation and benefits without
regard to the resolution of the dispute unless the arbitrators or judge
decide(s) that the Executive's claim of a dispute was frivolous or advanced by
the Executive in bad faith.


                                       9

EX-10.6.5A

                                                                 EXHIBIT 10.6.5A


            THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT ("First Amendment") is
made this first day of October, 2001 (the "Effective Date"), by and between
Sheffield Pharmaceuticals, Inc. (the "Corporation") and Scott A. Hoffmann (the
"Executive").

            WHEREAS, the Compensation Committee of the Board of Directors has
determined that a possibility of a Change in Control of the Corporation exists
and appropriate steps should be taken to reinforce and encourage the continued
attention and dedication of certain management to their assigned duties.

            NOW, THEREFORE, in consideration of the covenants and agreements
contained herein, intending to be legally bound, the Corporation and Executive
hereby agree, effective as of the Effective Date, as follows:

8.   Paragraph 3 of the Employment Agreement by and between the Corporation and
     Executive dated November 16, 1998 (the "Employment Agreement") is hereby
     amended by deleting the third sentence in its entirety and adding to the
     second sentence the following:

            "; provided that, no such notice by the Corporation shall be
            effective and the term of this Agreement shall be extended for an
            additional year if a Potential Change in Control shall have occurred
            or occurs at any time prior to the date of such notice or within the
            twelve month period beginning on the date of such notice. Further,
            if a Change in Control shall have occurred at any time during the
            term of this Agreement, then notwithstanding any provision hereof to
            the contrary, the term shall continue in effect for: (i) the
            remainder of the month in which the Change in Control occurred, and
            (ii) a term of twenty-four months beyond the month in which such
            Change in Control occurred; provided that, if any obligations of the
            Corporation hereunder shall not have been fully and finally
            discharged at the end of such twenty-four month period, the term
            shall continue until such obligations shall have been finally
            discharged in full. The period commencing on the earlier of a
            Potential Change in Control (if applicable) or Change in Control and
            ending with the conclusion of such twenty-four month period shall be
            referred to hereinafter as the "Protection Period."

9.   Paragraph 12(c) of the Employment Agreement is hereby deleted in its
     entirety.

10.  Paragraph 14 of the Employment Agreement is hereby amended by deleting
     Paragraph 14 in its entirety and replacing it with the following:

                        "14. Termination for Cause. The Corporation may at any
time upon written notice to Executive terminate Executive's employment for
Cause. For purposes of this Agreement, the following shall constitute Cause: (a)
the Executive's gross misconduct which is materially and demonstrably injurious
to the Corporation; (b) the Executive's willful and continued failure to perform
substantially his duties with the Corporation (other than a failure resulting
from the Executive's incapacity due to bodily injury or physical or mental
illness) after a demand for substantial performance is delivered to the
Executive by the Board which specifically identifies the manner in which the
Board believes that the Executive has not substantially performed his duties and
provides for a reasonable period of time within which the Executive may take
corrective measures; or (c) the Executive's conviction (including a plea of nolo
contendere) of willfully engaging in illegal conduct constituting a felony or a
gross misdemeanor involving an intentional act of fraud, misrepresentation,
theft, embezzlement or dishonesty under federal or state law (or comparable
illegal conduct under the laws of any foreign jurisdiction) which is materially
and demonstrably injurious to the Corporation or which impairs the Executive's
ability to perform substantially his duties with the Corporation. An act or
failure to act will be considered "gross" or "willful" for this purpose only if
done, or omitted to be done, by the Executive in bad faith and without
reasonable belief that it was in, or not opposed to, the best interests of the
Corporation. Any act, or failure to act, based upon authority given pursuant to
a resolution duly adopted by the Board or governing body of the Corporation (or
a committee thereof) or based upon the advice of counsel for the Corporation
will be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Corporation.
Executive's attention to matters not directly related to the business of the
Corporation will not provide a basis for termination for Cause so long as the
Board did not expressly disapprove in writing of his engagement in such
activities either before or within a reasonable period of time after the Board
knew or could reasonably have known that the Executive engaged in those
activities. Notwithstanding the


                                        1


foregoing, the Executive may not be terminated for Cause unless and until there
has been delivered to Executive a copy of a resolution duly adopted by the
affirmative vote of not less than two-thirds of the entire membership of the
Board (excluding such Executive) at a meeting of the Board called and held for
such purpose (after reasonable notice to such Executive and an opportunity for
such Executive, together with his counsel, to be heard before the Board),
finding that in the good faith opinion of the Board such Executive engaged in
the conduct set forth in paragraphs (a), (b) or (c) above and specifying the
particulars thereof in detail."

11.  Paragraph 21 of the Employment Agreement is hereby amended by adding to the
     end of the first sentence the following:

            "and the Corporation hereby irrevocably consents to the jurisdiction
            of the federal and state courts sitting in the State of Missouri for
            purposes of enforcing this Agreement."

12.  Paragraph 26 of the Employment Agreement is hereby amended by deleting
     Paragraph 26 in its entirety and replacing it with the following:

                        "26. Disputes. (a) If the Executive so elects, any
dispute, controversy or claim arising under or in connection with this Agreement
will be settled exclusively by binding arbitration in St. Louis, Missouri in
accordance with the Employee Benefit Plan Claims Arbitration Rules of the
American Arbitration Association, incorporated by referenced herein. Judgment
may be entered on the arbitrator's award in any court having jurisdiction;
provided that, the Executive may seek specific performance of his right to
receive benefits until the Termination Date during the pendency of any dispute
or controversy arising under or in connection with this Agreement.

                        (b) If the Executive does not elect arbitration to
resolve a dispute, claim or controversy, he may pursue all other available legal
remedies.

                        (c) Any review by an arbitrator or a court of competent
jurisdiction of a decision made by the Board at any time after a Change in
Control shall be de novo, and any such Board determination shall not be entitled
to deference.

                        (d) The Corporation will not assert in any dispute or
controversy with the Executive arising under or in connection with this
Agreement the Executive's failure to exhaust administrative remedies.

                        (e) In the event of any dispute, claim or controversy
arising out of or in connection with this Agreement, if the Executive prevails
on any of the material issues involved in any such dispute, claim or
controversy, the Corporation shall pay to the Executive immediately upon demand
all reasonable expenses (including without limitation attorneys' fees) incurred
by the Executive in connection therewith.

                        (f) If the Corporation refuses or otherwise fails to
make a payment when due under this Agreement and it is ultimately determined
that the Executive is entitled to such payment, such payment shall be increased
to reflect an interest factor, compounded annually, equal to the prime rate in
effect as of the date the payment was first due plus five points. For this
purpose, the prime rate shall be based on the rate identified by Chase Manhattan
Bank as its prime rate in New York City."

13.  The Employment Agreement is further amended by adding the following as new
     Paragraphs 27 through 32:

                        "27. Definitions. For purposes of this Agreement, the
capitalized terms set forth herein and not otherwise defined shall have the
meanings set forth in Appendix A attached hereto which shall have the same force
and effect as if included as a Paragraph in this Amendment and shall apply when
interpreting the terms of this Agreement.

                        28. Termination Employment in Connection with a Change
in Control.

                            (a) Eligibility. If the Executive's employment is
terminated during the Protection Period either: (i) by the Corporation without
Cause, or (ii) by the Executive for Good Reason, the Corporation will provide


                                        2


the Executive with the payments and benefits set forth in Paragraph 29 below
(collectively, the "Enhanced Severance Benefits"), accelerated vesting and
exercisability of stock based compensation under Paragraph 30 and a Gross-Up
Payment for "Excise Tax" (as defined in Paragraph 31) under Paragraph 31. If the
Executive terminates employment with the Corporation under any other
circumstances, he shall not be entitled to Enhanced Severance Benefits under
Paragraph 29, but may be entitled to (c) benefits under Paragraph 12 hereunder,
and (d) accelerated vesting and exercisability of stock based compensation under
Paragraph 30 and a Gross-Up Payment for Excise Tax under Paragraph 31 by
remaining employed with the Corporation as of a Change in Control. In no event
shall Executive be entitled to Enhanced Severance Benefits under Paragraph 29
and to benefits under Paragraph 12.

                            (b) Process for Termination of Employment. During
the Protection Period, any termination of the Executive's employment by the
Executive for Good Reason or by the Corporation for Cause shall be communicated
by written Notice of Termination from the party terminating employment hereunder
to the other party hereto in accordance with Paragraph 18. A "Notice of
Termination" shall mean, for purposes of this Agreement, a written notice given
in good faith and with a reasonable belief that Good Reason or Cause, as the
case may be, has occurred, which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated. Any Notice of
Termination must specify a Termination Date and any Notice of Termination for
Cause shall include a copy of the relevant resolution of the Board action taken
in accordance with the terms of this Agreement to terminate the Executive's
employment for Cause.

                            (c) Compensation and Benefits before Termination
Date. During the period beginning on the date the Executive or the Corporation,
as the case may be, receives Notice of Termination and ending on the Termination
Date, the Corporation will continue to pay the Executive his Base Pay and cause
his continued participation in all Benefit Plans in accordance with the terms of
such Benefit Plans.

                            (d) Rights Under Other Plans, Policies, Practices
and Agreements. Other than to the extent expressly provided herein, this
Agreement does not supersede any other plans, policies, and/or practices of the
Corporation. To the extent that any provision of any Benefit Plan limits,
qualifies or is inconsistent with any of the benefits provided under this
Agreement, then, for purposes of this Agreement, while such other Benefit Plans
remains in force, the provisions of this Agreement will control and such
provision of such other Benefit Plan will be deemed to have been superseded and
to be of no force or effect, as if such other agreement had been formally
amended to the extent necessary to accomplish such purpose. Nothing in this
Agreement prevents or limits the Executive's continuing or future participation
in any Benefit Plan provided by the Corporation and nothing in this Agreement
limits or otherwise affects the rights the Executive may have under any Benefit
Plans with the Corporation. Amounts that are vested benefits or which the
Executive is otherwise entitled to receive under any Benefit Plan with the
Corporation at or subsequent to the Termination Date will be payable in
accordance with such Benefit Plan.

         29. Enhanced Severance Benefits.

             (a) Cash Payment. The Executive will be entitled to a cash payment
equal to one and one-half (1.5) times Base Pay (disregarding any change in Base
Pay that constitutes Good Reason). The benefit provided under this Paragraph
29(a) will be distributed in a single lump sum within ten business days after
the Termination Date or, if later, within ten business days following the
effective date of the Change in Control.

             (b) Continuation of Certain Welfare Benefits.

                 (i) During the period described in Paragraph 29(b)(ii) below,
the Corporation will maintain, or continue to reimburse or pay on behalf of the
Executive, as the case may be, medical, dental and life insurance plans which by
their terms cover the Executive and his family members and dependents under the
same terms and at the same cost to the Executive and his family members and
dependents as similarly situated executives who continue to be employed by the
Corporation (without regard to any reduction in such benefits that constitutes
Good Reason). The continuation period under applicable federal and state
continuation laws will begin to run from the date on which coverage under this
Paragraph ends.

                 (ii) For purposes of Paragraph 29(b)(i) above, the continuation
period with respect to any particular plan is the period beginning on the
Termination Date and ending on the earlier of: (x) the last day


                                        3

of the twelfth month that begins after the Termination Date, (y) the date after
Termination Date on which the Executive first becomes eligible to participate in
the plan of another employer providing comparable benefits to the Executive and
his eligible family members and dependents which plan does not contain any
exclusion or limitation with respect to any pre-existing condition of the
Executive or any eligible family member or dependent who would otherwise be
covered under the Corporation's plan but for this clause (y), or (z) the date of
the Executive's death.

                 (iii) To the extent the Executive incurs a liability for Taxes
in connection with a benefit provided pursuant to Paragraph 29(b) which he would
not have incurred had he been an active employee of the Corporation
participating in one of the Corporation's Benefit Plans, the Corporation shall
make a Gross-Up Payment for any such Taxes to the Executive. For purposes of
applying the foregoing, the Executive's tax rate will be deemed to be the
highest statutory marginal state and federal tax rate (on a combined basis) then
in effect. The payment pursuant to this subparagraph will be made within ten
days after the Executive's remittal of a written request therefor, accompanied
by a statement indicating the basis for and amount of the liability.

             (c) Extended Exercise Period for Stock Options. Any stock options
issued by the Corporation and held by the Executive shall remain exercisable
until thirty-six months following the Termination Date, but in no event beyond
the stock option's maximum exercise period (without regard to any provisions
that shortens the exercise period in connection with termination of employment
or otherwise).

         30. Accelerated Vesting and Exercisability. If a Change in Control
occurs while the Executive is employed by the Corporation or after the Executive
has terminated employment with the Corporation under circumstances entitling him
to Enhanced Severance Benefits, (a) all stock options previously granted to the
Executive by the Corporation shall become fully vested and exercisable as of the
date of the Change in Control, whether or not otherwise exercisable and vested
as of that date, and (b) shares of restricted Corporation stock previously
awarded to the Executive shall become fully vested.

         31. Excise Tax Equalization. The Corporation will cause its independent
auditors promptly to review, at the Corporation's sole expense, the
applicability of Paragraph 4999 of the Code to any payment or distribution of
any type by the Corporation or its Affiliates to or for the benefit of the
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement, any Benefit Plan or otherwise (the "Total
Payments"). The Corporation shall engage the auditor so that its review is
completed no later than the Change in Control. If the auditor determines that
the Total Payments result in an excise tax imposed by Paragraph 4999 of the Code
or any comparable state or local law, or any interest or penalties with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are collectively referred to as the "Excise Tax") and if the
Executive is entitled to Enhanced Severance Benefits or accelerated vesting or
exercisability of equity compensation under Paragraph 30, or both, the
Corporation shall make a Gross-Up Payment for any Excise Taxes to the Executive
within ten business days after the Termination Date, but in no event later than
the due date for the payments of any excise tax. For purposes of the foregoing
determination, the Executive's tax rate will be deemed to be the highest
statutory marginal state and federal tax rate (on a combined basis) then in
effect. If any tax authority determines that a greater Excise Tax should be
imposed upon the Total Payments than is determined by the Corporation's
independent auditors pursuant to this Paragraph 31, the Executive is entitled to
receive from the Corporation the full Gross-Up Payment calculated on the basis
of the amount of Excise Tax determined to be payable by such tax authority
within ten business days after he notifies the Corporation of such
determination.

         32. Miscellaneous.

             (a) Successors and Assigns.

                 (i) The Corporation will require any Successor to expressly
assume and agree to perform the obligations of this Agreement in the same manner
and to the same extent that the Corporation would be required to perform if no
such succession had taken place except as specifically required to the contrary
hereunder. Failure of the Corporation to obtain such assumption and agreement at
least three business days prior to the time a Person becomes a Successor (or
where the Corporation does not have at least three business days' advance notice
that a Person may become a Successor, within one business day after having
notice that such Person may become or has become a Successor) will constitute
Good Reason for termination of the Executive's employment. The date on which any
such succession becomes effective will be deemed the Termination Date and Notice
of Termination will be deemed to have been timely given by the Executive. A
Successor has no rights, authority or power with respect to this Agreement prior
to a Change in Control.


                                        4


                 (ii) This Agreement is for the benefit of, and is enforceable
by, the Executive, his personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees; provided
that, the Executive may not otherwise assign any of his rights or delegate any
of his obligations under this Agreement. If the Executive dies after becoming
entitled to, but before receiving, any amounts payable under this Agreement, all
such amounts, unless otherwise specifically provided to the contrary in this
Agreement, will be paid in accordance with the terms of this Agreement to the
Executive's devisee, legatee or other designee or, if there be no such designee,
to the Executive's estate.

             (b) No Mitigation or Set-Off. The Executive will not be required to
mitigate the amount of any benefits the Corporation becomes obligated to provide
in connection with this Agreement by seeking other employment or otherwise. The
Corporation has no right to set-off benefits owed under this Agreement against
amounts owed or claimed to be owed by the Executive to the Corporation under
this Agreement or otherwise.

             (c) Taxes. All benefits to be provided to the Executive in
connection with the this Agreement will be subject to required withholding of
federal, state and local income, excise and employment-related taxes.

             (d) Survival. The respective obligations of, and benefits afforded
to, the Corporation and the Executive which, by their express terms or clear
meaning, survive termination of the Executive's employment with the Corporation
or termination of this Agreement, as the case may be, will remain in full force
and effect according to their terms notwithstanding the termination of the
Executive's employment with the Corporation or termination of this Agreement, as
the case may be.

             (e) Benefits as Eligible Compensation under Other Benefit Plans.
Unless otherwise expressly provided therein, benefits paid or payable under this
Agreement will not be deemed to be salary or compensation for purposes of
determining the benefits to which the Executive may be entitled under any other
Benefit Plan sponsored, maintained or contributed to by the Corporation."

14.  Except as amended as set forth in this First Amendment, the Employment
     Agreement shall remain in full force and effect in accordance with its
     terms.


            IN WITNESS WHEREOF, this First Amendment has been executed by the
Corporation, by its duly authorized representative, and by Executive, as of the
Effective Date.

EXECUTIVE                                       CORPORATION


/s/ Scott A. Hoffmann                           /s/ Loren G. Peterson
- ------------------------------                  -----------------------------
                                                By: Loren G. Peterson
                                                Title: President and CEO



                                       5


                                   APPENDIX A

                                   DEFINITIONS


Whenever the following capitalized terms are used in the Agreement, they shall
have the meaning specified below.

Affiliate

            "Affiliate" shall mean: (a) any corporation at least a majority of
whose outstanding securities ordinarily having the right to vote at elections of
directors is owned directly or indirectly by the Corporation; or (b) any other
form of business entity in which the Corporation, by virtue of a direct or
indirect ownership interest, has the right to elect a majority of the members of
such entity's governing body.

Base Pay

            "Base Pay" shall mean the Executive's base salary at the highest
annual rate in effect immediately prior to the Change in Control or at the time
Notice of Termination is given, whichever is greater, disregarding any decrease
which constitutes Good Reason for the Executive's termination of employment.
Base Pay includes only regular cash salary and wages and is determined before
any reduction for deferrals pursuant to any nonqualified deferred compensation
plan or arrangement, qualified cash or deferred arrangement or cafeteria plan.

Beneficial Owner

            "Beneficial Owner" shall have the meaning ascribed to such term in
Rule 13d-3 of the General Rules and Regulations under the Exchange Act.

Benefit Plan

            "Benefit Plan" is (a) employee benefit plan as defined in Paragraph
3(3) of ERISA, (b) a cafeteria plan described in Paragraph 125 of the Code, (c)
a plan, policy or practice providing for paid vacation, other paid time off or
short- or long-term profit sharing, bonus or incentive payments, or (d) stock
option, stock purchase, restricted stock, phantom stock, stock appreciation
right or other equity-based compensation plan that is sponsored, maintained or
contributed to by the Corporation or its Affiliates for the benefit of employees
(and/or their families and dependents) generally or the Executive (and/or the
Executive's family and dependents) in particular.

Board

            "Board" is the board of directors of the Corporation duly qualified
and acting at the time in question. On and after the date of a Change in
Control, any duty of the Board in connection with this Agreement is
non-delegable and any attempt by the Board to delegate any such duty is
ineffective.

Change in Control

            A "Change in Control" shall mean the first of the following events
to occur:

            (a) Any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Corporation representing at least thirty
percent or, in the case of Elan Corporation and its Affiliates in the aggregate
(collectively, the "Elan Group"), at least fifty percent, of the combined voting
power of the Corporation's then outstanding securities;

            (b) During any twenty-four month consecutive period beginning on or
after October 1, 2001, individuals who at the beginning of such period
constituted a majority of the Board of Directors cease for any reason during any
day during any such period to constitute a majority thereof; provided, however,
that any director who is not in office at the beginning of such twenty-four
month period, but whose election by the Board or whose nomination for election
by the Company's shareholders was to fill a vacancy caused by death or
retirement and was


                                       6


approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of such period or whose election or
nomination for election was previously so approved shall be deemed to have been
in office at the beginning of such period for purposes of this definition;

            (c) the stockholders of the Corporation approve a merger or
consolidation of the Corporation with any other Corporation or agreement of
exchange involving the Corporation ("Merger"), other than (1) a Merger which
would result in the voting securities of the Corporation outstanding as of
October 1, 2001 continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) more than fifty
percent of the combined voting power of the voting securities of the Corporation
or such surviving entity outstanding immediately after the Merger, or (2) a
Merger effected to implement a recapitalization of the Corporation (or similar
transaction) in which no Person acquires thirty percent or more, or in the case
of Elan Group in the aggregate, fifty percent or more, of the combined voting
power of the Corporation's then outstanding securities; or

            (d) the stockholders of the Corporation approve a plan of complete
liquidation of the Corporation or an agreement for the sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) or
disposition by the Corporation of all or substantially all of the Corporation's
assets.

Code

            "Code" shall mean the Internal Revenue Code of 1986, as amended. Any
reference to a specific provision of the Code includes a reference to such
provision as it may be amended from time to time and to any successor provision.

Effective Date

            "Effective Date" shall mean the Effective Date of the First
Amendment.

ERISA

            "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended. Any reference to a specific provision of ERISA includes a
reference to such provision as it may be amended from time to time and to any
successor provision.

Exchange Act

            The "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended. Any reference to a specific provision of the Exchange Act or to any
rule or regulation thereunder includes a reference to such provision as it may
be amended from time to time and to any successor provision.

Good Reason

            "Good Reason" shall mean the occurrence of one or more of the
following events (regardless of whether any other reason, other than Cause, for
such termination exists or has occurred, including without limitation other
employment):

            (a) failure to elect or reelect or otherwise maintain the Executive
in the offices or positions that the Executive held immediately prior to the
Change in Control;

            (b) a change in the nature or scope of the authorities, powers,
functions, duties or responsibilities attached to the position with the
Corporation that the Executive held immediately prior to the Change in Control,
as reasonably determined by the Executive;

            (c) a reduction by the Corporation in the Executive's Base Pay or an
adverse change in the form or timing of the payment thereof, as in effect
immediately prior to the Potential Change in Control or as thereafter increased;


                                       7


            (d) the failure by the Corporation to cover the Executive under
Benefit Plans that, in the aggregate, provide substantially similar benefits to
the Executive and/or his family and dependents at a substantially similar total
cost to the Executive (e.g., premiums, deductibles, co-pays, out of pocket
maximums, required contributions, Taxes and the like) relative to the highest
benefits and lowest total costs under the Benefit Plans in which the Executive
(and/or his family or dependents) is participating at any time during the period
between the Potential Change in Control and the Change in Control;

            (e) the Corporation's requiring the Executive to be based more than
fifty miles from where his office is located immediately prior to the Change in
Control, except for required travel on the Corporation's business, and then only
to the extent substantially consistent with the business travel obligations
which the Executive undertook on behalf of the Corporation during the ninety day
period ending on the date of the Potential Change in Control (without regard to
travel related to or in anticipation of the Change in Control);

            (f) the failure of the Corporation to obtain from any Successor the
assent to this Agreement as required under Paragraph 32(a)(i);

            (g) any purported termination by the Corporation of the Executive's
employment which is not properly effected pursuant to a Notice of Termination
and pursuant to any other requirements of this Agreement and, for purposes of
this Agreement, no such purported termination will be effective; or

            (h) any refusal by the Corporation to continue to allow the
Executive to attend to matters or engage in activities not directly related to
the business of the Corporation which, at any time prior to the Potential Change
in Control, the Executive was not expressly prohibited by the Corporation from
attending to or engaging in.

The Executive's continued employment does not constitute consent to, or waiver
of any rights arising in connection with, any circumstance constituting Good
Reason. Notwithstanding the foregoing, the occurrence of an event that would
otherwise constitute Good Reason hereunder shall cease to be an event
constituting Good Reason if the Executive does not provide a Notice of
Termination to the Corporation within one hundred eighty days of the date that
the Executive first becomes aware of the occurrence of such event. Termination
by the Executive of his employment for Good Reason as defined hereunder will
constitute Good Reason for all purposes of this Agreement, even if the Executive
may also thereby be deemed to have "retired" under any applicable retirement
programs of the Corporation.

Gross-Up Payment

            "Gross-Up Payment" shall mean an amount payable to the Executive
such that, after the payment of all Taxes attributable to any item of
compensation subject to gross-up under this Agreement by the Corporation, there
remains a balance sufficient to pay the Taxes being reimbursed.

Person

            A "Person" shall mean any individual, corporation, partnership,
group, association or other "person," as such term is used in Paragraph 14(d) of
the Exchange Act, other than the Corporation, any Affiliate or any benefit plan
sponsored by the Corporation or an Affiliate.


                                       8


Potential Change in Control

            A "Potential Change in Control" shall be the first of the following
events to occur:

            (a) the Corporation enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control;

            (b) any Person (including the Corporation) publicly announces an
intention to take or to consider taking actions which, if consummated, would
constitute a Change in Control; or

            (c) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Corporation representing fifteen percent or
more of the combined voting power of the Corporation's then outstanding
securities, increases its beneficial ownership of such securities by one
percentage point or more over the percentage so owned by such Person on the
Effective Date, other than an increase in ownership percentage due to the
payment of dividends by the issuance of additional securities of the
Corporation; or

            (d) the Board adopts a resolution to the effect that, for purposes
of this Agreement, a Potential Change in Control has occurred

The Board shall not be precluded from adopting a resolution to the effect that,
for purposes of this Agreement, it is the good faith opinion of the Board that a
Potential Change in Control has been abandoned and that a Potential Change in
Control no longer exists.

An event shall not be a Potential Change in Control for purposes of this
Agreement if a Change in Control does not occur within twelve months of such
event.

Successor

            A "Successor" shall mean any Person that succeeds to, or has the
practical ability to control (either immediately or solely with the passage of
time), the Corporation's business directly, by merger, consolidation or other
form of business combination, or indirectly, by purchase of the Corporation's
outstanding securities ordinarily having the right to vote at the election of
directors, all or substantially all of its assets or otherwise.

Taxes

            "Taxes" shall mean the incremental federal, state and local income,
excise and other taxes (including Excise Taxes), penalties and interest payable
by the Executive with respect to any applicable item of income.

Termination Date

            "Termination Date" shall mean: (1) in the case of an employment
termination by the Corporation for Cause or by the Executive for Good Reason,
the date specified as the Executive's last day of employment in the Notice of
Termination, which shall not be less than ten business days after the date such
Notice of Termination is deemed given in accordance with Paragraph 18, or (2) in
any other case, the last day worked by the Executive as reflected on the
Corporation's payroll records. Notwithstanding the foregoing, if the Corporation
terminates the Executive's employment for Cause and the Executive has not
previously expressly agreed in writing to the termination, then within the
thirty day period after the Executive's receipt of the Notice of Termination,
the Executive may notify the Corporation that a dispute exists concerning the
termination, in which event the Termination Date will be the date set either by
mutual written agreement of the parties or by the arbitrators or a court under
the dispute resolution provisions in Paragraph 26. During the pendency of any
such dispute, the Executive will continue to make himself available to provide
services to the Corporation and the Corporation will continue to pay the
Executive his full compensation and benefits in effect immediately prior to the
date on which the Notice of Termination is given (without regard to any changes
to such compensation or benefits which constitute Good Reason) and until the
dispute is resolved in accordance with Paragraph 26. The Executive will be
entitled to retain the full amount of any such compensation and benefits without
regard to the resolution of the dispute unless the arbitrators or judge
decide(s) that the Executive's claim of a dispute was frivolous or advanced by
the Executive in bad faith.


                                       9

EX-10.6.6

                                                                 EXHIBIT 10.6.6

                              EMPLOYMENT AGREEMENT

            AGREEMENT made as of the 3rd day of August, 1998, by and between
Sheffield Pharmaceuticals, Inc., a Delaware corporation (the "Corporation"), and
Thomas A. Armer, who currently resides at 5619 Overbrook, Ann Arbor, MI 48105
("Employee").

                                   WITNESSETH:

            WHEREAS, in July 1998, the Corporation, through a wholly-owned
subsidiary acquired from Aeroquip Corporation certain intellectual property
relating to an aerosol enhancement technology (the ADDS Technology");

            WHEREAS, Employee was employed by Aeroquip Corporation in the
development of the ADDS Technology;

            WHEREAS, the Corporation desires to employ and retain Employee as
Vice President - Pulmonary Delivery Systems. upon the terms and subject to the
conditions of this Agreement;
and

            NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto agree as follows:

            1. Employment of Employee. The Corporation hereby employs Employee
as Vice President - Pulmonary Delivery Systems to perform the duties and
responsibilities incidental to such office, subject at all times to the control
and direction of the Board of Directors of the Corporation.

            2. Acceptance of Employment; Time and Attention, Etc. (a) Employee
hereby accepts such employment and agrees that throughout the period of his
employment hereunder, except as hereinafter provided, he will devote his full
business and professional time in utilizing his business and professional
expertise, with proper attention, knowledge and skills faithfully, diligently
and to the best of his ability in furtherance of the business of the Corporation
and its subsidiaries and will perform the duties assigned to his pursuant to
Paragraph 1 hereof. As Vice President - Pulmonary Delivery Systems, Employee
shall also perform such specific duties and shall exercise such specific
authority related to the business and operations of the Corporation and its
subsidiaries as may be reasonably assigned to Employee from time to time by the
Chief Executive Officer or his designee.

            (b) Employee shall at all times be subject to, observe and carry out
such rules, regulations, policies, directions and restrictions as the Board of
Directors of the Corporation shall from time to time establish. During the
period of his employment hereunder, Employee shall not, directly or indirectly,
accept employment or compensation from, or perform services of any nature for,
any business enterprise other than the Corporation and its subsidiaries.
Notwithstanding the foregoing in this Paragraph 2, Employee shall not be
precluded from engaging in recreational, educational (including, but not limited
to, teaching or attending educational classes, seminars or other educational
endeavors) and other activities, which activities do not materially interfere
with his duties hereunder and shall occur during vacations, holidays and other
periods outside of business hours.

            3. Term. Except as otherwise provided herein, the term of Employee's
employment hereunder shall commence on the date hereof and shall continue to and
including July 31, 2000. Unless terminated earlier in accordance with the terms
hereof, this Agreement shall automatically be extended for one or more
additional consecutive one year terms unless either party notifies the other
party in writing at least 60 days before the end of the then current term
(including the initial term) of its or his desire to terminate this Agreement.
The last day of the term of this Agreement pursuant to this Paragraph 3
(including any early termination pursuant to the terms hereof) is referred to
herein as the "Termination Date."

            4. Compensation. (a) As compensation for his services hereunder, the
Corporation shall pay to Employee (i) a base annual salary at the rate of
$120,000, payable in equal installments in accordance with the normal payroll
practices of the Corporation but in no event less frequently than semi-monthly,
and (ii) such bonuses based on performance criteria relating to the development
of the Corporation's pulmonary development program as may he agreed to between
the Employee and the Corporation. All compensation paid to Employee shall be
subject to withholding and other employment taxes imposed by applicable law.


                                       1


            (b) During the period of Employee's employment hereunder, Employee
shall not be entitled to any additional compensation (other than as to stock
options granted pursuant to this Agreement) for rendering employment services to
subsidiaries of the Corporation or for serving in any office of the Corporation
or any of its subsidiaries to which he is elected or appointed.

            5. Stock Options. (a) As additional compensation for his services
hereunder, the Corporation shall grant to Employee an option to acquire a total
of 125,000 shares of Sheffield Pharmaceuticals, Inc. common stock at an exercise
price per share equal to the closing sale price of the Corporation's common
stock as reported by the American Stock Exchange on the date hereof, with the
terms of such option to be evidenced by an option letter agreement in the form
annexed as Exhibit "A" hereto.

            (b) On the date that the Corporation receives market approval from
the U.S. Food and Drug Administration (FDA) for its initial product based on the
ADDS Technology (the "Market Approval Date"), the Corporation shall grant to
Employee an option to acquire an additional 40,000 shares of Sheffield
Pharmaceuticals, Inc. common stock, with the terms of such option to be
evidenced by an option letter agreement in the form annexed as Exhibit "A"
containing such modification to such form as are set forth in the following
sentence. Such option shall (i) have an exercise price per share equal to the
closing sale price of the Corporation's common stock as reported by the American
Stock Exchange (or another exchange that constitutes the principal exchange for
the Corporation's common stock) on the Market Approval Date, (ii) be first
exercisable on the first anniversary of the Market Approval Date and (iii)
expire on the fifth anniversary of the Market Approval Date. "ADDS Technology"
means the aerosol enhancing technology purchased by the Corporation from
Aeroquip Corporation.

            6. Additional Benefits; Vacation. (a) In addition to such base
salary, Employee shall receive and be entitled to participate, to the extent he
is eligible under the terms and conditions thereof, in any profit sharing,
pension, retirement, hospitalization, disability, medical service, insurance or
other employee benefit plan generally available to employees of the Corporation
that may be in effect from time to time during the period of Employee's
employment hereunder.

            (b) Employee shall be entitled to two (2) weeks' paid vacation in
respect of each 12-month period during the term of his employment hereunder,
such vacation to be taken at times mutually agreeable to Employee and the Chief
Executive Officer or his designee.

            (c) Employee shall be entitled to recognize as holidays all days
recognized as such by the Corporation.

            7. Reimbursement of Expenses. The Corporation shall reimburse
Employee in accordance with applicable policies of the Corporation for all
expenses reasonably incurred by his in connection with the performance of his
duties hereunder and the business of the Corporation, upon the submission to the
Corporation of appropriate receipts or vouchers.

            8. Restrictive Covenant. (a) In consideration of the Corporation's
entering into this Agreement, Employee agrees that during the period of his
employment hereunder and, in the event of termination of this Agreement (i) by
the Corporation upon Employee becoming Disabled (as such term is defined in
Paragraph 13), (ii) by the Corporation for Cause (as that term is defined in
Paragraph 13 hereof) or (iii) by Employee otherwise than for Employer Breach (as
that term is defined in Paragraph 14 hereof), for a further period of six (6)
months thereafter, he will not (x) directly or indirectly own, manage, operate,
join, control, participate in, invest in, whether as an officer, director,
employee, partner, investor or otherwise, any business entity that is engaged in
a directly competitive business (as hereinafter defined) to that of the
Corporation or any of its subsidiaries within the United States of America (or
any of its territories or possessions), any country located in the Caribbean,
the United Kingdom, the Republic of Ireland or Italy, (y) for himself or on
behalf of any other person, partnership, corporation or entity, call on any
customer of the Corporation or any of its subsidiaries for the purpose of
soliciting away, diverting or taking away any customer from the Corporation or
its subsidiaries, or (z) solicit any person then engaged as an employee,
representative, agent, independent contractor or otherwise by the Corporation or
any of its subsidiaries, to terminate his or her relationship with the
Corporation or any of its subsidiaries. For purposes of this Agreement, the term
"directly competitive business" shall mean any business that is then involved in
the research, development, manufacturing or commercialization in any way of any
product, compound, device or method that is or becomes a part of the


                                       2


Corporation's business or the business of any of its subsidiaries during
Employee's employment by the Corporation or any of its subsidiaries, including
such products, compounds, devices, methods or other intellectual property which
constitute the Predisclosed Technologies (as defined in Paragraph 10 below).
Nothing contained in this Agreement shall be deemed to prohibit Employee from
investing his funds in securities of an issuer if the securities of such issuer
are listed for trading on a national securities exchange or are traded in the
over-the-counter market and Employee's holdings therein represent less than 10%
of the total number of shares or principal amount of the securities of such
issuer outstanding.

            (b) Employee acknowledges that the provisions of this Paragraph 8
are reasonable and necessary for the protection of the Corporation, and that
each provision, and the period or periods of time, geographic areas and types
and scope of restrictions on the activities specified herein are, and are
intended to be, divisible. In the event that any provision of this Paragraph 8,
including any sentence, clause or part hereof, shall be deemed contrary to law
or invalid or unenforceable in any respect by a court of competent jurisdiction,
the remaining provisions shall not be affected, but shall, subject to the
discretion of such court, remain in full force and effect.

            9. Confidential Information.

            (a) Employee shall hold in a fiduciary capacity for the benefit of
the Corporation and its subsidiaries all confidential information, knowledge and
data relating to or concerned with its research, development, information and
projects, as well as its operations, sales, business and affairs, and he shall
not, at any time during his employment hereunder and for two years thereafter,
use, disclose or divulge any such information, knowledge or data to any person,
firm or corporation other than to the Corporation and its subsidiaries or their
respective designees or except as may otherwise be reasonably required or
desirable in connection with the business and affairs of the Corporation and its
subsidiaries.

            (b) Notwithstanding anything to the contrary contained herein,
Employee's obligations under Paragraph 9(a) hereof shall not apply to any
information which:

            (i) becomes rightfully known to Employee subsequent or prior to his
            employment by the Corporation;

            (ii) is or becomes available to the public other than as a result of
            wrongful disclosure by Employee;

            (iii) becomes available to Employee subsequent to his employment by
            the Corporation on a confidential basis from a source other than the
            Corporation or its agents which source has a right to disclose such
            information; or

            (iv) results from research and development and/or commercial
            operations at any time by or on behalf of any person, company or
            other entity with which or with whom Employee shall become
            associated (in a manner consistent with the terms of this Agreement)
            subsequent to his employment by the Corporation or its agents
            totally independent from any disclosure from the Corporation or its
            agents.

            (c) Notwithstanding anything to the contrary contained herein, in
the event that Employee becomes legally compelled to disclose any confidential
information, Employee will provide the Corporation with prompt notice so that
the Corporation may seek a protective order or other appropriate remedy. In the
event that such protective order or other remedy is not obtained, Employee shall
furnish only such confidential information which is legally required to be
disclosed.

            10. Intellectual Property/Assignment. (a) Any idea, invention,
design, written material, manual, system, procedure, improvement, development or
discovery conceived, developed, created or made by Employee alone or with
others, during the period of his employment hereunder and applicable to the
business of the Corporation or any of its subsidiaries, whether or not
patentable or registrable, shall become the sole and exclusive property of the
Corporation or such subsidiary. Employee shall disclose the same promptly and
completely to the Corporation and shall, during the period of his employment
hereunder and at any time and from time to time hereafter at no cost to Employee
(i) execute all documents reasonably requested by the Corporation for vesting in
the Corporation or any of its subsidiaries the entire right, title and interest
in and to the same, (ii) execute all documents reasonably requested by the
Corporation for filing and prosecuting such applications for patents,
trademarks, service marks and/or copyrights the Corporation, in its sole
discretion, may desire to prosecute, and (iii) give the Corporation all


                                       3


assistance it reasonably requires, including the giving of testimony in any
suit, action or proceeding, in order to obtain, maintain and protect the
Corporation's right therein and thereto.

(b) The Corporation will consider existing intellectual property developed
collaboratively by Employee, Dr. Nahed Mohsen and Mr. Richard Pavkov and
disclosed to the Corporation prior to employment and set forth in Schedule A
hereto, provided such intellectual property is unencumbered (the "Predisclosed
Technologies"). At the Corporation's discretion, the Corporation may choose to
progress, to patent, and to commercialize any such Predisclosed Technology. Such
technology shall be the property of the Corporation. Employee agrees to execute
all necessary assignments to transfer any of the Predisclosed Technologies to
Corporation ownership. In the event that the Corporation commercializes this
technology, Dr. Armer, Dr. Mohsen, and Mr. Pavkov shall, collectively, be
granted a single royalty of two percent (2%) of the sales or revenue received by
the Corporation for such commercialization and payable for the life of the
applicable patent from the Predisclosed Technologies as a finders fee. The
allocation of the two percent (2%) royalty shall be equally divided amongst
Employee, Dr. Mohsen, and Mr. Pavkov.

            11. Equitable Relief. The parties hereto acknowledge that Employee's
services are unique and that, in the event of a breach or a threatened breach by
Employee of any of his obligations under Paragraphs 8, 9 or 10 this Agreement,
the Corporation shall not have an adequate remedy at law. Accordingly, in the
event of any such breach or threatened breach by Employee, the Corporation shall
be entitled to such equitable and injunctive relief as may be available to
restrain Employee and any business, firm, partnership, individual, corporation
or entity participating in such breach or threatened breach from the violation
of the provisions of Paragraph 8, 9 or 10 hereof. Nothing herein shall be
construed as prohibiting the Corporation from pursuing any other remedies
available at law or in equity for such breach or threatened breach, including
the recovery of damages and the immediate termination of the employment of
Employee hereunder, if and to the extent permitted hereunder.

            12. Termination of Agreement; Termination of Employment; Severance;
Survival. (a) This Agreement and Employee's employment hereunder shall terminate
upon the first to occur of the following: (i) Employee becoming Disabled (as
such term is defined in Paragraph 13); (ii) Employee's death; (iii) termination
of Employee's employment by the Corporation for Cause or pursuant to
subparagraph (b) of this Paragraph 12; (iv) termination of Employee's employment
for Employer Breach; and (v) the termination of this Agreement at the end of the
term of this Agreement on the Termination Date pursuant to Paragraph 3.

            (b) Notwithstanding anything to the contrary contained in this
Agreement, in the event of the termination of the Employee's employment by the
Corporation for any reason (other than for Cause or by reason of Employee
becoming Disabled), Employee shall be paid a severance payment in an amount
equal to $5,000 multiplied by the number of full months that Employee has been
employed by the Corporation prior to such termination, with such amount not to
exceed $60,000, payable in six equal monthly installments, with the first
installment being payable on the date falling two weeks after the date of such
termination and each additional installment being paid every month after such
date until such severance is paid in full.

            (c) Paragraphs 7-12 of this Agreement shall survive the termination
of Employee's employment hereunder, except in the case of termination pursuant
to Paragraph 15. Notwithstanding anything contained in this Agreement to the
contrary, the royalty payable pursuant to Paragraph 10 (b) shall be payable to
Employee regardless of any termination of this Agreement.

            13. Disability. In the event that during the term of his employment
by the Corporation Employee shall become Disabled (as that term is hereinafter
defined) he shall continue to receive the full amount of the base salary to
which he was theretofore entitled for a period of six months after he shall be
deemed to have become Disabled (the "First Disability Payment Period"). If the
First Disability Payment Period shall end prior to the Termination Date,
Employee thereafter shall be entitled to receive salary at an annual rate equal
to 80% of his then current base salary for a further period ending on the
earlier of (i) six months thereafter or (ii) the Termination Date (the "Second
Disability Payment Period"). Upon the expiration of the Second Disability
Payment Period, Employee shall not be entitled to receive any further payments
on account of his base salary until he shall cease to be Disabled and shall have
resumed his duties hereunder and provided that the Corporation shall not have
theretofore terminated this Agreement as hereinafter provided. The Corporation
may terminate Employee's employment hereunder at any time after Employee is
Disabled, upon at least 10 days' prior written notice; provided, however, that
such termination shall not relieve the Corporation from its obligation to make
the payments to Employee described above in this Paragraph 13. For the purposes
of this Agreement, Employee shall be deemed to have become Disabled when (x) by
reason of


                                       4


physical or mental incapacity, Employee is not able to perform his duties
hereunder for a period of 90 consecutive days or for 120 days in any consecutive
180-day period and (y) Employee's physician or a physician designated by the
Corporation shall have determined that it is unlikely that Employee will be
able, by reason of physical or mental incapacity, to perform a substantial
portion of his duties hereunder for the following 120 days. In the event that
Employee shall dispute any determination of his disability pursuant to clauses
(x) or (y) above, the matter shall be resolved by the determination of three
physicians qualified to practice medicine in the United States of America, one
to be selected by each of the Corporation and Employee and the third to be
selected by the designated physicians. If Employee shall receive benefits under
any disability policy maintained by the Corporation, the Corporation shall be
entitled to deduct the amount equal to the benefits so received from base salary
that it otherwise would have been required to pay to Employee as provided above.

            14. Termination for Cause. The Corporation may at any time upon
written notice to Employee terminate Employee's employment for Cause. For
purposes of this Agreement, the following shall constitute Cause: (i) the
willful and repeated failure of Employee to perform any material duties
hereunder or gross negligence of Employee in the performance of such duties, and
if such failure or gross negligence is susceptible to cure by Employee, the
failure to effect such cure within twenty (20) days after written notice of such
failure or gross negligence is given to Employee; (ii) except as permitted
hereunder, unexplained, willful and regular absences of Employee from the
Corporation; (iii) excessive use of alcohol or illegal drugs, interfering with
the performance of Employees duties hereunder; (iv) indictment for a crime of
theft, embezzlement, fraud, misappropriation of funds, other acts of dishonesty
or the violation of any law or ethical rule relating to Employee's employment;
(v) indicted for any other felony or other crime involving moral turpitude by
Employee; or (vi) the breach by Employee of any of the provisions of paragraphs
8, 9 or 10 and if such breach is susceptible of cure by Employee, the failure to
effect such cure within twenty (20) days after written notice of such breach is
given to Employee. For purposes of this Agreement, an action shall be considered
"willful" if it is done intentionally, purposely or knowingly, distinguished
from an act done carelessly, thoughtlessly or inadvertently. In any such event,
Employee shall be entitled to receive his base salary to and including the date
of termination.

            15. Termination for Employer Breach. Employee may upon written
notice to the Corporation terminate this Agreement in the event of the breach by
the Corporation of any material provision of this Agreement, and if such breach
is susceptible of cure, the failure to effect such cure within 20 days after
written notice of such breach is given to the Corporation (an "Employer
Breach"). Employee's right to terminate this Agreement under this Paragraph 14
shall be in addition to any other remedies Employee may have under law or
equity.

            16. Insurance Policies. The Corporation shall have the right from
time to time to purchase, increase, modify or terminate insurance policies on
the life of Employee for the benefit of the Corporation, in such amounts as the
Corporation shall determine in its sole discretion. In connection therewith,
Employee shall, at such time or times and at such place or places as the
Corporation may reasonably direct, submit himself to such physical examinations
and execute and deliver such documents as the Corporation may reasonably deem
necessary or desirable; provided that such examinations shall be performed by,
and that such documents shall be delivered only to, qualified physicians and/or
medical representatives of licensed insurance companies. At Employee's written
request upon the termination of Employee's employment under this Agreement
(other than for Cause or as result of Employee's death), the Corporation shall
assign to Employee the Corporation's interest in such life insurance policies
(to the extent such policies are so assignable by their terms), whereupon
Employee shall assume all obligations of the Corporation in respect thereof.

            17. Entire Agreement; Amendment. This Agreement constitutes the
entire agreement of the parties hereto relating to the subject matter hereof and
any prior agreement between the Corporation and Employee is hereby superseded
and terminated effective immediately and shall be without further force or
effect. No amendment or modification himself shall be valid or binding unless
made in writing and signed by the party against whom enforcement thereof is
sought.

            18. Notices. Any notice required, permitted or desired to be given
pursuant to any of the provisions of this Agreement shall be delivered in person
or sent by responsible overnight delivery service or sent by certified mail,
return receipt requested, postage and fees prepaid, if to the Corporation, at
its address set forth above to the attention of the Corporation's Chief
Executive Officer and, if to Employee, at his address set forth above. Either of
the parties hereto may at any time and from time to time change the address to
which notice shall be sent hereunder by notice to the other party given under
this Paragraph 18. Notices shall be deemed effective upon receipt.


                                       5


            19. No Assignment; Binding Effect. Neither this Agreement, nor the
right to receive any payments hereunder, may be assigned by either party without
the other party's prior written consent. This Agreement shall be binding upon
Employee, his heirs, executors and administrators and upon the Corporation, its
successors and assigns.

            20. Waivers. No course of dealing nor any delay on the part of
either party in exercising any rights hereunder shall operate as a waiver of any
such rights. No waiver of any default or breach of this Agreement shall be
deemed a continuing waiver or a waiver of any other breach or default.

            21. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, except that body of law
relating to choice of laws.

            22. Invalidity. If any clause, paragraph, section or part of this
Agreement shall be held or declared to be void, invalid or illegal, for any
reason, by any court of competent jurisdiction, such provision shall be
ineffective but shall not in any way invalidate or affect any other clause,
paragraph, section or part of this Agreement.

            23. Further Assurances. Each of the parties shall execute such
documents and take such other actions as may be reasonably requested by the
other party to carry out the provisions and purposes of this Agreement in
accordance with its terms.

            24. Headings. The headings contained in this Agreement have been
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.

            25. Publicity. The Corporation and Employee agree that they will not
make any press releases or other announcements prior to or at the time of
execution of this Agreement with respect to the terms contemplated hereby,
except as required by applicable law, without the prior approval of the other
party, which approval will not be unreasonably withheld.

            IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.

                                      SHEFFIELD PHARMACEUTICALS, INC.

                                      BY:  /s/ Carl F. Siekmann
                                           ----------------------------
                                           Name: Carl F. Siekmann
                                           Title: Executive VP


                                      /s/ Thomas A. Armer
                                      ----------------------------------
                                      Thomas A. Armer


                                       6



                                                                   Schedule A to
                                                            Employment Agreement

                              Intellectual Property


                                       7


                              INVENTION DESCRIPTION

                   METHOD AND APPARATUS FOR PRECISELY METERING
                       AND GENERATING DRY POWDER AEROSOLS

HISTORY:

            Carlos Mastrangelo (Univ. of Michigan), Richard Pavkov, Nahed
            Mohsen, June 1997 - request for proposal describes apparatus
            metering and actuation method.

            Nahed Mohsen, Richard Pavkov, Neal Lii, Tom Garver, Tom Armer,
            September 1997 - aerosol generation and actuation method.

            Tom Armer, Nahed Mohsen, December 1997 - method for deposition of
            precisely metered powders.

            Don Frei (Wood, Herron & Evans) and Tom Armer - May 1998,
            prosecution strategy.

DESCRIPTION:

            This invention teaches a method to precisely meter unit-doses of a
dry, powdered compound and to disperse it as an aerosol into an air stream. It
also describes the apparatus and a method to load powdered doses into the
apparatus.

Unit doses are defined as individual powder caches, precisely measured to
contain a specific amount of the powder compound. The amount can range from 5
micrograms up to 500 milligrams. The dose precision ranges from 1 microgram for
the smallest dose size, to 50 micrograms for the largest dose size.

The dry powder is composed of finely disperse compound(s) with median diameters
ranging from 0.5 micron to 20 microns. The powder is loaded into precisely
partitioned cells on a substrate by electrostatic deposition (such as the
commercial system from Delsys). Each cell in the partitioned zones constitutes a
unit dose. The cells are separated from each other by a finite distance or a
physical barrier to avoid overlap and intermixing. For example the partitioned
cells can be an array of cylindrical, rhombohedral, tetrahedral or pyramidal
mounds or bumps. Alternatively they can be rectangular or circular, octagonal,
hexagonal or other polygonal-perimeter walled-cells. The substrate can be a flat
surface or it can be preformed into shallow-walled lattice. The volume of the
partitions and deposit density control the mass of powder in each partition. The
deposit packing density is sufficiently low to minimize irreversible
agglomeration of the powder particles, but high enough to minimize settling.
Ideally the packing density corresponds to a level just at the threshold of the
critical packing fraction characteristic of the powder shape and size
distribution.

One (1) to several thousand cells could be formed on the substrate. The
substrate can be formed into three-dimensional shapes. For example it could be
cylindrical with the cells on the internal surface or on the external surface.
The substrate can be polymer, metallic or compose of silicon, alumina or other
ceramic material. The cells can be etched, pressed, stamped or machined
(optically or mechanically) into the surface. In certain embodiment it may be
desirable to render the substrate porous so that air may flow, under the
influence of an applied pressure gradient, through the cell to aid in evacuating
the deposited powder.

After deposition the cells are sealed with a thin foil of plastic and/or metal.
The foil can be applied by lamination, vapor deposition, gas phase
polymerization or by spraying. The foil serves to protect the powder deposit
from spilling, contamination, and mechanical or environmental disruption due to
the effects of handling, humidity, temperature and exposure to uncontrolled
environments. In preferred embodiments a polymer foil, coated with a vapor
deposited metal can practically package the powder cell array for up to several
years of storage.

Thus the above description discloses a method to precisely meter, package and
store unit doses of powdered compound(s). The method of aerosol actuation and
generation is next described.


                                       8


The partitioned cells and foil covering incorporate features which allow each
partition to be individually opened. For example the foil can be embossed with a
grid of conductors such as aluminum, graphite, nichrome. Alternatively the grid
can be incorporated into the shallow-walled partitions, or into the surface of
the substrate. The grid pattern is correspondent to the perimeters or a portion
or the perimeters of the cells. Electrical current passed selectively through
the grid on the partition perimeters heats sufficiently to melt or degrade the
foil to that the covering disintegrates, melts, or otherwise fails mechanically
to rupture the cell cover. The heating is sufficiently localized to avoid
degradation of the physical, chemical or biological properties of the powder
inside the cell. Simultaneously, a force field is applied to the deposit so that
as the cell ruptures the powder is ejected into the media above the substrate.
This force field can be: an electrostatic field, a mechanical force such as
vibrations from an electromechanical or an acoustic generator, or a convective
gradient such as a fluid flowing through the cell or tangentially above the
cell. The force field is sufficient to disperse the powder into the media
adjacent to the substrate. Thus each cell can individually ruptured and the
contents discharged into the media. The medium into which the cells are
discharged is typically gaseous, but it could be vapor or liquid state fluid.

Multiple partitions could be discharged simultaneously or in a specific
combinatorial sequence. Different compounds can be deposited into different
cells in the same array and discharged in a specific sequence or combination.

ADVANTAGES:

Existing dry powder dispersing technology relies either on a propellant or a
carrier powder to disperse the target compound into a carrier media. The
described invention eliminates the need for the propellant by using
electromechanical or other fluid propulsion mechanisms. This can increase the
precision and consistency of dispersion, while reducing cost, size and
complexity of the dispersing device.

The elimination of the powder carrier increases the dispersion efficiency and
affords more precise control of dose metering and particle size distribution. It
can also eliminate the presence of unnecessary species in the dispersed aerosol.

The partitioning and deposition method provides a highly accurate, pre-metering
system to generate precise dose sizes. It eliminates problems with typical unit
dose packages (e.g. blister packages or capsules) such as retention of powder in
the package, while providing the same packaging and storage stability. The
multiplicity of cells provides the equivalent to a reservoir of powder, but
provides an accuracy of measurement not available in existing reservoir devices.

The ability to discharge cells in specific sequences and combinations enables
the ability to customize dosing quantity and composition, while using a single
apparatus or powder supply.

Because the production of the substrate and filling with powder is comparable to
existing blister or capsule packaging, there should be no cost penalty.


                                       9


                              INVENTION DESCRIPTION

           METHOD AND APPARATUS FOR USING POROUS PLASTICS TO DISPERSE
                        AND DISPENSE DRUGS FOR INHALATION

HISTORY:

Disclosed 2/27/98:   Thomas Armer, Richard Pavkov

DESCRIPTION:

Porous material used to control airflow through a conduit thus creating a
laminar flow across the cross sectional area of a conduit. Due to the nature of
the porous material, it can be molded and machined into numerous shapes allowing
for various air flow boundary conditions, i.e. pipes, baffles, frits, plugs,
etc. Depending on the shape of the material, the air flow boundary, created by
the air moving through the pores, can be used to inhibit deposition on the inner
surfaces of a medical device such as a metered dose inhaler (MDI), dry powder
inhaler (DPI), nebulizer, etc. The airflow through the material can also be used
to displace the momentum of an aerosol burst, such as the bolus of an MDI, to
promote dispersion and/or evaporation.

Description of Material:
Porous plastic consisting of various polymers with a range of pore diameters:

o    High-density polyethylene (HDPE)
            Pore size: 35 - 250um

o    Ultra high molecular weight Polyethylene (UHMW)
            Pore size: 7 - 40um

o    Polypropylene (PP)
            Pore size: 125 - 350um

o    Polyvinylidene fluoride (PVDF)
            Pore size: 25um average size

o    Polytetrafluoroethylene (PTFE)
            Pore size: 25um average size

o    Nylon 6 (N6)
            Pore size: 200um average size

o    Polyethersulfone (PES)
            Pore size: 100um average size

ADVANTAGES:

o    Dispersion of air flow

o    Material creates a boundary of air flow extending from material surface
     thus allowing counteraction of opposing flows

o    Molded plastics shapes

o    Chemical resistant

o    Machinable

o    Low cost

o    Various pore sizes for controlled air flow

o    Minimizes drug deposition due to surface characteristics


                                       10


OTHER APPLICATIONS:

Impregnation of a suitable geometrical shape of the porous plastic with a dry
powder drug, such as albuterol. Impregnated plastic is then loaded into a device
for dispensing of the drug. Once air is pushed or pulled through the porous
plastic the entrapped drug would be carried out by the air flow. Due to the
nature of the porous plastic, the drug dose will dispense as a function of the
porosity, air flow, time of inhalation, and bulk of the material. The most
practical design of this dispensing method would be for single use dosage with a
disposable device. The design embodiment would be that of a pack of cigarettes
in which each single use device is sealed until the desired time of need. This
would be ideal for third world applications (low cost) and for conditions with
high humidity since the devices would be sealed until used.


                                       11


                              INVENTION DESCRIPTION

       A METHOD TO GENERATE DROPLETS OF PRECISE SIZE AND PRECISE EJECTION
                                    VELOCITY

HISTORY:

Nahed Mohsen, Tom Armer, Rich Pavkov, Richard Oeftering, March 1997- discussion
of potential application for acoustic radiation pressure.

Nahed Mohsen, Tom Armer, Rich Pavkov, Richard Oeftering and Dan Demiglio (NASA
Lewis Research Center), June 1997 - Discussion of experimental design and
protocols to generate droplets of insulin.

DESCRIPTION:

This is a disclosure of a method to generate droplets of precise size and
precise ejection velocity.

This invention teaches a method to generate precisely uniform size of droplets
at a controlled velocity. The method uses acoustic radiation pressure to
generate droplets for any liquid medicament. The generator consists of an
acoustic transducer that emits a focused tone burst from below a pool of liquid
directed at the pools' surface. The burst causes the surface to erupt and form a
droplet, which is ejected with an initial velocity. The droplet size can vary
over a wide range, since the generator is nozzleless and is not bound strictly
to a fixed nozzle diameter. The droplet size can be controlled, since it is
proportional to the acoustic wavelength, thus, varying the input frequency
varies the droplet size inversely. The droplet size produced can range from 1um
to 50um. For finer droplet size, multiple transducer may be used. The acoustic
radiation pressure droplet generator can create droplets from liquid solution as
well as from liquid suspension systems without clogging since the generator is
nozzleless. In addition, the particles in the suspension system would cross the
ejection point and would either get ejected along with the liquid or swept a way
from the ejection point, thus creating a self cleaning system.

The droplet generator consists of a piezoelectric transducer mounted on the end
of a buffer rod (sapphire). A spherical focusing lens is positioned at the
opposite end of the rod. The lens of the device is submerged below the surface
of a liquid pool. The transducer generates a high frequency acoustic tone burst
which propagates down the length of the sapphire rod. When it reaches the
opposing end, the acoustic waves encounter a spherical focusing lens that
transmits the acoustic energy into the liquid pool. The lens causes the acoustic
waves to be focused at a small point at the pool surface. The device relies on
the acoustic pressure to propel droplets from a small pool of liquid. The
pressure is greatest in the beam's focal region, particularly, at the pool
surface where the wave reflection occurs. The pressure acts to lift a small
column of liquid which appears initially as a small mound. When enough energy is
applied to overcome the liquid surface tension, the mound becomes a momentary
liquid fountain where each short tone burst emits a single droplet. As one
increases the energy level, the droplets begin to form tails, which then break
off into satellite droplets. Further increases in the energy causes the process
to transition to a continuous fountain.

ADVANTAGES:

The advantages of the acoustic pressure droplet generator:

1.   It produces uniform droplet size distribution,

2.   It produces a wide range of droplet size,

3.   It can control the ejection velocity of the droplets,

4.   It can atomize liquid as well as suspension systems,

5.   It can atomize polypeptides and proteins without any molecular chains
     denaturation,

6.   It does not clog, self cleaning system


                                       12


                                                                    EXHIBIT A TO
                                                            EMPLOYMENT AGREEMENT


                         SHEFFIELD PHARMACEUTICALS, INC.
                               425 WOODSMILL ROAD
                         ST. LOUIS, MISSOURI 63017-3441



                                                      --------------, 1998



To:           [Insert Name & Address
              of Employee]



            At a meeting of the Compensation Committee of the Board of Directors
of Sheffield Pharmaceuticals, Inc. (the "Company") held on July 15, 1998, the
Company authorized the grant to you of an option (the "Option") to purchase
_____________________ (___,000) shares (the "Shares") of Common Stock, par value
$.01 per share, of the Company. The Option is being granted in connection with
your employment by the Company.

            Except as provided below, the option may be exercised at anytime and
from time after ________________, 199__ and on or prior to _______________,
200__ (on which date the Option will, to the extent not previously exercised,
expire).(1) The purchase price per Share payable by you is $______.(2)

Unless at the time of the exercise of the Option a registration statement under
the Securities Act of 1933, as amended (the "Act") , is in effect as to the
Shares, any Shares purchased by you upon the exercise of the Option shall be
acquired for investment and not for sale or distribution, and if the Company so
requests, upon any exercise of the Option, in whole or in part, you will execute
and deliver to the Company a certificate to such effect. The Company shall not
be obligated to issue any Shares pursuant to the Option if, in the opinion of
counsel to the Company, the Shares to be so issued are required to be registered
or otherwise qualified under the Act or under any other applicable statute,
regulation or ordinance affecting the sale of securities, unless and until such
Shares have been so registered or otherwise qualified.

            You understand and acknowledge that, under existing law, unless at
the time of the exercise of the Option a registration statement under the Act is
in effect as to such Shares (i) any Shares purchased by you upon exercise of
this option may be required to be held indefinitely unless such Shares are
subsequently registered under the Act or an exemption from such registration is
available; (ii) any sales of such Shares made in reliance upon Rule 144
promulgated under the Act may be made only in accordance with the terms and
conditions of that Rule (which, under certain circumstances, restrict the number
of shares which may he sold and the manner in which shares may




- ----------
          (1) The first date for exercise shall be the date six months after the
          issuance date of the Option and the last date for exercise shall be
          the fifth anniversary of such issuance date.

          (2) Purchase price shall he the closing price of the Company's common
          stock on the American Stock Exchange as of the date of commencement of
          employment.


                                       13


be sold); (iii) in the case of securities to which Rule 144 is not applicable,
compliance with Regulation A promulgated under the Act or some other disclosure
exemption will be required; (iv) certificates for Shares to be issued to you
hereunder shall bear a legend to the effect that the Shares have not been
registered under the Act and that the Shares may not be sold, hypothecated or
otherwise transferred in the absence of an effective registration statement
under the Act relating thereto or an opinion of counsel satisfactory to the
Company that such registration is not required; and (v) the Company will place
an appropriate "stop transfer" order with its transfer agent with respect to
such Shares. In addition, you understand and-acknowledge that the Company has no
obligation to you to furnish information necessary to enable you to make sales
under Rule 144.

            In the event that the Company shall at any time prior to the
expiration of the Option and prior to the exercise thereof: (i) declare or pay
to the holders of the Common Stock a dividend payable in any kind of shares of
stock of the Company; or (ii) change or divide or otherwise reclassify its
Common Stock into the same or a different number of shares with or without par
value, or into shares of any class or classes; or (iii) consolidate or merge
with, or transfer its property as an entirety or substantially all of its assets
to any other corporation; or (iv) make any distribution of its assets to holders
of its Common Stock as a liquidation, or partial liquidation dividend or by way
of return of capital; then, upon the subsequent exercise of the Option, the
purchase price of the Shares issuable upon the exercise hereof shall be
appropriately adjusted by the Board of Directors of the Company so that you
shall receive for the exercise price, in addition to or in substitution for the
Shares to which you would be entitled upon such exercise, such additional shares
of stock of the Company, or such reclassified shares of stock of the Company, or
such securities or property of the Company resulting from such consolidation or
merger or transfer, of such assets of the Company, which you would have been
entitled to receive had you exercised the Option prior to the happening of any
of the foregoing events.

            In the event that your employment by the Company is terminated for
cause, then the Option shall be immediately canceled upon such termination of
employment and you shall have no further rights with respect to the Option. In
the event that your employment by the Company is terminated for reasons other
than for cause, then you may, during the ninety (90) day period following the
date you cease to be employed by the Company, exercise the Option to the extent
that you were entitled to exercise it at the date of such termination. To the
extent that you were not entitled to exercise the Option at the date of such
termination, or if you do not exercise the Option (to the extent you are
entitled to exercise) within the time specified in this paragraph, the Option
shall terminate.

            The Option (or installment thereof) is to be exercised by delivering
to the Company a written notice of exercise in the form attached hereto as Annex
A, specifying the number of Shares to be purchased, together with payment of the
purchase price of the Shares to be purchased. The purchase price is to be paid
in cash.

            The Option does not confer upon any right whatsoever as a
stockholder of the Company. Your right to exercise the Option shall not
terminate as a result of the termination of your employment by the Company.

            The Option shall be binding upon any successors or assigns of the
Company.

            If the foregoing correctly sets forth our understanding, please
indicate your acceptance by signing this letter in the space provided below.

                                     Very truly yours,

                                     SHEFFIELD PHARMACEUTICALS, INC.

                                     BY:
                                           ------------------------------

                                           Name:
                                           Title:
AGREED TO AND ACCEPTED:

- -------------------------------
[Name of Employee]


                                       14


                                                                       Exhibit A

                             STOCK SUBSCRIPTION FORM

To:     Sheffield Pharmaceuticals, Inc.


Gentlemen:

            I hereby exercise my option to purchase from Sheffield
Pharmaceuticals, Inc. (the "Company"), pursuant to the Stock Option Letter
Agreement between us dated as of _____________, 1998, ______________ shares of
the Company's Common Stock, $.01 par value, and herewith tender payment therefor
at the rate of $_____ per share.

            I represent and warrant that I am acquiring the said shares for my
own account for investment purposes only; that I have no present intention of
selling or otherwise disposing of such shares or any part thereof; that I will
not transfer said shares in violation of the securities laws of the United
States; that I am familiar with the business operations, management and
financial condition and affairs of the Company; that I have not relied upon any
representation of the Company with respect thereto; and that I have the personal
financial means to comply with all of said representations. I further confirm
that I have been advised that said shares will not be registered under the
Securities Act of 1933, as amended, and that I have consulted with and been
advised by counsel as to the restrictions on resale to which said shares will
thereby be subject.

            The form in which I wish my name and address to appear on the
Company stock records is as follows:

                                   Name:
                                        ---------------------------------------

                                   Address:
                                   --------------------------------------------
                                   --------------------------------------------
                                   --------------------------------------------

                                               Very truly yours,

                                               --------------------------------
                                               [Name of Employee]


                                       15

EX-10.6.6A

                                                                 EXHIBIT 10.6.6A


            THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT ("First Amendment") is
made this first day of October, 2001 (the "Effective Date"), by and between
Sheffield Pharmaceuticals, Inc. (the "Corporation") and Thomas A. Armer (the
"Executive").

            WHEREAS, the Compensation Committee of the Board of Directors has
determined that a possibility of a Change in Control of the Corporation exists
and appropriate steps should be taken to reinforce and encourage the continued
attention and dedication of certain management to their assigned duties.

            NOW, THEREFORE, in consideration of the covenants and agreements
contained herein, intending to be legally bound, the Corporation and Executive
hereby agree, effective as of the Effective Date, as follows:

15.  Paragraph 3 of the Employment Agreement by and between the Corporation and
     Executive dated August 3, 1998 (the "Employment Agreement") is hereby
     amended by deleting the third sentence in its entirety and adding to the
     second sentence the following:

            "; provided that, no such notice by the Corporation shall be
            effective and the term of this Agreement shall be extended for an
            additional year if a Potential Change in Control shall have occurred
            or occurs at any time prior to the date of such notice or within the
            twelve month period beginning on the date of such notice. Further,
            if a Change in Control shall have occurred at any time during the
            term of this Agreement, then notwithstanding any provision hereof to
            the contrary, the term shall continue in effect for: (i) the
            remainder of the month in which the Change in Control occurred, and
            (ii) a term of twenty-four months beyond the month in which such
            Change in Control occurred; provided that, if any obligations of the
            Corporation hereunder shall not have been fully and finally
            discharged at the end of such twenty-four month period, the term
            shall continue until such obligations shall have been finally
            discharged in full. The period commencing on the earlier of a
            Potential Change in Control (if applicable) or Change in Control and
            ending with the conclusion of such twenty-four month period shall be
            referred to hereinafter as the "Protection Period."

16.  Paragraph 12(c) of the Employment Agreement is hereby deleted in its
     entirety.

17.  Paragraph 14 of the Employment Agreement is hereby amended by deleting
     Paragraph 14 in its entirety and replacing it with the following:

                        "14. Termination for Cause. The Corporation may at any
time upon written notice to Executive terminate Executive's employment for
Cause. For purposes of this Agreement, the following shall constitute Cause: (a)
the Executive's gross misconduct which is materially and demonstrably injurious
to the Corporation; (b) the Executive's willful and continued failure to perform
substantially his duties with the Corporation (other than a failure resulting
from the Executive's incapacity due to bodily injury or physical or mental
illness) after a demand for substantial performance is delivered to the
Executive by the Board which specifically identifies the manner in which the
Board believes that the Executive has not substantially performed his duties and
provides for a reasonable period of time within which the Executive may take
corrective measures; or (c) the Executive's conviction (including a plea of nolo
contendere) of willfully engaging in illegal conduct constituting a felony or a
gross misdemeanor involving an intentional act of fraud, misrepresentation,
theft, embezzlement or dishonesty under federal or state law (or comparable
illegal conduct under the laws of any foreign jurisdiction) which is materially
and demonstrably injurious to the Corporation or which impairs the Executive's
ability to perform substantially his duties with the Corporation. An act or
failure to act will be considered "gross" or "willful" for this purpose only if
done, or omitted to be done, by the Executive in bad faith and without
reasonable belief that it was in, or not opposed to, the best interests of the
Corporation. Any act, or failure to act, based upon authority given pursuant to
a resolution duly adopted by the Board or governing body of the Corporation (or
a committee thereof) or based upon the advice of counsel for the Corporation
will be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Corporation.
Executive's attention to matters not directly related to the business of the
Corporation will not provide a basis for termination for Cause so long as the
Board did not expressly disapprove in writing of his engagement in such
activities either before or within a reasonable period of time after the Board
knew or could reasonably have known that the Executive engaged in those
activities. Notwithstanding the


                                       1


foregoing, the Executive may not be terminated for Cause unless and until there
has been delivered to Executive a copy of a resolution duly adopted by the
affirmative vote of not less than two-thirds of the entire membership of the
Board (excluding such Executive) at a meeting of the Board called and held for
such purpose (after reasonable notice to such Executive and an opportunity for
such Executive, together with his counsel, to be heard before the Board),
finding that in the good faith opinion of the Board such Executive engaged in
the conduct set forth in paragraphs (a), (b) or (c) above and specifying the
particulars thereof in detail."

18.  Paragraph 21 of the Employment Agreement is hereby amended by adding to the
     end of the first sentence the following:

            "and the Corporation hereby irrevocably consents to the jurisdiction
            of the federal and state courts sitting in the State of Missouri for
            purposes of enforcing this Agreement."

19.  Paragraph 26 of the Employment Agreement is hereby amended by deleting
     Paragraph 26 in its entirety and replacing it with the following:

                        "26. Disputes. (a) If the Executive so elects, any
dispute, controversy or claim arising under or in connection with this Agreement
will be settled exclusively by binding arbitration in St. Louis, Missouri in
accordance with the Employee Benefit Plan Claims Arbitration Rules of the
American Arbitration Association, incorporated by referenced herein. Judgment
may be entered on the arbitrator's award in any court having jurisdiction;
provided that, the Executive may seek specific performance of his right to
receive benefits until the Termination Date during the pendency of any dispute
or controversy arising under or in connection with this Agreement.

                        (b) If the Executive does not elect arbitration to
resolve a dispute, claim or controversy, he may pursue all other available legal
remedies.

                        (c) Any review by an arbitrator or a court of competent
jurisdiction of a decision made by the Board at any time after a Change in
Control shall be de novo, and any such Board determination shall not be entitled
to deference.

                        (d) The Corporation will not assert in any dispute or
controversy with the Executive arising under or in connection with this
Agreement the Executive's failure to exhaust administrative remedies.

                        (e) In the event of any dispute, claim or controversy
arising out of or in connection with this Agreement, if the Executive prevails
on any of the material issues involved in any such dispute, claim or
controversy, the Corporation shall pay to the Executive immediately upon demand
all reasonable expenses (including without limitation attorneys' fees) incurred
by the Executive in connection therewith.

                        (f) If the Corporation refuses or otherwise fails to
make a payment when due under this Agreement and it is ultimately determined
that the Executive is entitled to such payment, such payment shall be increased
to reflect an interest factor, compounded annually, equal to the prime rate in
effect as of the date the payment was first due plus five points. For this
purpose, the prime rate shall be based on the rate identified by Chase Manhattan
Bank as its prime rate in New York City."

20.  The Employment Agreement is further amended by adding the following as new
     Paragraphs 27 through 32:

                        "27. Definitions. For purposes of this Agreement, the
capitalized terms set forth herein and not otherwise defined shall have the
meanings set forth in Appendix A attached hereto which shall have the same force
and effect as if included as a Paragraph in this Amendment and shall apply when
interpreting the terms of this Agreement.

                        28. Termination Employment in Connection with a Change
in Control.

                        (a) Eligibility. If the Executive's employment is
terminated during the Protection Period either: (i) by the Corporation without
Cause, or (ii) by the Executive for Good Reason, the Corporation will provide


                                       2


the Executive with the payments and benefits set forth in Paragraph 29 below
(collectively, the "Enhanced Severance Benefits"), accelerated vesting and
exercisability of stock based compensation under Paragraph 30 and a Gross-Up
Payment for "Excise Tax" (as defined in Paragraph 31) under Paragraph 31. If the
Executive terminates employment with the Corporation under any other
circumstances, he shall not be entitled to Enhanced Severance Benefits under
Paragraph 29, but may be entitled to (c) benefits under Paragraph 12 hereunder,
and (d) accelerated vesting and exercisability of stock based compensation under
Paragraph 30 and a Gross-Up Payment for Excise Tax under Paragraph 31 by
remaining employed with the Corporation as of a Change in Control. In no event
shall Executive be entitled to Enhanced Severance Benefits under Paragraph 29
and to benefits under Paragraph 12.

                        (b) Process for Termination of Employment. During the
Protection Period, any termination of the Executive's employment by the
Executive for Good Reason or by the Corporation for Cause shall be communicated
by written Notice of Termination from the party terminating employment hereunder
to the other party hereto in accordance with Paragraph 18. A "Notice of
Termination" shall mean, for purposes of this Agreement, a written notice given
in good faith and with a reasonable belief that Good Reason or Cause, as the
case may be, has occurred, which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated. Any Notice of
Termination must specify a Termination Date and any Notice of Termination for
Cause shall include a copy of the relevant resolution of the Board action taken
in accordance with the terms of this Agreement to terminate the Executive's
employment for Cause.

                        (c) Compensation and Benefits before Termination Date.
During the period beginning on the date the Executive or the Corporation, as the
case may be, receives Notice of Termination and ending on the Termination Date,
the Corporation will continue to pay the Executive his Base Pay and cause his
continued participation in all Benefit Plans in accordance with the terms of
such Benefit Plans.

                        (d) Rights Under Other Plans, Policies, Practices and
Agreements. Other than to the extent expressly provided herein, this Agreement
does not supersede any other plans, policies, and/or practices of the
Corporation. To the extent that any provision of any Benefit Plan limits,
qualifies or is inconsistent with any of the benefits provided under this
Agreement, then, for purposes of this Agreement, while such other Benefit Plans
remains in force, the provisions of this Agreement will control and such
provision of such other Benefit Plan will be deemed to have been superseded and
to be of no force or effect, as if such other agreement had been formally
amended to the extent necessary to accomplish such purpose. Nothing in this
Agreement prevents or limits the Executive's continuing or future participation
in any Benefit Plan provided by the Corporation and nothing in this Agreement
limits or otherwise affects the rights the Executive may have under any Benefit
Plans with the Corporation. Amounts that are vested benefits or which the
Executive is otherwise entitled to receive under any Benefit Plan with the
Corporation at or subsequent to the Termination Date will be payable in
accordance with such Benefit Plan.

         29. Enhanced Severance Benefits.

             (a) Cash Payment. The Executive will be entitled to a cash payment
equal to one and one-half (1.5) times Base Pay (disregarding any change in Base
Pay that constitutes Good Reason). The benefit provided under this Paragraph
29(a) will be distributed in a single lump sum within ten business days after
the Termination Date or, if later, within ten business days following the
effective date of the Change in Control.

             (b) Continuation of Certain Welfare Benefits.

                 (i) During the period described in Paragraph 29(b)(ii) below,
the Corporation will maintain, or continue to reimburse or pay on behalf of the
Executive, as the case may be, medical, dental and life insurance plans which by
their terms cover the Executive and his family members and dependents under the
same terms and at the same cost to the Executive and his family members and
dependents as similarly situated executives who continue to be employed by the
Corporation (without regard to any reduction in such benefits that constitutes
Good Reason). The continuation period under applicable federal and state
continuation laws will begin to run from the date on which coverage under this
Paragraph ends.

                 (ii) For purposes of Paragraph 29(b)(i) above, the continuation
period with respect to any particular plan is the period beginning on the
Termination Date and ending on the earlier of: (x) the last day


                                       3

of the twelfth month that begins after the Termination Date, (y) the date after
Termination Date on which the Executive first becomes eligible to participate in
the plan of another employer providing comparable benefits to the Executive and
his eligible family members and dependents which plan does not contain any
exclusion or limitation with respect to any pre-existing condition of the
Executive or any eligible family member or dependent who would otherwise be
covered under the Corporation's plan but for this clause (y), or (z) the date of
the Executive's death.

                 (iii) To the extent the Executive incurs a liability for Taxes
in connection with a benefit provided pursuant to Paragraph 29(b) which he would
not have incurred had he been an active employee of the Corporation
participating in one of the Corporation's Benefit Plans, the Corporation shall
make a Gross-Up Payment for any such Taxes to the Executive. For purposes of
applying the foregoing, the Executive's tax rate will be deemed to be the
highest statutory marginal state and federal tax rate (on a combined basis) then
in effect. The payment pursuant to this subparagraph will be made within ten
days after the Executive's remittal of a written request therefor, accompanied
by a statement indicating the basis for and amount of the liability.

             (c) Extended Exercise Period for Stock Options. Any stock options
issued by the Corporation and held by the Executive shall remain exercisable
until thirty-six months following the Termination Date, but in no event beyond
the stock option's maximum exercise period (without regard to any provisions
that shortens the exercise period in connection with termination of employment
or otherwise).

         30. Accelerated Vesting and Exercisability. If a Change in Control
occurs while the Executive is employed by the Corporation or after the Executive
has terminated employment with the Corporation under circumstances entitling him
to Enhanced Severance Benefits, (a) all stock options previously granted to the
Executive by the Corporation shall become fully vested and exercisable as of the
date of the Change in Control, whether or not otherwise exercisable and vested
as of that date, and (b) shares of restricted Corporation stock previously
awarded to the Executive shall become fully vested.

         31. Excise Tax Equalization. The Corporation will cause its independent
auditors promptly to review, at the Corporation's sole expense, the
applicability of Paragraph 4999 of the Code to any payment or distribution of
any type by the Corporation or its Affiliates to or for the benefit of the
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement, any Benefit Plan or otherwise (the "Total
Payments"). The Corporation shall engage the auditor so that its review is
completed no later than the Change in Control. If the auditor determines that
the Total Payments result in an excise tax imposed by Paragraph 4999 of the Code
or any comparable state or local law, or any interest or penalties with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are collectively referred to as the "Excise Tax") and if the
Executive is entitled to Enhanced Severance Benefits or accelerated vesting or
exercisability of equity compensation under Paragraph 30, or both, the
Corporation shall make a Gross-Up Payment for any Excise Taxes to the Executive
within ten business days after the Termination Date, but in no event later than
the due date for the payments of any excise tax. For purposes of the foregoing
determination, the Executive's tax rate will be deemed to be the highest
statutory marginal state and federal tax rate (on a combined basis) then in
effect. If any tax authority determines that a greater Excise Tax should be
imposed upon the Total Payments than is determined by the Corporation's
independent auditors pursuant to this Paragraph 31, the Executive is entitled to
receive from the Corporation the full Gross-Up Payment calculated on the basis
of the amount of Excise Tax determined to be payable by such tax authority
within ten business days after he notifies the Corporation of such
determination.

         32. Miscellaneous.

             (a) Successors and Assigns.

                 (i) The Corporation will require any Successor to expressly
assume and agree to perform the obligations of this Agreement in the same manner
and to the same extent that the Corporation would be required to perform if no
such succession had taken place except as specifically required to the contrary
hereunder. Failure of the Corporation to obtain such assumption and agreement at
least three business days prior to the time a Person becomes a Successor (or
where the Corporation does not have at least three business days' advance notice
that a Person may become a Successor, within one business day after having
notice that such Person may become or has become a Successor) will constitute
Good Reason for termination of the Executive's employment. The date on which any
such succession becomes effective will be deemed the Termination Date and Notice
of Termination will be deemed to have been timely given by the Executive. A
Successor has no rights, authority or power with respect to this Agreement prior
to a Change in Control.


                                       4


                 (ii) This Agreement is for the benefit of, and is enforceable
by, the Executive, his personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees; provided
that, the Executive may not otherwise assign any of his rights or delegate any
of his obligations under this Agreement. If the Executive dies after becoming
entitled to, but before receiving, any amounts payable under this Agreement, all
such amounts, unless otherwise specifically provided to the contrary in this
Agreement, will be paid in accordance with the terms of this Agreement to the
Executive's devisee, legatee or other designee or, if there be no such designee,
to the Executive's estate.

             (b) No Mitigation or Set-Off. The Executive will not be required to
mitigate the amount of any benefits the Corporation becomes obligated to provide
in connection with this Agreement by seeking other employment or otherwise. The
Corporation has no right to set-off benefits owed under this Agreement against
amounts owed or claimed to be owed by the Executive to the Corporation under
this Agreement or otherwise.

             (c) Taxes. All benefits to be provided to the Executive in
connection with the this Agreement will be subject to required withholding of
federal, state and local income, excise and employment-related taxes.

             (d) Survival. The respective obligations of, and benefits afforded
to, the Corporation and the Executive which, by their express terms or clear
meaning, survive termination of the Executive's employment with the Corporation
or termination of this Agreement, as the case may be, will remain in full force
and effect according to their terms notwithstanding the termination of the
Executive's employment with the Corporation or termination of this Agreement, as
the case may be.

             (e) Benefits as Eligible Compensation under Other Benefit Plans.
Unless otherwise expressly provided therein, benefits paid or payable under this
Agreement will not be deemed to be salary or compensation for purposes of
determining the benefits to which the Executive may be entitled under any other
Benefit Plan sponsored, maintained or contributed to by the Corporation."

21.  Except as amended as set forth in this First Amendment, the Employment
     Agreement shall remain in full force and effect in accordance with its
     terms.

            IN WITNESS WHEREOF, this First Amendment has been executed by the
Corporation, by its duly authorized representative, and by Executive, as of the
Effective Date.

EXECUTIVE                                       CORPORATION


/s/ Thomas A. Armer                             /s/ Loren G. Peterson
- ------------------------------                  -----------------------------
                                                By: Loren G. Peterson
                                                Title: President and CEO


                                       5


                                   APPENDIX A

                                   DEFINITIONS


Whenever the following capitalized terms are used in the Agreement, they shall
have the meaning specified below.

Affiliate

            "Affiliate" shall mean: (a) any corporation at least a majority of
whose outstanding securities ordinarily having the right to vote at elections of
directors is owned directly or indirectly by the Corporation; or (b) any other
form of business entity in which the Corporation, by virtue of a direct or
indirect ownership interest, has the right to elect a majority of the members of
such entity's governing body.

Base Pay

            "Base Pay" shall mean the Executive's base salary at the highest
annual rate in effect immediately prior to the Change in Control or at the time
Notice of Termination is given, whichever is greater, disregarding any decrease
which constitutes Good Reason for the Executive's termination of employment.
Base Pay includes only regular cash salary and wages and is determined before
any reduction for deferrals pursuant to any nonqualified deferred compensation
plan or arrangement, qualified cash or deferred arrangement or cafeteria plan.

Beneficial Owner

            "Beneficial Owner" shall have the meaning ascribed to such term in
Rule 13d-3 of the General Rules and Regulations under the Exchange Act.

Benefit Plan

            "Benefit Plan" is (a) employee benefit plan as defined in Paragraph
3(3) of ERISA, (b) a cafeteria plan described in Paragraph 125 of the Code, (c)
a plan, policy or practice providing for paid vacation, other paid time off or
short- or long-term profit sharing, bonus or incentive payments, or (d) stock
option, stock purchase, restricted stock, phantom stock, stock appreciation
right or other equity-based compensation plan that is sponsored, maintained or
contributed to by the Corporation or its Affiliates for the benefit of employees
(and/or their families and dependents) generally or the Executive (and/or the
Executive's family and dependents) in particular.

Board

            "Board" is the board of directors of the Corporation duly qualified
and acting at the time in question. On and after the date of a Change in
Control, any duty of the Board in connection with this Agreement is
non-delegable and any attempt by the Board to delegate any such duty is
ineffective.

Change in Control

            A "Change in Control" shall mean the first of the following events
to occur:

            (a) Any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Corporation representing at least thirty
percent or, in the case of Elan Corporation and its Affiliates in the aggregate
(collectively, the "Elan Group"), at least fifty percent, of the combined voting
power of the Corporation's then outstanding securities;

            (b) During any twenty-four month consecutive period beginning on or
after October 1, 2001, individuals who at the beginning of such period
constituted a majority of the Board of Directors cease for any reason during any
day during any such period to constitute a majority thereof; provided, however,
that any director who is not in office at the beginning of such twenty-four
month period, but whose election by the Board or whose nomination for election
by the Company's shareholders was to fill a vacancy caused by death or
retirement and was


                                       6

approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of such period or whose election or
nomination for election was previously so approved shall be deemed to have been
in office at the beginning of such period for purposes of this definition;

            (c) the stockholders of the Corporation approve a merger or
consolidation of the Corporation with any other Corporation or agreement of
exchange involving the Corporation ("Merger"), other than (1) a Merger which
would result in the voting securities of the Corporation outstanding as of
October 1, 2001 continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) more than fifty
percent of the combined voting power of the voting securities of the Corporation
or such surviving entity outstanding immediately after the Merger, or (2) a
Merger effected to implement a recapitalization of the Corporation (or similar
transaction) in which no Person acquires thirty percent or more, or in the case
of Elan Group in the aggregate, fifty percent or more, of the combined voting
power of the Corporation's then outstanding securities; or

            (d) the stockholders of the Corporation approve a plan of complete
liquidation of the Corporation or an agreement for the sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) or
disposition by the Corporation of all or substantially all of the Corporation's
assets.

Code

            "Code" shall mean the Internal Revenue Code of 1986, as amended. Any
reference to a specific provision of the Code includes a reference to such
provision as it may be amended from time to time and to any successor provision.

Effective Date

            "Effective Date" shall mean the Effective Date of the First
Amendment.

ERISA

            "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended. Any reference to a specific provision of ERISA includes a
reference to such provision as it may be amended from time to time and to any
successor provision.

Exchange Act

            The "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended. Any reference to a specific provision of the Exchange Act or to any
rule or regulation thereunder includes a reference to such provision as it may
be amended from time to time and to any successor provision.

Good Reason

            "Good Reason" shall mean the occurrence of one or more of the
following events (regardless of whether any other reason, other than Cause, for
such termination exists or has occurred, including without limitation other
employment):

            (a) failure to elect or reelect or otherwise maintain the Executive
in the offices or positions that the Executive held immediately prior to the
Change in Control;

            (b) a change in the nature or scope of the authorities, powers,
functions, duties or responsibilities attached to the position with the
Corporation that the Executive held immediately prior to the Change in Control,
as reasonably determined by the Executive;

            (c) a reduction by the Corporation in the Executive's Base Pay or an
adverse change in the form or timing of the payment thereof, as in effect
immediately prior to the Potential Change in Control or as thereafter increased;


                                       7


            (d) the failure by the Corporation to cover the Executive under
Benefit Plans that, in the aggregate, provide substantially similar benefits to
the Executive and/or his family and dependents at a substantially similar total
cost to the Executive (e.g., premiums, deductibles, co-pays, out of pocket
maximums, required contributions, Taxes and the like) relative to the highest
benefits and lowest total costs under the Benefit Plans in which the Executive
(and/or his family or dependents) is participating at any time during the period
between the Potential Change in Control and the Change in Control;

            (e) the Corporation's requiring the Executive to be based more than
fifty miles from where his office is located immediately prior to the Change in
Control, except for required travel on the Corporation's business, and then only
to the extent substantially consistent with the business travel obligations
which the Executive undertook on behalf of the Corporation during the ninety day
period ending on the date of the Potential Change in Control (without regard to
travel related to or in anticipation of the Change in Control);

            (f) the failure of the Corporation to obtain from any Successor the
assent to this Agreement as required under Paragraph 32(a)(i);

            (g) any purported termination by the Corporation of the Executive's
employment which is not properly effected pursuant to a Notice of Termination
and pursuant to any other requirements of this Agreement and, for purposes of
this Agreement, no such purported termination will be effective; or

            (h) any refusal by the Corporation to continue to allow the
Executive to attend to matters or engage in activities not directly related to
the business of the Corporation which, at any time prior to the Potential Change
in Control, the Executive was not expressly prohibited by the Corporation from
attending to or engaging in.

The Executive's continued employment does not constitute consent to, or waiver
of any rights arising in connection with, any circumstance constituting Good
Reason. Notwithstanding the foregoing, the occurrence of an event that would
otherwise constitute Good Reason hereunder shall cease to be an event
constituting Good Reason if the Executive does not provide a Notice of
Termination to the Corporation within one hundred eighty days of the date that
the Executive first becomes aware of the occurrence of such event. Termination
by the Executive of his employment for Good Reason as defined hereunder will
constitute Good Reason for all purposes of this Agreement, even if the Executive
may also thereby be deemed to have "retired" under any applicable retirement
programs of the Corporation.

Gross-Up Payment

            "Gross-Up Payment" shall mean an amount payable to the Executive
such that, after the payment of all Taxes attributable to any item of
compensation subject to gross-up under this Agreement by the Corporation, there
remains a balance sufficient to pay the Taxes being reimbursed.

Person

            A "Person" shall mean any individual, corporation, partnership,
group, association or other "person," as such term is used in Paragraph 14(d) of
the Exchange Act, other than the Corporation, any Affiliate or any benefit plan
sponsored by the Corporation or an Affiliate.


                                       8


Potential Change in Control

            A "Potential Change in Control" shall be the first of the following
events to occur:

            (a) the Corporation enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control;

            (b) any Person (including the Corporation) publicly announces an
intention to take or to consider taking actions which, if consummated, would
constitute a Change in Control; or

            (c) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Corporation representing fifteen percent or
more of the combined voting power of the Corporation's then outstanding
securities, increases its beneficial ownership of such securities by one
percentage point or more over the percentage so owned by such Person on the
Effective Date, other than an increase in ownership percentage due to the
payment of dividends by the issuance of additional securities of the
Corporation; or

            (d) the Board adopts a resolution to the effect that, for purposes
of this Agreement, a Potential Change in Control has occurred.

The Board shall not be precluded from adopting a resolution to the effect that,
for purposes of this Agreement, it is the good faith opinion of the Board that a
Potential Change in Control has been abandoned and that a Potential Change in
Control no longer exists.

An event shall not be a Potential Change in Control for purposes of this
Agreement if a Change in Control does not occur within twelve months of such
event.

Successor

            A "Successor" shall mean any Person that succeeds to, or has the
practical ability to control (either immediately or solely with the passage of
time), the Corporation's business directly, by merger, consolidation or other
form of business combination, or indirectly, by purchase of the Corporation's
outstanding securities ordinarily having the right to vote at the election of
directors, all or substantially all of its assets or otherwise.

Taxes

            "Taxes" shall mean the incremental federal, state and local income,
excise and other taxes (including Excise Taxes), penalties and interest payable
by the Executive with respect to any applicable item of income.

Termination Date

            "Termination Date" shall mean: (1) in the case of an employment
termination by the Corporation for Cause or by the Executive for Good Reason,
the date specified as the Executive's last day of employment in the Notice of
Termination, which shall not be less than ten business days after the date such
Notice of Termination is deemed given in accordance with Paragraph 18, or (2) in
any other case, the last day worked by the Executive as reflected on the
Corporation's payroll records. Notwithstanding the foregoing, if the Corporation
terminates the Executive's employment for Cause and the Executive has not
previously expressly agreed in writing to the termination, then within the
thirty day period after the Executive's receipt of the Notice of Termination,
the Executive may notify the Corporation that a dispute exists concerning the
termination, in which event the Termination Date will be the date set either by
mutual written agreement of the parties or by the arbitrators or a court under
the dispute resolution provisions in Paragraph 26. During the pendency of any
such dispute, the Executive will continue to make himself available to provide
services to the Corporation and the Corporation will continue to pay the
Executive his full compensation and benefits in effect immediately prior to the
date on which the Notice of Termination is given (without regard to any changes
to such compensation or benefits which constitute Good Reason) and until the
dispute is resolved in accordance with Paragraph 26. The Executive will be
entitled to retain the full amount of any such compensation and benefits without
regard to the resolution of the dispute unless the arbitrators or judge
decide(s) that the Executive's claim of a dispute was frivolous or advanced by
the Executive in bad faith.


                                       9

EX-10.13A

                                                                 EXHIBIT 10.13A


            THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT ("First Amendment") is
made this first day of October, 2001 (the "Effective Date"), by and between
Sheffield Pharmaceuticals, Inc. (the "Corporation") and Loren G. Peterson (the
"Executive").

            WHEREAS, the Compensation Committee of the Board of Directors has
determined that a possibility of a Change in Control of the Corporation exists
and appropriate steps should be taken to reinforce and encourage the continued
attention and dedication of certain management to their assigned duties.

            NOW, THEREFORE, in consideration of the covenants and agreements
contained herein, intending to be legally bound, the Corporation and Executive
hereby agree, effective as of the Effective Date, as follows:

22.  Paragraph 3 of the Employment Agreement by and between the Corporation and
     Executive dated April 25, 1997 (the "Employment Agreement") is hereby
     amended by deleting the fourth sentence in its entirety and adding to the
     third sentence the following:

            "; provided that, no such notice by the Corporation shall be
            effective and the term of this Agreement shall be extended for an
            additional year if a Potential Change in Control shall have occurred
            or occurs at any time prior to the date of such notice or within the
            twelve month period beginning on the date of such notice. Further,
            if a Change in Control shall have occurred at any time during the
            term of this Agreement, then notwithstanding any provision hereof to
            the contrary, the term shall continue in effect for: (i) the
            remainder of the month in which the Change in Control occurred, and
            (ii) a term of twenty-four months beyond the month in which such
            Change in Control occurred; provided that, if any obligations of the
            Corporation hereunder shall not have been fully and finally
            discharged at the end of such twenty-four month period, the term
            shall continue until such obligations shall have been finally
            discharged in full. The period commencing on the earlier of a
            Potential Change in Control (if applicable) or Change in Control and
            ending with the conclusion of such twenty-four month period shall be
            referred to hereinafter as the "Protection Period."

23.  Paragraph 12(c) of the Employment Agreement is hereby deleted in its
     entirety.

24.  Paragraph 14 of the Employment Agreement is hereby amended by deleting
     Paragraph 14 in its entirety and replacing it with the following:

                        "14. Termination for Cause. The Corporation may at any
time upon written notice to Executive terminate Executive's employment for
Cause. For purposes of this Agreement, the following shall constitute Cause: (a)
the Executive's gross misconduct which is materially and demonstrably injurious
to the Corporation; (b) the Executive's willful and continued failure to perform
substantially his duties with the Corporation (other than a failure resulting
from the Executive's incapacity due to bodily injury or physical or mental
illness) after a demand for substantial performance is delivered to the
Executive by the Board which specifically identifies the manner in which the
Board believes that the Executive has not substantially performed his duties and
provides for a reasonable period of time within which the Executive may take
corrective measures; or (c) the Executive's conviction (including a plea of nolo
contendere) of willfully engaging in illegal conduct constituting a felony or a
gross misdemeanor involving an intentional act of fraud, misrepresentation,
theft, embezzlement or dishonesty under federal or state law (or comparable
illegal conduct under the laws of any foreign jurisdiction) which is materially
and demonstrably injurious to the Corporation or which impairs the Executive's
ability to perform substantially his duties with the Corporation. An act or
failure to act will be considered "gross" or "willful" for this purpose only if
done, or omitted to be done, by the Executive in bad faith and without
reasonable belief that it was in, or not opposed to, the best interests of the
Corporation. Any act, or failure to act, based upon authority given pursuant to
a resolution duly adopted by the Board or governing body of the Corporation (or
a committee thereof) or based upon the advice of counsel for the Corporation
will be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Corporation.
Executive's attention to matters not directly related to the business of the
Corporation will not provide a basis for termination for Cause so long as the
Board did not expressly disapprove in writing of his engagement in such
activities either before or within a reasonable period of time after the Board
knew or could reasonably have known that the Executive engaged in those
activities. Notwithstanding the


                                       1

foregoing, the Executive may not be terminated for Cause unless and until there
has been delivered to Executive a copy of a resolution duly adopted by the
affirmative vote of not less than two-thirds of the entire membership of the
Board (excluding such Executive) at a meeting of the Board called and held for
such purpose (after reasonable notice to such Executive and an opportunity for
such Executive, together with his counsel, to be heard before the Board),
finding that in the good faith opinion of the Board such Executive engaged in
the conduct set forth in paragraphs (a), (b) or (c) above and specifying the
particulars thereof in detail."

25.  Paragraph 21 of the Employment Agreement is hereby amended by adding to the
     end of the first sentence the following:

            "and the Corporation hereby irrevocably consents to the jurisdiction
            of the federal and state courts sitting in the State of Missouri for
            purposes of enforcing this Agreement."

26.  Paragraph 26 of the Employment Agreement is hereby amended by deleting
     Paragraph 26 in its entirety and replacing it with the following:

                        "26. Disputes. (a) If the Executive so elects, any
dispute, controversy or claim arising under or in connection with this Agreement
will be settled exclusively by binding arbitration in St. Louis, Missouri in
accordance with the Employee Benefit Plan Claims Arbitration Rules of the
American Arbitration Association, incorporated by referenced herein. Judgment
may be entered on the arbitrator's award in any court having jurisdiction;
provided that, the Executive may seek specific performance of his right to
receive benefits until the Termination Date during the pendency of any dispute
or controversy arising under or in connection with this Agreement.

                        (b) If the Executive does not elect arbitration to
resolve a dispute, claim or controversy, he may pursue all other available legal
remedies.

                        (c) Any review by an arbitrator or a court of competent
jurisdiction of a decision made by the Board at any time after a Change in
Control shall be de novo, and any such Board determination shall not be entitled
to deference.

                        (d) The Corporation will not assert in any dispute or
controversy with the Executive arising under or in connection with this
Agreement the Executive's failure to exhaust administrative remedies.

                        (e) In the event of any dispute, claim or controversy
arising out of or in connection with this Agreement, if the Executive prevails
on any of the material issues involved in any such dispute, claim or
controversy, the Corporation shall pay to the Executive immediately upon demand
all reasonable expenses (including without limitation attorneys' fees) incurred
by the Executive in connection therewith.

                        (f) If the Corporation refuses or otherwise fails to
make a payment when due under this Agreement and it is ultimately determined
that the Executive is entitled to such payment, such payment shall be increased
to reflect an interest factor, compounded annually, equal to the prime rate in
effect as of the date the payment was first due plus five points. For this
purpose, the prime rate shall be based on the rate identified by Chase Manhattan
Bank as its prime rate in New York City."

27. The Employment Agreement is further amended by adding the following as new
Paragraphs 27 through 32:

                        "27. Definitions. For purposes of this Agreement, the
capitalized terms set forth herein and not otherwise defined shall have the
meanings set forth in Appendix A attached hereto which shall have the same force
and effect as if included as a Paragraph in this Amendment and shall apply when
interpreting the terms of this Agreement.

                        28. Termination Employment in Connection with a Change
in Control.

                            (a) Eligibility. If the Executive's employment is
terminated during the Protection Period either: (i) by the Corporation without
Cause, or (ii) by the Executive for Good Reason, the Corporation will provide


                                       2

the Executive with the payments and benefits set forth in Paragraph 29 below
(collectively, the "Enhanced Severance Benefits"), accelerated vesting and
exercisability of stock based compensation under Paragraph 30 and a Gross-Up
Payment for "Excise Tax" (as defined in Paragraph 31) under Paragraph 31. If the
Executive terminates employment with the Corporation under any other
circumstances, he shall not be entitled to Enhanced Severance Benefits under
Paragraph 29, but may be entitled to (c) benefits under Paragraph 12 hereunder,
and (d) accelerated vesting and exercisability of stock based compensation under
Paragraph 30 and a Gross-Up Payment for Excise Tax under Paragraph 31 by
remaining employed with the Corporation as of a Change in Control. In no event
shall Executive be entitled to Enhanced Severance Benefits under Paragraph 29
and to benefits under Paragraph 12.

                            (b) Process for Termination of Employment. During
the Protection Period, any termination of the Executive's employment by the
Executive for Good Reason or by the Corporation for Cause shall be communicated
by written Notice of Termination from the party terminating employment hereunder
to the other party hereto in accordance with Paragraph 18. A "Notice of
Termination" shall mean, for purposes of this Agreement, a written notice given
in good faith and with a reasonable belief that Good Reason or Cause, as the
case may be, has occurred, which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated. Any Notice of
Termination must specify a Termination Date and any Notice of Termination for
Cause shall include a copy of the relevant resolution of the Board action taken
in accordance with the terms of this Agreement to terminate the Executive's
employment for Cause.

                            (c) Compensation and Benefits before Termination
Date. During the period beginning on the date the Executive or the Corporation,
as the case may be, receives Notice of Termination and ending on the Termination
Date, the Corporation will continue to pay the Executive his Base Pay and cause
his continued participation in all Benefit Plans in accordance with the terms of
such Benefit Plans.

                            (d) Rights Under Other Plans, Policies, Practices
and Agreements. Other than to the extent expressly provided herein, this
Agreement does not supersede any other plans, policies, and/or practices of the
Corporation. To the extent that any provision of any Benefit Plan limits,
qualifies or is inconsistent with any of the benefits provided under this
Agreement, then, for purposes of this Agreement, while such other Benefit Plans
remains in force, the provisions of this Agreement will control and such
provision of such other Benefit Plan will be deemed to have been superseded and
to be of no force or effect, as if such other agreement had been formally
amended to the extent necessary to accomplish such purpose. Nothing in this
Agreement prevents or limits the Executive's continuing or future participation
in any Benefit Plan provided by the Corporation and nothing in this Agreement
limits or otherwise affects the rights the Executive may have under any Benefit
Plans with the Corporation. Amounts that are vested benefits or which the
Executive is otherwise entitled to receive under any Benefit Plan with the
Corporation at or subsequent to the Termination Date will be payable in
accordance with such Benefit Plan.

         29. Enhanced Severance Benefits.

             (a) Cash Payment. The Executive will be entitled to a cash payment
equal to two (2) times Base Pay (disregarding any change in Base Pay that
constitutes Good Reason). The benefit provided under this Paragraph 29(a) will
be distributed in a single lump sum within ten business days after the
Termination Date or, if later, within ten business days following the effective
date of the Change in Control.

             (b) Continuation of Certain Welfare Benefits.

                 (i) During the period described in Paragraph 29(b)(ii) below,
the Corporation will maintain, or continue to reimburse or pay on behalf of the
Executive, as the case may be, medical, dental and life insurance plans which by
their terms cover the Executive and his family members and dependents under the
same terms and at the same cost to the Executive and his family members and
dependents as similarly situated executives who continue to be employed by the
Corporation (without regard to any reduction in such benefits that constitutes
Good Reason). The continuation period under applicable federal and state
continuation laws will begin to run from the date on which coverage under this
Paragraph ends.

                 (ii) For purposes of Paragraph 29(b)(i) above, the continuation
period with respect to any particular plan is the period beginning on the
Termination Date and ending on the earlier of: (x) the last day


                                       3

of the twelfth month that begins after the Termination Date, (y) the date after
Termination Date on which the Executive first becomes eligible to participate in
the plan of another employer providing comparable benefits to the Executive and
his eligible family members and dependents which plan does not contain any
exclusion or limitation with respect to any pre-existing condition of the
Executive or any eligible family member or dependent who would otherwise be
covered under the Corporation's plan but for this clause (y), or (z) the date of
the Executive's death.

                 (iii) To the extent the Executive incurs a liability for Taxes
in connection with a benefit provided pursuant to Paragraph 29(b) which he would
not have incurred had he been an active employee of the Corporation
participating in one of the Corporation's Benefit Plans, the Corporation shall
make a Gross-Up Payment for any such Taxes to the Executive. For purposes of
applying the foregoing, the Executive's tax rate will be deemed to be the
highest statutory marginal state and federal tax rate (on a combined basis) then
in effect. The payment pursuant to this subparagraph will be made within ten
days after the Executive's remittal of a written request therefor, accompanied
by a statement indicating the basis for and amount of the liability.

             (c) Extended Exercise Period for Stock Options. Any stock options
issued by the Corporation and held by the Executive shall remain exercisable
until thirty-six months following the Termination Date, but in no event beyond
the stock option's maximum exercise period (without regard to any provisions
that shortens the exercise period in connection with termination of employment
or otherwise).

         30. Accelerated Vesting and Exercisability. If a Change in Control
occurs while the Executive is employed by the Corporation or after the Executive
has terminated employment with the Corporation under circumstances entitling him
to Enhanced Severance Benefits, (a) all stock options previously granted to the
Executive by the Corporation shall become fully vested and exercisable as of the
date of the Change in Control, whether or not otherwise exercisable and vested
as of that date, and (b) shares of restricted Corporation stock previously
awarded to the Executive shall become fully vested.

         31. Excise Tax Equalization. The Corporation will cause its independent
auditors promptly to review, at the Corporation's sole expense, the
applicability of Paragraph 4999 of the Code to any payment or distribution of
any type by the Corporation or its Affiliates to or for the benefit of the
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement, any Benefit Plan or otherwise (the "Total
Payments"). The Corporation shall engage the auditor so that its review is
completed no later than the Change in Control. If the auditor determines that
the Total Payments result in an excise tax imposed by Paragraph 4999 of the Code
or any comparable state or local law, or any interest or penalties with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are collectively referred to as the "Excise Tax") and if the
Executive is entitled to Enhanced Severance Benefits or accelerated vesting or
exercisability of equity compensation under Paragraph 30, or both, the
Corporation shall make a Gross-Up Payment for any Excise Taxes to the Executive
within ten business days after the Termination Date, but in no event later than
the due date for the payments of any excise tax. For purposes of the foregoing
determination, the Executive's tax rate will be deemed to be the highest
statutory marginal state and federal tax rate (on a combined basis) then in
effect. If any tax authority determines that a greater Excise Tax should be
imposed upon the Total Payments than is determined by the Corporation's
independent auditors pursuant to this Paragraph 31, the Executive is entitled to
receive from the Corporation the full Gross-Up Payment calculated on the basis
of the amount of Excise Tax determined to be payable by such tax authority
within ten business days after he notifies the Corporation of such
determination.

         32. Miscellaneous.

             (a) Successors and Assigns.

                 (i) The Corporation will require any Successor to expressly
assume and agree to perform the obligations of this Agreement in the same manner
and to the same extent that the Corporation would be required to perform if no
such succession had taken place except as specifically required to the contrary
hereunder. Failure of the Corporation to obtain such assumption and agreement at
least three business days prior to the time a Person becomes a Successor (or
where the Corporation does not have at least three business days' advance notice
that a Person may become a Successor, within one business day after having
notice that such Person may become or has become a Successor) will constitute
Good Reason for termination of the Executive's employment. The date on which any
such succession becomes effective will be deemed the Termination Date and Notice
of Termination will be deemed to have been timely given by the Executive. A
Successor has no rights, authority or power with respect to this Agreement prior
to a Change in Control.


                                       4

                 (ii) This Agreement is for the benefit of, and is enforceable
by, the Executive, his personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees; provided
that, the Executive may not otherwise assign any of his rights or delegate any
of his obligations under this Agreement. If the Executive dies after becoming
entitled to, but before receiving, any amounts payable under this Agreement, all
such amounts, unless otherwise specifically provided to the contrary in this
Agreement, will be paid in accordance with the terms of this Agreement to the
Executive's devisee, legatee or other designee or, if there be no such designee,
to the Executive's estate.

             (b) No Mitigation or Set-Off. The Executive will not be required to
mitigate the amount of any benefits the Corporation becomes obligated to provide
in connection with this Agreement by seeking other employment or otherwise. The
Corporation has no right to set-off benefits owed under this Agreement against
amounts owed or claimed to be owed by the Executive to the Corporation under
this Agreement or otherwise.

             (c) Taxes. All benefits to be provided to the Executive in
connection with the this Agreement will be subject to required withholding of
federal, state and local income, excise and employment-related taxes.

             (d) Survival. The respective obligations of, and benefits afforded
to, the Corporation and the Executive which, by their express terms or clear
meaning, survive termination of the Executive's employment with the Corporation
or termination of this Agreement, as the case may be, will remain in full force
and effect according to their terms notwithstanding the termination of the
Executive's employment with the Corporation or termination of this Agreement, as
the case may be.

             (e) Benefits as Eligible Compensation under Other Benefit Plans.
Unless otherwise expressly provided therein, benefits paid or payable under this
Agreement will not be deemed to be salary or compensation for purposes of
determining the benefits to which the Executive may be entitled under any other
Benefit Plan sponsored, maintained or contributed to by the Corporation."

28.  Except as amended as set forth in this First Amendment, the Employment
     Agreement shall remain in full force and effect in accordance with its
     terms.

            IN WITNESS WHEREOF, this First Amendment has been executed by the
Corporation, by its duly authorized representative, and by Executive, as of the
Effective Date.

EXECUTIVE                                       CORPORATION


/s/ Loren G. Peterson                           /s/ Thomas M. Fitzgerald
- ------------------------------                  -----------------------------
                                                By: Thomas M. Fitzgerald
                                                Title: Chairman

                                       5


                                   APPENDIX A

                                   DEFINITIONS


Whenever the following capitalized terms are used in the Agreement, they shall
have the meaning specified below.

Affiliate

            "Affiliate" shall mean: (a) any corporation at least a majority of
whose outstanding securities ordinarily having the right to vote at elections of
directors is owned directly or indirectly by the Corporation; or (b) any other
form of business entity in which the Corporation, by virtue of a direct or
indirect ownership interest, has the right to elect a majority of the members of
such entity's governing body.

Base Pay

            "Base Pay" shall mean the Executive's base salary at the highest
annual rate in effect immediately prior to the Change in Control or at the time
Notice of Termination is given, whichever is greater, disregarding any decrease
which constitutes Good Reason for the Executive's termination of employment.
Base Pay includes only regular cash salary and wages and is determined before
any reduction for deferrals pursuant to any nonqualified deferred compensation
plan or arrangement, qualified cash or deferred arrangement or cafeteria plan.

Beneficial Owner

            "Beneficial Owner" shall have the meaning ascribed to such term in
Rule 13d-3 of the General Rules and Regulations under the Exchange Act.

Benefit Plan

            "Benefit Plan" is (a) employee benefit plan as defined in Paragraph
3(3) of ERISA, (b) a cafeteria plan described in Paragraph 125 of the Code, (c)
a plan, policy or practice providing for paid vacation, other paid time off or
short- or long-term profit sharing, bonus or incentive payments, or (d) stock
option, stock purchase, restricted stock, phantom stock, stock appreciation
right or other equity-based compensation plan that is sponsored, maintained or
contributed to by the Corporation or its Affiliates for the benefit of employees
(and/or their families and dependents) generally or the Executive (and/or the
Executive's family and dependents) in particular.

Board

            "Board" is the board of directors of the Corporation duly qualified
and acting at the time in question. On and after the date of a Change in
Control, any duty of the Board in connection with this Agreement is
non-delegable and any attempt by the Board to delegate any such duty is
ineffective.

Change in Control

            A "Change in Control" shall mean the first of the following events
to occur:

            (a) Any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Corporation representing at least thirty
percent or, in the case of Elan Corporation and its Affiliates in the aggregate
(collectively, the "Elan Group"), at least fifty percent, of the combined voting
power of the Corporation's then outstanding securities;

            (b) During any twenty-four month consecutive period beginning on or
after October 1, 2001, individuals who at the beginning of such period
constituted a majority of the Board of Directors cease for any reason during any
day during any such period to constitute a majority thereof; provided, however,
that any director who is not in office at the beginning of such twenty-four
month period, but whose election by the Board or whose nomination for election
by the Company's shareholders was to fill a vacancy caused by death or
retirement and was


                                       6

approved by a vote of at least two-thirds of the directors then still in
office who either were directors at the beginning of such period or whose
election or nomination for election was previously so approved shall be deemed
to have been in office at the beginning of such period for purposes of this
definition;

            (c) the stockholders of the Corporation approve a merger or
consolidation of the Corporation with any other Corporation or agreement of
exchange involving the Corporation ("Merger"), other than (1) a Merger which
would result in the voting securities of the Corporation outstanding as of
October 1, 2001 continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) more than fifty
percent of the combined voting power of the voting securities of the Corporation
or such surviving entity outstanding immediately after the Merger, or (2) a
Merger effected to implement a recapitalization of the Corporation (or similar
transaction) in which no Person acquires thirty percent or more, or in the case
of Elan Group in the aggregate, fifty percent or more, of the combined voting
power of the Corporation's then outstanding securities; or

            (d) the stockholders of the Corporation approve a plan of complete
liquidation of the Corporation or an agreement for the sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) or
disposition by the Corporation of all or substantially all of the Corporation's
assets.

Code

            "Code" shall mean the Internal Revenue Code of 1986, as amended. Any
reference to a specific provision of the Code includes a reference to such
provision as it may be amended from time to time and to any successor provision.

Effective Date

            "Effective Date" shall mean the Effective Date of the First
Amendment.

ERISA

            "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended. Any reference to a specific provision of ERISA includes a
reference to such provision as it may be amended from time to time and to any
successor provision.

Exchange Act

            The "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended. Any reference to a specific provision of the Exchange Act or to any
rule or regulation thereunder includes a reference to such provision as it may
be amended from time to time and to any successor provision.

Good Reason

            "Good Reason" shall mean the occurrence of one or more of the
following events (regardless of whether any other reason, other than Cause, for
such termination exists or has occurred, including without limitation other
employment):

            (a) failure to elect or reelect or otherwise maintain the Executive
in the offices or positions that the Executive held immediately prior to the
Change in Control;

            (b) a change in the nature or scope of the authorities, powers,
functions, duties or responsibilities attached to the position with the
Corporation that the Executive held immediately prior to the Change in Control,
as reasonably determined by the Executive;

            (c) a reduction by the Corporation in the Executive's Base Pay or an
adverse change in the form or timing of the payment thereof, as in effect
immediately prior to the Potential Change in Control or as thereafter increased;


                                       7


            (d) the failure by the Corporation to cover the Executive under
Benefit Plans that, in the aggregate, provide substantially similar benefits to
the Executive and/or his family and dependents at a substantially similar total
cost to the Executive (e.g., premiums, deductibles, co-pays, out of pocket
maximums, required contributions, Taxes and the like) relative to the highest
benefits and lowest total costs under the Benefit Plans in which the Executive
(and/or his family or dependents) is participating at any time during the period
between the Potential Change in Control and the Change in Control;

            (e) the Corporation's requiring the Executive to be based more than
fifty miles from where his office is located immediately prior to the Change in
Control, except for required travel on the Corporation's business, and then only
to the extent substantially consistent with the business travel obligations
which the Executive undertook on behalf of the Corporation during the ninety day
period ending on the date of the Potential Change in Control (without regard to
travel related to or in anticipation of the Change in Control);

            (f) the failure of the Corporation to obtain from any Successor the
assent to this Agreement as required under Paragraph 32(a)(i);

            (g) any purported termination by the Corporation of the Executive's
employment which is not properly effected pursuant to a Notice of Termination
and pursuant to any other requirements of this Agreement and, for purposes of
this Agreement, no such purported termination will be effective; or

            (h) any refusal by the Corporation to continue to allow the
Executive to attend to matters or engage in activities not directly related to
the business of the Corporation which, at any time prior to the Potential Change
in Control, the Executive was not expressly prohibited by the Corporation from
attending to or engaging in.

The Executive's continued employment does not constitute consent to, or waiver
of any rights arising in connection with, any circumstance constituting Good
Reason. Notwithstanding the foregoing, the occurrence of an event that would
otherwise constitute Good Reason hereunder shall cease to be an event
constituting Good Reason if the Executive does not provide a Notice of
Termination to the Corporation within one hundred eighty days of the date that
the Executive first becomes aware of the occurrence of such event. Termination
by the Executive of his employment for Good Reason as defined hereunder will
constitute Good Reason for all purposes of this Agreement, even if the Executive
may also thereby be deemed to have "retired" under any applicable retirement
programs of the Corporation.

Gross-Up Payment

            "Gross-Up Payment" shall mean an amount payable to the Executive
such that, after the payment of all Taxes attributable to any item of
compensation subject to gross-up under this Agreement by the Corporation, there
remains a balance sufficient to pay the Taxes being reimbursed.

Person

            A "Person" shall mean any individual, corporation, partnership,
group, association or other "person," as such term is used in Paragraph 14(d) of
the Exchange Act, other than the Corporation, any Affiliate or any benefit plan
sponsored by the Corporation or an Affiliate.

Potential Change in Control

            A "Potential Change in Control" shall be the first of the following
events to occur:

            (a) the Corporation enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control;

            (b) any Person (including the Corporation) publicly announces an
intention to take or to consider taking actions which, if consummated, would
constitute a Change in Control; or

            (c) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Corporation representing fifteen percent or
more of the combined voting power of the Corporation's then outstanding


                                       8

securities, increases its beneficial ownership of such securities by one
percentage point or more over the percentage so owned by such Person on the
Effective Date, other than an increase in ownership percentage due to the
payment of dividends by the issuance of additional securities of the
Corporation; or

            (d) the Board adopts a resolution to the effect that, for purposes
of this Agreement, a Potential Change in Control has occurred.

The Board shall not be precluded from adopting a resolution to the effect that,
for purposes of this Agreement, it is the good faith opinion of the Board that a
Potential Change in Control has been abandoned and that a Potential Change in
Control no longer exists.

An event shall not be a Potential Change in Control for purposes of this
Agreement if a Change in Control does not occur within twelve months of such
event.

Successor

            A "Successor" shall mean any Person that succeeds to, or has the
practical ability to control (either immediately or solely with the passage of
time), the Corporation's business directly, by merger, consolidation or other
form of business combination, or indirectly, by purchase of the Corporation's
outstanding securities ordinarily having the right to vote at the election of
directors, all or substantially all of its assets or otherwise.

Taxes

            "Taxes" shall mean the incremental federal, state and local income,
excise and other taxes (including Excise Taxes), penalties and interest payable
by the Executive with respect to any applicable item of income.

Termination Date

            "Termination Date" shall mean: (1) in the case of an employment
termination by the Corporation for Cause or by the Executive for Good Reason,
the date specified as the Executive's last day of employment in the Notice of
Termination, which shall not be less than ten business days after the date such
Notice of Termination is deemed given in accordance with Paragraph 18, or (2) in
any other case, the last day worked by the Executive as reflected on the
Corporation's payroll records. Notwithstanding the foregoing, if the Corporation
terminates the Executive's employment for Cause and the Executive has not
previously expressly agreed in writing to the termination, then within the
thirty day period after the Executive's receipt of the Notice of Termination,
the Executive may notify the Corporation that a dispute exists concerning the
termination, in which event the Termination Date will be the date set either by
mutual written agreement of the parties or by the arbitrators or a court under
the dispute resolution provisions in Paragraph 26. During the pendency of any
such dispute, the Executive will continue to make himself available to provide
services to the Corporation and the Corporation will continue to pay the
Executive his full compensation and benefits in effect immediately prior to the
date on which the Notice of Termination is given (without regard to any changes
to such compensation or benefits which constitute Good Reason) and until the
dispute is resolved in accordance with Paragraph 26. The Executive will be
entitled to retain the full amount of any such compensation and benefits without
regard to the resolution of the dispute unless the arbitrators or judge
decide(s) that the Executive's claim of a dispute was frivolous or advanced by
the Executive in bad faith.


                                       9

EX-10.37

                                                                   EXHIBIT 10.37



                                                  February 18, 2002



Mr. Carl F. Siekmann
15915 Wetherburn Road
Chesterfield, Missouri  63017

Dear Carl:

            This letter follows up on the discussions we have had recently
concerning the mutually agreeable separation of your employment for reasons
other than cause with Sheffield Pharmaceuticals, Inc. (the "Company"). To assist
you in your transition, the Company is offering to you certain severance and
other benefits in exchange for the general release of claims and other terms set
forth below. The specific terms of the Company's proposed agreement (the
"Agreement") are as follows:

            1. TERMINATION OF EMPLOYMENT. The effective date of your termination
shall be February 15, 2002 (the "Termination Date"). The Company will pay you
all wages earned and any accrued and unused vacation time in accordance with
Company policy through your Termination Date. For the period from the date of
this letter through your Termination Date, you will continue to perform your
duties and responsibilities in your current position; provided however that the
Company may at any time and in its sole discretion request that you vacate the
Company's premises and cease performing any duties for the Company. In such
event, the Company shall remain obligated to pay to you all wages due to you
through your Termination Date.

            2. SEVERANCE PAY. The Company will continue to pay your base salary,
as in effect on your Termination Date, for a period of nine months following
your Termination Date, subject to appropriate tax withholdings and authorized
deductions, in accordance with the Company's regular payroll practices and
regular pay schedule.

            3. BENEFIT CONTINUATION.

               (a) Death and Disability Insurance. The Company will continue to
pay the full premium cost of Company-sponsored death and/or disability insurance
coverage for you in effect as of your Termination Date, if any, for a period of
nine months following your Termination Date. Your rights and obligations under
such insurance plans shall be governed by the specific terms of the plans. In
the event you obtain comparable death and/or disability insurance coverage
through other employment prior to the expiration of the nine month period of
continuation coverage described herein, the Company's obligation to continue to
provide such coverage shall cease as of the effective date of such comparable
coverage. For purposes of this agreement, comparable coverage shall be deemed to
include, at a minimum, coverage at the same benefit level at no cost to you.
Should you obtain such comparable coverage, you agree to promptly notify the
Company's Chief Executive Officer in writing at the Company's headquarters.

               (b) Health and Dental Insurance. Upon the termination of your
employment, you and your dependents may be eligible to continue your health
and/or dental insurance coverage under Company-sponsored plans, if any, pursuant
to the federal law known as COBRA. In the event you elect COBRA continuation
coverage, the Company will pay the full premium cost and any administrative fee
for such continuation coverage for a period of nine months following your
Termination Date. After that time, you will become responsible for the full
premium cost and any administrative fee for such continuation coverage. You
understand and acknowledge that it is solely your responsibility to elect COBRA
continuation coverage if you desire such coverage. Your rights and obligations
under such insurance plans shall be governed by the specific terms of the plans
and COBRA. Information concerning COBRA rights, coverage and election will be
sent to you under separate cover. In the event you and/or your dependent(s)
become ineligible for COBRA continuation coverage during the nine month period
of premium payments described herein, the Company shall reimburse you for the
premium cost of health and/or dental insurance


                                       1


coverage at the same monthly rate the Company would have paid for COBRA
continuation coverage had you and/or your dependents remained eligible for such
coverage. In the event you obtain comparable health and/or dental insurance
coverage through other employment prior to the expiration of the nine month
period of premium payments described herein, the Company's obligation to
continue to provide such premium payments shall cease as of the effective date
of such comparable coverage. For purposes of this agreement, comparable coverage
shall be deemed to include, at a minimum, coverage at the same benefit level at
no cost to you. Should you obtain such comparable coverage, you agree to
promptly notify the Company's Chief Executive Officer in writing at the
Company's headquarters.

               (c) Other Benefits. Except as specifically set forth in this
Agreement, your right to, and participation in, all employee benefit plans of
the Company shall terminate as of your Termination Date in accordance with the
specific terms of each plan; provided however, and notwithstanding anything to
the contrary herein, in no event shall you have any right to any benefits upon a
change in control, except with respect to the specific benefits set forth in
this Agreement.

            4. STOCK OPTIONS. Except as provided in this paragraph 4, your
interest in and rights in your Vested Stock Options (as defined and set forth in
Exhibit A) shall be governed by and be subject to all conditions, terms and
restrictions contained in the Company's 1993 Stock Option Plan, as amended from
time to time ("the Plan"), and the option letter agreements dated April 25, 1997
(denoted as Exhibits A-1, A-2 and B to your Employment Agreement dated April 25,
1997, a copy of which is attached hereto as Exhibit B (the "Employment
Agreement")), the option letter agreement dated August 28, 1998 (a copy of which
is attached hereto as Exhibit C) and the option letter agreement dated March 1,
2000 (a copy of which is attached hereto as Exhibit D). Your rights with respect
to your Stock Options shall be fixed as of your Termination Date and pursuant to
this Agreement. With respect to the option letter agreements dated April 25,
1997 and denoted as Exhibits A-1 and A-2 to your Employment Agreement, all
250,000 options shall be deemed vested as of your Termination Date and you shall
be entitled to exercise those options on or before February 15, 2003. With
respect to the option letter agreement dated April 25, 1997 and denoted as
Exhibit B to your Employment Agreement, 60,000 options shall be deemed vested as
of your Termination Date and you shall be entitled to exercise those 60,000
options on or before February 15, 2003, and the 90,000 options that would have
been unvested as of your Termination Date shall be accelerated and deemed to
have become fully vested as of your Termination Date and you shall be entitled
to exercise those 90,000 options on or before February 15, 2005. With respect to
the option letter agreement dated August 28, 1998, you shall be entitled to
exercise, at your election, some or all of the 105,000 options that are vested
as of your Termination Date on a cashless basis (defined below) on the later of
either: (a) your Termination Date; or (b) within five (5) business days
following the expiration of the Revocation Period defined in paragraph 11. For
purposes of this Agreement, the term "Cashless Basis" shall mean that in lieu of
exercising some or all of your 105,000 vested stock options for cash, you shall
be entitled to receive up to a total number of shares of common stock of the
Company computed using the following formulas:

            X  =        35,000 (A - $1.2375) ; and
                        --------------------
                                    A

            X  =        35,000 (A - $2.125) ; and
                        -------------------
                                    A

            X  =        35,000 (A - $3.125)
                        -------------------
                                    A

where X equals the number of shares of common stock to be issued to you and A
equals the fair market value of one share of common stock on the date of
exercise. In addition, you may elect to have the Company withhold from the total
number of shares due under the above formulas a number of shares having a fair
market value equal to the minimum amount necessary to satisfy the Company's
aggregate federal, state, local and foreign tax withholding and FICA and FUTA
obligations due as a result of a Cashless Basis exercise. With respect to the
option letter agreement dated March 1, 2000, you shall be entitled to exercise
the 60,000 options that are vested as of your Termination Date on or before
February 15, 2005. You acknowledge and agree that you shall forfeit any right to
those 30,000 unvested stock options under the option letter agreement dated
March 1, 2000, as shown in Exhibit A hereto. You acknowledge and agree that
there has been no change of control at any time up to and including your
Termination Date and that you shall have no rights to accelerated vesting or
otherwise upon any change of control occurring after


                                       2

your Termination Date. The Company agrees to take any action necessary to
effectuate the terms of this paragraph 4.

            5. STOCK PROXY. You agree that at the time you execute this
Agreement, you will execute a proxy for all of your shares of Company common
stock in favor of the President of the Company, Loren G. Peterson, or his
designee, which proxy shall be in the form attached hereto as Exhibit E. The
proxy shall be granted for a term of one year and shall not be limited in scope
of authority.

            6. RETURN OF COMPANY PROPERTY. You agree to return to the Company:
(a) all originals and copies of all proprietary and/or confidential information
and trade secrets of the Company; (b) all originals and copies of customer
files; (c) all identification cards, keys, or other means of access to the
Company; and (d) any other property of the Company in your possession, custody
or control. All Company property must be returned no later than your Termination
Date.

            7. NONDISPARAGEMENT. You agree that you will not make disparaging or
adverse remarks about, or refer negatively to your association with the Company,
its parents, subsidiaries, affiliates, officers, directors, trustees, employees
or any other Released Party defined in paragraph 10. The Company agrees that its
Board of Directors and executive officers shall not make disparaging or adverse
remarks about you, or refer negatively to your association with the Company.

            8. NON-FILING OF COMPLAINT OR CHARGES. You represent that you have
not filed or asserted any cause of action, claim, charge or other action or
proceeding against the Company.

            9. COOPERATION. You agree that you will cooperate and assist the
Company in the future in the event that the Company is presented with legal
issues as to which you have relevant information and knowledge. To the extent
such cooperation is required, the Company agrees: (a) to reimburse you for
reasonable out-of-pocket expenses actually incurred in connection with providing
such cooperation so long as such expenses are approved in advance; and (b) to
compensate you for your time at a reasonable rate.

            10. GENERAL RELEASE. As a material inducement to the Company to
enter into this Agreement, and in consideration of the good and valuable
consideration contained herein, the receipt and sufficiency of which is hereby
acknowledged, you, on behalf of yourself, your heirs, administrators,
representatives, executors, successors, and assigns, hereby irrevocably and
unconditionally release, acquit, and forever discharge Sheffield
Pharmaceuticals, Inc. and its predecessors (including without limitation
Sheffield Medical Technologies Inc.), parents, subsidiaries, affiliates,
divisions, successors and assigns, and all of their current and former agents,
officers, directors, employees, members, trustees, fiduciaries, representatives
and attorneys (the "Released Parties") from any and all charges, complaints,
claims, liabilities, obligations, promises, agreements, damages, causes of
action, suits, demands, losses, debts, and expenses of any nature whatsoever,
known or unknown ("Claims") which you have, had or claim to have against any
Released Party up to and including the date you sign this Agreement. This
General Release of Claims shall include, without limitation, Claims relating to
your employment and separation from employment with the Company, Claims of
discrimination under the common law or any federal or state statute (including,
without limitation, the Civil Rights Act of 1964, the Americans with
Disabilities Act and the Age Discrimination in Employment Act, all as amended),
Claims for wrongful discharge, Claims for the payment of any salary, wages,
vacation time, bonuses or commissions, Claims for severance or other benefits
(other than as specifically set forth in paragraphs 2, 3 and 4 herein), Claims
of detrimental reliance, and all other statutory, common law or other Claims of
any nature whatsoever. This General Release of Claims does not apply to any
Claims concerning a breach of this Agreement, including the option letter
agreements referred to in Paragraph 4 as amended by this Agreement, or any
claims arising after the date you sign this Agreement. With respect to the
Claims you are waiving herein, you acknowledge that you are waiving your right
to receive money or any other relief in any action instituted by you or on your
behalf by any other person, entity or government agency.

            11. NOTICE AND RIGHT TO CONSIDER. You are advised to consult with an
attorney before executing this Agreement. You acknowledge that you have
consulted with an attorney of your choosing, Charles Elbert, Esquire, in
connection with your review of this Agreement. In any event, you should
thoroughly review and understand the effect of this Agreement and its General
Release before taking action upon them. You may have up to forty-five (45) days
from January 14, 2002 (the date you first received the Company's written offer
concerning the separation of your employment) to complete your review and sign
the Agreement. You acknowledge that if you sign this


                                       3

Agreement prior to the expiration of the forty-five (45) day period that you did
so voluntarily. You will also have seven (7) days following your execution of
this Agreement to revoke it (the "Revocation Period"). If you wish to revoke the
Agreement, you must do so in writing, addressed to the Company's Chief Executive
Officer at the Company's headquarters, and such revocation must be received by
the Company prior to the expiration of the Revocation Period.

            If you sign this Agreement prior to your Termination Date, then you
agree to execute the General Release attached hereto as Exhibit F on your
Termination Date. Should you fail to do so, then this Agreement shall
immediately become null and void.

            12. AGE AND JOB TITLE INFORMATION. Attached to this letter as
Exhibit G is a description of (i) any class, unit or group of individuals being
offered the benefits that the Company has offered to you, and any applicable
time limits regarding such offer; (ii) the job titles and ages of all
individuals eligible or selected for such offer, and (iii) the ages of all
individuals in the same job classification or organizational unit who are not
eligible or selected for the offer. By signing this Agreement you acknowledge
that you have received Exhibit G and understand its contents.

            13. MISCELLANEOUS. This Agreement constitutes the full understanding
and entire Agreement between you and the Company and supersedes and terminates
any other agreements, communications and understandings of any kind, whether
oral or written, formal or informal, including, without limitation, any
agreement concerning benefits upon a change in control. Except for paragraphs 9,
10 and 11 (excluding any reference in paragraph 11 to paragraph 8) and the
Exhibits to the Employment Agreement which have been referenced in this
Agreement, the Employment Agreement by and between the parties is hereby
superseded by this Agreement and shall be deemed null and void and of no further
force or effect. You represent and acknowledge that in signing this Agreement,
you have not relied upon any promise, inducement, representation or statement,
whether oral or written, not set forth in this Agreement. This Agreement may be
amended or modified only by a written instrument signed by the parties.

            The Company acknowledges that you are entitled to, and will continue
to be entitled to, the same rights of indemnification as current officers and
directors of the Company, to the fullest extent provided for under Delaware law
and as more particularly set forth in the Company's By-Laws.

            The parties agree that the failure of a party at any time to require
performance of any provision of this Agreement shall not affect, diminish,
obviate or void in any way the Party's full right or ability to require
performance of the same or any other provisions of this Agreement at any time
thereafter.

            This Agreement shall inure to the benefit of and shall be binding
upon you, your heirs, administrators, representatives, executors, successors and
assigns and upon the successors and assigns of the Company.

            This Agreement shall be construed in accordance with and governed by
the laws of the State of Missouri, without respect to its conflict of laws
provisions.

            Should any portion, term or provision of this Agreement be declared
or determined by any court to be illegal, invalid or unenforceable, the validity
or the remaining portions, terms and provisions shall not be affected thereby,
and the illegal, invalid or unenforceable portion, term or provision shall be
deemed not to be part of this Agreement.

            The headings of the paragraphs of this Agreement are for convenience
only and are not binding on any interpretation of this Agreement.

            In the event of any conflict between this Agreement and the stock
option letter agreements referred to in paragraph 4, the provisions of this
Agreement shall control.

                                      * * *

            If you wish to accept this Agreement, please sign and date the
Agreement below and return it to me within the time period specified in
paragraph 11.

            We wish you every success for the future.


                                       4


                                        Sincerely,


                                        /s/ Loren G. Peterson
                                        -------------------------------------
                                        Loren G. Peterson
                                        President and Chief Executive Officer


BY SIGNING THIS AGREEMENT, I STATE THAT I HAVE READ IT, I UNDERSTAND IT, I AGREE
WITH EVERYTHING IN IT AND I HAVE SIGNED IT KNOWINGLY AND VOLUNTARILY.


/s/ Carl F. Siekmann
- --------------------
Carl F. Siekmann

Date:  2/18/02
       -------


                                       5




                                    EXHIBIT A

                      STOCK OPTIONS AS OF TERMINATION DATE




                                                                                       Exercise Period for
Grant Date    Total Shares  Vested Stock Options  Unvested Shares  Exercise Price      Vested Stock Options
- ----------    ------------  --------------------  ---------------  --------------      -------------------
                                                                        
4/25/97       100,000       100,000               0                $2.75               To and including 2/15/03
(A-1 grant)
4/25/97       150,000       150,000               0                $2.75               To and including 2/15/03
(A-2 grant)
4/25/97       150,000       150,000               0                $2.75               60,000 to and including
(B grant)                                                                              2/15/03
                                                                                       ***
                                                                                       90,000 to and including
                                                                                       2/15/05
8/28/98       105,000       35,000 at $1.2375     0                35,000 at $1.2375   see n. 1
                            35,000 at $2.125                       35,000 at $2.125
                            35,000 at $3.125                       35,000 at $3.125
3/01/00       90,000        30,000 at $4.75       30,000 at        30,000 at $4.75     To and including 2/15/05
                            30,000 at $5.3125     at $6.3125       30,000 at $5.3125
                                                                   30,000 at $6.3125


n. 1:  Either (at your election):

            (1) 35,000 at $1.2375; 35,000 at $2.125; 35,000 at $3.125; all
within 90 days from your Termination Date; or

            (2) Some or all of the 105,000 options on a Cashless Basis, defined
in paragraph 4 of the Agreement, on the later of either: (a) your Termination
Date; or (b) within five (5) business days following the expiration of the
Revocation Period, defined in paragraph 12 of the Agreement.


                                       6


                                    EXHIBIT B

            EMPLOYMENT AGREEMENT (INCLUDING EXHIBITS A-1, A-2 AND B)


                              EMPLOYMENT AGREEMENT

            AGREEMENT made as of the 25th day of April, 1997, by and between
Sheffield Medical Technologies Inc., a Delaware corporation with its principal
offices at 30 Rockefeller Plaza, Suite 4515, New York, New York 10112 (the
"Corporation"), and Carl F. Siekmann residing at 15915 Wetherburn Road,
Chesterfield, Missouri 63017 ("Executive").

                                   WITNESSETH

            WHEREAS, the Corporation desires to employ and retain Executive as
its Executive Vice President - Corporate Development, upon the terms and subject
to the conditions of this Agreement; and

            NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto agree as follows:

            1. Employment of Executive. The Corporation hereby employs Executive
as its Executive Vice President - Corporate Development, to perform the duties
and responsibilities traditionally incident to such office, subject at all times
to the control and direction of the Board of Directors of the Corporation.

            2. Acceptance of Employment; Offices; Time and Attention, Etc. (a)
Executive hereby accepts such employment and agrees that throughout the period
of his employment hereunder, except as hereinafter provided, he will devote his
full business and professional time in utilizing his business and professional
expertise, with proper attention, knowledge and skills faithfully, diligently
and to the best of his ability in furtherance of the business of the Corporation
and its subsidiaries and will perform the duties assigned to him pursuant to
Paragraph 1 hereof. As Executive Vice President - Corporate Development,
Executive shall also perform such specific duties and shall exercise such
specific authority related to the management of the day-to-day operations of the
Corporation and its subsidiaries as may be reasonably assigned to Executive from
time to time by the Board of Directors of the Corporation.

            (b) Executive shall at all times be subject to, observe and carry
out such rules, regulations, policies, directions and restrictions as the Board
of Directors of the Corporation shall from time to time establish. During the
period of his employment hereunder, Executive shall not, directly or indirectly,
accept employment or compensation from, or perform services of any nature for,
any business enterprise other than the Corporation and its subsidiaries.
Notwithstanding the foregoing in this Paragraph 2, Executive shall not be
precluded from engaging in recreational, eleemosynary, educational and other
activities which do not materially interfere with his duties hereunder during
vacations, holidays and other periods outside of business hours.

            (c) It is anticipated that the Corporation's principal executive
office (now located in New York City) shall be relocated to St. Louis, Missouri
but that Executive may be required to spend substantial amounts of time at
locations in and outside of St. Louis, Missouri relating to the business of the
Corporation and its subsidiaries. It is understood that Executive shall continue
to reside in the vicinity of St. Louis, Missouri and that the Corporation shall
maintain an office in St. Louis, Missouri, which is where Executive shall
maintain his principal office until the Corporation relocates from New York City
to St. Louis, Missouri. The Corporation agrees to reimburse Executive for his
reasonable expenses, including hotel and travel costs, associated with the
Corporation's business. In addition, until completion of such relocation, it is
understood that Executive shall visit the Corporation's executive office in New
York City on a regular basis for meetings and to conduct Corporation business
that is more appropriately conducted from such executive office.

            3. Term. Except as otherwise provided herein, the term of
Executive's employment hereunder shall commence on the date of the consummation
of the merger of Camelot Pharmacal, L.L.C., a Missouri limited liability
company, with and into a subsidiary of the Company (the "Merger") and shall
continue to and including April 25, 2002. Notwithstanding anything to the
contrary contained in the Agreement, this Agreement shall terminate and have no
force and effect in the event that the Merger is not consummated on or before
June 6, 1997. Unless terminated earlier in accordance with the terms hereof,
this Agreement shall automatically be extended for one or more additional
consecutive one year terms unless either party notifies the other party in
writing at least six months before the end of the then current term (including
the initial term) of its or his desire to terminate this Agreement. The last day
of the term of this Agreement pursuant to this Paragraph 3 (including any early
termination pursuant to the terms hereof) is referred to herein as the
"Termination Date".

            4. Compensation. (a) As compensation for his services hereunder, the
Corporation shall pay to Executive (i) a base annual salary at the rate of
$160,000, payable in equal installments in accordance with the normal payroll
practices of the Corporation but in no event less frequently than semi-monthly,
and (ii) such incentive compensation and bonuses, if any, as the Board of
Directors of the Corporation in its absolute discretion may determine to award
Executive (it being understood that this Agreement shall in no event be
construed to require the payment to Executive of any incentive compensation or
bonuses), it being understood that Executive shall be entitled to receive such
incentive compensation and bonuses determined on a basis comparable to the
incentive compensation and/or bonuses awarded to other executive officers of the
Corporation. All compensation paid to Executive shall be subject to withholding
and other employment taxes imposed by applicable law.


                                       7

            (b) During the period of Executive's employment hereunder, Executive
shall not be entitled to any additional compensation for rendering employment
services to subsidiaries of the Corporation or for serving in any office of the
Corporation or any of its subsidiaries to which he is elected or appointed.

            (c) In the event that Executive is elected to the Corporation's
Board of Directors, Executive will receive compensation and benefits as a
director of the Corporation consistent with the compensation and benefits
received by the Corporation's other directors who are also employees of the
Corporation.

            5. Stock Options. (a) As additional compensation for his services
hereunder, the Corporation shall grant to Executive an option under the
Corporation's 1993 Stock Option Plan (the "Plan") to acquire a total of 400,000
shares of the Corporation's common stock at an exercise price per share equal to
the closing sale price of the Corporation's common stock as reported by the
American Stock Exchange on the date hereof, with the terms of such option to be
evidenced by (i) one option letter agreement in the form annexed as Exhibit "A"
hereto ("Option Letter A-1") being exercisable for 100,000 shares of Common
Stock, (ii) one option letter agreement in the form annexed as Exhibit "A-2"
hereto ("Option Letter A-2") being exercisable for 150,000 shares of Common
Stock and (iii) one option letter agreement in the form annexed as Exhibit "B"
hereto ("Option Letter B") being exercisable for 150,000 shares of Common Stock
(such option letters being referred to collectively herein as the "Plan Option
Letters").

            (b) The Company represents and warrants that there are sufficient
shares of Common Stock currently available under the Company's 1993 Stock Option
Plan (the "1993 Plan") to cover the shares of Common Stock issuable to Executive
upon exercise of Option Letter A-1.

            (c) In the event that the Company's stockholders fail at the next
annual meeting of stockholders of the Corporation to approve both (i) an
amendment increasing the number of shares available for the issuance of options
under the Plan to an amount at least sufficient to cover all the shares of
Common Stock issuable upon exercise of Option Letter A-2 and Option Letter B and
(ii) appropriate amendments to the Plan specifically confirming the right of the
Corporation's Board of Directors, in the issuance of stock options under the
Plan, to determine provisions regarding terms of the exercise of such stock
options (including without limitation, the period of exercisability of stock
options under the Plan upon termination of employment for cause or without
cause) and provisions regarding forfeiture of stock options under the Plan upon
termination of employment, the Company agrees, upon receipt of a written demand
from Executive, to promptly amend the Plan Option Letters to provide for three
non-qualified options outside the Plan having substantially the same terms and
provisions of the Plan Stock Options.

            (d) In the event that (i) the Corporation is required to amend the
Plan Option Letters pursuant to Paragraph 5(c) or (ii) Executive's employment by
the Corporation is terminated (x) by the Corporation for any reason other than
for Cause, (y) by Executive as a result of an Employer Breach or (z) by the
Corporation by reason of the Executive's disability or death prior to the
expiration of the options evidenced by the Plan Option Letters and Executive is
required after such event to pay any U.S. federal or state income and
withholding tax (collectively, "Income Taxes") on any income recognized by
Executive arising upon any exercise of options evidenced by the Plan Option
Letters, the Corporation agrees to reimburse Executive the difference between
(A) the amount of Income Taxes Executive would have been required to pay had the
income recognized on such exercise been treated as a long term capital gain and
(B) the amount of Income Taxes payable by Executive in respect of such exercise
(the amount of such difference being referred to as the "Tax Difference" in
respect of such exercise). In computing the Tax Difference, the amount of taxes
payable by Executive shall be determined by assuming that the income recognized
as a result of such exercise is taxed at the highest marginal federal and state
income tax rates applicable to ordinary income. In addition, the Corporation
shall pay Executive an amount equal to the Tax Difference arising in respect of
such exercise multiplied by a fraction, the numerator of which is 1 and the
denominator of which is equal to 1 minus (i) the highest marginal federal income
tax rate (currently 39.6%) and (ii) the highest marginal state income tax rate
applicable to Executive, in each case in respect of ordinary income, in effect
at the time of such exercise. Such amount shall be paid by the Corporation
within ninety (90) days after any such exercise. Notwithstanding anything to the
contrary in this Agreement or the Plan Option Letters, the Corporation shall
have no obligation to pay Executive any amount in excess of $250,000 in the
aggregate in respect of its obligations under this subparagraph.

            6. Additional Benefits; Vacation. (a) In addition to such base
salary, Executive shall receive and be entitled to participate, to the extent he
is eligible under the terms and conditions thereof, in any profit sharing,
pension, retirement, hospitalization, disability, medical service, insurance or
other employee benefit plan generally available to the executive officers of the
Corporation that may be in effect from time to time during the period of
Executive's employment hereunder. The Corporation agrees to cover Executive
under any directors' and officers' liability policy maintained by the
Corporation.

            (b) Executive shall be entitled to four (4) weeks' paid vacation in
respect of each 12-month period during the term of his employment hereunder,
such vacation to be taken at times mutually agreeable to Executive and the Board
of Directors of the Corporation.

            (c) Executive shall be entitled to recognize as holidays all days
recognized as such by the Corporation.

            7. Reimbursement of Expenses. The Corporation shall reimburse
Executive in accordance with applicable policies of the Corporation for all
expenses reasonably incurred by him in connection with the performance of his
duties hereunder and the business of the Corporation, upon the submission to the
Corporation of appropriate receipts or vouchers.

            8. Restrictive Covenant. (a) In consideration of the Corporation's
entering into this Agreement, Executive agrees that during the period of his
employment hereunder and, in the event of termination of this Agreement (i) by
the Corporation upon Executive becoming Disabled (as that term is defined in
Paragraph 13 hereof), (ii) by the Corporation for Cause (as that term, is
defined in Paragraph 14 hereof) or (iii) by Executive otherwise than for


                                       8


Employer Breach (as that term is defined in Paragraph 15 hereof), for a further
period of six months thereafter, he will not (x) directly or indirectly own,
manage, operate, join, control, participate in, invest in, whether as an
officer, director, employee, partner, investor or otherwise, any business entity
that is engaged in a directly competitive business (as hereinafter defined) to
that of the Corporation or any of its subsidiaries within the United States of
America, (y) for himself or on behalf of any other person, partnership,
corporation or entity, call on any customer of the Corporation or any of its
subsidiaries for the purpose of soliciting away, diverting or taking away any
customer from the Corporation or its subsidiaries, or (z) solicit any person
then engaged as an employee, representative, agent, independent contractor or
otherwise by the Corporation or any of its subsidiaries, to terminate his or her
relationship with the Corporation or any of its subsidiaries. For purposes of
this Agreement, the term "directly competitive business" shall mean any business
that is then involved in the research, development, manufacturing or
commercialization in any way of any product, compound, device or method that
acts or functions by, through or on the same active, binding or receptor site,
mechanism of action, signaling pathway or channel as any product, compound,
device or method that is or becomes a part of the Corporation's business or the
business of any of its subsidiaries during Executive's employment by the
Corporation or any of its subsidiaries. Nothing contained in this Agreement
shall be deemed to prohibit Executive from investing his funds in securities of
an issuer if the securities of such issuer are listed for trading on a national
securities exchange or are traded in the over-the-counter market and Executive's
holdings therein represent less than 10% of the total number of shares or
principal amount of the securities of such issuer outstanding.

            (b) Executive acknowledges that the provisions of this Paragraph 8
are reasonable and necessary for the protection of the Corporation, and that
each provision, and the period or periods of time, geographic areas and types
and scope of restrictions on the activities specified herein are, and are
intended to be, divisible. In the event that any provision of this Paragraph 8,
including any sentence, clause or part hereof, shall be deemed contrary to law
or invalid or unenforceable in any respect by a court of competent jurisdiction,
the remaining provisions shall not be affected, but shall, subject to the
discretion of such court, remain in full force and effect.

            9.  Confidential Information.

            (a) Executive shall hold in a fiduciary capacity for the benefit of
the Corporation and its subsidiaries all confidential information, knowledge and
data relating to or concerned with its operations, sales, business and affairs,
and he shall not, at any time during his employment hereunder and for two years
thereafter, use, disclose or divulge any such information, knowledge or data to
any person, firm or corporation other than to the Corporation and its
subsidiaries or their respective designees or except as may otherwise be
reasonably required or desirable in connection with the business and affairs of
the Corporation and its subsidiaries.

            (b) Notwithstanding anything to the contrary contained herein,
Executive's obligations under Paragraph 9(a) hereof shall not apply to any
information which:

            (i) becomes rightfully known to Executive subsequent or prior to his
            employment by the Corporation;

            (ii) is or becomes available to the public other than as a result of
            wrongful disclosure by Executive;

            (iii) becomes available to Executive subsequent to his employment by
            the Corporation on a nonconfidential basis from a source other than
            the Corporation or its agents which source has a right to disclose
            such information; or

            (iv) results from research and development and/or commercial
            operations at any time by or on behalf of any person, company or
            other entity with which or with whom Executive shall become
            associated (in a manner consistent with the terms of this Agreement)
            subsequent to his employment by the Corporation or its agents
            totally independent from any disclosure from the Corporation or its
            agents.

            (c) Notwithstanding anything to the contrary contained herein, in
the event that Executive becomes legally compelled to disclose any confidential
information, Executive will provide the Corporation with prompt notice so that
the Corporation may seek a protective order or other appropriate remedy. In the
event that such protective order or other remedy is not obtained, Executive
shall furnish only such confidential information which is legally required to be
disclosed.

            10. Intellectual Property. Any idea, invention, design, written
material, manual, system, procedure, improvement, development or discovery
conceived, developed, created or made by Executive alone or with others, during
the period of his employment hereunder and applicable to the business of the
Corporation or any of its subsidiaries, whether or not patentable or
registrable, shall become the sole and exclusive property of the Corporation or
such subsidiary. Executive shall disclose the same promptly and completely to
the Corporation and shall, during the period of his employment hereunder and at
any time and from time to time hereafter at no cost to Executive (i) execute all
documents reasonably requested by the Corporation for vesting in the Corporation
or any of its subsidiaries the entire right, title and interest in and to the
same, (ii) execute all documents reasonably requested by the Corporation for
filing and prosecuting such applications for patents, trademarks, service marks
and/or copyrights as the Corporation, in its sole discretion, may desire to
prosecute, and (iii) give the Corporation all assistance it reasonably requires,
including the giving of testimony in any suit, action or proceeding, in order to
obtain, maintain and protect the Corporation's right therein and thereto.

            11. Equitable Relief. The parties hereto acknowledge that
Executive's services are unique and that, in the event of a breach or a
threatened breach by Executive of any of his obligations under Paragraphs 8, 9
or 10 this Agreement, the Corporation shall not have an adequate remedy at law.
Accordingly, in the event of any such breach or threatened breach by Executive,
the Corporation shall be entitled to such equitable and injunctive relief as may
be available to restrain Executive and any business, firm, partnership,
individual, corporation or entity participating in


                                       9

such breach or threatened breach from the violation of the provisions of
Paragraph 8, 9 or 10 hereof. Nothing herein shall be construed as prohibiting
the Corporation from pursuing any other remedies available at law or in equity
for such breach or threatened breach, including the recovery of damages and the
immediate termination of the employment of Executive hereunder, if and to the
extent permitted hereunder.

            12. Termination of Agreement; Termination of Employment; Severance;
Survival. (a) This Agreement and Executive's employment hereunder shall
terminate upon the first to occur of the following: (i) Executive becoming
Disabled (as that term is defined in Paragraph 13 hereof); (ii) Executive's
death; (iii) termination of Executive's employment by the Corporation for Cause
or pursuant to subparagraph (b) of this Paragraph 12; (iv) termination of
Executive's employment for Employer Breach and (v) the termination of this
Agreement at the end of the term of this Agreement on the Termination Date
pursuant to Paragraph 3.

            (b) Notwithstanding anything to the contrary contained in this
Agreement, in the event of the termination of the Executive's employment by the
Corporation for any reason (other than for Cause), Executive shall be paid a
severance payment equal to 75% of Executive's then current annual base salary
payable in nine equal monthly installments, with the first installment being
payable on the date falling two weeks after the date of such termination and
each additional installment being paid every month after such date until such
severance is paid in full. In the event of such termination of the Executive's
employment by the Corporation (other than for Cause), the Corporation shall have
no further obligation to the Executive under this Agreement other than the
Corporation's obligation (i) to make such severance payment to the Executive
(ii) to pay Executive's COBRA premium payments for hospitalization and medical
insurance coverage provided by the Corporation and to pay Executive's premiums
on any death and/or disability insurance being maintained by the Corporation for
Executive at the time of such termination, in each case until the payment in
full of such severance payments

            (c) Paragraph 5(c) of this Agreement shall survive the termination
of Executive's employment hereunder until the earlier to occur of Executive's
exercise of all of the stock options granted pursuant to paragraph 5 and the
expiration of all such stock options pursuant to the Stock Option Letters.
Paragraphs 7, 8, 9, 10, 11 and 26 of this Agreement shall survive the
termination of Executive's employment hereunder, except in the case of
termination pursuant to Paragraph 15.

            13. Disability. In the event that during the term of his employment
by the Corporation Executive shall become Disabled (as that term is hereinafter
defined) he shall continue to receive the full amount of the base salary to
which he was theretofore entitled for a period of six months after he shall be
deemed to have become Disabled (the "First Disability Payment Period"). If the
First Disability Payment Period shall end prior to the Termination Date,
Executive thereafter shall be entitled to receive salary at an annual rate equal
to 80% of his then current base salary for a further period ending on the
earlier of (i) six months thereafter or (ii) the Termination Date (the "Second
Disability Payment Period"). Upon the expiration of the Second Disability
Payment Period, Executive shall not be entitled to receive any further payments
on account of his base salary until he shall cease to be Disabled and shall have
resumed his duties hereunder and provided that the Corporation shall not have
theretofore terminated this Agreement as hereinafter provided. The Corporation
may terminate Executive's employment hereunder at any time after Executive is
Disabled, upon at least 10 days' prior written notice; provided, however, that
such termination shall not relieve the Corporation from its obligation to make
the payments to Executive described above in this Paragraph 13. For the purposes
of this Agreement, Executive shall be deemed to have become Disabled when (x) by
reason of physical or mental incapacity, Executive is not able to perform his
duties hereunder for a period of 90 consecutive days or for 120 days in any
consecutive 180-day period or (y) when Executive's physician or a physician
designated by the Corporation shall have determined that Executive shall not be
able, by reason of physical or mental incapacity, to perform a substantial
portion of his duties hereunder. In the event that Executive shall dispute any
determination of his disability pursuant to clauses (x) or (y) above, the matter
shall be resolved by the determination of three physicians qualified to practice
medicine in the United States of America, one to be selected by each of the
Corporation and Executive and the third to be selected by the designated
physicians. If Executive shall receive benefits under any disability policy
maintained by the Corporation, the Corporation shall be entitled to deduct the
amount equal to the benefits so received from base salary that it otherwise
would have been required to pay to Executive as provided above.

            14. Termination for Cause. The Corporation may at any time upon
written notice to Executive terminate Executive's employment for Cause. For
purposes of this Agreement, the following shall constitute Cause: (i) the
willful and repeated failure of Executive to perform any material duties
hereunder or gross negligence of Executive in the performance of such duties,
and if such failure or gross negligence is susceptible to cure by Executive, the
failure to effect such cure within twenty (20) days after written notice of such
failure or gross negligence is given to Executive; (ii) except as permitted
hereunder, unexplained, willful and regular absences of Executive from the
Corporation; (iii) excessive use of alcohol or illegal drugs, interfering with
the performance of Executives duties hereunder; (iv) indictment for a crime of
theft, embezzlement, fraud, misappropriation of funds, other acts of dishonesty
or the violation of any law or ethical rule relating to Executive's employment;
(v) indicted for any other felony or other crime involving moral turpitude by
Executive; or (vi) the breach by Executive of any of the provisions of
paragraphs 8, 9 or 10 and if such breach is susceptible of cure by Executive,
the failure to effect such cure within twenty (20) days after written notice of
such breach is given to Executive. For purposes of this Agreement, an action
shall be considered "willful" if it is done intentionally, purposely or
knowingly, distinguished from an act done carelessly, thoughtlessly or
inadvertently. In any such event, Executive shall be entitled to receive his
base salary to and including the date of termination.

            15. Termination for Employer Breach. Executive may upon written
notice to the Corporation terminate this Agreement (including paragraphs 8, 9,
10 and 11) in the event of the breach by the Corporation of any material
provision of this Agreement, and if such breach is susceptible of cure, the
failure to effect such cure within 20 days after written notice of such breach
is given to the Corporation (an "Employer Breach"). Executive's right to
terminate this Agreement under this Paragraph 15 shall be in addition to any
other remedies Executive may have


                                       10

under law or equity. Paragraphs 2(d), 7 and 12(b) of this Agreement shall
survive the termination of this Agreement by Executive pursuant to this
Paragraph 15.

            16. Insurance Policies. The Corporation shall have the right from
time to time to purchase, increase, modify or terminate insurance policies on
the life of Executive for the benefit of the Corporation, in such amounts as the
Corporation shall determine in its sole discretion. In connection therewith,
Executive shall, at such time or times and at such place or places as the
Corporation may reasonably direct, submit himself to such physical examinations
and execute and deliver such documents as the Corporation may reasonably deem
necessary or desirable.

            17. Entire Agreement; Amendment. This Agreement constitutes the
entire agreement of the parties hereto, and any prior agreement between the
Corporation and Executive is hereby superseded and terminated effective
immediately and shall be without further force or effect. No amendment or
modification himself shall be valid or binding unless made in writing and signed
by the party against whom enforcement thereof is sought.

            18. Notices. Any notice required, permitted or desired to be given
pursuant to any of the provisions of this Agreement shall be delivered in person
or sent by responsible overnight delivery service or sent by certified mail,
return receipt requested, postage and fees prepaid, if to the Corporation, at
its address set forth above to the attention of the Corporation's Chief
Financial Officer and, if to Executive, at his address set forth above. Either
of the parties hereto may at any time and from time to time change the address
to which notice shall be sent hereunder by notice to the other party given under
this Paragraph 18. Notices shall be deemed effective upon receipt.

            19. No Assignment; Binding Effect. Neither this Agreement, nor the
right to receive any payments hereunder, may be assigned by either party without
the other party's prior written consent. This Agreement shall be binding upon
Executive, his heirs, executors and administrators and upon the Corporation, its
successors and assigns.

            20. Waivers. No course of dealing nor any delay on the part of
either party in exercising any rights hereunder shall operate as a waiver of any
such rights. No waiver of any default or breach of this Agreement shall be
deemed a continuing waiver or a waiver of any other breach or default.

            21. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, except that body of law
relating to choice of laws.

            22. Invalidity. If any clause, paragraph, section or part of this
Agreement shall be held or declared to be void, invalid or illegal, for any
reason, by any court of competent jurisdiction, such provision shall be
ineffective but shall not in any way invalidate or affect any other clause,
paragraph, section or part of this Agreement.

            23. Further Assurances. Each of the parties shall execute such
documents and take such other actions as may be reasonably requested by the
other party to carry out the provisions and purposes of this Agreement in
accordance with its terms.

            24. Headings. The headings contained in this Agreement have been
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.

            25. Publicity. The Corporation and Executive agree that they will
not make any press releases or other announcements prior to or at the time of
execution of this Agreement with respect to the terms contemplated hereby,
except as required by applicable law, without the prior approval of the other
party, which approval will not be unreasonably withheld.

            26. Arbitration. Any disputes arising under this Agreement shall be
submitted to and determined by arbitration in New York City, New York; provided,
however, that such arbitration shall be held in St. Louis, Missouri in the event
that the Company's principal executive offices is located at the time of such
dispute in St. Louis, Missouri. Such arbitration shall be conducted in
accordance with the rules of the American Arbitration Association. Any award or
decision of the arbitration shall be conclusive in the absence of fraud and
judgment thereon may be entered in any court having jurisdiction thereof. The
costs of such arbitration shall be paid by the non-prevailing party to the
extent directed by the arbitrator(s).

THIS AGREEMENT CONTAINS BINDING ARBITRATION PROVISIONS WHICH MAY BE ENFORCED BY
THE PARTIES.


                                       11


IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.

                                  SHEFFIELD MEDICAL TECHNOLOGIES INC.

                                  By:   /s/ George Lombardi
                                      ------------------------------------
                                            George Lombardi
                                            Vice President and Chief
                                            Financial Officer



                                        /s/ Carl F. Siekmann
                                      ------------------------------------
                                            Carl F. Siekmann


                                       12



                                                                  EXHIBIT A-1 TO
                                                            EMPLOYMENT AGREEMENT

                       SHEFFIELD MEDICAL TECHNOLOGIES INC.
                        30 ROCKEFELLER PLAZA, SUITE 4515
                            NEW YORK, NEW YORK 10112

                                                       April 25, 1997

Carl F. Siekmann
15915 Wetherburn Road
Chesterfield, Missouri 63017

            At a meeting of the Board of Directors of Sheffield Medical
Technologies Inc. (the "Company") held on April 22, 1997, the Board authorized
the grant to you of an option (the "Option") to purchase one hundred thousand
(100,000) shares (the "Shares") of Common Stock, par value $.01 per share, of
the Company. The Option is being granted in connection with the Employment
Agreement dated as of April 25, 1997 between the Company and you (the
"Employment Agreement"). The terms of the Option are set forth below.

            1. No part of the Option is currently exercisable. Subject to any
adjustment pursuant to paragraph 5 below, the Option is exercisable at an
exercise price of $2.75 per Share. Subject to the paragraph 2 below, the Option
may first be exercised on April 25, 1998 for 10,000 Shares and shall become
exercisable for an additional 10,000 Shares on each April 25 thereafter to and
including April 25, 2007. Subject to paragraph 2 below, the Option must be
exercised as to any and all Shares on or prior to April 25, 2007 (on which date
the Option will, to the extent not previously exercised, expire).

            2. Notwithstanding anything to the contrary contained herein or in
the Plan (as defined below):

                        (a) In the event your employment by the Company is
            terminated for Cause (as such term is defined in the Employment
            Agreement) prior to the expiration of the Option, the Option will be
            exercisable for 90 days from the date of such termination, but only
            as to such Shares that had become exercisable pursuant to paragraph
            1 above (and not previously purchased) prior to such date. The
            Option shall then expire to the extent not exercised within such 90
            day period.

                        (b) In the event that your employment by the Company is
            terminated by the Company for any reason other than for Cause, by
            you as a result of an Employer Breach (as such term is defined in
            the Employment Agreement) or by the Company by reason of your
            disability or death prior to the expiration of the Option, the
            Option shall become immediately exercisable for one year as to all
            Shares not previously purchased. The Option shall then expire to the
            extent not exercised within such one year period.

                        (c) In the event that your employment by the Company is
            terminated by you for any reason other than an Employer Breach prior
            to the expiration of the Option, the Option will be exercisable for
            90 days from the date of such termination, but only as to such
            Shares that had become exercisable pursuant to paragraph 1 above
            (and not previously purchased) prior to such date; provided,
            however, that if such termination occurs after the second
            anniversary of the date of this letter, the Option shall become
            immediately exercisable for such 90 day period as to all Shares not
            previously purchased. The Option shall then expire to the extent not
            exercised within such 90 day period.

                        (d) In the event that your employment by the Company is
            terminated by the Company by reason of your death or disability, the
            Option shall become immediately exercisable for one year as to all
            Shares not previously purchased. The Option shall then expire to the
            extent not exercised within such one year period.

                        (e) In the event of a Change of Control, the Option
            shall, at your option exercised by written notice delivered to the
            Company, become immediately exercisable for one year as to all
            Shares not previously purchased. The Option shall then expire to the
            extent not exercised within such one year period. As used in this
            paragraph, "Change of Control" shall mean (i) the merger,
            consolidation or other business combination of the Company with


                                       13


            or into another corporation with the effect that the shareholders of
            the Company immediately following the merger, consolidation or other
            business combination, hold 50% or less of the combined voting power
            of the then outstanding equity interests of the surviving
            corporation of such merger, consolidation or other business
            combination ordinarily (and apart from rights accruing under special
            circumstances) having the right to vote in the election of directors
            or (ii) the replacement of a majority of the Board of Directors of
            the Company in any given year as compared to the directors who
            constituted the Board at the beginning of such year, and such
            replacement shall not have been approved by the Board of Directors
            of the Company as constituted at the beginning of such year.

            If any of the options granted hereunder are treated as nonqualified
stock options ("NQO") as the result of exceeding the $100,000 exercise limit
contained in Section 422(d) of the Internal Revenue Code of 1986, as amended,
the Company shall issue separate certificates representing those shares
constituting incentive stock options ("ISO") and those shares constituting NQO's
and shall identify the ISO shares as such on its stock transfer records.

            3. Unless at the time of the exercise of the Option a registration
statement under the Securities Act of 1933, as amended (the "Act"), is in effect
as to such Shares, any Shares purchased by you upon the exercise of the Option
shall be acquired for investment and not for sale or distribution, and if the
Company so requests, upon any exercise of the Option, in whole or in part, you
will execute and deliver to the Company a certificate to such effect. The
Company shall not be obligated to issue any Shares pursuant to the Option if, in
the opinion of counsel to the Company, the Shares to be so issued are required
to be registered or otherwise qualified under the Act or under any other
applicable statute, regulation or ordinance affecting the sale of securities,
unless and until such Shares have been so registered or otherwise qualified.

            4. You understand and acknowledge that, under existing law, unless
at the time of the exercise of the Option a registration statement under the Act
is in effect as to such Shares (i) any Shares purchased by you upon exercise of
this option may be required to be held indefinitely unless such Shares are
subsequently registered under the Act or an exemption from such registration is
available; (ii) any sales of such Shares made in reliance upon Rule 144
promulgated under the Act may be made only in accordance with the terms and
conditions of that Rule (which, under certain circumstances, restrict the number
of shares which may be sold and the manner in which shares may be sold); (iii)
in the case of securities to which Rule 144 is not applicable, compliance with
Regulation A promulgated under the Act or some other disclosure exemption will
be required; (iv) certificates for Shares to be issued to you hereunder shall
bear a legend to the effect that the Shares have not been registered under the
Act and that the Shares may not be sold, hypothecated or otherwise transferred
in the absence of an effective registration statement under the Act relating
thereto or an opinion of counsel satisfactory to the Company that such
registration is not required; and (v) the Company will place an appropriate
"stop transfer" order with its transfer agent with respect to such Shares. In
addition, you understand and acknowledge that the Company has no obligation to
you to furnish information necessary to enable you to make sales under Rule 144.

            5. In the event that the Company shall at any time prior to the
expiration of the Option and prior to the exercise thereof: (i) declare or pay
to the holders of the Common Stock a dividend payable in any kind of shares of
stock of the Company; or (ii) change or divide or otherwise reclassify its
Common Stock into the same or a different number of shares with or without par
value, or into shares of any class or classes; or (iii) consolidate or merge
with, or transfer its property as an entirety or substantially all of its assets
to any other corporation; or (iv) make any distribution of its assets to holders
of its Common Stock as a liquidation, or partial liquidation dividend or by way
of return of capital; then, upon the subsequent exercise of the Option, the
exercise price of the Shares issuable upon the exercise hereof shall be
appropriately adjusted by the Board of Directors of the Company so that you
shall receive for the exercise price, in addition to or in substitution for the
Shares to which you would be entitled upon such exercise, such additional shares
of stock of the Company, or such reclassified shares of stock of the Company, or
such securities or property of the Company resulting from such consolidation or
merger or transfer, of such assets of the Company, which you would have been
entitled to receive had you exercised the Option prior to the happening of any
of the foregoing events.

            6. The Option (or installment thereof) is to be exercised by
delivering to the Company a written notice of exercise in the form attached
hereto as Annex A, specifying the number of Shares to be purchased, together
with payment of the purchase price of the Shares to be purchased. The purchase
price is to be paid in cash.

            7. The Option does not confer upon you any right whatsoever as a
stockholder of the Company. The Option is granted to you under the Company's
1993 Stock Option Plan, as amended, (the "Plan") and is intended to be an
incentive stock option. The terms of the Plan are incorporated by reference into
the Option, except as modified in accordance with the Plan by the terms set
forth herein. A copy of the Plan has been delivered to you with this letter. The
Option shall be binding upon any successors or assigns of the Company.

            If the foregoing correctly sets forth our understanding of the
option, please indicate your acceptance by signing this letter in the space
provided below.

                                          Very truly yours,

                                          SHEFFIELD MEDICAL TECHNOLOGIES INC.

                                          By: /s/ George Lombardi
                                              ----------------------------
                                              George Lombardi
                                              Chief Financial Officer



AGREED TO AND ACCEPTED:

/s/ Carl F. Siekmann
- --------------------
Carl F. Siekmann


                                       14


                                                                         Annex A

                             STOCK SUBSCRIPTION FORM

To:            Sheffield Medical Technologies Inc.

Gentlemen:

            I hereby exercise my option to purchase from Sheffield Medical
Technologies Inc. (the "Company"), pursuant to the Stock Option Letter Agreement
between us dated as of April 25, 1997, ________ shares of the Company's Common
Stock, $.01 par value, and herewith tender payment therefor at the rate of $____
per share. The option was originally granted pursuant to the terms of the
Company's 1993 Stock Option Plan.

            I represent and warrant that I am acquiring the said shares for my
own account for investment purposes only; that I have no present intention of
selling or otherwise disposing of such shares or any part thereof; that I will
not transfer said shares in violation of the securities laws of the United
States; that I am familiar with the business operations, management and
financial condition and affairs of the Company; that I have not relied upon any
representation of the Company with respect thereto; and that I have the personal
financial means to comply with all of said representations. I further confirm
that I have been advised that said shares will not be registered under the
Securities Act of 1933, as amended, and that I have consulted with and been
advised by counsel as to the restrictions on resale to which said shares will
thereby be subject.

            The form in which I wish my name and address to appear on the
Company's stock records is as follows:

                                     Name:
                                               -----------------------

                                     Address:
                                               -----------------------
                                               -----------------------
                                               -----------------------


                                                        Very truly yours,


                                                        ---------------------
                                                        Carl F. Siekmann


                                       15



                                                                  EXHIBIT A-2 TO
                                                            EMPLOYMENT AGREEMENT

                       SHEFFIELD MEDICAL TECHNOLOGIES INC.
                        30 ROCKEFELLER PLAZA, SUITE 4515
                            NEW YORK, NEW YORK 10112

                                                                  April 25, 1997

Carl F. Siekmann
15915 Wetherburn Road
Chesterfield, Missouri 63017

            At a meeting of the Board of Directors of Sheffield Medical
Technologies Inc. (the "Company") held on April 22, 1997, the Board authorized
the grant to you of an option (the "Option") to purchase one hundred thousand
(150,000) shares (the "Shares") of Common Stock, par value $.01 per share, of
the Company. The Option is being granted in connection with the Employment
Agreement dated as of April 25, 1997 between the Company and you (the
"Employment Agreement"). The terms of the Option are set forth below.

            1. No part of the Option is currently exercisable. Subject to any
adjustment pursuant to paragraph 5 below, the Option is exercisable at an
exercise price of $2.75 per Share. Subject to the paragraph 2 below, the Option
may first be exercised on April 25, 1998 for 15,000 Shares and shall become
exercisable for an additional 15,000 Shares on each April 25 thereafter to and
including April 25, 2007. Subject to paragraph 2 below, the Option must be
exercised as to any and all Shares on or prior to April 25, 2007 (on which date
the Option will, to the extent not previously exercised, expire).

            2. Notwithstanding anything to the contrary contained herein or in
the Plan (as defined below):

                        (a) In the event your employment by the Company is
            terminated for Cause (as such term is defined in the Employment
            Agreement) prior to the expiration of the Option, the Option will be
            exercisable for 90 days from the date of such termination, but only
            as to such Shares that had become exercisable pursuant to paragraph
            1 above (and not previously purchased) prior to such date. The
            Option shall then expire to the extent not exercised within such 90
            day period.

                        (b) In the event that your employment by the Company is
            terminated by the Company for any reason other than for Cause, by
            you as a result of an Employer Breach (as such term is defined in
            the Employment Agreement) or by the Company by reason of your
            disability or death prior to the expiration of the Option, the
            Option shall become immediately exercisable for one year as to all
            Shares not previously purchased. The Option shall then expire to the
            extent not exercised within such one year period.

                        (c) In the event that your employment by the Company is
            terminated by you for any reason other than an Employer Breach prior
            to the expiration of the Option, the Option will be exercisable for
            90 days from the date of such termination, but only as to such
            Shares that had become exercisable pursuant to paragraph 1 above
            (and not previously purchased) prior to such date; provided,
            however, that if such termination occurs after the second
            anniversary of the date of this letter, the Option shall become
            immediately exercisable for such 90 day period as to all Shares not
            previously purchased. The Option shall then expire to the extent not
            exercised within such 90 day period.

                        (d) In the event that your employment by the Company is
            terminated by the Company by reason of your death or disability, the
            Option shall become immediately exercisable for one year as to all
            Shares not previously purchased. The Option shall then expire to the
            extent not exercised within such one year period.

                        (e) In the event of a Change of Control, the Option
            shall, at your option exercised by written notice delivered to the
            Company, become immediately exercisable for one year as to all
            Shares not previously purchased. The Option shall then expire to the
            extent not exercised within such one year period. As used in this
            paragraph, "Change of Control" shall mean (i) the merger,
            consolidation or other business combination of the Company with or
            into another corporation with the effect that the shareholders of
            the Company immediately following the merger, consolidation or other
            business combination, hold 50% or less of the combined voting power
            of the then outstanding equity interests of the surviving
            corporation of such merger, consolidation or other business
            combination ordinarily (and apart from rights accruing under special
            circumstances) having the right to vote in the election of directors
            or (ii) the replacement of a majority of the Board of Directors of
            the Company in any given year as compared to the directors who
            constituted the Board at the beginning of such year, and such
            replacement shall not have been approved by the Board of Directors
            of the Company as constituted at the beginning of such year.

            If any of the options granted hereunder are treated as nonqualified
stock options ("NQO") as the result of exceeding the $100,000 exercise limit
contained in Section 422(d) of the Internal Revenue Code of 1986, as amended,
the Company shall issue separate certificates representing those shares
constituting incentive stock options ("ISO") and those shares constituting NQO's
and shall identify the ISO shares as such on its stock transfer records.

            3. Unless at the time of the exercise of the Option a registration
statement under the Securities Act of 1933, as amended (the "Act"), is in effect
as to such Shares, any Shares purchased by you upon the exercise of the Option
shall be acquired for investment and not for sale or distribution, and if the
Company so requests, upon any exercise of the Option, in whole or in part, you
will execute and deliver to the Company a certificate to such effect. The
Company shall not be obligated to issue any Shares pursuant to the Option if, in
the opinion of counsel to the


                                       16

Company, the Shares to be so issued are required to be registered or otherwise
qualified under the Act or under any other applicable statute, regulation or
ordinance affecting the sale of securities, unless and until such Shares have
been so registered or otherwise qualified.

            4. You understand and acknowledge that, under existing law, unless
at the time of the exercise of the Option a registration statement under the Act
is in effect as to such Shares (i) any Shares purchased by you upon exercise of
this option may be required to be held indefinitely unless such Shares are
subsequently registered under the Act or an exemption from such registration is
available; (ii) any sales of such Shares made in reliance upon Rule 144
promulgated under the Act may be made only in accordance with the terms and
conditions of that Rule (which, under certain circumstances, restrict the number
of shares which may be sold and the manner in which shares may be sold); (iii)
in the case of securities to which Rule 144 is not applicable, compliance with
Regulation A promulgated under the Act or some other disclosure exemption will
be required; (iv) certificates for Shares to be issued to you hereunder shall
bear a legend to the effect that the Shares have not been registered under the
Act and that the Shares may not be sold, hypothecated or otherwise transferred
in the absence of an effective registration statement under the Act relating
thereto or an opinion of counsel satisfactory to the Company that such
registration is not required; and (v) the Company will place an appropriate
"stop transfer" order with its transfer agent with respect to such Shares. In
addition, you understand and acknowledge that the Company has no obligation to
you to furnish information necessary to enable you to make sales under Rule 144.

            5. In the event that the Company shall at any time prior to the
expiration of the Option and prior to the exercise thereof: (i) declare or pay
to the holders of the Common Stock a dividend payable in any kind of shares of
stock of the Company; or (ii) change or divide or otherwise reclassify its
Common Stock into the same or a different number of shares with or without par
value, or into shares of any class or classes; or (iii) consolidate or merge
with, or transfer its property as an entirety or substantially all of its assets
to any other corporation; or (iv) make any distribution of its assets to holders
of its Common Stock as a liquidation, or partial liquidation dividend or by way
of return of capital; then, upon the subsequent exercise of the Option, the
exercise price of the Shares issuable upon the exercise hereof shall be
appropriately adjusted by the Board of Directors of the Company so that you
shall receive for the exercise price, in addition to or in substitution for the
Shares to which you would be entitled upon such exercise, such additional shares
of stock of the Company, or such reclassified shares of stock of the Company, or
such securities or property of the Company resulting from such consolidation or
merger or transfer, of such assets of the Company, which you would have been
entitled to receive had you exercised the Option prior to the happening of any
of the foregoing events.

            6. The Option (or installment thereof) is to be exercised by
delivering to the Company a written notice of exercise in the form attached
hereto as Annex A, specifying the number of Shares to be purchased, together
with payment of the purchase price of the Shares to be purchased. The purchase
price is to be paid in cash.

            7. The Option does not confer upon you any right whatsoever as a
stockholder of the Company. The Option is granted to you under the Company's
1993 Stock Option Plan, as amended, (the "Plan") and is intended to be an
incentive stock option. The terms of the Plan are incorporated by reference into
the Option, except as modified in accordance with the Plan by the terms set
forth herein. A copy of the Plan has been delivered to you with this letter. The
Option shall be binding upon any successors or assigns of the Company.

            If the foregoing correctly sets forth our understanding of the
option, please indicate your acceptance by signing this letter in the space
provided below.

                                        Very truly yours,

                                        SHEFFIELD MEDICAL TECHNOLOGIES INC.

                                    By: /s/ George Lombardi
                                        -------------------
                                        George Lombardi
                                        Chief Financial Officer



AGREED TO AND ACCEPTED:

/s/ Carl F. Siekmann
- ---------------------
Carl F. Siekmann


                                       17



                                                                         Annex A

                             STOCK SUBSCRIPTION FORM

To: Sheffield Medical Technologies Inc.

Gentlemen:

            I hereby exercise my option to purchase from Sheffield Medical
Technologies Inc. (the "Company"), pursuant to the Stock Option Letter Agreement
between us dated as of April 25, 1997, ________ shares of the Company's Common
Stock, $.01 par value, and herewith tender payment therefor at the rate of $____
per share. The option was originally granted pursuant to the terms of the
Company's 1993 Stock Option Plan.

            I represent and warrant that I am acquiring the said shares for my
own account for investment purposes only; that I have no present intention of
selling or otherwise disposing of such shares or any part thereof; that I will
not transfer said shares in violation of the securities laws of the United
States; that I am familiar with the business operations, management and
financial condition and affairs of the Company; that I have not relied upon any
representation of the Company with respect thereto; and that I have the personal
financial means to comply with all of said representations. I further confirm
that I have been advised that said shares will not be registered under the
Securities Act of 1933, as amended, and that I have consulted with and been
advised by counsel as to the restrictions on resale to which said shares will
thereby be subject.

            The form in which I wish my name and address to appear on the
Company's stock records is as follows:


                                     Name:
                                               -----------------------

                                     Address:
                                               -----------------------
                                               -----------------------
                                               -----------------------


                                                        Very truly yours,


                                                        ---------------------
                                                        Carl F. Siekmann


                                       18



                                                                    EXHIBIT B TO
                                                            EMPLOYMENT AGREEMENT


                       SHEFFIELD MEDICAL TECHNOLOGIES INC.
                        30 ROCKEFELLER PLAZA, SUITE 4515
                            NEW YORK, NEW YORK 10112

April 25, 1997

Carl F. Siekmann
15915 Wetherburn Road
Chesterfield, Missouri 63017

            At a meeting of the Board of Directors of Sheffield Medical
Technologies Inc. (the "Company") held on April 22, 1997, the Board authorized
the grant to you of an option (the "Option") to purchase one hundred and fifty
(150,000) shares (the "Shares") of Common Stock, par value $.01 per share, of
the Company. The Option is being granted in connection with the Employment
Agreement dated as of April 25, 1997 between the Company and you (the
"Employment Agreement"). The terms of the Option are set forth below.

            1. No part of the option is currently exercisable. Subject to any
adjustment pursuant to paragraph 5 below, the Option is exercisable at an
exercise price of $2.75 per Share. Subject to the paragraph 2 below, the Option
may first be exercised on April 25, 1998 for 15,000 Shares and shall become
exercisable for an additional 15,000 Shares on each April 25 thereafter to and
including April 25, 2007. Subject to paragraph 2 below, the Option must be
exercised as to any and all Shares on or prior to April 25, 2007 (on which date
the Option will, to the extent not previously exercised, expire).

            2. Notwithstanding anything to the contrary contained herein or in
the Plan (as defined below):

                        (a) In the event your employment by the Company is
            terminated for Cause (as such term is defined in the Employment
            Agreement) prior to the expiration of the Option, the Option will be
            exercisable for 90 days from the date of such termination, but only
            as to such Shares that had become exercisable pursuant to paragraph
            1 above (and not previously purchased) prior to such date. The
            Option shall then expire to the extent not exercised within such 90
            day period.

                        (b) In the event that your employment by the Company is
            terminated by the Company for any reason other than for Cause, by
            you as a result of an Employer Breach (as such term is defined in
            the Employment Agreement) or by the Company by reason of your
            disability or death prior to the expiration of the Option, the
            Option shall be exercisable for one year from the date of such
            termination, but only as to such Shares that had become exercisable
            pursuant to paragraph 1 above (and not previously purchased) prior
            to such date; provided, however, that if such termination occurs
            after the fifth anniversary of the date of this letter, the Option
            shall become immediately exercisable for such one year period as to
            all Shares not previously purchased. The Option shall then expire to
            the extent not exercised within such one year period.

                        (c) In the event that your employment by the Company is
            terminated by you for any reason other than an Employer Breach other
            than an Employer Breach prior to the expiration of the Option, the
            Option will be exercisable for 90 days from the date of such
            termination, but only as to such Shares that had become exercisable
            pursuant to paragraph 1 above (and not previously purchased) prior
            to such date; provided, however, that if such termination occurs
            after the fifth anniversary of the date of this letter, the Option
            shall become immediately exercisable for such 90 day period as to
            all Shares not previously purchased. The Option shall then expire to
            the extent not exercised within such 90 day period.

                        (d) In the event that your employment by the Company is
            terminated by the Company by reason of your death or disability, the
            Option shall be exercisable for one year from the date of such
            termination, but only as to such Shares that had become exercisable
            pursuant to paragraph 1 above (and not previously purchased) prior
            to such date; provided, however, that if such termination occurs
            after the fifth anniversary of the date of this letter, the Option
            shall become immediately exercisable for such one year period as to
            all Shares not previously purchased. The Option shall then expire to
            the extent not exercised within such one year period.

                        (e) in the event of a Change of Control, the Option
            shall, at your option exercised by written notice delivered to the
            Company, be exercisable for one year from the date of such
            termination, but only as to such Shares that had become exercisable
            pursuant to paragraph 1 above (and not previously purchased) prior
            to such date; provided, however, that if such termination occurs
            after the fifth anniversary of the date of this letter, the Option
            shall become immediately exercisable for such one year period as to
            all Shares not previously purchased. The Option shall then expire to
            the extent not exercised within such one year period. As used in
            this paragraph, "Change of Control" shall mean (i) the merger,
            consolidation or other business combination of the Company with or
            into another corporation with the effect that the shareholders of
            the Company immediately following the merger, consolidation or other
            business combination, hold 50% or less of the combined voting power
            of the then outstanding equity interests of the surviving
            corporation of such merger, consolidation or other business
            combination ordinarily (and apart from rights accruing under special
            circumstances) having the right to vote in the election of directors
            or (ii) the replacement of a majority of the Board of Directors of
            the Company in any given year as compared to the directors who
            constituted the Board at the beginning of such year, and such
            replacement shall not have been approved by the Board of Directors
            of the Company as constituted at the beginning of such year.


                                       19


            If any of the options granted hereunder are treated as nonqualified
stock options ("NQO") as the result of exceeding the $100,000 exercise limit
contained in Section 422(d) of the Internal Revenue Code of 1986, as amended,
the Company shall issue separate certificates representing those shares
constituting incentive stock options ("ISO") and those shares constituting NQO's
and shall identify the ISO shares as such on its stock transfer records.

            3. Unless at the time of the exercise of the Option a registration
statement under the Securities Act of 1933, as amended (the "Act"), is in effect
as to such Shares, any Shares purchased by you upon the exercise of the Option
shall be acquired for investment and not for sale or distribution, and if the
Company so requests, upon any exercise of the Option, in whole or in part, you
will execute and deliver to the Company a certificate to such effect. The
Company shall not be obligated to issue any Shares pursuant to the Option if, in
the opinion of counsel to the Company, the Shares to be so issued are required
to be registered or otherwise qualified under the Act or under any other
applicable statute, regulation or ordinance affecting the sale of securities,
unless and until such Shares have been so registered or otherwise qualified.

            4. You understand and acknowledge that, under existing law, unless
at the time of the exercise of the Option a registration statement Under the Act
is in effect as to such Shares (i) any Shares purchased by you upon exercise of
this option may be required to be held indefinitely unless such Shares are
subsequently registered under the Act or an exemption from such registration is
available; (ii) any sales of such Shares made in reliance upon Rule 144
promulgated under the Act may be made only in accordance with the terms and
conditions of that Rule (which, under certain circumstances, restrict the number
of shares which may be sold and the manner in which shares may be sold) ; (iii)
in the case of securities to which Rule 144 is not applicable, compliance with
Regulation A promulgated under the Act or some other disclosure exemption will
be required; (iv) certificates for Shares to be issued to you hereunder shall
bear a legend to the effect that the Shares have not been registered under the
Act and that the Shares may not be sold, hypothecated or otherwise transferred
in the absence of an effective registration statement under the Act relating
thereto or an opinion of counsel satisfactory to the Company that such
registration is not required; and (v) the Company will place an appropriate
"stop transfer" order with its transfer agent with respect to such Shares. In
addition, you understand and acknowledge that the Company has no obligation to
you to furnish information necessary to enable you to make sales under Rule 144.

            5. In the event that the Company shall at any time prior to the
expiration of the Option and prior to the exercise thereof: (i) declare or pay
to the holders of the Common Stock a dividend payable in any kind of shares of
stock of the Company; or (ii) change or divide or otherwise reclassify its
Common Stock into the same or a different number of shares with or without par
value, or into shares of any class or classes; or (iii) consolidate or merge
with, or transfer its property as an entirety or substantially all of its assets
to any other corporation; or (iv) make any distribution of its assets to holders
of its Common Stock as a liquidation, or partial liquidation dividend or by way
of return of capital; then, upon the subsequent exercise of the Option, the
exercise price of the Shares issuable upon the exercise hereof shall be
appropriately adjusted by the Board of Directors of the Company so that you
shall receive for the exercise price, in addition to or in substitution for the
Shares to which you would be entitled upon such exercise, such additional shares
of stock of the Company, or such reclassified shares of stock of the Company, or
such securities or property of the Company resulting from such consolidation or
merger or transfer, of such assets of the Company, which you would have been
entitled to receive had you exercised the option prior to the happening of any
of the foregoing events.

            6. The Option (or installment thereof) is to be exercised by
delivering to the Company a written notice of exercise in the form attached
hereto as Annex A, specifying the number of Shares to be purchased, together
with payment of the purchase price of the Shares to be purchased. The purchase
price is to be paid in cash.

            7. The Option does not confer upon you any right whatsoever as a
stockholder of the Company. The Option is granted to you under the Company's
1993 Stock Option Plan, as amended, (the "Plan") and is intended to be an
incentive stock option. The terms of the Plan are incorporated by reference into
the option, except as modified in accordance with the Plan by the terms set
forth herein. A copy of the Plan has -been delivered to you with this letter.
The option shall be binding upon any successors or assigns of the Company.

            If the foregoing correctly sets forth our understanding of the
Option, please indicate your acceptance by signing this letter in the space
provided below.

                                        Very truly yours,

                                        SHEFFIELD MEDICAL TECHNOLOGIES INC.

                                        By:  /s/ George Lombardi
                                             ------------------------
                                             George Lombardi
                                             Chief Financial Officer


AGREED TO AND ACCEPTED:

/s/ Carl F. Siekmann
- -----------------------
Carl F. Siekmann


                                       20



                                                                         Annex A

                             STOCK SUBSCRIPTION FORM

To: Sheffield Medical Technologies Inc.

Gentlemen:

            I hereby exercise my option to purchase from Sheffield Medical
Technologies Inc. (the "Company"), pursuant to the Stock Option Letter Agreement
between us dated as of April 25, 1997, _________ shares of the Company's Common
Stock, $.01 par value, and herewith tender payment therefor at the rate of
$______ per share. The option was originally granted pursuant to the terms of
the Company's 1993 Stock Option Plan.

            I represent and warrant that I am acquiring the said shares for my
own account for investment purposes only; that I have no present intention of
selling or otherwise disposing of such shares or any part thereof; that I will
not transfer said shares in violation of the securities laws of the United
States; that I am familiar with the business operations, management and
financial condition and affairs of the Company; that I have not relied upon any
representation of the Company with respect thereto; and that I have the personal
financial means to comply with all of said representations. I further confirm
that I have been advised that said shares will not be registered under the
Securities Act of 1933, as amended, and that I have consulted with and been
advised by counsel as to the restrictions on resale to which said shares will
thereby be subject.

            The form in which I wish my name and address to appear on the
Company's stock records is as follows:


                                     Name:
                                               -----------------------

                                     Address:
                                               -----------------------
                                               -----------------------
                                               -----------------------


                                                        Very truly yours,


                                                        ---------------------
                                                        Carl F. Siekmann


                                       21



                                    EXHIBIT C

                  OPTION LETTER AGREEMENT DATED AUGUST 28, 1998


                         SHEFFIELD PHARMACEUTICALS, INC.
                            425 SOUTH WOODSMILL ROAD
                            ST. LOUIS, MISSOURI 63017

                                                                 August 28, 1998

To:           Carl F. Siekmann
              15915 Wetherburn Road
              Chesterfield, Missouri 63017

            At a meeting of the Stock Option Committee of the Board of Directors
of Sheffield Pharmaceuticals, Inc. (the "Company") held on August 25, 1998, the
Company authorized the grant to you as of the date hereof of an option (the
"Option") to purchase one Hundred Fifty Five Thousand (105,000) shares (the
"Shares") of Common Stock, par value $.01 per share, of the Company (the "Common
Stock").

            No part of the option is currently exercisable. On or after August
28, 1999 and prior to August 28, 2008 (on which date the Option, to the extent
it has not previously been exercised or has not previously expired, will
expire), the Option may be exercised as follows: (i) as to 35,000 Shares,
subsequent to the time that the Fair Market Value (as hereinafter defined) of
the Common Stock equals or exceeds $1.2375 for 10 consecutive trading days (such
Shares constituting the "First Tranche" of the Option); (ii) as to 35,000
Shares, subsequent to the time that the Fair Market Value of the Common Stock
equals or exceeds $2.125 for 10 consecutive trading days (such shares
constituting the "Second Tranche" of the Option) and (iii) as to the remaining
35,000 Shares, subsequent to the time that the Fair Market Value of the Common
Stock exceeds $3.125 for 10 consecutive trading days (such Shares constituting
the "Third Tranche" of the Option). As used herein, "Fair Market Value" means
the closing price of the Common Stock on the principal U.S. national securities
exchange on which the Common Stock is listed for trading (if the shares are so
listed) or on the Nasdaq National Market or Small Cap Market (if the Common
Shares are regularly quoted on the Nasdaq National Market or Small Cap Market),
or, if not so listed or regularly quoted or if there is no such closing price,
the mean between the closing bid and asked prices of the Common Stock on such
exchange or on Nasdaq or in the over-the-counter market or, if such bid and
asked prices shall not be available, as reported by any nationally recognized
quotation service selected by the Company.

            Shares may be purchased by you upon exercise of the Option at the
following respective purchase prices: (i) Shares constituting the First Tranche
$1.2375 per Share; (ii) Shares constituting the Second Tranche $2.125 per Share;
and (iii) Shares constituting the Third Tranche - $3.125 per Share.

            This Option must be exercised as to any and all Shares on or prior
to August 28, 2008 (on which date the Option, to the extent it has not
previously been exercised or has not previously expired, will expire).

            Notwithstanding anything to the contrary contained in this letter
agreement, the following provisions shall apply:

            (a) In the event that Fair Market Value does not equal or exceed
            $1.2375 for 10 consecutive trading days prior to August 28, 2001
            (the "Target Date"), the First Tranche of the Option may be
            exercised on the Target Date and for 60 days thereafter (after which
            60th day the Option in respect of the First Tranche will, to the
            extent not previously exercised, expire);

            (b) In the event that Fair Market Value does not equal or exceed
            $2.125 for 10 consecutive trading days prior to the Target Date, the
            Second Tranche of the Option may be exercised on the Target Date and
            for 60 days thereafter (after which 60th day the Option in respect
            of the Second Tranche will, to the extent not previously exercised,
            expire); and


                                       22


            (c) In the event that Fair Market Value does not equal or exceed
            $3.125 for 10 consecutive trading days prior to the Target Date, the
            Third Tranche of the Option may be exercised on the Target Date and
            for 60 days thereafter (after which 60th day the Option in respect
            of the Third Tranche will, to the extent not previously exercised,
            expire).

            Unless at the time of the exercise of the Option a registration
statement under the Securities Act of 1933, as amended (the "Act"), is in effect
as to such Shares, any Shares purchased by you upon the exercise of the Option
shall be acquired for investment and not for sale or distribution, and if the
Company so requests, upon any exercise of the Option, in whole or in part, you
will execute and deliver to the Company a certificate to such effect. The
Company shall not be obligated to issue any Shares pursuant to the Option if, in
the opinion of counsel to the Company, the Shares to be so issued are required
to be registered or otherwise qualified under the Act or under any other
applicable statute, regulation or ordinance affecting the sale of securities,
unless and until such Shares have been so registered or otherwise qualified.

            You understand and acknowledge that, under existing law, unless at
the time of the exercise of the Option a registration statement under the Act is
in effect as to such Shares (i) any Shares purchased by you upon exercise of
this Option may be required to be held indefinitely unless such Shares are
subsequently registered under the Act or an exemption from such registration is
available; (ii) any sales of such Shares made in reliance upon Rule 144
promulgated under the Act may be made only in accordance with the terms and
conditions of that Rule (which, under certain circumstances, restrict the number
of shares which may be sold and the manner in which shares may be sold); (iii)
in the case of securities to which Rule 144 is not applicable, compliance with
Regulation A promulgated under the Act or some other disclosure exemption will
be required; (iv) certificates for Shares to be issued to you hereunder shall
bear a legend to the effect that the Shares have not been registered under the
Act and that the Shares may not be sold, hypothecated or otherwise transferred
in the absence of an effective registration statement under the Act relating
thereto or an opinion of counsel satisfactory to the Company that such
registration is not required; and (v) the Company will place an appropriate
"stop transfer" order with its transfer agent with respect to such Shares. In
addition, you understand and acknowledge that the Company has no obligation to
you to furnish information necessary to enable you to make sales under Rule 144.

            In the event that the Company shall at any time prior to the
expiration of the Option and prior to the exercise thereof: (i) declare or pay
to the holders of the Common Stock a dividend payable in any kind of shares of
stock of the Company; or (ii) change or divide or otherwise reclassify its
Common Stock into the same or a different number of shares with or without par
value, or into shares of any class or classes; or (iii) consolidate or merge
with, or transfer its property as an entirety or substantially all of its assets
to any other corporation; or (iv) make any distribution of its assets to holders
of its Common Stock as a liquidation, or partial liquidation dividend or by way
of return of capital; then, upon the subsequent exercise of the Option, the
purchase price of the Shares issuable upon the exercise hereof shall be
appropriately adjusted by the Board of Directors of the Company so that you
shall receive for the exercise price, in addition to or in substitution for the
Shares to which you would be entitled upon such exercise, such additional shares
of stock of the Company, or such reclassified shares of stock of the Company, or
such securities or property of the Company resulting from such consolidation or
merger or transfer, of such assets of the Company, which you would have been
entitled to receive had you exercised the Option prior to the happening of any
of the foregoing events.

            The Option (or installment thereof) is to be exercised by delivering
to the Company a written notice of exercise in the form attached hereto as Annex
A, specifying the number of Shares to be purchased, together with payment of the
purchase price of the Shares to be purchased. The purchase price is to be paid
in cash.

            The Option does not confer upon you any right whatsoever as a
stockholder of the Company.

            By accepting the Option, you acknowledge your agreement to advise
the Company in writing at least five trading days prior to selling, assigning or
otherwise transferring any of the Shares.

            The Option is granted to you under the Company's 1993 Stock Option
Plan, as amended, (the "Plan") and is not intended to be an incentive stock
option. The terms of the Plan are incorporated by reference into the Option,


                                       23


except as modified by the terms set forth herein. A copy of the Plan has been
delivered to you with this letter.

            The Option shall be binding upon any successors or assigns of the
Company.

            If the foregoing correctly sets forth our understanding, please
indicate your acceptance by signing this letter in the space provided below.

                                      Very truly yours,

                                      Sheffield Pharmaceuticals, Inc.

                                      By:    /s/ Loren G. Peterson
                                             --------------------------
                                                 Loren G. Peterson
                                                 President and CEO
AGREED TO AND ACCEPTED:


/s/ Carl F. Siekmann
 --------------------
Carl F. Siekmann


                                       24



                                                                         Annex A

                             STOCK SUBSCRIPTION FORM

To: Sheffield Pharmaceuticals, Inc.

Gentlemen:

            I hereby exercise my option to purchase from Sheffield
Pharmaceuticals, Inc. (the "Company"), pursuant to the Stock Option Letter
Agreement between us dated August 28, 1998, ______ shares of the Company's
Common Stock, $.01 par value, and herewith tender payment therefore at the rate
of $____ per share. The option was originally granted pursuant to the terms of
the Company's 1993 Stock Option Plan, as amended.

            I represent and warrant that I am acquiring the said shares for my
own account for investment purposes only; that I have no present intention of
selling or otherwise disposing of such shares or any part thereof; that I will
not transfer said shares in violation of the securities laws of the United
States; that I am familiar with the business operations, management and
financial condition and affairs of the Company; that I have not relied upon any
representation of the Company with respect thereto; and that I have the personal
financial means to comply with all of said representations. I further confirm
that I have been advised that said shares will not be registered under the
Securities Act of 1933, as amended, and that I have consulted with and been
advised by counsel as to the restrictions on resale to which said shares will
thereby be subject.

            The form in which I wish my name and address to appear on the
Company's stock records is as follows:


                                     Name:
                                               -----------------------

                                     Address:
                                               -----------------------
                                               -----------------------
                                               -----------------------


                                                        Very truly yours,


                                                        ---------------------
                                                        Carl F. Siekmann


                                       25



                                    EXHIBIT D

                   OPTION LETTER AGREEMENT DATED MARCH 1, 2000


                         SHEFFIELD PHARMACEUTICALS, INC.
                            425 SOUTH WOODSMILL ROAD
                            ST. LOUIS, MISSOURI 63017


                                  March 1, 2000


To:         Carl F. Siekmann
            15915 Wetherburn
            Chesterfield, MO 63017

            At a meeting of the Stock Option Committee of the Board of Directors
of Sheffield Pharmaceuticals, Inc. (the "Company") held on February 29, 2000,
the Company authorized the grant to you as of the date hereof of an option (the
"Option") to purchase Ninety Thousand (90,000) shares (the "Shares") of Common
Stock, par value $.01 per share, of the Company (the "Common Stock").

            No part of the Option is currently exercisable. On or after March 1,
2001 and prior to March 1, 2010 (on which date the Option, to the extent it has
not previously been exercised or has not previously expired, will expire), the
Option may be exercised as follows: (i) as to 30,000 Shares, subsequent to the
time that the Fair Market Value (as hereinafter defined) of the Common Stock
equals or exceeds $4.75 for 10 consecutive trading days (such Shares
constituting the "First Tranche" of the Option); (ii) as to 30,000 Shares,
subsequent to the time that the Fair Market Value of the Common Stock equals or
exceeds $5.3125 for 10 consecutive trading days (such shares constituting the
"Second Tranche" of the Option) and (iii) as to the remaining 30,000 Shares,
subsequent to the time that the Fair Market Value of the Common Stock exceeds
$6.3125 for 10 consecutive trading days (such Shares constituting the "Third
Tranche" of the Option). As used herein, "Fair Market Value" means the closing
price of the Common Stock on the principal U.S. national securities exchange on
which the Common Stock is listed for trading (if the shares are so listed) or on
the Nasdaq National Market or Small Cap Market (if the Common Shares are
regularly quoted on the Nasdaq National Market or Small Cap Market), or, if not
so listed or regularly quoted or if there is no such closing price, the mean
between the closing bid and asked prices of the Common Stock on such exchange or
on Nasdaq or in the over-the-counter market or, if such bid and asked prices
shall not be available, as reported by any nationally recognized quotation
service selected by the Company.

            Shares may be purchased by you upon exercise of the Option at the
following respective purchase prices: (i) Shares constituting the First Tranche
- - $4.75 per Share; (ii) Shares constituting the Second Tranche - $5.3125 per
Share; and (iii) Shares constituting the Third Tranche - $6.3125 per Share.

            This Option must be exercised as to any and all Shares on or prior
to March 1, 2010 (on which date the Option, to the extent it has not previously
been exercised or has not previously expired, will expire).

            Notwithstanding anything to the contrary contained in this letter
agreement, the following provisions shall apply:

                        (a) In the event that Fair Market Value does not equal
            or exceed $4.75 for 10 consecutive trading days prior to March 1,
            2003 (the "Target Date"), the First Tranche of the Option may be
            exercised on the Target Date and for 60 days thereafter (after which
            60th day the Option in respect of the First Tranche will, to the
            extent not previously exercised, expire);

                        (b) In the event that Fair Market Value does not equal
            or exceed $5.3125 for 10 consecutive trading days prior to the
            Target Date, the Second Tranche of the Option may be exercised on
            the Target


                                       26

            Date and for 60 days thereafter (after which 60th day the Option in
            respect of the Second Tranche will, to the extent not previously
            exercised, expire); and

                        (c) In the event that Fair Market Value does not equal
            or exceed $6.3125 for 10 consecutive trading days prior to the
            Target Date, the Third Tranche of the Option may be exercised on the
            Target Date and for 60 days thereafter (after which 60th day the
            Option in respect of the Third Tranche will, to the extent not
            previously exercised, expire).

            Unless at the time of the exercise of the Option a registration
statement under the Securities Act of 1933, as amended (the "Act"), is in effect
as to such Shares, any Shares purchased by you upon the exercise of the Option
shall be acquired for investment and not for sale or distribution, and if the
Company so requests, upon any exercise of the Option, in whole or in part, you
will execute and deliver to the Company a certificate to such effect. The
Company shall not be obligated to issue any Shares pursuant to the Option if, in
the opinion of counsel to the Company, the Shares to be so issued are required
to be registered or otherwise qualified under the Act or under any other
applicable statute, regulation or ordinance affecting the sale of securities,
unless and until such Shares have been so registered or otherwise qualified.

            You understand and acknowledge that, under existing law, unless at
the time of the exercise of the Option a registration statement under the Act is
in effect as to such Shares (i) any Shares purchased by you upon exercise of
this Option may be required to be held indefinitely unless such Shares are
subsequently registered under the Act or an exemption from such registration is
available; (ii) any sales of such Shares made in reliance upon Rule 144
promulgated under the Act may be made only in accordance with the terms and
conditions of that Rule (which, under certain circumstances, restrict the number
of shares which may be sold and the manner in which shares may be sold); (iii)
in the case of securities to which Rule 144 is not applicable, compliance with
Regulation A promulgated under the Act or some other disclosure exemption will
be required; (iv) certificates for Shares to be issued to you hereunder shall
bear a legend to the effect that the Shares have not been registered under the
Act and that the Shares may not be sold, hypothecated or otherwise transferred
in the absence of an effective registration statement under the Act relating
thereto or an opinion of counsel satisfactory to the Company that such
registration is not required; and (v) the Company will place an appropriate
"stop transfer" order with its transfer agent with respect to such Shares. In
addition, you understand and acknowledge that the Company has no obligation to
you to furnish information necessary to enable you to make sales under Rule 144.

            In the event that the Company shall at any time prior to the
expiration of the Option and prior to the exercise thereof: (i) declare or pay
to the holders of the Common Stock a dividend payable in any kind of shares of
stock of the Company; or (ii) change or divide or otherwise reclassify its
Common Stock into the same or a different number of shares with or without par
value, or into shares of any class or classes; or (iii) consolidate or merge
with, or transfer its property as an entirety or substantially all of its assets
to any other corporation; or (iv) make any distribution of its assets to holders
of its Common Stock as a liquidation, or partial liquidation dividend or by way
of return of capital; then, upon the subsequent exercise of the Option, the
purchase price of the Shares issuable upon the exercise hereof shall be
appropriately adjusted by the Board of Directors of the Company so that you
shall receive for the exercise price, in addition to or in substitution for the
Shares to which you would be entitled upon such exercise, such additional shares
of stock of the Company, or such reclassified shares of stock of the Company, or
such securities or property of the Company resulting from such consolidation or
merger or transfer, of such assets of the Company, which you would have been
entitled to receive had you exercised the Option prior to the happening of any
of the foregoing events.

            The Option (or installment thereof) is to be exercised by delivering
to the Company a written notice of exercise in the form attached hereto as Annex
A, specifying the number of Shares to be purchased, together with payment of the
purchase price of the Shares to be purchased. The purchase price is to be paid
in cash.

            The Option does not confer upon you any right whatsoever as a
stockholder of the Company.

            By accepting the Option, you acknowledge your agreement to advise
the Company in writing at least five trading days prior to selling, assigning or
otherwise transferring any of the Shares.


                                       27


            The Option is granted to you under the Company's 1993 Stock Option
Plan, as amended, (the "Plan") and is not intended to be an incentive stock
option. The terms of the Plan are incorporated by reference into the Option,
except as modified by the terms set forth herein. A copy of the Plan has been
delivered to you with this letter.

            The Option shall be binding upon any successors or assigns of the
Company.

            If the foregoing correctly sets forth our understanding, please
indicate your acceptance by signing this letter in the space provided below.

                                      Very truly yours,

                                      Sheffield Pharmaceuticals, Inc.


                                      By:  /s/ Loren G. Peterson
                                           ----------------------------------
                                               Loren G. Peterson
                                               President


AGREED TO AND ACCEPTED:


/s/ Carl F. Siekmann
 -----------------------
Carl F. Siekmann


                                       28


                                                                         Annex A


                             STOCK SUBSCRIPTION FORM

To: Sheffield Pharmaceuticals, Inc.


Gentlemen:

            I hereby exercise my option to purchase from Sheffield
Pharmaceuticals, Inc. (the "Company"), pursuant to the Stock Option Letter
Agreement between us dated March 1, 2000, _______ shares of the Company's Common
Stock, $.01 par value, and herewith tender payment therefor at the rate of $____
per share. The option was originally granted pursuant to the terms of the
Company's 1993 Stock Option Plan, as amended.

            I represent and warrant that I am acquiring the said shares for my
own account for investment purposes only; that I have no present intention of
selling or otherwise disposing of such shares or any part thereof; that I will
not transfer said shares in violation of the securities laws of the United
States; that I am familiar with the business operations, management and
financial condition and affairs of the Company; that I have not relied upon any
representation of the Company with respect thereto; and that I have the personal
financial means to comply with all of said representations. I further confirm
that I have been advised that said shares will not be registered under the
Securities Act of 1933, as amended, and that I have consulted with and been
advised by counsel as to the restrictions on resale to which said shares will
thereby be subject.

            The form in which I wish my name and address to appear on the
Company's stock records is as follows:


                                     Name:
                                               -----------------------

                                     Address:
                                               -----------------------
                                               -----------------------
                                               -----------------------


                                                        Very truly yours,


                                                        ---------------------
                                                        Carl F. Siekmann


                                       29


                                    EXHIBIT E

                                IRREVOCABLE PROXY


            The undersigned, Carl F. Siekmann ("Holder"), an individual with a
residential address of 15915 Wetherburn Road, Chesterfield, Missouri, 63017,
hereby revokes any and all proxies heretofore granted with respect to any shares
of common stock, $.01 par value (the "Stock"), of Sheffield Pharmaceuticals,
Inc. ("Sheffield") held by Holder and, hereby irrevocably appoints the President
of Sheffield, Loren G. Peterson, or his designee, and each of them, as
attorney-in-fact and proxy of Holder to attend any and all meetings of the
stockholders of Sheffield and to vote such Holder's Stock, to represent and
otherwise to act for Holder in the same manner and with the same effect as if
such Holder were personally present and to act by consent in the same manner and
with the same effect as if Holder were executing such consent, with respect to
any matter.

            Holder agrees that, so long as this Irrevocable Proxy remains in
effect, Holder will not execute or deliver to any persons, any proxy forms
relating to any meeting, or written consent in lieu of a meeting, of
stockholders of Sheffield, will promptly provide Sheffield with copies of any
communications related to Sheffield received by Holder and will not take any
action inconsistent with this Irrevocable Proxy.

            The foregoing appointment shall be (a) absolute and irrevocable and
(b) deemed coupled with an interest.

            This Irrevocable Proxy shall be effective for a period of one (1)
year in accordance with Delaware law and may be relied upon by any third party.

            IN WITNESS WHEREOF, the undersigned Holder has executed this
Irrevocable Proxy as of February 18, 2002.


Witness:
                                        CARL F. SIEKMANN



/s/ Sally Reiter                        /s/ Carl F. Siekmann
- ----------------                        --------------------


Witness print name: Sally Reiter
                    ------------


                                       30



                                    EXHIBIT F

                                 GENERAL RELEASE

            Carl F. Siekmann, in consideration of the good and valuable
consideration contained in the attached Agreement ("the Agreement"), the receipt
and sufficiency of which is hereby acknowledged, on behalf of himself, his
heirs, administrators, representatives, executors, successors, and assigns,
hereby irrevocably and unconditionally releases, acquits, and forever discharges
Sheffield Pharmaceuticals, Inc. and its predecessors (including without
limitation Sheffield Medical Technologies Inc.), parents, subsidiaries,
affiliates, divisions, successors and assigns, and all of their current and
former agents, officers, directors, employees, members, trustees, fiduciaries,
representatives and attorneys (the "Released Parties") from any and all charges,
complaints, claims, liabilities, obligations, promises, agreements, damages,
causes of action, suits, demands, losses, debts, and expenses of any nature
whatsoever, known or unknown ("Claims") which he has, had or claims to have
against any Released Party up to and including the date he signs this General
Release. This General Release of Claims shall include, without limitation,
Claims relating to his employment and separation from employment with the
Company, Claims of discrimination under the common law or any federal or state
statute (including, without limitation, the Civil Rights Act of 1964, the
Americans with Disabilities Act and the Age Discrimination in Employment Act,
all as amended), Claims for wrongful discharge, Claims for the payment of any
salary, wages, vacation time, bonuses or commissions, Claims for severance or
other benefits (other than as specifically set forth in paragraphs 2, 3 and 4 of
the Agreement), Claims of detrimental reliance, and all other statutory, common
law or other Claims of any nature whatsoever. This General Release of Claims
does not apply to any Claims concerning a breach of the Agreement, including the
option letter agreements referred to in Paragraph 4 of the Agreement as amended
by the Agreement, or any claims arising after the date you sign this General
Release. With respect to the Claims being waived herein, Siekmann acknowledges
that he is waiving his right to receive money or any other relief in any action
instituted by him or on his behalf by any other person, entity or government
agency.

            IN WITNESS WHEREOF, the undersigned Carl F. Siekmann has executed
this General Release as of February 18, 2002.


Witness:                                 CARL F. SIEKMANN


/s/ Sally Reiter                         /s/ Carl F. Siekmann
- ----------------                         --------------------

Witness print name: Sally Reiter
                    ------------


                                       31


                                    EXHIBIT G

                      OLDER WORKERS BENEFIT PROTECTION ACT
                               NOTICE TO EMPLOYEES
                          AGE AND JOB TITLE INFORMATION

In connection with the Agreement and the offer of benefits described therein,
you are being provided with information as to (i) any class, unit or group of
individuals covered by such offer; (ii) the job titles and ages of all
individuals eligible or selected for the offer, and (iii) the ages of all
individuals in the same job classification or organizational unit who are not
eligible or selected for the offer. Eligible employees age forty (40) and over
shall have forty-five (45) days to consider the Company's offer and may revoke
their agreement to the offer within seven (7) days after their execution of the
Agreement.



Departments or                                             Ages of Employees    Ages of Ineligible
Units Affected          Job Title                          Affected             Employees
- --------------          ---------                          -----------------    ------------------
                                                                       
Executive Officers      Chairman                                                51
                        President and Chief
                        Executive Officer                                       45
                        Executive Vice President,
                        Corporate Development              58
                        Executive Vice President,
                        Scientific Affairs                 53
                        Vice President, Finance and
                        Administration and                                      37
                        Chief Financial Officer
                        Vice President, Pulmonary
                        Delivery Systems                                        48



                                       32

EX-10.38

                                                                  EXHIBIT 10.38



                                                       February 18, 2002



Mr. David A. Byron
17674 Lasiandra Drive
Chesterfield, Missouri 63017

Dear David:

            This letter follows up on the discussions we have had recently
concerning the mutually agreeable separation of your employment for reasons
other than cause with Sheffield Pharmaceuticals, Inc. (the "Company"). To assist
you in your transition, the Company is offering to you certain severance and
other benefits in exchange for the general release of claims and other terms set
forth below. The specific terms of the Company's proposed agreement (the
"Agreement") are as follows:

            1. TERMINATION OF EMPLOYMENT. The effective date of your termination
shall be January 11, 2002 (the "Termination Date"). The Company will pay you all
wages earned and any accrued and unused vacation time in accordance with Company
policy through your Termination Date. For the period from the date of this
letter through your Termination Date, you will continue to perform your duties
and responsibilities in your current position; provided however that the Company
may at any time and in its sole discretion request that you vacate the Company's
premises and cease performing any duties for the Company. In such event, the
Company shall remain obligated to pay to you all wages due to you through your
Termination Date.

            2. SEVERANCE PAY. The Company will continue to pay your base salary,
as in effect on your Termination Date, for a period of nine months following
your Termination Date, subject to appropriate tax withholdings and authorized
deductions, in accordance with the Company's regular payroll practices and
regular pay schedule.

            3. BENEFIT CONTINUATION.

                        (a) Death and Disability Insurance. The Company will
continue to pay the full premium cost of Company-sponsored death and/or
disability insurance coverage for you in effect as of your Termination Date, if
any, for a period of nine months following your Termination Date. Your rights
and obligations under such insurance plans shall be governed by the specific
terms of the plans. In the event you obtain comparable death and/or disability
insurance coverage through other employment prior to the expiration of the nine
month period of continuation coverage described herein, the Company's obligation
to continue to provide such coverage shall cease as of the effective date of
such comparable coverage. For purposes of this agreement, comparable coverage
shall be deemed to include, at a minimum, coverage at the same benefit level at
no cost to you. Should you obtain such comparable coverage, you agree to
promptly notify the Company's Chief Executive Officer in writing at the
Company's headquarters.

                        (b) Health and Dental Insurance. Upon the termination of
your employment, you and your dependents may be eligible to continue your health
and/or dental insurance coverage under Company-sponsored plans, if any, pursuant
to the federal law known as COBRA. In the event you elect COBRA continuation
coverage, the Company will pay the full premium cost and any administrative fee
for such continuation coverage for a period of nine months following your
Termination Date. After that time, you will become responsible for the full
premium cost and any administrative fee for such continuation coverage. You
understand and acknowledge that it is solely your responsibility to elect COBRA
continuation coverage if you desire such coverage. Your rights and obligations
under such insurance plans shall be governed by the specific terms of the plans
and COBRA. Information concerning COBRA rights, coverage and election will be
sent to you under separate cover. In the event you and/or your dependent(s)
become ineligible for COBRA continuation coverage during the nine month period
of premium payments described herein, the Company shall reimburse you for the
premium cost of health and/or dental insurance coverage at the same monthly rate
the Company would have paid for COBRA continuation coverage had you and/or your
dependents remained eligible for such coverage. In the event you obtain
comparable health and/or dental insurance


                                       1


coverage through other employment prior to the expiration of the nine month
period of premium payments described herein, the Company's obligation to
continue to provide such premium payments shall cease as of the effective date
of such comparable coverage. For purposes of this agreement, comparable coverage
shall be deemed to include, at a minimum, coverage at the same benefit level at
no cost to you. Should you obtain such comparable coverage, you agree to
promptly notify the Company's Chief Executive Officer in writing at the
Company's headquarters.

                        (c) Other Benefits. Except as specifically set forth in
this Agreement, your right to, and participation in, all employee benefit plans
of the Company shall terminate as of your Termination Date in accordance with
the specific terms of each plan; provided however, and notwithstanding anything
to the contrary herein, in no event shall you have any right to any benefits
upon a change in control, except with respect to the specific benefits set forth
in this Agreement.

            4. STOCK OPTIONS. Except as provided in this paragraph 4, your
interest in and rights in your Vested Stock Options (as defined and set forth in
Exhibit A) shall be governed by and be subject to all conditions, terms and
restrictions contained in the Company's 1993 Stock Option Plan, as amended from
time to time ("the Plan"), and the option letter agreements dated April 25, 1997
(denoted as Exhibits A-1, A-2 and B to your Employment Agreement dated April 25,
1997, a copy of which is attached hereto as Exhibit B (the "Employment
Agreement")), the option letter agreement dated August 28, 1998 (a copy of which
is attached hereto as Exhibit C) and the option letter agreement dated March 1,
2000 (a copy of which is attached hereto as Exhibit D). Your rights with respect
to your Stock Options shall be fixed as of your Termination Date and pursuant to
this Agreement. With respect to the option letter agreements dated April 25,
1997 and denoted as Exhibit A-1 and A-2 to your Employment Agreement, all
250,000 options shall be deemed vested as of your Termination Date and you shall
be entitled to exercise those options on or before January 11, 2003. With
respect to the option letter agreement dated April 25, 1997 and denoted as
Exhibit B to your Employment Agreement, 60,000 options shall be deemed vested as
of your Termination Date and you shall be entitled to exercise those 60,000
options on or before January 11, 2003, and the 90,000 options that would have
been unvested as of your Termination Date shall be accelerated and deemed to
have become fully vested as of your Termination Date and you shall be entitled
to exercise those 90,000 options on or before January 11, 2005. With respect to
the option letter agreement dated August 28, 1998, you shall be entitled to
exercise, at your election, some or all of the 105,000 options that are vested
as of your Termination Date on a cashless basis (defined below) on the later of
either: (a) your Termination Date; or (b) within five (5) business days
following the expiration of the Revocation Period defined in paragraph 11. For
purposes of this Agreement, the term "Cashless Basis" shall mean that in lieu of
exercising some or all of your 105,000 vested stock options for cash, you shall
be entitled to receive up to a total number of shares of common stock of the
Company computed using the following formulas:

            X  =        35,000 (A - $1.2375) ; and
                        --------------------
                                    A

            X  =        35,000 (A - $2.125) ; and
                        -------------------
                                    A

            X  =        35,000 (A - $3.125)
                        -------------------
                                    A

where X equals the number of shares of common stock to be issued to you and A
equals the fair market value of one share of common stock on the date of
exercise. In addition, you may elect to have the Company withhold from the total
number of shares due under the above formulas a number of shares having a fair
market value equal to the minimum amount necessary to satisfy the Company's
aggregate federal, state, local and foreign tax withholding and FICA and FUTA
obligations due as a result of a Cashless Basis exercise. With respect to the
option letter agreement dated March 1, 2000, you shall be entitled to exercise
the 60,000 options that are vested as of your Termination Date on or before
January 11, 2005. You acknowledge and agree that you shall forfeit any right to
those 30,000 unvested stock options under the option letter agreement dated
March 1, 2000, as shown in Exhibit A hereto. You acknowledge and agree that
there has been no change of control at any time up to and including your
Termination


                                       2


Date and that you shall have no rights to accelerated vesting or otherwise upon
any change of control occurring after your Termination Date. The Company agrees
to take any action necessary to effectuate the terms of this paragraph 4.

            5. STOCK PROXY. You agree that at the time you execute this
Agreement, you will execute a proxy for all of your shares of Company common
stock in favor of the President of the Company, Loren G. Peterson, or his
designee, which proxy shall be in the form attached hereto as Exhibit E. The
proxy shall be granted for a term of one year and shall not be limited in scope
of authority.

            6. RETURN OF COMPANY PROPERTY. You agree to return to the Company:
(a) all originals and copies of all proprietary and/or confidential information
and trade secrets of the Company; (b) all originals and copies of customer
files; (c) all identification cards, keys, or other means of access to the
Company; and (d) any other property of the Company in your possession, custody
or control. All Company property must be returned no later than your Termination
Date. The parties acknowledge and agree that Mr. Byron has returned his phone
card and keys on his Termination Date and that Mr. Byron has represented that he
has no other Company property in his possession, custody or control.

            7. NONDISPARAGEMENT. You agree that you will not make disparaging or
adverse remarks about, or refer negatively to your association with the Company,
its parents, subsidiaries, affiliates, officers, directors, trustees, employees
or any other Released Party defined in paragraph 10. The Company agrees that its
Board of Directors and executive officers shall not make disparaging or adverse
remarks about you, or refer negatively to your association with the Company.

            8. NON-FILING OF COMPLAINT OR CHARGES. You represent that you have
not filed or asserted any cause of action, claim, charge or other action or
proceeding against the Company.

            9. COOPERATION. You agree that you will cooperate and assist the
Company in the future in the event that the Company is presented with legal
issues as to which you have relevant information and knowledge. To the extent
such cooperation is required, the Company agrees: (a) to reimburse you for
reasonable out-of-pocket expenses actually incurred in connection with providing
such cooperation so long as such expenses are approved in advance; and (b) to
compensate you for your time at a reasonable rate.

            10. GENERAL RELEASE. As a material inducement to the Company to
enter into this Agreement, and in consideration of the good and valuable
consideration contained herein, the receipt and sufficiency of which is hereby
acknowledged, you, on behalf of yourself, your heirs, administrators,
representatives, executors, successors, and assigns, hereby irrevocably and
unconditionally release, acquit, and forever discharge Sheffield
Pharmaceuticals, Inc. and its predecessors (including without limitation
Sheffield Medical Technologies Inc.), parents, subsidiaries, affiliates,
divisions, successors and assigns, and all of their current and former agents,
officers, directors, employees, members, trustees, fiduciaries, representatives
and attorneys (the "Released Parties") from any and all charges, complaints,
claims, liabilities, obligations, promises, agreements, damages, causes of
action, suits, demands, losses, debts, and expenses of any nature whatsoever,
known or unknown ("Claims") which you have, had or claim to have against any
Released Party up to and including the date you sign this Agreement. This
General Release of Claims shall include, without limitation, Claims relating to
your employment and separation from employment with the Company, Claims of
discrimination under the common law or any federal or state statute (including,
without limitation, the Civil Rights Act of 1964, the Americans with
Disabilities Act and the Age Discrimination in Employment Act, all as amended),
Claims for wrongful discharge, Claims for the payment of any salary, wages,
vacation time, bonuses or commissions, Claims for severance or other benefits
(other than as specifically set forth in paragraphs 2, 3 and 4 herein), Claims
of detrimental reliance, and all other statutory, common law or other Claims of
any nature whatsoever. This General Release of Claims does not apply to any
Claims concerning a breach of this Agreement, including the option letter
agreements referred to in Paragraph 4 as amended by this Agreement, or any
claims arising after the date you sign this Agreement. With respect to the
Claims you are waiving herein, you acknowledge that you are waiving your right
to receive money or any other relief in any action instituted by you or on your
behalf by any other person, entity or government agency.


                                       3


            11. NOTICE AND RIGHT TO CONSIDER. You are advised to consult with an
attorney before executing this Agreement. You acknowledge that you have
consulted with an attorney of your choosing, Mark S. Rubin, Esquire, in
connection with your review of this Agreement. In any event, you should
thoroughly review and understand the effect of this Agreement and its General
Release before taking action upon them. You may have up to forty-five (45) days
from January 7, 2002 (the date you first received the Company's written offer
concerning the separation of your employment) to complete your review and sign
this Agreement. You acknowledge that if you sign this Agreement prior to the
expiration of the forty-five (45) day period that you did so voluntarily. You
will also have seven (7) days following your execution of this Agreement to
revoke it (the "Revocation Period"). If you wish to revoke the Agreement, you
must do so in writing, addressed to the Company's Chief Executive Officer at the
Company's headquarters, and such revocation must be received by the Company
prior to the expiration of the Revocation Period.

            If you sign this Agreement prior to your Termination Date, then you
agree to execute the General Release attached hereto as Exhibit F on your
Termination Date. Should you fail to do so, then this Agreement shall
immediately become null and void.

            12. AGE AND JOB TITLE INFORMATION. Attached to this letter as
Exhibit G is a description of (i) any class, unit or group of individuals being
offered the benefits that the Company has offered to you, and any applicable
time limits regarding such offer; (ii) the job titles and ages of all
individuals eligible or selected for such offer, and (iii) the ages of all
individuals in the same job classification or organizational unit who are not
eligible or selected for the offer. By signing this Agreement you acknowledge
that you have received Exhibit G and understand its contents.

            13. MISCELLANEOUS. This Agreement constitutes the full understanding
and entire Agreement between you and the Company and supersedes and terminates
any other agreements, communications and understandings of any kind, whether
oral or written, formal or informal, including, without limitation, any
agreement concerning benefits upon a change in control. Except for paragraphs 9,
10 and 11 (excluding any reference in paragraph 11 to paragraph 8) and the
Exhibits to the Employment Agreement which have been referenced in this
Agreement, the Employment Agreement by and between the parties is hereby
superseded by this Agreement and shall be deemed null and void and of no further
force or effect. You represent and acknowledge that in signing this Agreement,
you have not relied upon any promise, inducement, representation or statement,
whether oral or written, not set forth in this Agreement. This Agreement may be
amended or modified only by a written instrument signed by the parties.

            The Company acknowledges that you are entitled to, and will continue
to be entitled to, the same rights of indemnification as current officers and
directors of the Company, to the fullest extent provided for under Delaware law
and as more particularly set forth in the Company's By-Laws.

            The parties agree that the failure of a party at any time to require
performance of any provision of this Agreement shall not affect, diminish,
obviate or void in any way the Party's full right or ability to require
performance of the same or any other provisions of this Agreement at any time
thereafter.

            This Agreement shall inure to the benefit of and shall be binding
upon you, your heirs, administrators, representatives, executors, successors and
assigns and upon the successors and assigns of the Company.

            This Agreement shall be construed in accordance with and governed by
the laws of the State of Missouri, without respect to its conflict of laws
provisions.

            Should any portion, term or provision of this Agreement be declared
or determined by any court to be illegal, invalid or unenforceable, the validity
or the remaining portions, terms and provisions shall not be affected thereby,
and the illegal, invalid or unenforceable portion, term or provision shall be
deemed not to be part of this Agreement.

            The headings of the paragraphs of this Agreement are for convenience
only and are not binding on any interpretation of this Agreement.

            In the event of any conflict between this Agreement and the stock
option letter agreements referred to in paragraph 4, the provisions of this
Agreement shall control.


                                       4


                                      * * *

            If you wish to accept this Agreement, please sign and date the
Agreement below and return it to me within the time period specified in
paragraph 11.

            We wish you every success for the future.

                                          Sincerely,


                                          /s/ Loren G. Peterson
                                          --------------------------------------
                                          Loren G. Peterson
                                          President and Chief Executive Officer


            BY SIGNING THIS AGREEMENT, I STATE THAT I HAVE READ IT, I UNDERSTAND
IT, I AGREE WITH EVERYTHING IN IT AND I HAVE SIGNED IT KNOWINGLY AND
VOLUNTARILY.


/s/ David A. Byron
 ------------------
David A. Byron

Date:  2/18/02
      ---------


                                        5




                                    EXHIBIT A

                      STOCK OPTIONS AS OF TERMINATION DATE



                                                                                             Exercise Period for
Grant Date     Total Shares   Vested Stock Options   Unvested Shares     Exercise Price      Vested Stock Options
- ----------     ------------   --------------------   ---------------     --------------      -------------------
                                                                              
4/25/97        100,000        100,000                0                   $2.75               To and including 1/11/03
(A-1 grant)
4/25/97        150,000        150,000                0                   $2.75               To and including 1/11/03
(A-2 grant)
4/25/97        150,000        150,000                0                   $2.75               60,000 to and including
(B grant)                                                                                    1/11/03
                                                                                             ***
                                                                                             90,000 to and including
                                                                                             1/11/05
8/28/98        105,000        35,000 at $1.2375      0                   35,000 at $1.2375   see n. 1
                              35,000 at $2.125                           35,000 at $2.125
                              35,000 at $3.125                           35,000 at $3.125
3/01/00        90,000         30,000 at $4.75        30,000 at $6.3125   30,000 at $4.75     To and including 1/11/05
                              30,000 at $5.3125                          30,000 at $5.3125
                                                                         30,000 at $6.3125



n. 1:  Either (at your election):

            (1) 35,000 at $1.2375; 35,000 at $2.125; 35,000 at $3.125; all
within 90 days from your Termination Date; or

            (2) Some or all of the 105,000 options on a Cashless Basis, defined
in paragraph 4 of the Agreement, on the later of either: (a) your Termination
Date; or (b) within five (5) business days following the expiration of the
Revocation Period, defined in paragraph 12 of the Agreement.


                                       6


                                    EXHIBIT B

            EMPLOYMENT AGREEMENT (INCLUDING EXHIBITS A-1, A-2 AND B)


                              EMPLOYMENT AGREEMENT

            AGREEMENT made as of the 25th day of April, 1997, by and between
Sheffield Medical Technologies Inc., a Delaware corporation with its principal
offices at 30 Rockefeller Plaza, Suite 4515, New York, New York 10112 (the
"Corporation"), and David A. Byron residing at 17674 Lasiandra Drive,
Chesterfield, Missouri 63017 ("Executive").

                                   WITNESSETH

            WHEREAS, the Corporation desires to employ and retain Executive as
its Executive Vice President - Scientific Affairs, upon the terms and subject to
the conditions of this Agreement; and

            NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto agree as follows:

            1. Employment of Executive. The Corporation hereby employs Executive
as its Executive Vice President - Scientific Affairs, to perform the duties and
responsibilities traditionally incident to such office, subject at all times to
the control and direction of the Board of Directors of the Corporation.

            2. Acceptance of Employment; Offices; Time and Attention, Etc. (a)
Executive hereby accepts such employment and agrees that throughout the period
of his employment hereunder, except as hereinafter provided, he will devote his
full business and professional time in utilizing his business and professional
expertise, with proper attention, knowledge and skills faithfully, diligently
and to the best of his ability in furtherance of the business of the Corporation
and its subsidiaries and will perform the duties assigned to him pursuant to
Paragraph 1 hereof. As Executive Vice President - Scientific Affairs, Executive
shall also perform such specific duties and shall exercise such specific
authority related to the management of the day-to-day operations of the
Corporation and its subsidiaries as may be reasonably assigned to Executive from
time to time by the Board of Directors of the Corporation.

            (b) Executive shall at all times be subject to, observe and carry
out such rules, regulations, policies, directions and restrictions as the Board
of Directors of the Corporation shall from time to time establish. During the
period of his employment hereunder, Executive shall not, directly or indirectly,
accept employment or compensation from, or perform services of any nature for,
any business enterprise other than the Corporation and its subsidiaries.
Notwithstanding the foregoing in this Paragraph 2, Executive shall not be
precluded from engaging in recreational, eleemosynary, educational and other
activities which do not materially interfere with his duties hereunder during
vacations, holidays and other periods outside of business hours.

            (c) It is anticipated that the Corporation's principal executive
office (now located in New York City) shall be relocated to St. Louis, Missouri
but that Executive may be required to spend substantial amounts of time at
locations in and outside of St. Louis, Missouri relating to the business of the
Corporation and its subsidiaries. It is understood that Executive shall continue
to reside in the vicinity of St. Louis, Missouri and that the Corporation shall
maintain an office in St. Louis, Missouri, which is where Executive shall
maintain his principal office until the Corporation relocates from New York City
to St. Louis, Missouri. The Corporation agrees to reimburse Executive for his
reasonable expenses, including hotel and travel costs, associated with the
Corporation's business. In addition, until completion of such relocation, it is
understood that Executive shall visit the Corporation's executive office in New
York City on a regular basis for meetings and to conduct Corporation business
that is more appropriately conducted from such executive office.

            3. Term. Except as otherwise provided herein, the term of
Executive's employment hereunder shall commence on the date of the consummation
of the merger of Camelot Pharmacal, L.L.C., a Missouri limited liability
company, with and into a subsidiary of the Company (the "Merger") and shall
continue to and including April 25, 2002. Notwithstanding anything to the
contrary contained in the Agreement, this Agreement shall terminate and have no
force and effect in the event that the Merger is not consummated on or before
June 6, 1997. Unless terminated earlier in accordance with the terms hereof,
this Agreement shall automatically be extended for one or more additional
consecutive one year terms unless either party notifies the other party in
writing at least six months before the end of the then current term (including
the initial term) of its or his desire to terminate this Agreement. The last day
of the term of this Agreement pursuant to this Paragraph 3 (including any early
termination pursuant to the terms hereof) is referred to herein as the
"Termination Date".

            4. Compensation. (a) As compensation for his services hereunder, the
Corporation shall pay to Executive (i) a base annual salary at the rate of
$160,000, payable in equal installments in accordance with the normal payroll
practices of the Corporation but in no event less frequently than semi-monthly,
and (ii) such incentive compensation and bonuses, if any, as the Board of
Directors of the Corporation in its absolute discretion may determine to award
Executive (it being understood that this Agreement shall in no event be
construed to require the payment to Executive of any incentive compensation or
bonuses), it being understood that Executive shall be entitled to receive such
incentive compensation and bonuses determined on a basis comparable to the
incentive compensation and/or bonuses awarded to other executive officers of the
Corporation. All compensation paid to Executive shall be subject to withholding
and other employment taxes imposed by applicable law.


                                       7


            (b) During the period of Executive's employment hereunder, Executive
shall not be entitled to any additional compensation for rendering employment
services to subsidiaries of the Corporation or for serving in any office of the
Corporation or any of its subsidiaries to which he is elected or appointed.

            (c) In the event that Executive is elected to the Corporation's
Board of Directors, Executive will receive compensation and benefits as a
director of the Corporation consistent with the compensation and benefits
received by the Corporation's other directors who are also employees of the
Corporation.

            5. Stock Options. (a) As additional compensation for his services
hereunder, the Corporation shall grant to Executive an option under the
Corporation's 1993 Stock Option Plan (the "Plan") to acquire a total of 400,000
shares of the Corporation's common stock at an exercise price per share equal to
the closing sale price of the Corporation's common stock as reported by the
American Stock Exchange on the date hereof, with the terms of such option to be
evidenced by (i) one option letter agreement in the form annexed as Exhibit "A"
hereto ("Option Letter A-1") being exercisable for 100,000 shares of Common
Stock, (ii) one option letter agreement in the form annexed as Exhibit "A-2"
hereto ("Option Letter A-2") being exercisable for 150,000 shares of Common
Stock and (iii) one option letter agreement in the form annexed as Exhibit "B"
hereto ("Option Letter B") being exercisable for 150,000 shares of Common Stock
(such option letters being referred to collectively herein as the "Plan Option
Letters").

            (b) The Company represents and warrants that there are sufficient
shares of Common Stock currently available under the Company's 1993 Stock Option
Plan (the "1993 Plan") to cover the shares of Common Stock issuable to Executive
upon exercise of Option Letter A-1.

            (c) In the event that the Company's stockholders fail at the next
annual meeting of stockholders of the Corporation to approve both (i) an
amendment increasing the number of shares available for the issuance of options
under the Plan to an amount at least sufficient to cover all the shares of
Common Stock issuable upon exercise of Option Letter A-2 and Option Letter B and
(ii) appropriate amendments to the Plan specifically confirming the right of the
Corporation's Board of Directors, in the issuance of stock options under the
Plan, to determine provisions regarding terms of the exercise of such stock
options (including without limitation, the period of exercisability of stock
options under the Plan upon termination of employment for cause or without
cause) and provisions regarding forfeiture of stock options under the Plan upon
termination of employment, the Company agrees, upon receipt of a written demand
from Executive, to promptly amend the Plan Option Letters to provide for three
non-qualified options outside the Plan having substantially the same terms and
provisions of the Plan Stock Options.

            (d) In the event that (i) the Corporation is required to amend the
Plan Option Letters pursuant to Paragraph 5(c) or (ii) Executive's employment by
the Corporation is terminated (x) by the Corporation for any reason other than
for Cause, (y) by Executive as a result of an Employer Breach or (z) by the
Corporation by reason of the Executive's disability or death prior to the
expiration of the options evidenced by the Plan Option Letters and Executive is
required after such event to pay any U.S. federal or state income and
withholding tax (collectively, "Income Taxes") on any income recognized by
Executive arising upon any exercise of options evidenced by the Plan Option
Letters, the Corporation agrees to reimburse Executive the difference between
(A) the amount of Income Taxes Executive would have been required to pay had the
income recognized on such exercise been treated as a long term capital gain and
(B) the amount of Income Taxes payable by Executive in respect of such exercise
(the amount of such difference being referred to as the "Tax Difference" in
respect of such exercise). In computing the Tax Difference, the amount of taxes
payable by Executive shall be determined by assuming that the income recognized
as a result of such exercise is taxed at the highest marginal federal and state
income tax rates applicable to ordinary income. In addition, the Corporation
shall pay Executive an amount equal to the Tax Difference arising in respect of
such exercise multiplied by a fraction, the numerator of which is 1 and the
denominator of which is equal to 1 minus (i) the highest marginal federal income
tax rate (currently 39.6%) and (ii) the highest marginal state income tax rate
applicable to Executive, in each case in respect of ordinary income, in effect
at the time of such exercise. Such amount shall be paid by the Corporation
within ninety (90) days after any such exercise. Notwithstanding anything to the
contrary in this Agreement or the Plan Option Letters, the Corporation shall
have no obligation to pay Executive any amount in excess of $250,000 in the
aggregate in respect of its obligations under this subparagraph.

            6. Additional Benefits; Vacation. (a) In addition to such base
salary, Executive shall receive and be entitled to participate, to the extent he
is eligible under the terms and conditions thereof, in any profit sharing,
pension, retirement, hospitalization, disability, medical service, insurance or
other employee benefit plan generally available to the executive officers of the
Corporation that may be in effect from time to time during the period of
Executive's employment hereunder. The Corporation agrees to cover Executive
under any directors' and officers' liability policy maintained by the
Corporation.

            (b) Executive shall be entitled to four (4) weeks' paid vacation in
respect of each 12-month period during the term of his employment hereunder,
such vacation to be taken at times mutually agreeable to Executive and the Board
of Directors of the Corporation.

            (c) Executive shall be entitled to recognize as holidays all days
recognized as such by the Corporation.

            7. Reimbursement of Expenses. The Corporation shall reimburse
Executive in accordance with applicable policies of the Corporation for all
expenses reasonably incurred by him in connection with the performance of his
duties hereunder and the business of the Corporation, upon the submission to the
Corporation of appropriate receipts or vouchers.

            8. Restrictive Covenant. (a) In consideration of the Corporation's
entering into this Agreement, Executive agrees that during the period of his
employment hereunder and, in the event of termination of this Agreement (i) by
the Corporation upon Executive becoming Disabled (as that term is defined in
Paragraph 13 hereof), (ii) by the Corporation for Cause (as that term, is
defined in Paragraph 14 hereof) or (iii) by Executive otherwise than for
Employer Breach (as that term is defined in Paragraph 15 hereof), for a further
period of six months thereafter, he


                                       8

will not (x) directly or indirectly own, manage, operate, join, control,
participate in, invest in, whether as an officer, director, employee, partner,
investor or otherwise, any business entity that is engaged in a directly
competitive business (as hereinafter defined) to that of the Corporation or any
of its subsidiaries within the United States of America, (y) for himself or on
behalf of any other person, partnership, corporation or entity, call on any
customer of the Corporation or any of its subsidiaries for the purpose of
soliciting away, diverting or taking away any customer from the Corporation or
its subsidiaries, or (z) solicit any person then engaged as an employee,
representative, agent, independent contractor or otherwise by the Corporation or
any of its subsidiaries, to terminate his or her relationship with the
Corporation or any of its subsidiaries. For purposes of this Agreement, the term
"directly competitive business" shall mean any business that is then involved in
the research, development, manufacturing or commercialization in any way of any
product, compound, device or method that acts or functions by, through or on the
same active, binding or receptor site, mechanism of action, signaling pathway or
channel as any product, compound, device or method that is or becomes a part of
the Corporation's business or the business of any of its subsidiaries during
Executive's employment by the Corporation or any of its subsidiaries. Nothing
contained in this Agreement shall be deemed to prohibit Executive from investing
his funds in securities of an issuer if the securities of such issuer are listed
for trading on a national securities exchange or are traded in the
over-the-counter market and Executive's holdings therein represent less than 10%
of the total number of shares or principal amount of the securities of such
issuer outstanding.

            (b) Executive acknowledges that the provisions of this Paragraph 8
are reasonable and necessary for the protection of the Corporation, and that
each provision, and the period or periods of time, geographic areas and types
and scope of restrictions on the activities specified herein are, and are
intended to be, divisible. In the event that any provision of this Paragraph 8,
including any sentence, clause or part hereof, shall be deemed contrary to law
or invalid or unenforceable in any respect by a court of competent jurisdiction,
the remaining provisions shall not be affected, but shall, subject to the
discretion of such court, remain in full force and effect.

            9.  Confidential Information.

            (a) Executive shall hold in a fiduciary capacity for the benefit of
the Corporation and its subsidiaries all confidential information, knowledge and
data relating to or concerned with its operations, sales, business and affairs,
and he shall not, at any time during his employment hereunder and for two years
thereafter, use, disclose or divulge any such information, knowledge or data to
any person, firm or corporation other than to the Corporation and its
subsidiaries or their respective designees or except as may otherwise be
reasonably required or desirable in connection with the business and affairs of
the Corporation and its subsidiaries.

            (b) Notwithstanding anything to the contrary contained herein,
Executive's obligations under Paragraph 9(a) hereof shall not apply to any
information which:

            (i) becomes rightfully known to Executive subsequent or prior to his
            employment by the Corporation;

            (ii) is or becomes available to the public other than as a result of
            wrongful disclosure by Executive;

            (iii) becomes available to Executive subsequent to his employment by
            the Corporation on a nonconfidential basis from a source other than
            the Corporation or its agents which source has a right to disclose
            such information; or

            (iv) results from research and development and/or commercial
            operations at any time by or on behalf of any person, company or
            other entity with which or with whom Executive shall become
            associated (in a manner consistent with the terms of this Agreement)
            subsequent to his employment by the Corporation or its agents
            totally independent from any disclosure from the Corporation or its
            agents.

            (c) Notwithstanding anything to the contrary contained herein, in
the event that Executive becomes legally compelled to disclose any confidential
information, Executive will provide the Corporation with prompt notice so that
the Corporation may seek a protective order or other appropriate remedy. In the
event that such protective order or other remedy is not obtained, Executive
shall furnish only such confidential information which is legally required to be
disclosed.

            10. Intellectual Property. Any idea, invention, design, written
material, manual, system, procedure, improvement, development or discovery
conceived, developed, created or made by Executive alone or with others, during
the period of his employment hereunder and applicable to the business of the
Corporation or any of its subsidiaries, whether or not patentable or
registrable, shall become the sole and exclusive property of the Corporation or
such subsidiary. Executive shall disclose the same promptly and completely to
the Corporation and shall, during the period of his employment hereunder and at
any time and from time to time hereafter at no cost to Executive (i) execute all
documents reasonably requested by the Corporation for vesting in the Corporation
or any of its subsidiaries the entire right, title and interest in and to the
same, (ii) execute all documents reasonably requested by the Corporation for
filing and prosecuting such applications for patents, trademarks, service marks
and/or copyrights as the Corporation, in its sole discretion, may desire to
prosecute, and (iii) give the Corporation all assistance it reasonably requires,
including the giving of testimony in any suit, action or proceeding, in order to
obtain, maintain and protect the Corporation's right therein and thereto.

            11. Equitable Relief. The parties hereto acknowledge that
Executive's services are unique and that, in the event of a breach or a
threatened breach by Executive of any of his obligations under Paragraphs 8, 9
or 10 this Agreement, the Corporation shall not have an adequate remedy at law.
Accordingly, in the event of any such breach or threatened breach by Executive,
the Corporation shall be entitled to such equitable and injunctive relief as may
be available to restrain Executive and any business, firm, partnership,
individual, corporation or entity participating in such breach or threatened
breach from the violation of the provisions of Paragraph 8, 9 or 10 hereof.
Nothing herein


                                       9

shall be construed as prohibiting the Corporation from pursuing any other
remedies available at law or in equity for such breach or threatened breach,
including the recovery of damages and the immediate termination of the
employment of Executive hereunder, if and to the extent permitted hereunder.

            12. Termination of Agreement; Termination of Employment; Severance;
Survival. (a) This Agreement and Executive's employment hereunder shall
terminate upon the first to occur of the following: (i) Executive becoming
Disabled (as that term is defined in Paragraph 13 hereof); (ii) Executive's
death; (iii) termination of Executive's employment by the Corporation for Cause
or pursuant to subparagraph (b) of this Paragraph 12; (iv) termination of
Executive's employment for Employer Breach and (v) the termination of this
Agreement at the end of the term of this Agreement on the Termination Date
pursuant to Paragraph 3.

            (b) Notwithstanding anything to the contrary contained in this
Agreement, in the event of the termination of the Executive's employment by the
Corporation for any reason (other than for Cause), Executive shall be paid a
severance payment equal to 75% of Executive's then current annual base salary
payable in nine equal monthly installments, with the first installment being
payable on the date falling two weeks after the date of such termination and
each additional installment being paid every month after such date until such
severance is paid in full. In the event of such termination of the Executive's
employment by the Corporation (other than for Cause), the Corporation shall have
no further obligation to the Executive under this Agreement other than the
Corporation's obligation (i) to make such severance payment to the Executive
(ii) to pay Executive's COBRA premium payments for hospitalization and medical
insurance coverage provided by the Corporation and to pay Executive's premiums
on any death and/or disability insurance being maintained by the Corporation for
Executive at the time of such termination, in each case until the payment in
full of such severance payments

            (c) Paragraph 5(c) of this Agreement shall survive the termination
of Executive's employment hereunder until the earlier to occur of Executive's
exercise of all of the stock options granted pursuant to paragraph 5 and the
expiration of all such stock options pursuant to the Stock Option Letters.
Paragraphs 7, 8, 9, 10, 11 and 26 of this Agreement shall survive the
termination of Executive's employment hereunder, except in the case of
termination pursuant to Paragraph 15.

            13. Disability. In the event that during the term of his employment
by the Corporation Executive shall become Disabled (as that term is hereinafter
defined) he shall continue to receive the full amount of the base salary to
which he was theretofore entitled for a period of six months after he shall be
deemed to have become Disabled (the "First Disability Payment Period"). If the
First Disability Payment Period shall end prior to the Termination Date,
Executive thereafter shall be entitled to receive salary at an annual rate equal
to 80% of his then current base salary for a further period ending on the
earlier of (i) six months thereafter or (ii) the Termination Date (the "Second
Disability Payment Period"). Upon the expiration of the Second Disability
Payment Period, Executive shall not be entitled to receive any further payments
on account of his base salary until he shall cease to be Disabled and shall have
resumed his duties hereunder and provided that the Corporation shall not have
theretofore terminated this Agreement as hereinafter provided. The Corporation
may terminate Executive's employment hereunder at any time after Executive is
Disabled, upon at least 10 days' prior written notice; provided, however, that
such termination shall not relieve the Corporation from its obligation to make
the payments to Executive described above in this Paragraph 13. For the purposes
of this Agreement, Executive shall be deemed to have become Disabled when (x) by
reason of physical or mental incapacity, Executive is not able to perform his
duties hereunder for a period of 90 consecutive days or for 120 days in any
consecutive 180-day period or (y) when Executive's physician or a physician
designated by the Corporation shall have determined that Executive shall not be
able, by reason of physical or mental incapacity, to perform a substantial
portion of his duties hereunder. In the event that Executive shall dispute any
determination of his disability pursuant to clauses (x) or (y) above, the matter
shall be resolved by the determination of three physicians qualified to practice
medicine in the United States of America, one to be selected by each of the
Corporation and Executive and the third to be selected by the designated
physicians. If Executive shall receive benefits under any disability policy
maintained by the Corporation, the Corporation shall be entitled to deduct the
amount equal to the benefits so received from base salary that it otherwise
would have been required to pay to Executive as provided above.

            14. Termination for Cause. The Corporation may at any time upon
written notice to Executive terminate Executive's employment for Cause. For
purposes of this Agreement, the following shall constitute Cause: (i) the
willful and repeated failure of Executive to perform any material duties
hereunder or gross negligence of Executive in the performance of such duties,
and if such failure or gross negligence is susceptible to cure by Executive, the
failure to effect such cure within twenty (20) days after written notice of such
failure or gross negligence is given to Executive; (ii) except as permitted
hereunder, unexplained, willful and regular absences of Executive from the
Corporation; (iii) excessive use of alcohol or illegal drugs, interfering with
the performance of Executives duties hereunder; (iv) indictment for a crime of
theft, embezzlement, fraud, misappropriation of funds, other acts of dishonesty
or the violation of any law or ethical rule relating to Executive's employment;
(v) indicted for any other felony or other crime involving moral turpitude by
Executive; or (vi) the breach by Executive of any of the provisions of
paragraphs 8, 9 or 10 and if such breach is susceptible of cure by Executive,
the failure to effect such cure within twenty (20) days after written notice of
such breach is given to Executive. For purposes of this Agreement, an action
shall be considered "willful" if it is done intentionally, purposely or
knowingly, distinguished from an act done carelessly, thoughtlessly or
inadvertently. In any such event, Executive shall be entitled to receive his
base salary to and including the date of termination.

            15. Termination for Employer Breach. Executive may upon written
notice to the Corporation terminate this Agreement (including paragraphs 8, 9,
10 and 11) in the event of the breach by the Corporation of any material
provision of this Agreement, and if such breach is susceptible of cure, the
failure to effect such cure within 20 days after written notice of such breach
is given to the Corporation (an "Employer Breach"). Executive's right to
terminate this Agreement under this Paragraph 15 shall be in addition to any
other remedies Executive may have under law or equity. Paragraphs 2(d), 7 and
12(b) of this Agreement shall survive the termination of this Agreement
by Executive pursuant to this Paragraph 15.


                                       10


            16. Insurance Policies. The Corporation shall have the right from
time to time to purchase, increase, modify or terminate insurance policies on
the life of Executive for the benefit of the Corporation, in such amounts as the
Corporation shall determine in its sole discretion. In connection therewith,
Executive shall, at such time or times and at such place or places as the
Corporation may reasonably direct, submit himself to such physical examinations
and execute and deliver such documents as the Corporation may reasonably deem
necessary or desirable.

            17. Entire Agreement; Amendment. This Agreement constitutes the
entire agreement of the parties hereto, and any prior agreement between the
Corporation and Executive is hereby superseded and terminated effective
immediately and shall be without further force or effect. No amendment or
modification himself shall be valid or binding unless made in writing and signed
by the party against whom enforcement thereof is sought.

            18. Notices. Any notice required, permitted or desired to be given
pursuant to any of the provisions of this Agreement shall be delivered in person
or sent by responsible overnight delivery service or sent by certified mail,
return receipt requested, postage and fees prepaid, if to the Corporation, at
its address set forth above to the attention of the Corporation's Chief
Financial Officer and, if to Executive, at his address set forth above. Either
of the parties hereto may at any time and from time to time change the address
to which notice shall be sent hereunder by notice to the other party given under
this Paragraph 18. Notices shall be deemed effective upon receipt.

            19. No Assignment; Binding Effect. Neither this Agreement, nor the
right to receive any payments hereunder, may be assigned by either party without
the other party's prior written consent. This Agreement shall be binding upon
Executive, his heirs, executors and administrators and upon the Corporation, its
successors and assigns.

            20. Waivers. No course of dealing nor any delay on the part of
either party in exercising any rights hereunder shall operate as a waiver of any
such rights. No waiver of any default or breach of this Agreement shall be
deemed a continuing waiver or a waiver of any other breach or default.

            21. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, except that body of law
relating to choice of laws.

            22. Invalidity. If any clause, paragraph, section or part of this
Agreement shall be held or declared to be void, invalid or illegal, for any
reason, by any court of competent jurisdiction, such provision shall be
ineffective but shall not in any way invalidate or affect any other clause,
paragraph, section or part of this Agreement.

            23. Further Assurances. Each of the parties shall execute such
documents and take such other actions as may be reasonably requested by the
other party to carry out the provisions and purposes of this Agreement in
accordance with its terms.

            24. Headings. The headings contained in this Agreement have been
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.

            25. Publicity. The Corporation and Executive agree that they will
not make any press releases or other announcements prior to or at the time of
execution of this Agreement with respect to the terms contemplated hereby,
except as required by applicable law, without the prior approval of the other
party, which approval will not be unreasonably withheld.

            26. Arbitration. Any disputes arising under this Agreement shall be
submitted to and determined by arbitration in New York City, New York; provided,
however, that such arbitration shall be held in St. Louis, Missouri in the event
that the Company's principal executive offices is located at the time of such
dispute in St. Louis, Missouri. Such arbitration shall be conducted in
accordance with the rules of the American Arbitration Association. Any award or
decision of the arbitration shall be conclusive in the absence of fraud and
judgment thereon may be entered in any court having jurisdiction thereof. The
costs of such arbitration shall be paid by the non-prevailing party to the
extent directed by the arbitrator(s).

THIS AGREEMENT CONTAINS BINDING ARBITRATION PROVISIONS WHICH MAY BE ENFORCED BY
THE PARTIES.


                                       11



IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.

                                     SHEFFIELD MEDICAL TECHNOLOGIES INC.

                                     By:   /s/ George Lombardi
                                           --------------------------
                                               George Lombardi
                                               Vice President and Chief
                                               Financial Officer



                                     /s/ David A. Byron
                                     -------------------
                                     David A. Byron


                                       12



                                                                  EXHIBIT A-1 TO
                                                            EMPLOYMENT AGREEMENT

                       SHEFFIELD MEDICAL TECHNOLOGIES INC.
                        30 ROCKEFELLER PLAZA, SUITE 4515
                            NEW YORK, NEW YORK 10112

                                 April 25, 1997

David A. Byron
17674 Lasiandra Drive
Chesterfield, Missouri 63017

            At a meeting of the Board of Directors of Sheffield Medical
Technologies Inc. (the "Company") held on April 22, 1997, the Board authorized
the grant to you of an option (the "Option") to purchase one hundred thousand
(100,000) shares (the "Shares") of Common Stock, par value $.01 per share, of
the Company. The Option is being granted in connection with the Employment
Agreement dated as of April 25, 1997 between the Company and you (the
"Employment Agreement"). The terms of the Option are set forth below.

            1. No part of the Option is currently exercisable. Subject to any
adjustment pursuant to paragraph 5 below, the Option is exercisable at an
exercise price of $2.75 per Share. Subject to the paragraph 2 below, the Option
may first be exercised on April 25, 1998 for 10,000 Shares and shall become
exercisable for an additional 10,000 Shares on each April 25 thereafter to and
including April 25, 2007. Subject to paragraph 2 below, the Option must be
exercised as to any and all Shares on or prior to April 25, 2007 (on which date
the Option will, to the extent not previously exercised, expire).

            2. Notwithstanding anything to the contrary contained herein or in
the Plan (as defined below):

                        (a) In the event your employment by the Company is
            terminated for Cause (as such term is defined in the Employment
            Agreement) prior to the expiration of the Option, the Option will be
            exercisable for 90 days from the date of such termination, but only
            as to such Shares that had become exercisable pursuant to paragraph
            1 above (and not previously purchased) prior to such date. The
            Option shall then expire to the extent not exercised within such 90
            day period.

                        (b) In the event that your employment by the Company is
            terminated by the Company for any reason other than for Cause, by
            you as a result of an Employer Breach (as such term is defined in
            the Employment Agreement) or by the Company by reason of your
            disability or death prior to the expiration of the Option, the
            Option shall become immediately exercisable for one year as to all
            Shares not previously purchased. The Option shall then expire to the
            extent not exercised within such one year period.

                        (c) In the event that your employment by the Company is
            terminated by you for any reason other than an Employer Breach prior
            to the expiration of the Option, the Option will be exercisable for
            90 days from the date of such termination, but only as to such
            Shares that had become exercisable pursuant to paragraph 1 above
            (and not previously purchased) prior to such date; provided,
            however, that if such termination occurs after the second
            anniversary of the date of this letter, the Option shall become
            immediately exercisable for such 90 day period as to all Shares not
            previously purchased. The Option shall then expire to the extent not
            exercised within such 90 day period.

                        (d) In the event that your employment by the Company is
            terminated by the Company by reason of your death or disability, the
            Option shall become immediately exercisable for one year as to all
            Shares not previously purchased. The Option shall then expire to the
            extent not exercised within such one year period.

                        (e) In the event of a Change of Control, the Option
            shall, at your option exercised by written notice delivered to the
            Company, become immediately exercisable for one year as to all
            Shares not previously purchased. The Option shall then expire to the
            extent not exercised within such one year period. As used in this
            paragraph, "Change of Control" shall mean (i) the merger,
            consolidation or other business combination of the Company with or
            into another corporation with the effect that the shareholders of
            the Company immediately following the merger, consolidation or other
            business combination, hold 50% or less of the combined voting power
            of the then outstanding equity interests of the surviving
            corporation of such merger, consolidation or other business
            combination ordinarily (and apart from rights accruing under special
            circumstances) having the right to vote in the election of directors
            or (ii) the replacement of a majority of the Board of Directors of
            the Company in any given year as compared to the directors who
            constituted the Board at the beginning of such year, and such
            replacement shall not have been approved by the Board of Directors
            of the Company as constituted at the beginning of such year.

            If any of the options granted hereunder are treated as nonqualified
stock options ("NQO") as the result of exceeding the $100,000 exercise limit
contained in Section 422(d) of the Internal Revenue Code of 1986, as amended,
the Company shall issue separate certificates representing those shares
constituting incentive stock options ("ISO") and those shares constituting NQO's
and shall identify the ISO shares as such on its stock transfer records.

            3. Unless at the time of the exercise of the Option a registration
statement under the Securities Act of 1933, as amended (the "Act"), is in effect
as to such Shares, any Shares purchased by you upon the exercise of the Option
shall be acquired for investment and not for sale or distribution, and if the
Company so requests, upon any exercise of the Option, in whole or in part, you
will execute and deliver to the Company a certificate to such effect. The
Company shall not be obligated to issue any Shares pursuant to the Option if, in
the opinion of counsel to the


                                       13

Company, the Shares to be so issued are required to be registered or otherwise
qualified under the Act or under any other applicable statute, regulation or
ordinance affecting the sale of securities, unless and until such Shares have
been so registered or otherwise qualified.

            4. You understand and acknowledge that, under existing law, unless
at the time of the exercise of the Option a registration statement under the Act
is in effect as to such Shares (i) any Shares purchased by you upon exercise of
this option may be required to be held indefinitely unless such Shares are
subsequently registered under the Act or an exemption from such registration is
available; (ii) any sales of such Shares made in reliance upon Rule 144
promulgated under the Act may be made only in accordance with the terms and
conditions of that Rule (which, under certain circumstances, restrict the number
of shares which may be sold and the manner in which shares may be sold); (iii)
in the case of securities to which Rule 144 is not applicable, compliance with
Regulation A promulgated under the Act or some other disclosure exemption will
be required; (iv) certificates for Shares to be issued to you hereunder shall
bear a legend to the effect that the Shares have not been registered under the
Act and that the Shares may not be sold, hypothecated or otherwise transferred
in the absence of an effective registration statement under the Act relating
thereto or an opinion of counsel satisfactory to the Company that such
registration is not required; and (v) the Company will place an appropriate
"stop transfer" order with its transfer agent with respect to such Shares. In
addition, you understand and acknowledge that the Company has no obligation to
you to furnish information necessary to enable you to make sales under Rule 144.

            5. In the event that the Company shall at any time prior to the
expiration of the Option and prior to the exercise thereof: (i) declare or pay
to the holders of the Common Stock a dividend payable in any kind of shares of
stock of the Company; or (ii) change or divide or otherwise reclassify its
Common Stock into the same or a different number of shares with or without par
value, or into shares of any class or classes; or (iii) consolidate or merge
with, or transfer its property as an entirety or substantially all of its assets
to any other corporation; or (iv) make any distribution of its assets to holders
of its Common Stock as a liquidation, or partial liquidation dividend or by way
of return of capital; then, upon the subsequent exercise of the Option, the
exercise price of the Shares issuable upon the exercise hereof shall be
appropriately adjusted by the Board of Directors of the Company so that you
shall receive for the exercise price, in addition to or in substitution for the
Shares to which you would be entitled upon such exercise, such additional shares
of stock of the Company, or such reclassified shares of stock of the Company, or
such securities or property of the Company resulting from such consolidation or
merger or transfer, of such assets of the Company, which you would have been
entitled to receive had you exercised the Option prior to the happening of any
of the foregoing events.

            6. The Option (or installment thereof) is to be exercised by
delivering to the Company a written notice of exercise in the form attached
hereto as Annex A, specifying the number of Shares to be purchased, together
with payment of the purchase price of the Shares to be purchased. The purchase
price is to be paid in cash.

            7. The Option does not confer upon you any right whatsoever as a
stockholder of the Company. The Option is granted to you under the Company's
1993 Stock Option Plan, as amended, (the "Plan") and is intended to be an
incentive stock option. The terms of the Plan are incorporated by reference into
the Option, except as modified in accordance with the Plan by the terms set
forth herein. A copy of the Plan has been delivered to you with this letter. The
Option shall be binding upon any successors or assigns of the Company.

            If the foregoing correctly sets forth our understanding of the
option, please indicate your acceptance by signing this letter in the space
provided below.

                                        Very truly yours,

                                        SHEFFIELD MEDICAL TECHNOLOGIES INC.

                                    By: /s/ George Lombardi
                                        ----------------------------------
                                        George Lombardi
                                        Chief Financial Officer



AGREED TO AND ACCEPTED:

/s/ David A. Byron
- ------------------
David A. Byron


                                       14

                                                                         Annex A

                             STOCK SUBSCRIPTION FORM

To: Sheffield Medical Technologies Inc.

Gentlemen:

            I hereby exercise my option to purchase from Sheffield Medical
Technologies Inc. (the "Company"), pursuant to the Stock Option Letter Agreement
between us dated as of April 25, 1997, ________ shares of the Company's Common
Stock, $.01 par value, and herewith tender payment therefor at the rate of $____
per share. The option was originally granted pursuant to the terms of the
Company's 1993 Stock Option Plan.

            I represent and warrant that I am acquiring the said shares for my
own account for investment purposes only; that I have no present intention of
selling or otherwise disposing of such shares or any part thereof; that I will
not transfer said shares in violation of the securities laws of the United
States; that I am familiar with the business operations, management and
financial condition and affairs of the Company; that I have not relied upon any
representation of the Company with respect thereto; and that I have the personal
financial means to comply with all of said representations. I further confirm
that I have been advised that said shares will not be registered under the
Securities Act of 1933, as amended, and that I have consulted with and been
advised by counsel as to the restrictions on resale to which said shares will
thereby be subject.

            The form in which I wish my name and address to appear on the
Company's stock records is as follows:

                                     Name:
                                               -----------------------

                                     Address:
                                               -----------------------
                                               -----------------------
                                               -----------------------


                                               Very truly yours,


                                               -----------------------
                                               David A. Byron


                                       15



                                                                  EXHIBIT A-2 TO
                                                            EMPLOYMENT AGREEMENT

                       SHEFFIELD MEDICAL TECHNOLOGIES INC.
                        30 ROCKEFELLER PLAZA, SUITE 4515
                            NEW YORK, NEW YORK 10112

                                                                  April 25, 1997

David A. Byron
17674 Lasiandra Drive
Chesterfield, Missouri 63017

            At a meeting of the Board of Directors of Sheffield Medical
Technologies Inc. (the "Company") held on April 22, 1997, the Board authorized
the grant to you of an option (the "Option") to purchase one hundred thousand
(150,000) shares (the "Shares") of Common Stock, par value $.01 per share, of
the Company. The Option is being granted in connection with the Employment
Agreement dated as of April 25, 1997 between the Company and you (the
"Employment Agreement"). The terms of the Option are set forth below.

            1. No part of the Option is currently exercisable. Subject to any
adjustment pursuant to paragraph 5 below, the Option is exercisable at an
exercise price of $2.75 per Share. Subject to the paragraph 2 below, the Option
may first be exercised on April 25, 1998 for 15,000 Shares and shall become
exercisable for an additional 15,000 Shares on each April 25 thereafter to and
including April 25, 2007. Subject to paragraph 2 below, the Option must be
exercised as to any and all Shares on or prior to April 25, 2007 (on which date
the Option will, to the extent not previously exercised, expire).

            2. Notwithstanding anything to the contrary contained herein or in
the Plan (as defined below):

                        (a) In the event your employment by the Company is
            terminated for Cause (as such term is defined in the Employment
            Agreement) prior to the expiration of the Option, the Option will be
            exercisable for 90 days from the date of such termination, but only
            as to such Shares that had become exercisable pursuant to paragraph
            1 above (and not previously purchased) prior to such date. The
            Option shall then expire to the extent not exercised within such 90
            day period.

                        (b) In the event that your employment by the Company is
            terminated by the Company for any reason other than for Cause, by
            you as a result of an Employer Breach (as such term is defined in
            the Employment Agreement) or by the Company by reason of your
            disability or death prior to the expiration of the Option, the
            Option shall become immediately exercisable for one year as to all
            Shares not previously purchased. The Option shall then expire to the
            extent not exercised within such one year period.

                        (c) In the event that your employment by the Company is
            terminated by you for any reason other than an Employer Breach prior
            to the expiration of the Option, the Option will be exercisable for
            90 days from the date of such termination, but only as to such
            Shares that had become exercisable pursuant to paragraph 1 above
            (and not previously purchased) prior to such date; provided,
            however, that if such termination occurs after the second
            anniversary of the date of this letter, the Option shall become
            immediately exercisable for such 90 day period as to all Shares not
            previously purchased. The Option shall then expire to the extent not
            exercised within such 90 day period.

                        (d) In the event that your employment by the Company is
            terminated by the Company by reason of your death or disability, the
            Option shall become immediately exercisable for one year as to all
            Shares not previously purchased. The Option shall then expire to the
            extent not exercised within such one year period.

                        (e) In the event of a Change of Control, the Option
            shall, at your option exercised by written notice delivered to the
            Company, become immediately exercisable for one year as to all
            Shares not previously purchased. The Option shall then expire to the
            extent not exercised within such one year period. As used in this
            paragraph, "Change of Control" shall mean (i) the merger,
            consolidation or other business combination of the Company with or
            into another corporation with the effect that the shareholders of
            the Company immediately following the merger, consolidation or other
            business combination, hold 50% or less of the combined voting power
            of the then outstanding equity interests of the surviving
            corporation of such merger, consolidation or other business
            combination ordinarily (and apart from rights accruing under special
            circumstances) having the right to vote in the election of directors
            or (ii) the replacement of a majority of the Board of Directors of
            the Company in any given year as compared to the directors who
            constituted the Board at the beginning of such year, and such
            replacement shall not have been approved by the Board of Directors
            of the Company as constituted at the beginning of such year.

            If any of the options granted hereunder are treated as nonqualified
stock options ("NQO") as the result of exceeding the $100,000 exercise limit
contained in Section 422(d) of the Internal Revenue Code of 1986, as amended,
the Company shall issue separate certificates representing those shares
constituting incentive stock options ("ISO") and those shares constituting NQO's
and shall identify the ISO shares as such on its stock transfer records.

            3. Unless at the time of the exercise of the Option a registration
statement under the Securities Act of 1933, as amended (the "Act"), is in effect
as to such Shares, any Shares purchased by you upon the exercise of the Option
shall be acquired for investment and not for sale or distribution, and if the
Company so requests, upon any exercise of the Option, in whole or in part, you
will execute and deliver to the Company a certificate to such effect. The
Company shall not be obligated to issue any Shares pursuant to the Option if, in
the opinion of counsel to the


                                       16

Company, the Shares to be so issued are required to be registered or otherwise
qualified under the Act or under any other applicable statute, regulation or
ordinance affecting the sale of securities, unless and until such Shares have
been so registered or otherwise qualified.

            4. You understand and acknowledge that, under existing law, unless
at the time of the exercise of the Option a registration statement under the Act
is in effect as to such Shares (i) any Shares purchased by you upon exercise of
this option may be required to be held indefinitely unless such Shares are
subsequently registered under the Act or an exemption from such registration is
available; (ii) any sales of such Shares made in reliance upon Rule 144
promulgated under the Act may be made only in accordance with the terms and
conditions of that Rule (which, under certain circumstances, restrict the number
of shares which may be sold and the manner in which shares may be sold); (iii)
in the case of securities to which Rule 144 is not applicable, compliance with
Regulation A promulgated under the Act or some other disclosure exemption will
be required; (iv) certificates for Shares to be issued to you hereunder shall
bear a legend to the effect that the Shares have not been registered under the
Act and that the Shares may not be sold, hypothecated or otherwise transferred
in the absence of an effective registration statement under the Act relating
thereto or an opinion of counsel satisfactory to the Company that such
registration is not required; and (v) the Company will place an appropriate
"stop transfer" order with its transfer agent with respect to such Shares. In
addition, you understand and acknowledge that the Company has no obligation to
you to furnish information necessary to enable you to make sales under Rule 144.

            5. In the event that the Company shall at any time prior to the
expiration of the Option and prior to the exercise thereof: (i) declare or pay
to the holders of the Common Stock a dividend payable in any kind of shares of
stock of the Company; or (ii) change or divide or otherwise reclassify its
Common Stock into the same or a different number of shares with or without par
value, or into shares of any class or classes; or (iii) consolidate or merge
with, or transfer its property as an entirety or substantially all of its assets
to any other corporation; or (iv) make any distribution of its assets to holders
of its Common Stock as a liquidation, or partial liquidation dividend or by way
of return of capital; then, upon the subsequent exercise of the Option, the
exercise price of the Shares issuable upon the exercise hereof shall be
appropriately adjusted by the Board of Directors of the Company so that you
shall receive for the exercise price, in addition to or in substitution for the
Shares to which you would be entitled upon such exercise, such additional shares
of stock of the Company, or such reclassified shares of stock of the Company, or
such securities or property of the Company resulting from such consolidation or
merger or transfer, of such assets of the Company, which you would have been
entitled to receive had you exercised the Option prior to the happening of any
of the foregoing events.

            6. The Option (or installment thereof) is to be exercised by
delivering to the Company a written notice of exercise in the form attached
hereto as Annex A, specifying the number of Shares to be purchased, together
with payment of the purchase price of the Shares to be purchased. The purchase
price is to be paid in cash.

            7. The Option does not confer upon you any right whatsoever as a
stockholder of the Company. The Option is granted to you under the Company's
1993 Stock Option Plan, as amended, (the "Plan") and is intended to be an
incentive stock option. The terms of the Plan are incorporated by reference into
the Option, except as modified in accordance with the Plan by the terms set
forth herein. A copy of the Plan has been delivered to you with this letter. The
Option shall be binding upon any successors or assigns of the Company.

            If the foregoing correctly sets forth our understanding of the
option, please indicate your acceptance by signing this letter in the space
provided below.

                                   Very truly yours,

                                   SHEFFIELD MEDICAL TECHNOLOGIES INC.

                               By: /s/ George Lombardi
                                   -----------------------------------
                                       George Lombardi
                                       Chief Financial Officer



AGREED TO AND ACCEPTED:

/s/ David A. Byron
 ---------------------
David A. Byron


                                       17


                                                                         Annex A

                             STOCK SUBSCRIPTION FORM

To: Sheffield Medical Technologies Inc.

Gentlemen:

            I hereby exercise my option to purchase from Sheffield Medical
Technologies Inc. (the "Company"), pursuant to the Stock Option Letter Agreement
between us dated as of April 25, 1997, ________ shares of the Company's Common
Stock, $.01 par value, and herewith tender payment therefor at the rate of $____
per share. The option was originally granted pursuant to the terms of the
Company's 1993 Stock Option Plan.

            I represent and warrant that I am acquiring the said shares for my
own account for investment purposes only; that I have no present intention of
selling or otherwise disposing of such shares or any part thereof; that I will
not transfer said shares in violation of the securities laws of the United
States; that I am familiar with the business operations, management and
financial condition and affairs of the Company; that I have not relied upon any
representation of the Company with respect thereto; and that I have the personal
financial means to comply with all of said representations. I further confirm
that I have been advised that said shares will not be registered under the
Securities Act of 1933, as amended, and that I have consulted with and been
advised by counsel as to the restrictions on resale to which said shares will
thereby be subject.

            The form in which I wish my name and address to appear on the
Company's stock records is as follows:


                                     Name:
                                               -----------------------

                                     Address:
                                               -----------------------
                                               -----------------------
                                               -----------------------


                                                        Very truly yours,


                                                        ---------------------
                                                        David A. Byron


                                       18



                                                                    EXHIBIT B TO
                                                            EMPLOYMENT AGREEMENT

                       SHEFFIELD MEDICAL TECHNOLOGIES INC.
                        30 ROCKEFELLER PLAZA, SUITE 4515
                            NEW YORK, NEW YORK 10112

April 25, 1997

David A. Byron
17674 Lasiandra Drive
Chesterfield, Missouri 63017

            At a meeting of the Board of Directors of Sheffield Medical
Technologies Inc. (the "Company") held on April 22, 1997, the Board authorized
the grant to you of an option (the "Option") to purchase one hundred and fifty
(150,000) shares (the "Shares") of Common Stock, par value $.01 per share, of
the Company. The Option is being granted in connection with the Employment
Agreement dated as of April 25, 1997 between the Company and you (the
"Employment Agreement"). The terms of the Option are set forth below.

            1. No part of the option is currently exercisable. Subject to any
adjustment pursuant to paragraph 5 below, the Option is exercisable at an
exercise price of $2.75 per Share. Subject to the paragraph 2 below, the Option
may first be exercised on April 25, 1998 for 15,000 Shares and shall become
exercisable for an additional 15,000 Shares on each April 25 thereafter to and
including April 25, 2007. Subject to paragraph 2 below, the Option must be
exercised as to any and all Shares on or prior to April 25, 2007 (on which date
the Option will, to the extent not previously exercised, expire).

            2. Notwithstanding anything to the contrary contained herein or in
the Plan (as defined below):

                        (a) In the event your employment by the Company is
            terminated for Cause (as such term is defined in the Employment
            Agreement) prior to the expiration of the Option, the Option will be
            exercisable for 90 days from the date of such termination, but only
            as to such Shares that had become exercisable pursuant to paragraph
            1 above (and not previously purchased) prior to such date. The
            Option shall then expire to the extent not exercised within such 90
            day period.

                        (b) In the event that your employment by the Company is
            terminated by the Company for any reason other than for Cause, by
            you as a result of an Employer Breach (as such term is defined in
            the Employment Agreement) or by the Company by reason of your
            disability or death prior to the expiration of the Option, the
            Option shall be exercisable for one year from the date of such
            termination, but only as to such Shares that had become exercisable
            pursuant to paragraph 1 above (and not previously purchased) prior
            to such date; provided, however, that if such termination occurs
            after the fifth anniversary of the date of this letter, the Option
            shall become immediately exercisable for such one year period as to
            all Shares not previously purchased. The Option shall then expire to
            the extent not exercised within such one year period.

                        (c) In the event that your employment by the Company is
            terminated by you for any reason other than an Employer Breach other
            than an Employer Breach prior to the expiration of the Option, the
            Option will be exercisable for 90 days from the date of such
            termination, but only as to such Shares that had become exercisable
            pursuant to paragraph 1 above (and not previously purchased) prior
            to such date; provided, however, that if such termination occurs
            after the fifth anniversary of the date of this letter, the Option
            shall become immediately exercisable for such 90 day period as to
            all Shares not previously purchased. The Option shall then expire to
            the extent not exercised within such 90 day period.

                        (d) In the event that your employment by the Company is
            terminated by the Company by reason of your death or disability, the
            Option shall be exercisable for one year from the date of such
            termination, but only as to such Shares that had become exercisable
            pursuant to paragraph 1 above (and not previously purchased) prior
            to such date; provided, however, that if such termination occurs
            after the fifth anniversary of the date of this letter, the Option
            shall become immediately exercisable for such one year period as to
            all Shares not previously purchased. The Option shall then expire to
            the extent not exercised within such one year period.

                        (e) in the event of a Change of Control, the Option
            shall, at your option exercised by written notice delivered to the
            Company, be exercisable for one year from the date of such
            termination, but only as to such Shares that had become exercisable
            pursuant to paragraph 1 above (and not previously purchased) prior
            to such date; provided, however, that if such termination occurs
            after the fifth anniversary of the date of this letter, the Option
            shall become immediately exercisable for such one year period as to
            all Shares not previously purchased. The Option shall then expire to
            the extent not exercised within such one year period. As used in
            this paragraph, "Change of Control" shall mean (i) the merger,
            consolidation or other business combination of the Company with or
            into another corporation with the effect that the shareholders of
            the Company immediately following the merger, consolidation or other
            business combination, hold 50% or less of the combined voting power
            of the then outstanding equity interests of the surviving
            corporation of such merger, consolidation or other business
            combination ordinarily (and apart from rights accruing under special
            circumstances) having the right to vote in the election of directors
            or (ii) the replacement of a majority of the Board of Directors of
            the Company in any given year as compared to the directors who
            constituted the Board at the beginning of such year, and such
            replacement shall not have been approved by the Board of Directors
            of the Company as constituted at the beginning of such year.


                                       19


            If any of the options granted hereunder are treated as nonqualified
stock options ("NQO") as the result of exceeding the $100,000 exercise limit
contained in Section 422(d) of the Internal Revenue Code of 1986, as amended,
the Company shall issue separate certificates representing those shares
constituting incentive stock options ("ISO") and those shares constituting NQO's
and shall identify the ISO shares as such on its stock transfer records.

            3. Unless at the time of the exercise of the Option a registration
statement under the Securities Act of 1933, as amended (the "Act"), is in effect
as to such Shares, any Shares purchased by you upon the exercise of the Option
shall be acquired for investment and not for sale or distribution, and if the
Company so requests, upon any exercise of the Option, in whole or in part, you
will execute and deliver to the Company a certificate to such effect. The
Company shall not be obligated to issue any Shares pursuant to the Option if, in
the opinion of counsel to the Company, the Shares to be so issued are required
to be registered or otherwise qualified under the Act or under any other
applicable statute, regulation or ordinance affecting the sale of securities,
unless and until such Shares have been so registered or otherwise qualified.

            4. You understand and acknowledge that, under existing law, unless
at the time of the exercise of the Option a registration statement Under the Act
is in effect as to such Shares (i) any Shares purchased by you upon exercise of
this option may be required to be held indefinitely unless such Shares are
subsequently registered under the Act or an exemption from such registration is
available; (ii) any sales of such Shares made in reliance upon Rule 144
promulgated under the Act may be made only in accordance with the terms and
conditions of that Rule (which, under certain circumstances, restrict the number
of shares which may be sold and the manner in which shares may be sold) ; (iii)
in the case of securities to which Rule 144 is not applicable, compliance with
Regulation A promulgated under the Act or some other disclosure exemption will
be required; (iv) certificates for Shares to be issued to you hereunder shall
bear a legend to the effect that the Shares have not been registered under the
Act and that the Shares may not be sold, hypothecated or otherwise transferred
in the absence of an effective registration statement under the Act relating
thereto or an opinion of counsel satisfactory to the Company that such
registration is not required; and (v) the Company will place an appropriate
"stop transfer" order with its transfer agent with respect to such Shares. In
addition, you understand and acknowledge that the Company has no obligation to
you to furnish information necessary to enable you to make sales under Rule 144.

            5. In the event that the Company shall at any time prior to the
expiration of the Option and prior to the exercise thereof: (i) declare or pay
to the holders of the Common Stock a dividend payable in any kind of shares of
stock of the Company; or (ii) change or divide or otherwise reclassify its
Common Stock into the same or a different number of shares with or without par
value, or into shares of any class or classes; or (iii) consolidate or merge
with, or transfer its property as an entirety or substantially all of its assets
to any other corporation; or (iv) make any distribution of its assets to holders
of its Common Stock as a liquidation, or partial liquidation dividend or by way
of return of capital; then, upon the subsequent exercise of the Option, the
exercise price of the Shares issuable upon the exercise hereof shall be
appropriately adjusted by the Board of Directors of the Company so that you
shall receive for the exercise price, in addition to or in substitution for the
Shares to which you would be entitled upon such exercise, such additional shares
of stock of the Company, or such reclassified shares of stock of the Company, or
such securities or property of the Company resulting from such consolidation or
merger or transfer, of such assets of the Company, which you would have been
entitled to receive had you exercised the option prior to the happening of any
of the foregoing events.

            6. The Option (or installment thereof) is to be exercised by
delivering to the Company a written notice of exercise in the form attached
hereto as Annex A, specifying the number of Shares to be purchased, together
with payment of the purchase price of the Shares to be purchased. The purchase
price is to be paid in cash.

            7. The Option does not confer upon you any right whatsoever as a
stockholder of the Company. The Option is granted to you under the Company's
1993 Stock Option Plan, as amended, (the "Plan") and is intended to be an
incentive stock option. The terms of the Plan are incorporated by reference into
the option, except as modified in accordance with the Plan by the terms set
forth herein. A copy of the Plan has -been delivered to you with this letter.
The option shall be binding upon any successors or assigns of the Company.

            If the foregoing correctly sets forth our understanding of the
Option, please indicate your acceptance by signing this letter in the space
provided below.


                                   Very truly yours,

                                   SHEFFIELD MEDICAL TECHNOLOGIES INC.

                                   By: /s/ George Lombardi
                                       --------------------------------
                                       George Lombardi
                                       Chief Financial Officer


AGREED TO AND ACCEPTED:

/s/ David A. Byron
- ------------------------
David A. Byron


                                       20



                                                                         Annex A

                             STOCK SUBSCRIPTION FORM

To:           Sheffield Medical Technologies Inc.

Gentlemen:

            I hereby exercise my option to purchase from Sheffield Medical
Technologies Inc. (the "Company"), pursuant to the Stock Option Letter Agreement
between us dated as of April 25, 1997, _________ shares of the Company's Common
Stock, $.01 par value, and herewith tender payment therefor at the rate of
$______ per share. The option was originally granted pursuant to the terms of
the Company's 1993 Stock Option Plan.

            I represent and warrant that I am acquiring the said shares for my
own account for investment purposes only; that I have no present intention of
selling or otherwise disposing of such shares or any part thereof; that I will
not transfer said shares in violation of the securities laws of the United
States; that I am familiar with the business operations, management and
financial condition and affairs of the Company; that I have not relied upon any
representation of the Company with respect thereto; and that I have the personal
financial means to comply with all of said representations. I further confirm
that I have been advised that said shares will not be registered under the
Securities Act of 1933, as amended, and that I have consulted with and been
advised by counsel as to the restrictions on resale to which said shares will
thereby be subject.

            The form in which I wish my name and address to appear on the
Company's stock records is as follows:

                                     Name:
                                               -----------------------

                                     Address:
                                               -----------------------
                                               -----------------------
                                               -----------------------


                                                        Very truly yours,


                                                        ---------------------
                                                        David A. Byron


                                       21



                                    EXHIBIT C

                  OPTION LETTER AGREEMENT DATED AUGUST 28, 1998


                         SHEFFIELD PHARMACEUTICALS, INC.
                            425 SOUTH WOODSMILL ROAD
                            ST. LOUIS, MISSOURI 63017

                                                                 August 28, 1998

To:           David A. Byron
              17674 Lasiandra Drive
              Chesterfield, Missouri 63017

            At a meeting of the Stock Option Committee of the Board of Directors
of Sheffield Pharmaceuticals, Inc. (the "Company") held on August 25, 1998, the
Company authorized the grant to you as of the date hereof of an option (the
"Option") to purchase one Hundred Fifty Five Thousand (105,000) shares (the
"Shares") of Common Stock, par value $.01 per share, of the Company (the "Common
Stock").

            No part of the option is currently exercisable. On or after August
28, 1999 and prior to August 28, 2008 (on which date the Option, to the extent
it has not previously been exercised or has not previously expired, will
expire), the Option may be exercised as follows: (i) as to 35,000 Shares,
subsequent to the time that the Fair Market Value (as hereinafter defined) of
the Common Stock equals or exceeds $1.2375 for 10 consecutive trading days (such
Shares constituting the "First Tranche" of the Option); (ii) as to 35,000
Shares, subsequent to the time that the Fair Market Value of the Common Stock
equals or exceeds $2.125 for 10 consecutive trading days (such shares
constituting the "Second Tranche" of the Option) and (iii) as to the remaining
35,000 Shares, subsequent to the time that the Fair Market Value of the Common
Stock exceeds $3.125 for 10 consecutive trading days (such Shares constituting
the "Third Tranche" of the Option). As used herein, "Fair Market Value" means
the closing price of the Common Stock on the principal U.S. national securities
exchange on which the Common Stock is listed for trading (if the shares are so
listed) or on the Nasdaq National Market or Small Cap Market (if the Common
Shares are regularly quoted on the Nasdaq National Market or Small Cap Market),
or, if not so listed or regularly quoted or if there is no such closing price,
the mean between the closing bid and asked prices of the Common Stock on such
exchange or on Nasdaq or in the over-the-counter market or, if such bid and
asked prices shall not be available, as reported by any nationally recognized
quotation service selected by the Company.

            Shares may be purchased by you upon exercise of the Option at the
following respective purchase prices: (i) Shares constituting the First Tranche
$1.2375 per Share; (ii) Shares constituting the Second Tranche $2.125 per Share;
and (iii) Shares constituting the Third Tranche - $3.125 per Share.

            This Option must be exercised as to any and all Shares on or prior
to August 28, 2008 (on which date the Option, to the extent it has not
previously been exercised or has not previously expired, will expire).

            Notwithstanding anything to the contrary contained in this letter
agreement, the following provisions shall apply:

            (a) In the event that Fair Market Value does not equal or exceed
            $1.2375 for 10 consecutive trading days prior to August 28, 2001
            (the "Target Date"), the First Tranche of the Option may be
            exercised on the Target Date and for 60 days thereafter (after which
            60th day the Option in respect of the First Tranche will, to the
            extent not previously exercised, expire);

            (b) In the event that Fair Market Value does not equal or exceed
            $2.125 for 10 consecutive trading days prior to the Target Date, the
            Second Tranche of the Option may be exercised on the Target Date and
            for 60 days thereafter (after which 60th day the Option in respect
            of the Second Tranche will, to the extent not previously exercised,
            expire); and


                                       22


            (c) In the event that Fair Market Value does not equal or exceed
            $3.125 for 10 consecutive trading days prior to the Target Date, the
            Third Tranche of the Option may be exercised on the Target Date and
            for 60 days thereafter (after which 60th day the Option in respect
            of the Third Tranche will, to the extent not previously exercised,
            expire).

            Unless at the time of the exercise of the Option a registration
statement under the Securities Act of 1933, as amended (the "Act"), is in effect
as to such Shares, any Shares purchased by you upon the exercise of the Option
shall be acquired for investment and not for sale or distribution, and if the
Company so requests, upon any exercise of the Option, in whole or in part, you
will execute and deliver to the Company a certificate to such effect. The
Company shall not be obligated to issue any Shares pursuant to the Option if, in
the opinion of counsel to the Company, the Shares to be so issued are required
to be registered or otherwise qualified under the Act or under any other
applicable statute, regulation or ordinance affecting the sale of securities,
unless and until such Shares have been so registered or otherwise qualified.

            You understand and acknowledge that, under existing law, unless at
the time of the exercise of the Option a registration statement under the Act is
in effect as to such Shares (i) any Shares purchased by you upon exercise of
this Option may be required to be held indefinitely unless such Shares are
subsequently registered under the Act or an exemption from such registration is
available; (ii) any sales of such Shares made in reliance upon Rule 144
promulgated under the Act may be made only in accordance with the terms and
conditions of that Rule (which, under certain circumstances, restrict the number
of shares which may be sold and the manner in which shares may be sold); (iii)
in the case of securities to which Rule 144 is not applicable, compliance with
Regulation A promulgated under the Act or some other disclosure exemption will
be required; (iv) certificates for Shares to be issued to you hereunder shall
bear a legend to the effect that the Shares have not been registered under the
Act and that the Shares may not be sold, hypothecated or otherwise transferred
in the absence of an effective registration statement under the Act relating
thereto or an opinion of counsel satisfactory to the Company that such
registration is not required; and (v) the Company will place an appropriate
"stop transfer" order with its transfer agent with respect to such Shares. In
addition, you understand and acknowledge that the Company has no obligation to
you to furnish information necessary to enable you to make sales under Rule 144.

            In the event that the Company shall at any time prior to the
expiration of the Option and prior to the exercise thereof: (i) declare or pay
to the holders of the Common Stock a dividend payable in any kind of shares of
stock of the Company; or (ii) change or divide or otherwise reclassify its
Common Stock into the same or a different number of shares with or without par
value, or into shares of any class or classes; or (iii) consolidate or merge
with, or transfer its property as an entirety or substantially all of its assets
to any other corporation; or (iv) make any distribution of its assets to holders
of its Common Stock as a liquidation, or partial liquidation dividend or by way
of return of capital; then, upon the subsequent exercise of the Option, the
purchase price of the Shares issuable upon the exercise hereof shall be
appropriately adjusted by the Board of Directors of the Company so that you
shall receive for the exercise price, in addition to or in substitution for the
Shares to which you would be entitled upon such exercise, such additional shares
of stock of the Company, or such reclassified shares of stock of the Company, or
such securities or property of the Company resulting from such consolidation or
merger or transfer, of such assets of the Company, which you would have been
entitled to receive had you exercised the Option prior to the happening of any
of the foregoing events.

            The Option (or installment thereof) is to be exercised by delivering
to the Company a written notice of exercise in the form attached hereto as Annex
A, specifying the number of Shares to be purchased, together with payment of the
purchase price of the Shares to be purchased. The purchase price is to be paid
in cash.

            The Option does not confer upon you any right whatsoever as a
stockholder of the Company.

            By accepting the Option, you acknowledge your agreement to advise
the Company in writing at least five trading days prior to selling, assigning or
otherwise transferring any of the Shares.

            The Option is granted to you under the Company's 1993 Stock Option
Plan, as amended, (the "Plan") and is not intended to be an incentive stock
option. The terms of the Plan are incorporated by reference into the Option,


                                       23


except as modified by the terms set forth herein. A copy of the Plan has been
delivered to you with this letter.

            The Option shall be binding upon any successors or assigns of the
Company.

            If the foregoing correctly sets forth our understanding, please
indicate your acceptance by signing this letter in the space provided below.


                                         Very truly yours,

                                         Sheffield Pharmaceuticals, Inc.

                                         By: /s/ Loren G. Peterson
                                             --------------------------------
                                             Loren G. Peterson
                                             President and CEO

AGREED TO AND ACCEPTED:


/s/ David A. Byron
 ----------------------
David A. Byron


                                       24

                                                                         Annex A


                             STOCK SUBSCRIPTION FORM

To: Sheffield Pharmaceuticals, Inc.

Gentlemen:

            I hereby exercise my option to purchase from Sheffield
Pharmaceuticals, Inc. (the "Company"), pursuant to the Stock Option Letter
Agreement between us dated August 28, 1998, ______ shares of the Company's
Common Stock, $.01 par value, and herewith tender payment therefor at the rate
of $____ per share. The option was originally granted pursuant to the terms of
the Company's 1993 Stock Option Plan, as amended.

            I represent and warrant that I am acquiring the said shares for my
own account for investment purposes only; that I have no present intention of
selling or otherwise disposing of such shares or any part thereof; that I will
not transfer said shares in violation of the securities laws of the United
States; that I am familiar with the business operations, management and
financial condition and affairs of the Company; that I have not relied upon any
representation of the Company with respect thereto; and that I have the personal
financial means to comply with all of said representations. I further confirm
that I have been advised that said shares will not be registered under the
Securities Act of 1933, as amended, and that I have consulted with and been
advised by counsel as to the restrictions on resale to which said shares will
thereby be subject.

            The form in which I wish my name and address to appear on the
Company's stock records is as follows:

                                     Name:
                                               -----------------------

                                     Address:
                                               -----------------------
                                               -----------------------
                                               -----------------------


                                               Very truly yours,


                                               ---------------------
                                               David A. Byron


                                       25




                                    EXHIBIT D

                   OPTION LETTER AGREEMENT DATED MARCH 1, 2000


                         SHEFFIELD PHARMACEUTICALS, INC.
                            425 SOUTH WOODSMILL ROAD
                            ST. LOUIS, MISSOURI 63017


                                                          March 1, 2000


To:         David A. Byron
            17674 Lasiandra Drive
            Chesterfield, MO 63005

            At a meeting of the Stock Option Committee of the Board of Directors
of Sheffield Pharmaceuticals, Inc. (the "Company") held on February 29, 2000,
the Company authorized the grant to you as of the date hereof of an option (the
"Option") to purchase Ninety Thousand (90,000) shares (the "Shares") of Common
Stock, par value $.01 per share, of the Company (the "Common Stock").

            No part of the Option is currently exercisable. On or after March 1,
2001 and prior to March 1, 2010 (on which date the Option, to the extent it has
not previously been exercised or has not previously expired, will expire), the
Option may be exercised as follows: (i) as to 30,000 Shares, subsequent to the
time that the Fair Market Value (as hereinafter defined) of the Common Stock
equals or exceeds $4.75 for 10 consecutive trading days (such Shares
constituting the "First Tranche" of the Option); (ii) as to 30,000 Shares,
subsequent to the time that the Fair Market Value of the Common Stock equals or
exceeds $5.3125 for 10 consecutive trading days (such shares constituting the
"Second Tranche" of the Option) and (iii) as to the remaining 30,000 Shares,
subsequent to the time that the Fair Market Value of the Common Stock exceeds
$6.3125 for 10 consecutive trading days (such Shares constituting the "Third
Tranche" of the Option). As used herein, "Fair Market Value" means the closing
price of the Common Stock on the principal U.S. national securities exchange on
which the Common Stock is listed for trading (if the shares are so listed) or on
the Nasdaq National Market or Small Cap Market (if the Common Shares are
regularly quoted on the Nasdaq National Market or Small Cap Market), or, if not
so listed or regularly quoted or if there is no such closing price, the mean
between the closing bid and asked prices of the Common Stock on such exchange or
on Nasdaq or in the over-the-counter market or, if such bid and asked prices
shall not be available, as reported by any nationally recognized quotation
service selected by the Company.

            Shares may be purchased by you upon exercise of the Option at the
following respective purchase prices: (i) Shares constituting the First Tranche
- - $4.75 per Share; (ii) Shares constituting the Second Tranche - $5.3125 per
Share; and (iii) Shares constituting the Third Tranche - $6.3125 per Share.

            This Option must be exercised as to any and all Shares on or prior
to March 1, 2010 (on which date the Option, to the extent it has not previously
been exercised or has not previously expired, will expire).

            Notwithstanding anything to the contrary contained in this letter
agreement, the following provisions shall apply:

                        (a) In the event that Fair Market Value does not equal
            or exceed $4.75 for 10 consecutive trading days prior to March 1,
            2003 (the "Target Date"), the First Tranche of the Option may be
            exercised on the Target Date and for 60 days thereafter (after which
            60th day the Option in respect of the First Tranche will, to the
            extent not previously exercised, expire);


                                       26


                        (b) In the event that Fair Market Value does not equal
            or exceed $5.3125 for 10 consecutive trading days prior to the
            Target Date, the Second Tranche of the Option may be exercised on
            the Target Date and for 60 days thereafter (after which 60th day the
            Option in respect of the Second Tranche will, to the extent not
            previously exercised, expire); and

                        (c) In the event that Fair Market Value does not equal
            or exceed $6.3125 for 10 consecutive trading days prior to the
            Target Date, the Third Tranche of the Option may be exercised on the
            Target Date and for 60 days thereafter (after which 60th day the
            Option in respect of the Third Tranche will, to the extent not
            previously exercised, expire).

            Unless at the time of the exercise of the Option a registration
statement under the Securities Act of 1933, as amended (the "Act"), is in effect
as to such Shares, any Shares purchased by you upon the exercise of the Option
shall be acquired for investment and not for sale or distribution, and if the
Company so requests, upon any exercise of the Option, in whole or in part, you
will execute and deliver to the Company a certificate to such effect. The
Company shall not be obligated to issue any Shares pursuant to the Option if, in
the opinion of counsel to the Company, the Shares to be so issued are required
to be registered or otherwise qualified under the Act or under any other
applicable statute, regulation or ordinance affecting the sale of securities,
unless and until such Shares have been so registered or otherwise qualified.

            You understand and acknowledge that, under existing law, unless at
the time of the exercise of the Option a registration statement under the Act is
in effect as to such Shares (i) any Shares purchased by you upon exercise of
this option may be required to be held indefinitely unless such Shares are
subsequently registered under the Act or an exemption from such registration is
available; (ii) any sales of such Shares made in reliance upon Rule 144
promulgated under the Act may be made only in accordance with the terms and
conditions of that Rule (which, under certain circumstances, restrict the number
of shares which may be sold and the manner in which shares may be sold); (iii)
in the case of securities to which Rule 144 is not applicable, compliance with
Regulation A promulgated under the Act or some other disclosure exemption will
be required; (iv) certificates for Shares to be issued to you hereunder shall
bear a legend to the effect that the Shares have not been registered under the
Act and that the Shares may not be sold, hypothecated or otherwise transferred
in the absence of an effective registration statement under the Act relating
thereto or an opinion of counsel satisfactory to the Company that such
registration is not required; and (v) the Company will place an appropriate
"stop transfer" order with its transfer agent with respect to such Shares. In
addition, you understand and acknowledge that the Company has no obligation to
you to furnish information necessary to enable you to make sales under Rule 144.

            In the event that the Company shall at any time prior to the
expiration of the Option and prior to the exercise thereof: (i) declare or pay
to the holders of the Common Stock a dividend payable in any kind of shares of
stock of the Company; or (ii) change or divide or otherwise reclassify its
Common Stock into the same or a different number of shares with or without par
value, or into shares of any class or classes; or (iii) consolidate or merge
with, or transfer its property as an entirety or substantially all of its assets
to any other corporation; or (iv) make any distribution of its assets to holders
of its Common Stock as a liquidation, or partial liquidation dividend or by way
of return of capital; then, upon the subsequent exercise of the Option, the
purchase price of the Shares issuable upon the exercise hereof shall be
appropriately adjusted by the Board of Directors of the Company so that you
shall receive for the exercise price, in addition to or in substitution for the
Shares to which you would be entitled upon such exercise, such additional shares
of stock of the Company, or such reclassified shares of stock of the Company, or
such securities or property of the Company resulting from such consolidation or
merger or transfer, of such assets of the Company, which you would have been
entitled to receive had you exercised the Option prior to the happening of any
of the foregoing events.

            The Option (or installment thereof) is to be exercised by delivering
to the Company a written notice of exercise in the form attached hereto as Annex
A, specifying the number of Shares to be purchased, together with payment of the
purchase price of the Shares to be purchased. The purchase price is to be paid
in cash.

            The Option does not confer upon you any right whatsoever as a
stockholder of the Company.

            By accepting the Option, you acknowledge your agreement to advise
the Company in writing at least five trading days prior to selling, assigning or
otherwise transferring any of the Shares.


                                       27


            The Option is granted to you under the Company's 1993 Stock Option
Plan, as amended, (the "Plan") and is not intended to be an incentive stock
option. The terms of the Plan are incorporated by reference into the Option,
except as modified by the terms set forth herein. A copy of the Plan has been
delivered to you with this letter.

            The Option shall be binding upon any successors or assigns of the
Company.

            If the foregoing correctly sets forth our understanding, please
indicate your acceptance by signing this letter in the space provided below.


                                         Very truly yours,

                                         Sheffield Pharmaceuticals, Inc.

                                         By: /s/ Loren G. Peterson
                                             --------------------------------
                                                 President

AGREED TO AND ACCEPTED:


/s/ David A. Byron
  ------------------
David A. Byron


                                       28



                                                                         Annex A


                             STOCK SUBSCRIPTION FORM

To: Sheffield Pharmaceuticals, Inc.


Gentlemen:

            I hereby exercise my option to purchase from Sheffield
Pharmaceuticals, Inc. (the "Company"), pursuant to the Stock Option Letter
Agreement between us dated March 1, 2000, _______ shares of the Company's Common
Stock, $.01 par value, and herewith tender payment therefor at the rate of $____
per share. The option was originally granted pursuant to the terms of the
Company's 1993 Stock Option Plan, as amended.

            I represent and warrant that I am acquiring the said shares for my
own account for investment purposes only; that I have no present intention of
selling or otherwise disposing of such shares or any part thereof; that I will
not transfer said shares in violation of the securities laws of the United
States; that I am familiar with the business operations, management and
financial condition and affairs of the Company; that I have not relied upon any
representation of the Company with respect thereto; and that I have the personal
financial means to comply with all of said representations. I further confirm
that I have been advised that said shares will not be registered under the
Securities Act of 1933, as amended, and that I have consulted with and been
advised by counsel as to the restrictions on resale to which said shares will
thereby be subject.

            The form in which I wish my name and address to appear on the
Company's stock records is as follows:

                                     Name:
                                               -----------------------

                                     Address:
                                               -----------------------
                                               -----------------------
                                               -----------------------


                                               Very truly yours,


                                               -----------------------
                                               David A. Byron


                                       29




                                    EXHIBIT E

                                IRREVOCABLE PROXY


            The undersigned, David A. Byron ("Holder"), an individual with a
residential address of 17674 Lasiandra Drive, Chesterfield, Missouri, 63017,
hereby revokes any and all proxies heretofore granted with respect to any shares
of common stock, $.01 par value (the "Stock"), of Sheffield Pharmaceuticals,
Inc. ("Sheffield") held by Holder and, hereby irrevocably appoints the President
of Sheffield, Loren G. Peterson, or his designee, and each of them, as
attorney-in-fact and proxy of Holder to attend any and all meetings of the
stockholders of Sheffield and to vote such Holder's Stock, to represent and
otherwise to act for Holder in the same manner and with the same effect as if
such Holder were personally present and to act by consent in the same manner and
with the same effect as if Holder were executing such consent, with respect to
any matter.

            Holder agrees that, so long as this Irrevocable Proxy remains in
effect, Holder will not execute or deliver to any persons, any proxy forms
relating to any meeting, or written consent in lieu of a meeting, of
stockholders of Sheffield, will promptly provide Sheffield with copies of any
communications related to Sheffield received by Holder and will not take any
action inconsistent with this Irrevocable Proxy.

            The foregoing appointment shall be (a) absolute and irrevocable and
(b) deemed coupled with an interest.

            This Irrevocable Proxy shall be effective for a period of one (1)
year in accordance with Delaware law and may be relied upon by any third party.

            IN WITNESS WHEREOF, the undersigned Holder has executed this
Irrevocable Proxy as of February 18, 2002.


Witness:
                                                DAVID A. BYRON



/s/ Sally Reiter                                /s/ David A. Byron
- -------------------------------                 -------------------------------


Witness print name: Sally Reiter
                    ------------


                                       30


                                    EXHIBIT F

                                 GENERAL RELEASE

            David A. Byron, in consideration of the good and valuable
consideration contained in the attached Agreement ("the Agreement"), the receipt
and sufficiency of which is hereby acknowledged, on behalf of himself, his
heirs, administrators, representatives, executors, successors, and assigns,
hereby irrevocably and unconditionally releases, acquits, and forever discharges
Sheffield Pharmaceuticals, Inc. and its predecessors (including without
limitation Sheffield Medical Technologies Inc.), parents, subsidiaries,
affiliates, divisions, successors and assigns, and all of their current and
former agents, officers, directors, employees, members, trustees, fiduciaries,
representatives and attorneys (the "Released Parties") from any and all charges,
complaints, claims, liabilities, obligations, promises, agreements, damages,
causes of action, suits, demands, losses, debts, and expenses of any nature
whatsoever, known or unknown ("Claims") which he has, had or claims to have
against any Released Party up to and including the date he signs this General
Release. This General Release of Claims shall include, without limitation,
Claims relating to his employment and separation from employment with the
Company, Claims of discrimination under the common law or any federal or state
statute (including, without limitation, the Civil Rights Act of 1964, the
Americans with Disabilities Act and the Age Discrimination in Employment Act,
all as amended), Claims for wrongful discharge, Claims for the payment of any
salary, wages, vacation time, bonuses or commissions, Claims for severance or
other benefits (other than as specifically set forth in paragraphs 2, 3 and 4 of
the Agreement), Claims of detrimental reliance, and all other statutory, common
law or other Claims of any nature whatsoever. This General Release of Claims
does not apply to any Claims concerning a breach of the Agreement, including the
option letter agreements referred to in Paragraph 4 of the Agreement as amended
by the Agreement, or any claims arising after the date you sign this General
Release. With respect to the Claims being waived herein, Byron acknowledges that
he is waiving his right to receive money or any other relief in any action
instituted by him or on his behalf by any other person, entity or government
agency.

            IN WITNESS WHEREOF, the undersigned David A. Byron has executed this
General Release as of February 18, 2002.


Witness:
                                                DAVID A. BYRON



/s/ Sally Reiter                                /s/ David A. Byron
- -------------------------------                 -------------------------------


Witness print name: Sally Reiter
                    ------------

                                       31



                                    EXHIBIT G

                      OLDER WORKERS BENEFIT PROTECTION ACT
                               NOTICE TO EMPLOYEES
                          AGE AND JOB TITLE INFORMATION

In connection with the Agreement and the offer of benefits described therein,
you are being provided with information as to (i) any class, unit or group of
individuals covered by such offer; (ii) the job titles and ages of all
individuals eligible or selected for the offer, and (iii) the ages of all
individuals in the same job classification or organizational unit who are not
eligible or selected for the offer. Eligible employees age forty (40) and over
shall have forty-five (45) days to consider the Company's offer and may revoke
their agreement to the offer within seven (7) days after their execution of the
Agreement.




Departments or                                             Ages of Employees    Ages of Ineligible
Units Affected          Job Title                          Affected             Employees
- --------------          ---------                          -----------------    ------------------
                                                                       
Executive Officers      Chairman                                                51
                        President and Chief                                     45
                        Executive Officer
                        Executive Vice President,          58
                        Corporate Development
                        Executive Vice President,          53
                        Scientific Affairs
                        Vice President, Finance and                             37
                        Administration and
                        Chief Financial Officer
                        Vice President, Pulmonary                               48
                        Delivery Systems



                                       32

EX-10.39

                                                                  EXHIBIT 10.39


                         SHEFFIELD PHARMACEUTICALS, INC.

                            INDEMNIFICATION AGREEMENT

            THIS INDEMNIFICATION AGREEMENT (the "Agreement") is made and entered
into this 23rd day of January, 2002 by and between Sheffield Pharmaceuticals,
Inc., a Delaware corporation (the "Company"), and the individuals listed on
Schedule I hereto (each such individual an "Indemnitee" and collectively the
"Indemnitees"):

            WHEREAS, qualified persons are reluctant to serve publicly-held
corporations as directors or officers or in other capacities, unless they are
provided with adequate protection against inordinate risks of claims and actions
against them arising out of their service to and activities on behalf of such
corporations;

            WHEREAS, the uncertainties related to obtaining adequate insurance
and indemnification have increased the difficulty of attracting and retaining
such quality persons;

            WHEREAS, it is reasonable, prudent and necessary for the Company to
obligate itself contractually to indemnify such persons to the fullest extent
permitted by law, so that such persons will serve or continue to serve the
Company free from undue concern that they will not be adequately indemnified;

            WHEREAS, the Company and the Indemnitees recognize that the legal
risks and potential liabilities, and the threat thereof, associated with
lawsuits filed against persons serving the Company, and the resultant time,
expense and anxiety spent and endured in defending lawsuits bears no reasonable
relationship to the compensation received by such persons, and thus poses a
significant deterrent and increased reluctance on the part of experienced and
capable individuals to serve the Company;

            WHEREAS, the By-laws of the Company and the laws of the State of
Delaware provide for the indemnification of directors, officers, agents and
employees of the Company and specifically provide that they are not exclusive,
and thereby contemplate that contracts may be entered into between the Company
and persons providing services to it; and

            WHEREAS, the Indemnitees are willing to serve, continue to serve and
to take on additional service for or on behalf of the Company on the condition
that he be indemnified according to the terms of this Agreement;

            NOW, THEREFORE, in consideration of the premises and promises
contained herein, the parties agree as follows:

Section 1.  Services by Indemnitee. Indemnitees agree to serve as directors
            and/or officers of the Company, and, with their subsequent consent,
            at the Company's request or for its benefit, as directors, officers,
            employees, agents or fiduciaries of certain other corporations and
            entities. Nothing contained herein shall entitle or require any
            Indemnitee to continue in his or her present position or any future
            position with the Company.

Section 2.  Term of Agreement. For any Indemnitee, this Agreement shall
            continue until and terminate upon the later of: (a) ten years after
            the date that such Indemnitee ceases to hold a Corporate Status or
            (b) 120 days after the final termination of all pending Proceedings
            in respect of which Indemnitee is granted rights of indemnification
            or advancement of Expenses hereunder and of any proceeding commenced
            by such Indemnitee pursuant to Section 8 of this Agreement.

Section 3.  Indemnification.

            3.1 General. The Company shall hold harmless and indemnify the
Indemnitees against all Liabilities and advance to the Indemnitees all Expenses
to the fullest extent permitted by the General Corporation Law of the State of
Delaware, or by any amendment thereof (but in the case of any amendment, only to
the extent such amendment permits the Company to provide broader indemnification
than provided prior to such amendment), or by other statutory provisions
authorizing or permitting indemnification applicable from time to time
hereafter.

            3.2 Proceedings Other Than Proceedings by or in the Right of the
Company. The Indemnitees shall be entitled to the rights of indemnification
provided in this Section 3.2 if, by reason of an Indemnitee's Corporate Status,
such Indemnitee is, or is threatened to be, made a party to any threatened,
pending or completed Proceeding, other than a Proceeding by or in the right of
the Company. Under this Section 3.2, any such Indemnitee shall be indemnified
against all Liabilities actually and reasonably incurred by the Indemnitee or on
the Indemnitee's behalf in connection with such Proceeding or any claim, issue
or matter therein, if the Indemnitee acted in good faith and in a manner that
the Indemnitee reasonably believed to be in or not opposed to the best interests
of the Company and, with respect to any criminal Proceeding, if the Indemnitee
had no reasonable cause to believe the conduct was unlawful.

            3.3 Proceedings by or in the Right of the Company. Each Indemnitee
shall be entitled to the rights of indemnification provided in this Section 3.3,
if, by reason of such Indemnitee's Corporate Status, the Indemnitee is, or is
threatened to be, made a party to any threatened, pending or completed
Proceeding


                                       1


brought by or in the right of the Company to procure a judgment in its favor.
Subject to the last sentence of this Section 3.3, any such Indemnitee shall be
indemnified against all Liabilities actually and reasonably incurred by the
Indemnitee or on the Indemnitee's behalf in connection with such Proceeding in
good faith and in a manner that the Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company. No indemnification of
Liabilities shall be made in respect of any claim, issue or matter in such
Proceeding as to which an Indemnitee shall have been adjudged to be liable to
the Company unless and only to the extent that the Court of Chancery of the
State of Delaware or the court in which such Proceeding was brought, determines
such indemnification is proper.

            3.4 Indemnification for Expenses as a Witness. Notwithstanding any
other provision of this Agreement, to the extent that any Indemnitee is, by
reason of such Indemnitee's Corporate Status, a witness in any Proceeding, he or
she shall be indemnified against all Expenses actually and reasonably incurred
by him or her or on his or her behalf in connection therewith.

            3.5 Partial Indemnity. If an Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of any Liabilities but not, however, for all the total amount thereof,
the Company shall nevertheless indemnify such Indemnitee for the portion thereof
to which the Indemnitee is entitled. Moreover, notwithstanding any other
provision of this Agreement, to the extent that an Indemnitee has been
successful on the merits or otherwise in defense of any Proceeding or in defense
of any claim, issue or matter therein, including dismissal without prejudice,
such Indemnitee shall be indemnified against all Expenses incurred in connection
therewith.

Section 4.  Advancement of Expenses. The Company shall advance all Expenses
            incurred or to be incurred by or on behalf of an Indemnitee in
            connection with any Proceeding within fifteen (15) days after the
            receipt by the Company of a statement from such Indemnitee
            requesting such advance from time to time, whether prior to or after
            final disposition of such Proceeding. Each statement shall
            reasonably evidence the Expenses incurred or to be incurred by the
            Indemnitee. The Indemnitee hereby undertakes to repay any Expenses
            so advanced if it shall ultimately be determined that the Indemnitee
            is not entitled to be indemnified against such Expenses.

Section 5.  Specific Limitations on Indemnity. No Indemnitee shall be
            entitled to indemnification under this Agreement:

                   (a) In respect to remuneration paid to or advantage gained by
            such Indemnitee, if it shall be determined by final judgment or
            other final adjudication that such Indemnitee was not legally
            entitled to such remuneration or advantage;

                   (b) On account of such Indemnitee's conduct which is finally
            adjudged to have been knowingly fraudulent, deliberately dishonest
            or willful misconduct; or

                   (c) Prior to a Change in Control in respect of any Proceeding
            initiated by an Indemnitee against the Company or any director or
            officer of the Company, unless the Company has joined in or
            consented to the initiation of such Proceeding, except (i) as
            provided in Section 8 hereof, (ii) in respect of any counterclaims
            made against Indemnitee in any such Proceeding and (iii) to the
            extent Indemnitee seeks contribution or apportionment of an award or
            settlement against Indemnitee and against the Company and/or any
            other director or officer of the Company.

Section 6.  Procedure for Determination of Entitlement to Indemnification.

            6.1 Initial Request. To obtain indemnification under this Agreement
in connection with any Proceeding, and for the duration thereof, an Indemnitee
shall submit to the Company a written request, including such documentation and
information as is reasonably available to such Indemnitee and is reasonably
necessary to


                                       2

determine whether and to what extent the Indemnitee is entitled to
indemnification. The Secretary of the Company shall, promptly upon receipt of
any request for indemnification, advise the Board in writing that the Indemnitee
has requested indemnification.

            6.2 Method of Determination. Upon written request by an Indemnitee
for indemnification pursuant to Section 6.1 hereof, a determination, if required
by applicable law, with respect to the Indemnitee's entitlement thereto shall be
made in such case: (a) if a Change in Control shall have occurred, by
Independent Counsel (unless Indemnitee shall request that such determination be
made by the Board of Directors or the stockholders, in which case in the manner
provided for in clauses (b) or (c) of this Section 6.2) in a written opinion to
the Board of Directors, a copy of which shall be delivered to the Indemnitee;
(b) if a Change of Control shall not have occurred, (i) by the Board of
Directors by a majority vote of a quorum consisting of Disinterested Directors,
or (ii) if a quorum of the Board consisting of Disinterested Directors is not
obtainable, or even if such quorum is obtainable, if such quorum of
Disinterested Directors so directs, either (x) by Independent Counsel in a
written opinion to the Board, a copy of which shall be delivered to the
Indemnitee(s), or (y) by the stockholders of the Company, as determined by such
quorum of Disinterested Directors, or a quorum of the Board, as the case may be;
or (c) as provided in Section 7.2 of this Agreement. If it is determined that an
Indemnitee is entitled to indemnification, payment to such Indemnitee shall be
made within ten (10) days after such determination.

            6.3 Selection, Payment and Discharge of Independent Counsel. If
required, Independent Counsel shall be selected as follows: (a) if a Change of
Control shall not have occurred, Independent Counsel shall be selected by the
Board, and the Company shall give written notice to the Indemnitee advising him
or her of the identity of Independent Counsel so selected; or (b) if a Change of
Control shall have occurred, Independent Counsel shall be selected by the
Indemnitee (unless the Indemnitee shall request that such selection be made by
the Board, in which event clause (a) shall apply), and the Indemnitee shall give
written notice to the Company advising it of the identity of Independent Counsel
so selected. In either event, the Indemnitee or the Company, as the case may be,
may, within seven (7) days after such written notice of selection shall have
been given, deliver to the Company or to the Indemnitee, as the case may be, a
written objection to such selection. Such objection may be asserted only on the
ground that Independent Counsel so selected does not meet the requirements of
"Independent Counsel" as defined in this Agreement, and the objection shall set
forth with particularity the factual basis of such assertion. If such written
objection is made, Independent Counsel so selected may not serve as Independent
Counsel, unless and until a court has determined that such objection is without
merit. If, within twenty (20) days after submission by the Indemnitee of a
written request for indemnification pursuant to Section 6.1 hereof, no
Independent Counsel shall have been selected and not objected to, either the
Company or the Indemnitee may petition the Court of Chancery of the State of
Delaware, or other court of competent jurisdiction, for resolution of any
objection which shall have been made by the Company or by the Indemnitee to the
other's selection of Independent Counsel and/or for the appointment as
Independent Counsel of a person selected by such court or by such other person
as such court shall designate, and the person with respect to whom an objection
is so resolved or the person so appointed shall act as Independent Counsel under
Section 6.2 hereof. The Company shall pay any and all reasonable fees and
expenses of Independent Counsel incurred by such Independent Counsel in
connection with its actions pursuant to this Agreement, and the Company shall
pay all reasonable fees and expenses incident to the procedures of this Section
6.3, regardless of the manner in which such Independent Counsel was selected or
appointed. Upon the due commencement date of any judicial proceeding or
arbitration pursuant to Section 8.1 of this Agreement, Independent Counsel shall
be discharged and relieved of any further responsibility in such capacity
(subject to the applicable standards of professional conduct then prevailing).

            6.4 Cooperation. Both the Company and the Indemnitees shall
cooperate with the person, persons or entity making the determination with
respect to any Indemnitee's entitlement to indemnification, including providing
to such person, persons or entity any documentation or information which is not
privileged or otherwise protected from disclosure and which is reasonably
available to the Indemnitees or to the Company, as the case may be, and
reasonably necessary to such determination. Any reasonable costs or expenses
(including attorneys' fees and disbursements) incurred by an Indemnitee in so
cooperating with the person, persons or entity making such determination shall
be borne by the Company (irrespective of the determination as to the
Indemnitee's entitlement to indemnification).

Section 7.  Presumptions and Effects of Certain Proceedings.

            7.1 Burden of Proof. In making a determination with respect to
entitlement to indemnification hereunder, the person, persons or entity making
such determination shall presume that an Indemnitee is entitled to
indemnification under this Agreement if the Indemnitee has submitted a request
for indemnification in accordance with Section 6.1 of this Agreement, and the
Company shall have the burden of proof to overcome that presumption in
connection with the making by any person, persons or entity of any determination
contrary to that presumption.


                                       3


            7.2 Failure to Determine Entitlement. If the person, persons or
entity empowered or selected under Section 6 of this Agreement to determine
whether the Indemnitee is entitled to indemnification shall not have made a
determination within sixty (60) days after receipt by the Company of the request
therefor, the requisite determination of entitlement to indemnification shall be
deemed to have been made and the Indemnitee shall be entitled to such
indemnification; provided, however, that such 60-day period may be extended for
a reasonable time, not to exceed an additional thirty (30) days, if the person,
persons or entity making the determination with respect to entitlement to
indemnification in good faith require(s) such additional time for the obtaining
or evaluating of documentation or information relating thereto; and provided,
further, that the foregoing provisions of this Section 7.2 shall not apply if
the determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 6.2 of this Agreement and if (a) within fifteen
(15) days after receipt by the Company of the request for such determination the
Board has resolved to submit such determination to the stockholders for their
consideration at an annual meeting thereof to be held within seventy-five (75)
days after such receipt and such determination is made thereat, or (b) a special
meeting of stockholders is called within fifteen (15) days after such receipt
for the purpose of making such determination, such meeting is held for such
purpose within sixty (60) days after having been so called and such
determination is made thereat.

            7.3 Effect of Other Proceedings. The termination of any Proceeding
or of any claim, issue or matter therein, by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its equivalent, shall not
(except as otherwise expressly provided in this Agreement) of itself adversely
affect the right of an Indemnitee to indemnification or create a presumption (i)
that an Indemnitee did not act in good faith and in a manner which such
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company or (ii) with respect to any criminal Proceeding, that the Indemnitee
had reasonable cause to believe that the conduct was unlawful.

            Section 8. Remedies of Indemnitee.

            8.1 Adjudication. In the event that (a) a determination is made
pursuant to Section 6 of this Agreement that an Indemnitee is not entitled to
indemnification under this Agreement, (b) advancement of Expenses is not timely
made pursuant to Section 4 of this Agreement, (c) payment of indemnification is
not made pursuant to Section 3 of this Agreement within ten (10) days after
receipt by the Company of a written request therefor, or (d) payment of
indemnification is not made within ten (10) days after a determination has been
made that Indemnitee is entitled to indemnification or such determination is
deemed to have been made pursuant to Sections 6 or 7 of this Agreement, such
Indemnitee shall be entitled to an adjudication, in any court of competent
jurisdiction and in a venue to be determined by the Indemnitee. Alternatively,
an Indemnitee, at his or her option, may seek an award in arbitration to be
conducted by a single arbitrator pursuant to the rules of the American
Arbitration Association. Indemnitees shall commence any action under this
Section 8.1 within 180 days following the date on which they first have the
right to commence such action hereunder.

            8.2 Good Faith. The Company hereby covenants and agrees to perform
its obligations under this Agreement in good faith; and in any judgement or
arbitration brought by an Indemnitee to enforce any such obligations the Company
shall have the burden of establishing by a preponderance of the evidence that it
(and its Board of Directors, if applicable) so performed such obligations and
that the Indemnitee is not entitled to indemnification or the advancement of
Expenses.

            8.3 De Novo Review. In the event that a determination shall have
been made pursuant to Section 6 of this Agreement that an Indemnitee is not
entitled to indemnification, any judicial proceeding or arbitration commenced
pursuant to Section 8.1 shall be conducted in all respects as a de novo trial or
arbitration on the merits and such Indemnitee shall not be prejudiced by reason
of that adverse determination.

            8.4 Company Bound. If a determination shall have been made or deemed
to have been made pursuant to Section 6 or 7 of this Agreement that an
Indemnitee is entitled to indemnification, the Company shall be bound by such
determination in any judicial proceeding or arbitration absent (a) a
misstatement of a material fact by the Indemnitee, or an omission of a material
fact necessary to make the Indemnitee's statement not materially misleading, in
connection with the request for indemnification or the furnishing of information
on (b) a prohibition of such indemnification under applicable law. The Company
shall be precluded from asserting in any such judicial proceeding or arbitration
that the procedures and presumptions of this Agreement are not valid, binding
and enforceable and shall stipulate in any such court or before any such
arbitrator that the Company is bound by all provisions of this Agreement.

            8.5 Expenses of Adjudication. In the event that an Indemnitee seeks
an adjudication or an award to enforce his rights under, or to recover damages
for breach of, this Agreement, such Indemnitee shall be entitled to recover from
the Company, and shall be indemnified by the Company against, any and all
expenses (of the type described in the definition of Expenses) actually and
reasonably incurred by such Indemnitee in such adjudication or arbitration,


                                       4

but only if the Indemnitee prevails therein. If it shall be determined in such
adjudication or arbitration that an Indemnitee is entitled to receive part but
not all of the indemnification or advancement of Expenses sought, such
Indemnitee shall be entitled to recover expenses from the Company on a pro rata
basis.

Section 9. Non-Exclusivity; Subrogation.

            9.1 Non-Exclusivity. The rights of indemnification and to receive
advancement of Expenses as provided by this Agreement shall not be deemed
exclusive of any other rights to which any Indemnitee may at any time be
entitled under applicable law, the certificate of incorporation or by-laws of
any corporation, any other agreement, a vote of stockholders, a resolution of
directors or otherwise.

            9.2 Subrogation. In the event of any payment under this Agreement,
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of the Indemnitee(s), who shall execute all papers required
and take all action necessary to secure such rights, including execution of such
documents as are necessary to enable the Company to bring suit to enforce such
rights.

            9.3 No Duplicative Payment. The Company shall not be liable under
this Agreement to make any payment of amounts otherwise indemnifiable hereunder
if and to the extent that an Indemnitee has otherwise actually received such
payment under any insurance policy, contract, agreement or otherwise.

Section 10. Insurance. The Company hereby covenants and agrees that, for
            each Indemnitee, for so long as such Indemnitee shall continue to
            serve as a director or officer of the Company (or shall continue at
            the request of the Company to serve as a director, officer, employee
            or agent of another corporation, partnership, joint venture, trust
            or other enterprise) and thereafter for so long as such Indemnitee
            shall be subject to any possible claim or threatened, pending or
            completed action, suit or proceeding, whether civil, criminal or
            investigative by reason of the fact that the Indemnitee was a
            director or officer of the Company (or served in any of said other
            capacities), the Company shall obtain and maintain in full force and
            effect for the benefit of such Indemnitee one or more valid, binding
            and enforceable policy or policies of directors' and officers'
            liability insurance ("D&O Insurance") in reasonable amounts from
            established and reputable insurers. Each Indemnitee shall be named
            as an insured in such a manner as to provide him or her the same
            rights and benefits as are accorded to the most favorably insured of
            the Company's directors, if the Indemnitee is a director; or of the
            Company's officers, if the Indemnitee is an officer but not a
            director of the Company; or of the Company's key employees, if the
            Indemnitee is not a director or officer but is a key employee.
            Notwithstanding the provisions of this Section 10, the Company shall
            have no obligation to obtain or maintain D&O Insurance for any
            Indemnitee, if the Company determines in good faith (i) that such
            insurance is not reasonably available, (ii) that the premium costs
            for such insurance are disproportionate to the amount of coverage
            provided, (iii) that the coverage provided by such insurance is
            limited by exclusion so as to provide an insufficient benefit, or
            (iv) that such Indemnitee is covered by similar insurance maintained
            by an affiliate of the Company. In the event that the Company does
            not purchase and maintain in effect said policy or policies of D & O
            Insurance pursuant to the provisions of this Section 10, the Company
            agrees to hold harmless and indemnify the Indemnitees to the full
            extent of the coverage which would otherwise have been provided for
            the benefit of such Indemnities pursuant to insurance policies held
            by the Company as of the Effective Date. If, at the time of the
            receipt of the notice of the commencement of a Proceeding, the
            Company has D&O Insurance in effect, the Company shall give prompt
            notice of the commencement of such Proceeding to the insurers in
            accordance with the procedures set forth in the applicable policy.
            The Company shall thereafter take all necessary or desirable action
            to cause such insurers to pay on behalf of the Indemnitee(s) all
            amounts payable as a result of such Proceeding in accordance with
            the terms of such policy.

Section 11. Company May Assume Defense. In the event the Company shall be
            obligated to pay the Expenses of any Proceeding against an
            Indemnitee, the Company, if appropriate, shall be entitled to assume
            the defense of such Proceeding, with counsel reasonably acceptable
            to such Indemnitee, upon the delivery to the Indemnitee of written
            notice of its election to do so. After delivery of such notice, the
            Company shall not be liable to the Indemnitee under this Agreement
            for any fees of counsel subsequently incurred by the Indemnitee with
            respect to the same Proceeding; provided, however, that (a) the
            Indemnitee shall have the right to employ counsel in any such
            Proceeding at the Indemnitee's expense and (b) if (i) the employment
            of counsel by the Indemnitee has been previously authorized by the
            Company, (ii) the Indemnitee shall have reasonably concluded that
            there may be a conflict of interest between the Company and the
            Indemnitee in the conduct of any such defense, or (iii) the Company
            shall not, in fact, have employed counsel to assume the defense of
            such Proceeding, the fees and expenses of Indemnitee's counsel shall
            be at the expense of the Company.


                                       5


Section 12. Definitions.  For purposes of this Agreement:

                  (a) "Change in Control" means a change in control of the
         Company occurring after the Effective Date of a nature that would be
         required to be reported in response to Item 6(e) of Schedule 14A of
         Regulation 14A (or in response to any similar item on any similar
         schedule or form) promulgated under the Securities Exchange Act of 1934
         (the "act"), whether or not the Company is then subject to such
         reporting requirement; provided, however, that, without limitation,
         such a Change in Control shall be deemed to have occurred if after the
         Effective Date (i) any "person" (or as such term is used in Sections
         13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as
         defined in Rule 13d-3 under the Act), directly or indirectly, of
         securities of the Company representing at least 20% or, in the case of
         Elan Corporation and its affiliates in the aggregate (collectively, the
         "Elan Group"), at least fifty (50%), of the combined voting power of
         the Company's then outstanding securities; (ii) approval by the
         stockholders of the Company of a merger or consolidation of the Company
         with any other company or plan of exchange involving the Company
         ("Merger"), other than (1) a Merger which would result in the voting
         securities of the Company outstanding immediately prior thereto
         continuing to represent (either by remaining outstanding or by being
         converted into voting securities of the surviving entity) more than
         fifty percent (50%) the combined voting power of the voting securities
         of the Company or such surviving entity outstanding immediately after
         the Merger, or (2) a Merger effected to implement a recapitalization of
         the Company (or similar transaction) in which no Person acquires twenty
         percent (20%) or more, or in the case of Elan Group in the aggregate,
         fifty percent (50%) or more, of the combined voting power of the
         Company's then outstanding securities; (iii) approval by the
         stockholders of the Company of a plan of complete liquidation of the
         Company or an agreement for the sale, lease, exchange or other transfer
         (in one transaction or a series of related transactions) or disposition
         by the Company of all or substantially all of the Company's assets (iv)
         at any time, during any period of two consecutive years, individuals
         who at the beginning of such period constituted the Board of Directors
         (including for this purpose any new director whose election or
         nomination for election by the Company's stockholders was approved by a
         vote of the directors then still in office who were directors at the
         beginning of such period) cease for any reason to constitute at least a
         majority of the Board of Directors.

                  (b) "Corporate Status" means the position of a person as a
         director, officer, employee, agent or fiduciary of the Company or of
         any other corporation, partnership, joint venture, trust, employee
         benefit plan or other enterprise held at the request of the Company and
         shall include any position which imposes duties on, or involves
         services by, such person with respect to an employee benefit plan, its
         participants or beneficiaries.

                  (c) "Disinterested Director" means a director of the Company
         who is not and was not a party to the Proceeding in respect of which
         indemnification is sought by an Indemnitee.

                  (d) "Effective Date" means the date of this Agreement.

                  (e) "Expenses" means all reasonable attorneys' fees,
         retainers, court costs, transcript costs, fees of experts, witness
         fees, travel expenses, duplicating costs, printing and binding costs,
         telephone charges, postage, delivery service fees, and all other
         disbursements or expenses of the types of customarily incurred in
         connection with the prosecuting, defending, preparing to prosecute or
         defend, investigating, or being or preparing to be a witness in a
         Proceeding.

                  (f) "Independent Counsel" means a law firm, or a member of a
         law firm, that is nationally recognized as experienced in matters of
         corporation law and neither presently is, not in the past five years
         has been, retained to represent either (i) the Company or Indemnitee in
         any matter material to either such party or (ii) any other party to the
         Proceeding giving rise to a claim for indemnification hereunder. The
         term "Independent Counsel" shall not include any person who, under the
         applicable standards of professional conduct then prevailing, would
         have a conflict of interest in representing either the Company or an
         Indemnitee in an action to determine an Indemnitee's rights under this
         Agreement.

                  (g) "Liabilities" means any judgments, fines, penalties, or
         similar payments or amounts paid or incurred by an Indemnitee in
         connection with any Proceeding, and amounts paid or incurred by an
         Indemnitee or on an Indemnitee's behalf in settlement of any Proceeding
         (including any excise taxes or penalties assessed upon, or claimed
         against, an Indemnitee with respect to any employee benefit plan) and
         all Expenses.


                                       6


                  (h) "Proceeding" means any action, suit, arbitration,
         alternate dispute resolution mechanism, investigation, administrative
         hearing or any other proceeding, pending or threatened, whether civil,
         criminal, administrative or investigative, except one initiated by an
         Indemnitee, unless the Board of Directors consents thereto.

Section 13. Notices. All notices, requests, demands and other communications
            hereunder shall be in writing and shall be deemed to have been duly
            given if (a) delivered by hand and receipted for by the party to
            whom such notice or other communication shall have been directed or
            (b) mailed by certified or registered mail with postage prepaid, on
            the third business day after the date on which it is so mailed:

                  (a) If to an Indemnitee, to the address set forth for such
         Indemnitee upon Schedule I hereto.

                  (b) If to the Company, to:

                                    Sheffield Pharmaceuticals, Inc.
                                    14528 South Outer Forty Road
                                    Suite 205
                                    St. Louis, MO  63017
                                    Attention:  Secretary

or to such other address as may have been furnished to the other party. Promptly
after receipt by an Indemnitee of notice of the commencement of or the threat of
commencement of any Proceeding, such Indemnitee shall notify the Company of the
commencement or the threat of commencement thereof.

Section 14. General Provisions.

            14.1 Successors and Assigns. This Agreement shall be binding upon
the Company and its successors and assigns and shall inure to the benefit of the
Indemnitees and their heirs, executors and administrators. The Company shall
require and cause any successor to substantially all of the business or assets
of the Company, by written agreement in form and substance satisfactory to a
majority of the Indemnitees, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place.

            14.2 No Adequate Remedy. The parties acknowledge that it is
impossible to measure in money the damages which will accrue to either party by
reason of a failure to perform any of the obligations under this Agreement.
Therefore, if either party shall institute any action or proceeding to enforce
the provisions hereof, the party against whom such action or proceeding is
brought hereby waives the claim or defense that the party bringing such action
has an adequate remedy at law, and the party against whom the action is brought
shall not urge in any action or proceeding the claim or defense that the other
party has an adequate remedy at law.

            14.3 Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of Delaware.

            14.4 Severability. If any provision or provisions of this Agreement
shall be held to be invalid or unenforceable for any reason whatsoever: (a) the
validity, legality and enforceability of the remaining provisions of this
Agreement (including, without limitation, each portion of any Section of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid or unenforceable) shall not in any way
be affected or impaired thereby; and 9b) to the fullest extent possible, the
remaining provisions of this Amendment (including, without limitation, each
portion of any Section of this Agreement containing any such provision held to
be invalid or unenforceable, that is not itself invalid, illegal or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid or unenforceable.

            14.5 Modification and Waiver. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by the
Company and a majority of the Indemnitees. No amendment, alteration, rescission
or replacement of this Agreement or any provision hereof shall be effective as
to any Indemnitee with respect to any action taken or omitted by such Indemnitee
in any such Indemnitee's Corporate Status before such amendment, alteration,
rescission or replacement. No waiver or any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provision hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
No party shall be deemed to have waived a right or remedy provided in or
relating to this Agreement, unless the waiver is in writing and duly executed by
such party.


                                       7


            14.6 Entire Agreement. This Agreement as to its subject matter,
exclusively and completely states the rights and duties of the parties, sets
forth their entire understanding and merges all prior and contemporaneous
representations, promises, proposes, discussions and understandings by or
between the parties.

                            [Signature Page Follows]


                                       8


            IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first written above.


                                            
SHEFFIELD PHARMACEUTICALS, INC.                INDEMNITEES



By:  /s/ Loren G. Peterson                     /s/ Thomas M. Fitzgerald
     -------------------------------------     -------------------------------------
     Loren G. Peterson                         Thomas M. Fitzgerald
     President and Chief Executive Officer
                                               /s/ Loren G. Peterson
                                               --------------------------------------
                                               Loren G. Peterson

                                               /s/ John M. Bailey
                                               --------------------------------------
                                               John M. Bailey

                                               /s/ Digby W. Barrios
                                               --------------------------------------
                                               Digby W. Barrios

                                               /s/ Todd C. Davis
                                               --------------------------------------
                                               Todd C. Davis

                                               /s/ David A. Byron
                                               --------------------------------------
                                               David A. Byron

                                               /s/ Carl F. Siekmann
                                               --------------------------------------
                                               Carl F. Siekmann

                                               /s/ Scott A. Hoffmann
                                               -------------------------------------
                                               Scott A. Hoffmann

                                               /s/ Thomas A. Armer
                                               -------------------------------------
                                               Thomas A. Armer




                                       9



                                   SCHEDULE I
                             LISTING OF INDEMNITEES




                INDEMNITEE                                      NOTICE ADDRESS
                ----------                                      --------------
                                                
Thomas M. Fitzgerald                               4 St. Andrews Hill, Pittsford, NY 14534

Loren G. Peterson                                  1776 Stifel Lane Drive, Town & Country, MO 63017

John M. Bailey                                     The Coach House, East Lane, Dedham Essex, UK, C07 6BL

Digby W. Barrios                                   44 St. John's Road, Ridgefield, CT  06877

Todd C. Davis                                      445 Park Avenue, 11th Floor, New York, NY 10022

David A. Byron                                     17674 Lasiandra Dr., Chesterfield, MO 63301

Carl F. Siekmann                                   15915 Wetherburn Road Park, Chesterfield, MO 63017

Scott A. Hoffmann                                  17664 Wildridge Dr., Chesterfield, MO 63005

Thomas A. Armer                                    19000 Tilson Avenue, Cupertino, CA  95014



                                       10

EX-21

                                                                      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

                                                                   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. 333-27753, Form S-3 No. 333-38327, and Form
S-3 No. 333-54446) of Sheffield Pharmaceuticals, Inc. (the Company) and in the
related Prospectuses and in the Registration Statements (Form S-8 No. 33-95262
and Form S-8 No. 333-14867) pertaining to the 1993 Stock Option Plan of
Sheffield Pharmaceuticals, Inc., the 1993 Restricted Stock 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 12, 2002,
with respect to the consolidated financial statements of Sheffield
Pharmaceuticals, Inc. and Subsidiaries contained in the Annual Report on Form
10-K for the year ended December 31, 2001.




/s/ Ernst & Young LLP
St. Louis, Missouri
March 28, 2002