<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>c60732e10-k405.txt
<DESCRIPTION>FORM 10-K
<TEXT>

<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

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

                         Commission file number 1-12584

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

<TABLE>
<S>                                        <C>                         <C>
        DELAWARE                                                                    13-3808303
(State of Incorporation)                                               (IRS Employee Identification Number)

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

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

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

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

                                      None

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

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

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

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



<PAGE>   2


                       DOCUMENTS INCORPORATED BY REFERENCE

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

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

                                       2
<PAGE>   3


         PART I

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

ITEM 1.  BUSINESS

THE COMPANY

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

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

BUSINESS STRATEGY

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


                                       3
<PAGE>   4

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

STRATEGIC ALLIANCES

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

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

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

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

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

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

                                       4
<PAGE>   5


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

PULMONARY DELIVERY MARKET ENVIRONMENT

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

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

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

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

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

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

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

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

                                       5
<PAGE>   6

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

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

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

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

METERED SOLUTION INHALER

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

Description of the MSI

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

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

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

                                       6
<PAGE>   7

MSI Advantages

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

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

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

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

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

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

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

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

MSI Product Pipeline in Development

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



                                       7
<PAGE>   8

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

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

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

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

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

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

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

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

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

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

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

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


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<PAGE>   9
AEROSOL DRUG DELIVERY SYSTEM

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

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

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

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

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

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

Description of the ADDS

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

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

                                       9
<PAGE>   10
The unique features of ADDS are:

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

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

ADDS Advantages

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

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

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

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

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

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

ADDS Product Pipeline in Development

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

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


                                       10
<PAGE>   11

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

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

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

INHALED STEROID PRODUCTS

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

ULTRASONIC PULMONARY DRUG ABSORPTION SYSTEM

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

ABSORPTION ENHANCING TECHNOLOGY

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

                                       11
<PAGE>   12
EARLY STAGE RESEARCH PROJECTS

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

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

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

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

GOVERNMENT REGULATION

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

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

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

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

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

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

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

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

PATENTS AND TRADEMARKS

         MSI System Patents and Trademark

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

         Aerosol Drug Delivery System Patents

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

         Early Stage Research Technology Patents

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

COMPETITION

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

SUBSIDIARIES

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

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

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

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

EMPLOYEES

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


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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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


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

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

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

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

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

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


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

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


ITEM 2.  PROPERTIES

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

ITEM 3.  LEGAL PROCEEDINGS

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

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

None.



















                                       21
<PAGE>   22
 PART II

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

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

<TABLE>
<CAPTION>
2000:                                                                  High     Low
                                                                       ----     ---

<S>                                                                  <C>         <C>
        Fourth Quarter..........................................     $6.625      $3.250
        Third Quarter...........................................      6.875       4.250
        Second Quarter..........................................      5.938       3.000
        First Quarter...........................................      7.938       3.375
</TABLE>

<TABLE>
<CAPTION>
1999:                                                                  High     Low
                                                                       ----     ---

<S>                                                                  <C>         <C>
        Fourth Quarter..........................................     $5.250      $2.438
        Third Quarter...........................................      2.938       2.000
        Second Quarter..........................................      3.063       2.188
        First Quarter...........................................      3.500       2.000
</TABLE>

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

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

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

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

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

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

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

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


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


                                       22
<PAGE>   23
ITEM 6.  SELECTED FINANCIAL DATA

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

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

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

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company has no material market risk exposure.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Quarterly financial data for 2000 and 1999 is summarized below:

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

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


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

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


None.

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

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

ITEM 11. EXECUTIVE COMPENSATION

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


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

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

         (a)(1)   Financial Statements

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

         (a)(2)   Financial Statement Schedules

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

         (a)(3)   Exhibits:

<TABLE>
<CAPTION>

NO.                                                                                              REFERENCE

<S>               <C>                                                                            <C>
3.1               Certificate of Incorporation of the Company, as amended                          (10)

3.2               By-Laws of the Company                                                            (4)

4.1               Form of Common Stock Certificate                                                  (2)

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


                                       24
<PAGE>   25
<TABLE>
<CAPTION>

NO.                                                                                              REFERENCE

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

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

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

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

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

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

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

10.10             1996 Directors Stock Option Plan*                                                 (7)

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

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

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

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

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

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

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


                                       25
<PAGE>   26


<TABLE>
<CAPTION>

NO.                                                                                              REFERENCE

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

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

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

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

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


                                       26
<PAGE>   27

<TABLE>
<CAPTION>

NO.                                                                                              REFERENCE

<S>               <C>                                                                            <C>

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

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

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

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

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

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

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


                                       27
<PAGE>   28

<TABLE>
<CAPTION>

NO.                                                                                              REFERENCE

<S>               <C>                                                                            <C>


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

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

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

21                Subsidiaries of Registrant                                                     (1)

23.1              Consent of Ernst & Young LLP                                                   (1)

24                Power of Attorney (Included on page 29 hereof)                                 (1)
</TABLE>


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

(b)      Reports on Form 8-K

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


                                       28
<PAGE>   29
                                   SIGNATURES

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

                                     SHEFFIELD PHARMACEUTICALS, INC.

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

                                POWER OF ATTORNEY

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

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



<TABLE>
<CAPTION>
                 SIGNATURE                                     TITLE                                DATE
                 ---------                                     -----                                ----
<S>                                          <C>                                               <C>
                   /S/                       Chairman and Director                             March 9, 2001
----------------------------------------
         Thomas M. Fitzgerald

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

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

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

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

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



                                       29
</TEXT>
</DOCUMENT>
