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<SEC-DOCUMENT>0000950134-02-010082.txt : 20020814
<SEC-HEADER>0000950134-02-010082.hdr.sgml : 20020814
<ACCEPTANCE-DATETIME>20020814160750
ACCESSION NUMBER:		0000950134-02-010082
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		2
CONFORMED PERIOD OF REPORT:	20020630
FILED AS OF DATE:		20020814

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			SHEFFIELD PHARMACEUTICALS INC
		CENTRAL INDEX KEY:			0000894158
		STANDARD INDUSTRIAL CLASSIFICATION:	PHARMACEUTICAL PREPARATIONS [2834]
		IRS NUMBER:				133808303
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-Q
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	001-12584
		FILM NUMBER:		02736600

	BUSINESS ADDRESS:	
		STREET 1:		425 WOODSMILL RD
		CITY:			ST LOUIS
		STATE:			MO
		ZIP:			63017
		BUSINESS PHONE:		3145799899

	MAIL ADDRESS:	
		STREET 1:		425 WOODSMILL RD
		CITY:			ST LOUIS
		STATE:			MO
		ZIP:			63017

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	SHEFFIELD MEDICAL TECHNOLOGIES INC
		DATE OF NAME CHANGE:	19940606
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>c71273e10vq.txt
<DESCRIPTION>FORM 10-Q FOR QUARTER ENDING JUNE 30, 2002
<TEXT>
<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

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

                                      1934

                       FOR THE QUARTER ENDED JUNE 30, 2002

                         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 Employer Identification Number)

14528 SOUTH OUTER FORTY 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:

<TABLE>
<S>                                   <C>
      Title of Class                  Name of each exchange on which registered
Common Stock. $.01 par value                   American Stock Exchange
</TABLE>

           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

The number of shares outstanding of the Registrant's Common Stock is 29,563,712
shares as of August 14, 2002.
<PAGE>
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)

                                    FORM 10-Q
                       For the Quarter Ended June 30, 2002

                                Table of Contents

<TABLE>
<CAPTION>
                                                                                              Page
                                                                                              ----
<S>                                                                                           <C>
                                     PART I
Item 1.  Financial Statements

Consolidated Balance Sheets as of June 30, 2002
   and December 31, 2001.................................................................       3

Consolidated Statements of Operations
  for the three and six months ended June 30, 2002 and 2001 and for the period from
  October 17, 1986 (inception) to June 30, 2002 .........................................       4

Consolidated Statements of Stockholders' Equity
  (Net Capital Deficiency) for the period from October 17, 1986
  (inception) to June 30, 2002 ..........................................................       5

Consolidated Statements of Cash Flows
  for the six months ended June 30, 2002 and 2001 and for the period from
  October 17, 1986 (inception) to June 30, 2002..........................................       6

Notes to Consolidated Financial Statements ..............................................       7

Item 2.  Management's Discussion and Analysis of Financial
  Condition and Results of Operations....................................................       9

Item 3.  Quantitative and Qualitative Disclosure About Market Risk.......................      19

                                     PART II

Item 2.  Changes in Securities...........................................................      19

Item 4.  Submission of Matters to a Vote of Security Holders ............................      19

Item 6.  Exhibits and Reports on Form 8-K................................................      20

Signatures...............................................................................      21
</TABLE>


                                       2
<PAGE>
PART I:           FINANCIAL INFORMATION
Item 1.           Financial Statements

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

<TABLE>
<CAPTION>
                                      Assets                                            June 30,                 December 31,
                                                                                          2002                       2001
                                                                                     ----------------           ---------------
                                                                                       (unaudited)
<S>                                                                                  <C>                        <C>
Current assets:
    Cash and cash equivalents ...............................................          $     855,920              $    859,298
    Clinical supplies........................................................                499,422                   427,550
    Prepaid expenses and other current assets ...............................                208,173                    86,080
                                                                                     ----------------           ---------------
       Total current assets .................................................              1,563,515                 1,372,928
                                                                                     ----------------           ---------------
Property and equipment:
    Laboratory equipment ....................................................                462,949                   431,920
    Office equipment ........................................................                245,019                   245,019
    Leasehold improvements ..................................................                 25,309                    25,309
                                                                                     ----------------           ---------------
       Total at cost ........................................................                733,277                   702,248
    Less accumulated depreciation and amortization ..........................               (426,714)                 (355,014)
                                                                                     ----------------           ---------------
       Property and equipment, net ..........................................                306,563                   347,234
                                                                                     ----------------           ---------------
Patent costs, net of accumulated amortization of $26,977 and $20,216, respectively           392,116                   308,203
Other assets.................................................................                 27,913                    27,913
                                                                                     ----------------           ---------------
    Total assets ............................................................          $   2,290,107              $ 2,056,278
                                                                                     ================           ===============
           Liabilities and Stockholders' Equity (Net Capital Deficiency)

Current liabilities:
    Accounts payable.........................................................          $   2,263,452              $    856,216
    Accrued liabilities......................................................                376,044                   441,778
    Sponsored research payable ..............................................                235,757                   235,757
    Note payable ............................................................                     --                 4,000,000
                                                                                     ----------------           ---------------
       Total current liabilities ............................................              2,875,253                 5,533,751

Convertible promissory note .................................................              2,000,000                 2,000,000
Long-term debt ..............................................................              9,500,000                 3,000,000
Other long-term liabilities .................................................              1,024,341                   608,803
Commitments and contingencies ...............................................                     --                        --
                                                                                     ----------------           ---------------
    Total liabilities .......................................................             15,399,594                11,142,554

Minority interest in subsidiary..............................................                     --                        --

Stockholders' equity (net capital deficiency): Preferred stock, $.01 par value,
    authorized 3,000,0000 shares:
       Series C cumulative convertible preferred stock, authorized 23,000
         shares; issued and outstanding 15,229 and 14,708 shares at June 30,
         2002 and December 31, 2001, respectively............................                    152                       147
       Series D cumulative convertible exchangeable preferred stock, authorized
         21,000 shares; issued and outstanding 14,287 and 13,779 shares at June
         30, 2002 and December 31, 2001, respectively........................                    143                       138
       Series E cumulative convertible non-exchangeable preferred stock,
         authorized 9,000 shares; issued and outstanding 3,231 and 2,124 shares at
         June 30, 2002 and December 31, 2001, respectively...................                     32                        21
       Series F convertible non-exchangeable preferred stock, 5,000 shares
           authorized; 5,000 shares issued and outstanding at June 30, 2002 and
           December 31, 2001.................................................                     50                        50
    Common stock, $.01 par value, authorized 100,000,000 shares; issued and
          outstanding 29,563,712 and 29,001,602 shares at June 30, 2002
          and December 31, 2001, respectively................................                295,637                   290,016
      Additional paid-in capital ............................................             86,519,602                83,120,316
      Other comprehensive income ............................................                     --                        --
      Deficit accumulated during development stage ..........................            (99,925,103)              (92,496,964)
                                                                                     ----------------           ---------------
                    Total stockholders' equity (net capital deficiency) .....            (13,109,487)               (9,086,276)
                                                                                     ----------------           ---------------

Total liabilities and stockholders' equity (net capital deficiency)..........          $  2,290,107               $ 2,056,278
                                                                                     ================           ===============
</TABLE>


                       See notes to consolidated financial statements.


                                       3
<PAGE>
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)

                           CONSOLIDATED STATEMENTS OF
               Operations For the Three and Six Months Ended June
                      30, 2002 and 2001 and for the Period
               from October 17, 1986 (inception) to June 30, 2002
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                 Three Months Ended                  Six Months Ended           October 17, 1986
                                                      June 30,                           June 30,                (inception) to
                                          ---------------------------------   --------------------------------       June 30,
                                              2002               2001             2002               2001              2002
                                          --------------     --------------   --------------     -------------    ---------------
<S>                                       <C>                <C>              <C>                <C>              <C>
Revenues:
  Contract research revenue.........      $       5,000      $     688,348    $       5,000      $    869,095     $    1,775,045
  Sublicense revenue................              5,000              5,000            5,000             5,000          1,375,000
                                          --------------     --------------   --------------     -------------    ---------------

     Total revenues.................             10,000            693,348           10,000           874,095          3,150,045

Expenses:
  Acquisition of research and develop-
   ment in-process technology.......                 --                 --               --                --         29,975,000
  Research and development..........          1,622,136          1,934,362        2,775,926         2,980,135         37,548,481
  General and administrative........          1,442,734          1,119,531        3,381,400         1,877,800         32,268,146
                                          --------------     --------------   --------------     -------------    ---------------

     Total expenses.................          3,064,870          3,053,893        6,157,326         4,857,935         99,791,627
                                          --------------     --------------   --------------     -------------    ---------------

Loss from operations................         (3,054,870)       (2,360,545)       (6,147,326)       (3,983,840)       (96,641,582)

Interest income.....................              4,356            22,382             7,018            50,765            796,405
Interest expense....................           (180,926)          (51,398)         (330,757)         (109,247)        (1,404,327)
Realized loss on sale of marketable
   securities.......................                 --                --                --                --             (5,580)
Minority interest in loss of subsidiary          54,544           110,151           160,586           182,502          3,679,279
                                          --------------     --------------   --------------     -------------    ---------------

Net loss............................      $  (3,176,896)     $ (2,279,410)    $  (6,310,479)     $ (3,859,820)    $  (93,575,805)
                                          ==============     ==============   ==============     =============    ===============

Preferred stock dividends...........           (588,914)         (504,953)       (1,141,576)         (992,728)        (6,871,097)
Accretion of mandatorily redeemable
  preferred stock...................                 --                --               --                 --           (103,400)
                                          --------------     --------------   --------------     -------------    ---------------

Net loss - attributable to common shares  $  (3,765,810)      $(2,784,363)    $  (7,452,055)     $ (4,852,548)    $ (100,550,302)

                                          ==============     ==============   ==============     =============    ===============

Weighted average common shares
  outstanding-basic and diluted.....         29,541,954         28,965,925       29,284,410        28,897,350         11,209,969
                                          ==============     ==============   ==============     =============    ===============

Net loss per share of common stock -
  basic and diluted.................      $       (0.13)     $       (0.10)   $       (0.25)       $    (0.17)    $        (8.97)
                                          ==============     ==============   ==============     =============    ===============
</TABLE>


                 See notes to consolidated financial statements.


                                       4
<PAGE>
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
        For the Period from October 17, 1986 (Inception) to June 30, 2002
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                    Notes
                                                                                receivable in
                                                                                  connection       Additional
                                                      Preferred      Common      with sale of        paid-in
                                                        stock         Stock         stock            capital
                                                        -----         -----         -----            -------
<S>                                                 <C>          <C>           <C>               <C>
Balance at October 17, 1986.......................  $        --  $        --   $           --    $        --
   Common stock issued............................           --   11,484,953          100,000     30,539,185
   Reincorporation in Delaware at $.01 par value..           --  (11,220,369)              --     11,220,369
   Common stock subscribed........................           --           --         (110,000)            --
   Common stock issued............................           --        2,504           10,000         89,059
   Common stock options and warrants issued.......           --           --               --        444,320
   Issuance of common stock in connection with
       acquisition of Camelot Pharmacal, L.L.C....           --        6,000               --      1,644,000
   Common stock options extended..................           --           --               --        215,188
   Accretion of issuance costs for Series A                  --           --               --             --
preferred stock
   Series C preferred stock issued................          115           --               --     11,499,885
   Series C preferred stock dividends.............           13           --               --      1,279,987
   Series D preferred stock issued................          120           --               --     12,014,880
   Series F preferred stock issued................           50           --               --      4,691,255
   Comprehensive income (loss):
       Unrealized gain on marketable securities...           --           --               --             --
       Net loss...................................           --           --               --             --
       Comprehensive loss.........................           --           --               --             --
                                                    -----------  ------------  --------------    -----------
Balance at December 31, 1999......................          298      273,088               --     73,638,128
   Common stock issued............................           --       15,738               --      3,796,072
   Repurchase and retirement of common stock......           --         (910)              --       (312,279)
   Series C preferred stock dividends.............            9           --               --        931,991
   Series D preferred stock dividends.............            9           --               --        854,991
   Series E preferred stock issued................           10           --               --        999,990
   Series E preferred stock dividends.............                        --               --          4,000
   Common stock warrants issued...................           --           --               --        195,202
   Comprehensive income (loss):
       Unrealized loss on marketable securities...           --           --               --             --
       Net loss...................................           --           --               --             --
       Comprehensive loss.........................           --           --               --             --
                                                    -----------  ------------  --------------    -----------
Balance at December 31, 2000......................          326      287,916               --     80,108,095
   Common stock issued............................           --        4,251               --        481,201
   Repurchase and retirement of common stock                 --       (2,151)              --       (640,691)
   Series C preferred stock dividends.............           10           --               --        995,990
   Series D preferred stock dividends.............            9           --               --        928,991
   Series E preferred stock issued................           10           --               --        999,990
   Series E preferred stock dividends.............            1           --               --        119,999
   Common stock warrants issued...................           --           --               --        126,741
   Comprehensive income (loss):
       Unrealized loss on marketable securities...           --           --               --             --
       Net loss...................................           --           --               --             --
       Comprehensive loss.........................           --           --               --             --
                                                    -----------  ------------  --------------    -----------
Balance December 31, 2001.........................          356      290,016   $           --     83,120,316
   Common stock issued............................           --        5,621               --      1,001,379
   Series C preferred stock dividends.............            5           --               --        520,995
   Series D preferred stock dividends.............            5           --               --        487,995
   Series E preferred stock issued................           10           --               --        999,990
   Series E preferred stock dividends.............            1           --               --        106,999
   Common stock warrants issued...................           --           --               --        281,928
   Net loss.......................................           --           --               --             --
                                                    -----------  ------------  --------------    -----------
Balance June 30, 2002.............................  $       377  $   295,637   $           --    $86,519,602
                                                    ===========  ============  ==============    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                       Deficit          Total
                                                         Other       accumulated     stockholders'
                                                       comprehen-       during        equity (net
                                                      sive income     development      capital
                                                         (loss)          stage        deficiency)
                                                         ------          -----        -----------
<S>                                                   <C>          <C>             <C>
Balance at October 17, 1986.......................    $       --   $         --    $          --
   Common stock issued............................            --             --       42,124,138
   Reincorporation in Delaware at $.01 par value..            --             --               --
   Common stock subscribed........................            --             --         (110,000)
   Common stock issued............................            --             --          101,563
   Common stock options and warrants issued.......            --             --          444,320
   Issuance of common stock in connection with
       acquisition of Camelot Pharmacal, L.L.C....            --             --        1,650,000
   Common stock options extended..................            --             --          215,188
   Accretion of issuance costs for Series A                   --       (103,400)        (103,400)
preferred stock
   Series C preferred stock issued................            --             --       11,500,000
   Series C preferred stock dividends.............            --     (1,283,389)          (3,389)
   Series D preferred stock issued................            --             --       12,015,000
   Series F preferred stock issued................            --             --        4,691,305
   Comprehensive income (loss):
       Unrealized gain on marketable securities...       169,387             --               --
       Net loss...................................            --    (72,023,039)              --
       Comprehensive loss.........................            --              --     (71,853,652)
                                                      -----------  --------------  --------------
Balance at December 31, 1999......................       169,387    (73,409,828)         671,073
   Common stock issued............................            --             --        3,811,810
   Repurchase and retirement of common stock......            --             --         (313,189)
   Series C preferred stock dividends.............            --       (934,045)          (2,045)
   Series D preferred stock dividends.............            --       (855,750)            (750)
   Series E preferred stock issued................            --             --        1,000,000
   Series E preferred stock dividends.............            --         (4,750)            (750)
   Common stock warrants issued...................            --             --          195,202
   Comprehensive income (loss):
       Unrealized loss on marketable securities...       (11,920)            --               --
       Net loss...................................            --     (5,763,151)              --
       Comprehensive loss.........................            --              --      (5,775,071)
                                                      -----------  --------------  --------------
Balance at December 31, 2000......................       157,467    (80,967,524)        (413,720)
   Common stock issued............................            --              --         485,452
   Repurchase and retirement of common stock                  --              --        (642,842)
   Series C preferred stock dividends.............            --       (999,278)          (3,278)
   Series D preferred stock dividends.............            --       (929,603)            (603)
   Series E preferred stock issued................            --              --       1,000,000
   Series E preferred stock dividends.............            --       (121,422)          (1,422)
   Common stock warrants issued...................            --              --         126,741
   Comprehensive income (loss):
       Unrealized loss on marketable securities...      (157,467)             --              --
       Net loss...................................            --     (9,479,137)              --
       Comprehensive loss.........................            --              --      (9,636,604)
                                                      -----------  --------------  --------------
Balance December 31, 2001.........................                  (92,496,964)      (9,086,276)
   Common stock issued............................            --              --       1,007,000
   Series C preferred stock dividends.............            --       (522,187)          (1,187)
   Series D preferred stock dividends.............            --       (488,331)            (331)
   Series E preferred stock issued................            --              --       1,000,000
   Series E preferred stock dividends.............            --       (107,142)            (142)
   Common stock warrants issued...................            --              --         281,928
   Net loss.......................................            --     (6,310,479)      (6,310,479)
                                                      -----------  --------------  --------------
Balance June 30, 2002.............................    $       --   $(99,925,103)   $ (13,109,487)
                                                      ===========  ==============  ==============
</TABLE>


                 See notes to consolidated financial statements.


                                       5
<PAGE>
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
       For the Six Months Ended June 30, 2002 and 2001 and for the Period
               from October 17, 1986 (inception) to June 30, 2002
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                       October 17,
                                                                        Six Months Ended                  1986
                                                                            June 30,                 (inception) to
                                                                ---------------------------------        June 30,
                                                                     2002              2001                2002
                                                                ---------------    --------------    ----------------
<S>                                                              <C>                <C>               <C>
Cash outflows from operating activities:
     Net loss........................................            $  (6,310,479)     $ (3,859,820)     $  (93,575,805)
Adjustments to reconcile net loss to net cash used by
   development stage activities:
     Issuance of common stock, stock options/warrants for
     services........................................                  281,928           126,741           3,101,296
     Depreciation and amortization...................                   78,461            62,506             807,351
     Non-cash acquisition of research and development
     in-process technology...........................                       --                --           1,650,000
     Loss on sale of marketable securities...........                       --                --               5,580
     Increase in clinical supplies, prepaid expenses &
     other current assets............................                 (193,965)         (545,393)           (766,636)
     Decrease in milestone advance receivable........                       --         1,000,000                  --
     Increase in other assets........................                  (90,674)          (57,494)           (387,966)
     Increase in accounts payable and accrued liabilities            1,593,511           542,130           2,747,659
     Increase in sponsored research payable..........                       --                --             812,827
     Other...........................................                  166,003           (78,773)            391,706
                                                                ---------------    --------------    ----------------
Net cash used by operating activities................               (4,475,215)       (2,810,103)        (85,213,988)
                                                                ---------------    --------------    ----------------

Cash flows from investing activities:
     Proceeds from sale of marketable securities.....                       --                --             844,420
     Acquisition of laboratory and office equipment, and
     leasehold improvements..........................                  (31,029)         (107,979)           (903,419)

     Other...........................................                       --                --             (57,087)
                                                                ---------------    --------------    ----------------
Net cash used by investing activities................                  (31,029)         (107,979)           (116,086)
                                                                ---------------    --------------    ----------------

Cash flows from financing activities:
     Payments on debt and capital leases.............                   (4,134)           (3,581)           (854,170)
     Net proceeds from issuance of:
        Debt.........................................                2,500,000                --          14,550,000
        Common stock.................................                       --                --          23,433,660
        Preferred stock..............................                1,000,000         1,000,000          35,741,117
     Proceeds from exercise of warrants/stock options                1,007,000           343,683          14,770,358
     Repurchase and retirement of common stock.......                       --                --            (956,031)
     Other...........................................                       --                --            (500,024)
                                                                ---------------    --------------    ----------------
Net cash provided by financing activities............                4,502,866         1,340,102          86,184,910
                                                                ---------------    --------------    ----------------

Net increase (decrease) in cash and cash equivalents.                   (3,378)       (1,577,980)            854,836
Cash and cash equivalents at beginning of period.....                  859,298         3,041,948               1,084
                                                                ---------------    --------------    ----------------
Cash and cash equivalents at end of period...........            $     855,920      $  1,463,968      $      855,920
                                                                ===============    ==============    ================

Noncash investing and financing activities:
     Common stock, stock options/warrants issued for             $     281,928      $    126,741      $    3,101,296
services.............................................
     Common stock redeemed in payment of notes receivable                   --                --              10,400
     Acquisition of research and development in-process
         technology..................................                       --                --           1,655,216
     Common stock issued for intellectual property rights                   --                --             866,250
     Common stock issued to retire debt..............                       --                --             600,000
     Common stock issued to redeem convertible securities                   --                --           5,353,368
     Securities acquired under sublicense agreement..                       --                --             850,000
     Equipment acquired under capital lease..........                       --                --             121,684
     Notes payable converted to common stock.........                       --                --             749,976
     Stock dividends.................................                1,117,660           985,000           6,609,334

Supplemental disclosure of cash flow information:                $       1,162      $      1,106      $      287,482
Interest paid........................................
</TABLE>


                 See notes to consolidated financial statements.


                                       6
<PAGE>
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2002
                                   (Unaudited)

1.       BASIS OF PRESENTATION

         The accompanying unaudited consolidated financial statements have been
         prepared in accordance with the instructions to Form 10-Q of the
         Securities and Exchange Commission and should be read in conjunction
         with the financial statements and notes thereto included in the
         Company's Annual Report on Form 10-K for the year ended December 31,
         2001. In the opinion of management, all adjustments (consisting only of
         normal recurring accruals) necessary to present fairly the financial
         position, results of operations, stockholders' equity and cash flows at
         June 30, 2002 and for all periods presented have been made. Certain
         information and footnote disclosures normally included in financial
         statements prepared in accordance with generally accepted accounting
         principles have been condensed or omitted. The results of operations
         for the three and six months ended June 30, 2002 and 2001 are not
         necessarily indicative of the operating results for the full years.

         The consolidated financial statements include the accounts of Sheffield
         Pharmaceuticals, Inc. and its wholly owned subsidiaries, Systemic
         Pulmonary Delivery, Ltd., Ion Pharmaceuticals, Inc., and CP
         Pharmaceuticals, Inc., and its 80.1% owned subsidiary, Respiratory
         Steroid Delivery, Ltd., and are herein referred to as "Sheffield" or
         the "Company." All significant intercompany transactions are eliminated
         in consolidation.

         The Company is focused on the development and commercialization of
         later stage pharmaceutical products that utilize the Company's unique
         proprietary pulmonary delivery technologies. The Company is in the
         development stage and to date has been principally engaged in research,
         development and licensing efforts.

         The accompanying consolidated financial statements have been prepared
         on a going concern basis that contemplates the realization of assets
         and satisfaction of liabilities and commitments in the normal course of
         business. The Company has generated minimal operating revenue,
         sustained significant net operating losses, and requires additional
         capital that the Company intends to obtain through out-licensing of
         rights to its technology, as well as through equity and debt offerings,
         to continue to operate its business. Management believes that the
         Company's ability to meet its obligations as they become due and to
         continue as a going concern is dependent upon obtaining additional
         funding immediately. In an effort to meet this capital requirement, the
         Company is evaluating various financing alternatives including private
         offerings of its securities, debt financings, and collaboration and
         licensing arrangements with other companies. However, the accompanying
         financial statements do not include any adjustments that might result
         from the failure to obtain additional financing.

         Additionally, the Company's ability to meet its obligations as they
         become due and to continue as a going concern must be considered in
         light of the expenses, difficulties and delays frequently encountered
         in developing a new business, particularly since the Company will focus
         on product development that may require a lengthy period of time and
         substantial expenditures to complete. Even if the Company is able to
         successfully develop new products, there can be no assurance that the
         Company will generate sufficient revenues from the sale or licensing of
         such products to be profitable.

2.       BASIC LOSS PER COMMON SHARE

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

3.       LONG-TERM DEBT

         On August 14, 2001, the Company entered into a Note Purchase Agreement
         ("Agreement") with Elan Pharma International Ltd. ("Elan Pharma"),
         pursuant to which Elan Pharma agreed to lend the Company up to $4
         million. On April 4, 2002, the Company amended the Agreement. Under the
         terms of the amended Agreement, Elan Pharma agreed to increase the
         principal amount of the loan available from $4 million to $5 million
         and extend the maturity date from November 14, 2002 to April 4, 2004.
         On April 5, 2002, the Company received proceeds on the loan of $1
         million,


                                       7
<PAGE>
         increasing the total borrowings to $5 million. All borrowings under the
         Agreement are evidenced by a $5 million unsecured promissory note of
         the Company that provides for interest on principal and semi-annually
         compounded interest at a fixed rate of 10% per annum. The outstanding
         principal balance of the Agreement at June 30, 2002, and December 31,
         2001, was $5 million and $4 million, respectively. Due to the
         modification of the maturity date, the borrowings under the Agreement,
         totaling $5 million at June 30, 2002, have been classified in the
         Company's balance sheet as long-term debt.

         In September 2001, in connection with the amendment of its 1998
         agreement with Zambon Group SpA ("Zambon"), the Company entered into a
         Loan and Security Agreement ("Loan Agreement") with Zambon, pursuant to
         which Zambon agreed to lend the Company $2.5 million. The Company
         received $1.0 million upon signing of the Loan Agreement, $1.0 million
         on January 2, 2002 and $.5 million on April 5, 2002. The Loan Agreement
         provides for interest on principal and annually compounded interest at
         a fixed rate of 2% per annum and is secured by certain security
         interests in respiratory products developed in the Premaire. One third
         of the principal balance, together with interest, is payable by the
         Company upon the Company's execution of an agreement with one or more
         third parties to develop, co-promote and/or sell certain products in
         North America, with all remaining unpaid principal and interest due on
         December 31, 2005. The outstanding principal balance of the Loan
         Agreement at June 30, 2002, and December 31, 2001, was $2.5 million and
         $1.0 million, respectively.

4.       RECLASSIFICATIONS

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


                                       8
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations

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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Important Factors
that May Affect Future Results" 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. The Company disclaims any obligation to update or revise the
information provided in this report to reflect future events.

OVERVIEW

We provide innovative, cost-effective pharmaceutical therapies by combining
state-of-the-art pulmonary drug delivery technologies with existing and emerging
therapeutic agents. We are developing a range of products to treat respiratory
and systemic diseases in our proprietary Premaire(R) Delivery System
("Premaire") and Tempo(TM) Inhaler ("Tempo"). We are in the development stage
and, as such, have been principally engaged in the development of our pulmonary
delivery systems.

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

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

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

In June 1998, we sublicensed to Zambon Group SpA ("Zambon") worldwide marketing
and development rights to respiratory products to be delivered by the Premaire
in return for an equity investment in the Company (approximately 10%). From June
1998 to September 2001, Zambon funded the development costs for the respiratory
compounds delivered by Premaire. In September 2001, we amended our 1998
agreement with Zambon whereby we regained the rights to the Premaire previously
granted to Zambon. As part of the amended agreement, Zambon provided a
low-interest, $2.5 million loan to us to progress the development


                                       9
<PAGE>
of the Premaire respiratory program. Upon commercialization, Zambon will be
entitled to certain royalties on payments received by us for albuterol,
ipratropium and cromolyn sales for specified periods.

As part of a strategic alliance with Elan, we are developing therapies for
non-respiratory diseases to be delivered to the lungs using both Tempo and
Premaire. In 1998, the systemic applications of Premaire and Tempo were licensed
to Systemic Pulmonary Delivery, Ltd. ("SPD"), one of our wholly owned
subsidiaries. In addition, two Elan technologies, UPDAS(TM) and the Enhancing
Technology, were also licensed to SPD. We retained exclusive rights outside of
the strategic alliance to respiratory disease applications utilizing the Tempo
technology and the two Elan technologies.

In addition to the above alliance with Elan, in 1999, we and Elan formed a joint
venture, Respiratory Steroid Delivery, Ltd. ("RSD"), to develop certain inhaled
steroid products to treat respiratory diseases using Elan's NanoCrystal
technology. Currently, RSD is developing a solution-based unit-dose-packaged
steroid formulation for delivery using a conventional tabletop nebulizer, and a
solution-based steroid formulation for delivery using the Premaire.

RESULTS OF OPERATIONS

Revenue

Contract research revenues primarily represent revenues earned from a
collaborative research agreement with Zambon relating to the development of
respiratory applications of Premaire. Contract research revenues for the second
quarter of 2002 and 2001 were $5,000 and $688,348, respectively. For the first
six months of 2002 and 2001, contract research revenues were $5,000 and
$869,095, respectively. The decrease for both the second quarter and first half
of 2002 was due to no longer performing development work for Zambon as a result
of our regaining the Premaire respiratory rights in the third quarter of 2001.
Costs of contract research revenue approximated such revenues in 2001 and were
included in research and development expenses. Future contract research revenues
and expenses are anticipated to fluctuate depending, on part, in obtaining
additional collaborative agreements and upon the success of current clinical
studies.

Our ability to generate material revenues is contingent on the successful
commercialization of our technologies and other technologies and products that
we may acquire, followed by the successful marketing and commercialization of
such technologies through licenses, joint ventures and other arrangements.

Research and Development

Research and development ("R&D") expenses were $1.6 million and $1.9 million for
the second quarter of 2002 and 2001, respectively. The decrease of $.3 million
for the second quarter of 2002 was primarily due to lower design and development
costs associated with finalizing the to-be-marketed Premaire device in December
2001 ($.4 million), higher development expenses in the second quarter of 2001
related to the anticipation of a Phase I trial of RSD's unit dose product ($.3
million), lower Tempo development costs resulting from finalizing the
industrialization of the device in the first half of 2002 for Phase I and II
trials and reduced formulation work on certain respiratory products ($.3
million), and lower new product development in the area of polypeptides ($.1
million). These decreases were partially offset by higher expenses related to
formulation work on the Tempo dyhydroergotamine ("DHE") product ($.8 million).
For the six months ended June 30, 2002 and 2001, R&D costs were $2.8 million and
$3.0 million, respectively. The decrease of $.2 million was primarily due to
lower design and development costs associated with finalizing the to-be-marketed
Premaire device in December 2001 ($.4 million), lower expenses related to
formulation work on certain Tempo respiratory products ($.3 million), lower
Tempo development costs resulting from industrialization of the device in the
first half of 2002 for Phase I and II trials ($.1 million), higher development
expenses in the second quarter of 2001 related to the anticipation of a Phase I
trial of RSD's unit dose product ($.1 million), and lower product development
work in the area of polypeptides ($.1 million). These decreases were partially
offset by higher expenses related to formulation work on the Tempo DHE product
($.8 million) and Premaire steroid product ($.1 million).

         The following details the status of each of our development programs as
         of June 30, 2002:

         Premaire Respiratory Program:

         As a result of our regaining from Zambon the rights to the respiratory
         applications to the Premaire in September 2001, the sponsorship of the
         Premaire respiratory development programs was transferred to us from
         Zambon with the Food and Drug Administration ("FDA") being notified
         accordingly. In the fourth quarter of 2001, we reviewed all of the
         development work completed-to-date, identifying a number of
         deficiencies in the Zambon development program. To address these
         issues, we made a number of internal management changes and moved the
         program to a group of highly experienced pulmonary clinical and
         regulatory experts. The Premaire device is currently in a
         to-be-marketed form and


                                       10
<PAGE>
         fully industrialized. As of June 30, 2002, we had spent $3.6 million on
         developing the respiratory products discussed below.

         Our strategy is to out license the U.S. rights to the Premaire
         respiratory products to a third party which we anticipate concluding in
         2003. As a result, we estimate a U.S. commercial launch of our first
         products in Premaire to occur in the last half of 2005 or first half of
         2006. Subject to obtaining additional financing from debt and/or equity
         placements, we intend to fund the continued development work for the
         Premaire respiratory products up through the period of outlicensing,
         currently estimated at approximately $10 million, after which time it
         is anticipated that the licensee would assume funding responsibility
         for further development work.

                  Albuterol Sulfate. Zambon initiated a Phase II clinical trial
         in December 1999 that compared the Premaire-albuterol sulfate to a
         conventional albuterol-pMDI. Findings from Phase II studies indicated
         that Premaire-albuterol and pMDI-albuterol were comparable in improving
         lung function in the 24 adult patients. An end of Phase II meeting was
         held in February 2002 with the FDA where the results of the development
         activities-to-date, specifically the results of the Phase II trial,
         were reviewed. We are currently reviewing the FDA's comments and
         recommendations, integrating the information into the plans for the
         Phase III trial and NDA submission. Subject to obtaining additional
         funding by the end of 2002, we anticipate to begin pivotal clinical
         trials for the albuterol sulfate program at the beginning of 2003.

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

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

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

         Premaire Systemic Program:

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

         Tempo Respiratory Program:

         In September 2000, we completed a pilot study using the Tempo to
         deliver an undisclosed, patented respiratory drug used to treat asthma.
         The study measured the distribution of this respiratory drug delivered
         by Tempo compared to the distribution of this same drug delivered
         through a commercially available pMDI in 12 healthy volunteers. Results
         of this study demonstrated that Tempo significantly increased drug
         deposition in all regions of the lung. Tempo delivered approximately
         200% more drug to the lungs, deposited approximately 75% less drug in
         the mouth, and increased dosing consistency by approximately 55%
         compared to the currently marketed form of this same drug. As of June
         30,


                                       11
<PAGE>
         2002, we had incurred approximately $.9 million to-date on this study.
         We are using the results of this study as a basis for conducting
         discussions for feasibility work and/or clinical studies with potential
         collaboration partners.

         Tempo Systemic Program:

         The development of systemic drugs using Tempo is being conducted as
         part of our alliance with Elan. The initial product developed was
         targeted to address migraine headaches. We utilized ergotamine tartrate
         as a proof-of-principle product. In December 1999, we completed a gamma
         scintigraphy/pharmacokinetic trial comparing the Tempo to a
         conventional pMDI. The trial showed successful delivery of the drug to
         all regions of lung with significantly reduced mouth and throat
         deposition, and rapid drug absorption. As part of the development
         alliance with Elan, Elan has the first right of refusal on the
         development of any product developed by the joint venture. Elan has
         chosen not to license this product from the joint venture. As such, the
         joint venture continues to seek to attract a partner for the continued
         development and commercialization of this product. As of June 30, 2002,
         we had spent $1.0 million to date to develop this product and do not
         anticipate incurring any future costs for further development until
         such time as a licensing partner is secured.

         As a result of the work performed on the ergotamine product noted
         above, in April 2002, we announced the initiation of a pulmonary
         migraine therapy program with Inhale Therapeutic Systems ("Inhale"), a
         world-renowned expert in particle design. We will combine Inhale's
         supercritical fluid technology with our proprietary drug delivery
         technologies to develop a systemically acting DHE administered through
         the pulmonary route. We plan to study DHE in sub-categories of migraine
         where DHE administered by injection is often used to relieve migraine
         symptoms. These sub-categories are the more serious forms of migraine
         and often require either hospitalization or treatment in pain or
         headache clinics. Under the terms of the agreement, Inhale will supply
         the particle engineering technology and receive R&D funding, milestone
         payments, and royalties upon commercialization. We are responsible for
         all other aspects of clinical development and marketing of the product.
         As part of this agreement, Inhale will produce DHE particles using Good
         Manufacturing Practices ("GMP") for clinical development and commercial
         sale. The treatment of migraine represents a worldwide prescription
         market estimated at approximately $2.4 billion. As of June 30, 2002, we
         had incurred-to-date approximately $1.0 million related to this
         project. Future costs related to this project are dependent upon, among
         other factors, the timing of securing a development partner. Subject to
         obtaining additional financing from debt and/or equity placements, we
         estimate incurring approximately $2.0 million in 2002 related to the
         development of the DHE project.

         Unit Dose Nebulizer Program:

         As part of an alliance with Elan, RSD is developing a product for
         inhalation delivery in a standard commercial tabletop device using the
         steroid budesonide, formulated using the NanoCrystal technology. A
         Phase I, double-blind safety and pharmacokinetic study of nebulized
         nanobudesonide in 16 healthy volunteers was satisfactorily completed at
         Thomas Jefferson University Hospital in February 2002. This study
         compared single doses of Pulmicort Respules ("Pulmicort"), our
         proprietary nanobudesonide in two different single dose strengths and
         placebo. The study resulted in no significant adverse events with
         either of our dosage strengths or the Pulmicort reference drug. Data
         from the study is currently undergoing final data and statistical
         analysis. After such data has been analyzed, we plan on initiating
         discussions with potential partners regarding the outlicensing of this
         opportunity. As of June 30, 2002, we incurred-to-date approximately
         $2.8 million on this project. We intend to fund the continued
         development work for this program up through the period of
         outlicensing, currently estimated at approximately $.7 million, after
         which time it is anticipated that the licensee would assume funding
         responsibility for further development work. Our additional funding of
         this program will be through the sale of our remaining $1.0 million of
         Series E Preferred Stock committed to be purchased by Elan.

General and Administrative

General and administrative expenses were $1.4 million for the second quarter of
2002 as compared to $1.1 million for the second quarter of 2001. The increase of
$.3 million from 2001 was primarily due to higher severance-related costs and
ongoing benefit coverage associated with the resignation of the Chief Executive
Officer effective April 30, 2002. For the six months ended June 30, 2002 and
2001, general and administrative expenses were $3.4 million and $1.9 million,
respectively. The increase of $1.5 million from 2001 was primarily due to higher
consulting costs, legal fees and severance-related costs. The higher consulting
costs and legal fees were associated with expanded business development, and
merger and acquisition activities in the area of licensing and partnering of our
delivery systems, as well as potential acquisitions of complementary pulmonary
delivery technologies and companies ($.7 million). The severance costs were
associated with the resignation of


                                       12
<PAGE>
three executive officers in 2002 and include costs incurred pursuant to their
respective separation agreements for severance payments and ongoing benefit
coverage ($.6 million) and modification of the terms of certain stock options
($.2 million).

Interest

Interest income was $4,356 and $22,382 for the second quarter of 2002 and 2001,
respectively, and $7,018 and $50,765 for the first six months of 2002 and 2001,
respectively. The decrease in interest income for both the second quarter and
first six months of 2002 was primarily due to less cash available for investment
and lower yields on those investments.

Interest expense was $180,926 and $51,398 for the second quarter of 2002 and
2001, respectively, and $330,757 and $109,247 for the first half of 2002 and
2001, respectively. The increase for both the second quarter and first six
months of 2002 resulted primarily from interest associated with the borrowings
on the August 2001 Note Purchase Agreement with Elan Pharma. The borrowings
totaled $4 million as of January 1, 2002 and $5 million as of April 5, 2002; no
borrowings were outstanding for the first half of 2001.

LIQUIDITY AND CAPITAL RESOURCES

At both June 30, 2002 and December 31, 2001, we had $.9 million in cash and cash
equivalents. The comparable cash balances between periods reflect the receipt of
$1.0 million from the issuance of 1,000 shares of our Series E Cumulative
Convertible Preferred Stock, $1.5 million from the proceeds of a secured loan
from Zambon, $1.0 million from the proceeds of an unsecured promissory note from
Elan Pharma, and $1.0 million in proceeds from the exercise of a portion of a
common stock warrant by Elan International Services, Ltd., offset by cash
disbursements of $4.5 million used primarily to fund operating activities.

Cash available for funding our operations as of June 30, 2002 was $.9 million.
As of such date, we had trade payables and accrued liabilities of $2.6 million,
and current research obligations of $.2 million. In addition, committed and/or
anticipated funding of research and development after June 30, 2002 is estimated
at approximately $.3 million, of which $.1 million has been committed to be
funded by Elan through the issuance of our Series E cumulative convertible
preferred stock, which funds are required to be used by the Company to fund its
portion of RSD's operating and development costs. As of August 12, 2002, we had
cash and equivalents of approximately $.5 million, of which $.2 million is
committed to fund our portion of RSD's expenditures. In addition, through the
sale of our Series E Preferred Stock, we have available $1.0 million to fund our
portion of future RSD expenditures. As of such date, we had trade payable and
accrued liabilities of approximately 2.8 million. In an effort to trim our
short-term costs, we recently decreased our total headcount by 27% by reducing
our administrative headcount. In addition, we have reduced all R&D expenditures
not specifically related to the Tempo DHE, unit dose nebulizer, Premaire and
certain Tempo respiratory programs. We may consider future cost reductions by
curtailing these development programs, as well as other administrative and R&D
headcount reductions.

Because we do not expect to generate significant cash flows from operations for
at least the next few years, we will require additional funds to meet our
current obligations and future costs. In an effort to meet both our short- and
long-term capital requirements, we are currently evaluating various financing
alternatives including private offerings of our securities, debt financings, and
collaboration and licensing arrangements with other companies. There can be no
assurance that we will be able to obtain such additional funds or enter into
such collaborative and licensing arrangements on terms favorable to us, if at
all. Our development programs may be curtailed if future financings are not
completed.

On April 5, 2002, Elan International Services, Ltd. exercised a portion of a
warrant that it had received in June 1998 as part of a strategic alliance with
us and purchased 495,000 shares of our common stock at $2.00 per share. We
received approximately $1.0 million in proceeds as a result of the exercise of a
portion of this warrant.

On August 14, 2001, we entered into a Note Purchase Agreement ("Agreement") with
Elan Pharma, pursuant to which Elan Pharma agreed to lend us up to $4 million.
On April 4, 2002, we amended the Agreement. Under the terms of the amended
Agreement, Elan Pharma agreed to increase the principal amount of the loan
available from $4 million to $5 million and extend the maturity date from
November 14, 2002 to April 4, 2004. On April 5, 2002, we received proceeds on
the loan of $1 million, increasing the total borrowings to $5 million. All
borrowings under the Agreement are evidenced by our $5 million unsecured
promissory note that provides for interest on principal and semi-annually
compounded interest at a fixed rate of 10% per annum. Due to the modification of
the maturity date, the borrowings under the Agreement, totaling $5 million at
June 30, 2002, have been classified in our balance sheet as long-term debt.

In September 2001, in connection with the amendment of our 1998 agreement with
Zambon, we entered into a Loan and Security Agreement ("Loan Agreement") with
Zambon, pursuant to which Zambon agreed to lend us $2.5 million. We received
$1.0


                                       13
<PAGE>
million upon signing of the Loan Agreement, $1.0 million on January 2, 2002 and
$.5 million on April 5, 2002. The Loan Agreement provides for interest on
principal and annually compounded interest at a fixed rate of 2% per annum and
is secured by certain security interests in respiratory products developed in
the Premaire. One third of the principal balance, together with interest, is
payable by us upon our execution of an agreement with one or more third parties
to develop, co-promote and/or sell certain products in North America, with all
remaining unpaid principal and interest due on December 31, 2005. On October 17,
2001, as part of the amendment of its 1998 agreement with Zambon, we repurchased
from Zambon, 214,997 shares of common stock for $3.0233 per share ("Repurchase
Price"). In addition, we received an option, expiring December 31, 2002, to
repurchase the remaining shares of our common stock held by Zambon at the
Repurchase Price. In the event we complete a sublicense for the North American
rights or a sublicense for the non-North American rights to certain Premaire
respiratory products prior to December 31, 2002, we will repurchase from Zambon
882,051 shares of our common stock on each of the events.

In October 1999, as part of a licensing agreement with Elan, we received gross
proceeds of $17,015,000 related to the issuance to Elan of 12,015 shares of
Series D Cumulative Convertible Exchangeable Preferred Stock and 5,000 shares of
Series F Convertible Non-Exchangeable Preferred Stock. In turn, we made an
equity investment of $12,015,000 in a joint venture, RSD, representing an
initial 80.1% ownership. The remaining proceeds from this preferred stock
issuance will be utilized for general operating purposes. As part of the
agreement, Elan also committed to purchase, on a drawdown basis, up to an
additional $4.0 million of our Series E Preferred Stock, of which $1.0 million
of such commitment remains outstanding. The proceeds from the Series E Preferred
Stock will be utilized by us to fund our portion of RSD's operating and
development costs.

In May 1999, in conjunction with the completion of its Phase I/II
Premaire-albuterol trial, Zambon provided us with a $1.0 million interest-free
advance against future milestone payments. In January 2001, we received an
additional $1.0 million interest-free milestone advance resulting from the
demonstration of the technical feasibility of delivering an inhaled steroid
formulation in Premaire. The proceeds from these advances are not restricted as
to their use by us. As part of the amendment of its 1998 agreement with Zambon,
the terms of the milestone advances were modified in that we shall repay $1.0
million of the advance milestone payments upon the earlier of December 31, 2003,
or upon the first regulatory approval for either albuterol or an inhaled steroid
delivered in the Premaire. The remaining $1.0 million advance shall be repaid by
us on the earlier of December 31, 2005, or the regulatory approval of the second
product (albuterol or an inhaled steroid) delivered in the Premaire. Due to the
modification in the repayment terms, the advances have been reclassified in our
balance sheet as long-term debt.

CERTAIN RISK FACTOR 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 us or on our 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 $96.6 million of operating losses
since our inception, including $6.1 million during the six months ended June 30,
2002. Our operating losses and negative cash flow from operations are expected
to continue in the foreseeable future. The Company expects that it will continue
to have a high level of operating expenses, negative cash flow from operations
and will be required to make significant up-front expenditures in connection
with its product development activities. As a result, we anticipate additional
operating losses for the remainder of 2002 and that such losses will continue
thereafter until such time, if ever, as we are able to generate sufficient
revenues to sustain our operations. The independent auditors' report dated
February 12, 2002, on our consolidated financial statements for the year ended
December 31, 2001 stated that we have incurred recurring operating losses and
have a working capital deficiency and that these conditions raise substantial
doubt about our ability to continue as a going concern.

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

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


                                       14
<PAGE>
regulatory approvals, the cost involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims, the need to acquire licenses to new
technology and the status of competitive products.

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

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

Our common stock is listed for trading on the American Stock Exchange, or AMEX,
under the symbol "SHM". We do not satisfy AMEX standards for continued listing,
including a standard that a listed company that has sustained losses from
continuing operations and/or net losses in its five most recent fiscal years,
have stockholders' equity of at least $6,000,000. We had a net capital
deficiency of $13.1 million at June 30, 2002. We have been requested by the AMEX
to submit a plan advising the AMEX of the action we will take that will bring us
into compliance with continued listing standards. If this plan is accepted by
the AMEX, we will be able to continue our listing pursuant to an extension, and
subject to periodic reviews to determine whether we are progressing consistent
with the plan. There can be no assurance that the plan will be accepted by the
AMEX, or that we will be able to meet the objectives outlined in the plan, both
of which may result in the AMEX initiating delisting procedures. If our common
stock were delisted from AMEX, trading of our common stock, if any, would
thereafter likely be conducted in the over-the-counter market, unless we were
able to list our common stock on The Nasdaq Stock Market or another national
securities exchange, which cannot be assured. If our common stock were to trade
in the over-the-counter market it may be more difficult for investors to dispose
of, or to obtain accurate quotations as to the market value of our common stock.
In addition, it may become more difficult for us to raise funds through the sale
of our securities.

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

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

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

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

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.


                                       15
<PAGE>
We will be required to make royalty payments on products we may develop,
reducing the amount of revenues with which we could fund ongoing operations.

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

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

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

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

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

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

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

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


                                       16
<PAGE>
Delays in the planned release of our products may adversely affect forecasted
revenues and create operational inefficiencies resulting from staffing levels
designed to support the forecasted revenues. Our failure to introduce new
products on a timely basis could delay or hinder market acceptance and allow
competitors to gain greater market share.

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

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

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

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

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

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

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

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

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


                                       17
<PAGE>
successful claim brought against us in excess of our insurance coverage would
have a material adverse effect upon us and our financial condition. We intend to
require our licensees to obtain adequate product liability insurance. However,
licensees may be unable to maintain or obtain adequate product liability
insurance on acceptable terms and such insurance may not provide adequate
coverage against all potential claims.

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

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

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

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

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

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

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

As of June 30, 2002, we had reserved approximately 5,433,206 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 June 30, 2002, we had $2,000,000 principal amount
of a convertible promissory note, 15,229 shares of our Series C preferred stock,
14,287 shares of our Series D preferred stock, 3,231 shares of our Series E
preferred stock and 5,000 shares of our Series F preferred stock outstanding.
Our Series C, D, E and F preferred stock are convertible into 10,800,709 shares,
2,939,712 shares, 830,591 shares and 1,470,588 shares, respectively, of common
stock. The convertible promissory note, including accrued interest is
convertible into 1,534,052 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


                                       18
<PAGE>
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 3.     Quantitative and Qualitative Disclosure About Market Risk

            The Company has no material market risk exposure.

PART II:    OTHER INFORMATION

Item 2.     Changes in Securities

            The following unregistered securities were issued by the
            Company during the quarter ended June 30, 2002:

<TABLE>
<CAPTION>
   Date of                Description              Number             Aggregate
Sale/Issuance        of Securities Issued         of Shares         Offering Price
- -------------        --------------------         ---------         --------------
<S>                <C>                            <C>               <C>
 March 2002        Series E Preferred Stock         1,000             $1,000,000
</TABLE>

            Each share of these securities is generally convertible prior to
            September 30, 2006 and into the number of shares of common stock
            determined by multiplying the number of shares by $1,000, and
            dividing by $3.89. The issuance of these securities is 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.

Item 4.     Submission of Matters to a Vote of Security Holders

            An annual Meeting of Stockholders was held on June 12, 2002. All
            management's nominees for director, as listed in the Proxy Statement
            for the Annual Meeting, were elected. Listed below are the matters
            voted on by Stockholders and the number of votes cast at the Annual
            Meeting.

(a)         Election of members of the Board of Directors.

<TABLE>
<CAPTION>
                                                                          Broker Non-Votes
     Name                 Voted for    Voted Against    Votes Withheld    and Abstentions
     ----                 ---------    -------------    --------------    ---------------
<S>                       <C>          <C>              <C>               <C>
John M. Bailey            27,513,177         --           1,161,922              --
Thomas M. Fitzgerald      27,292,966         --           1,382,103              --
Digby W. Barrios          27,512,677         --           1,162,422              --
Todd C. Davis             27,513,677         --           1,161,422              --
Andrew J. Ferrara         27,510,677         --           1,164,422              --
Allan M. Fox              27,511,677         --           1,163,422              --
</TABLE>

            In accordance with Section 121 of the Amex Company Guide (the
            "Guide"), the Amex requires that the Audit Committee (the
            "Committee") be comprised solely of independent directors. Todd C.
            Davis, an affiliate of the Company as defined by the Guide, serves
            as a member of the Committee under an exception as provided by the
            Guide. The Board of Directors has determined that it is in the best
            interest of the Company and its shareholders for Mr. Davis to serve
            on the Committee for the following reasons: (1) the remaining four
            Committee members are independent as defined by the Amex, (2) Mr.
            Davis's financial experience and expertise are important to matters
            brought forth to the Audit Committee, (3) Mr. Davis does not control
            a majority of the votes on the Audit Committee and (4) the Board has
            required, and Mr. Davis has agreed, to abstain from voting on any
            issues that may be considered in conflict with his current or past
            affiliations.

(b)         Amendment to the Company's 1993 Stock Option Plan to increase the
            aggregate number of shares of Common Stock reserved for issuance
            pursuant to the exercise of options granted thereunder from
            4,000,000 shares to 5,000,000 shares.

<TABLE>
<S>                                   <C>
            Voted For:                23,691,837
            Voted Against:             4,919,402
            Votes Abstained:              63,860
            Broker Non-Votes:                 --
</TABLE>

                                       19
<PAGE>
Item 6.     Exhibits and Reports on Form 8-K.

            (a)  Exhibits

            10.40     Separation Agreement dated as of April 26, 2002 between
                      the Company and Loren G. Peterson.

                  (b) Reports on Form 8-K

                  A current Report on Form 8-K filed with the Securities and
                  Exchange Commission on May 13, 2002 to announce the filing of
                  a press release under Item 5.


                                       20
<PAGE>
                                   SIGNATURES

Pursuant to the requirements 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:  August 14, 2002             /s/ Thomas M. Fitzgerald
                                    ------------------------
                                    Thomas M. Fitzgerald
                                    President & Chief Executive Officer

Dated:  August 14, 2002             /s/ Scott A. Hoffmann
                                    ---------------------
                                    Scott A. Hoffmann
                                    Vice President & Chief Financial Officer
                                    (Principal Financial and Accounting Officer)


                                       21

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.40
<SEQUENCE>3
<FILENAME>c71273exv10w40.txt
<DESCRIPTION>SEPARATION AGREEMENT DATED AS OF APRIL 26, 2002
<TEXT>
<PAGE>
                                                                  EXHIBIT 10.40

                         SHEFFIELD PHARMACEUTICALS, INC.
                          14528 SOUTH OUTER FORTY ROAD
                                    SUITE 205
                            ST. LOUIS, MISSOURI 83017

                                                April 26, 2002

Mr. Loren G. Peterson
1776 Stifel Lane Drive
Town & Country, Missouri  63017

Dear Loren:

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

         1.       TERMINATION OF EMPLOYMENT. The effective date of your
termination shall be April 30, 2002 (the "Termination Date"). The Company will
pay you all wages earned and any accrued and unused vacation time in accordance
with Company policy through your Termination Date. For the period from the date
of this letter through your Termination Date, you will continue to perform your
duties and responsibilities in your current position; provided however that the
Company may at any time and in its sole discretion request that you vacate the
Company's premises and cease performing any duties for the Company. In such
event, the Company shall remain obligated to pay to you all wages due to you
through your Termination Date.

         2.       SEVERANCE PAY. The Company will continue to pay your base
salary, as in effect on your Termination Date, for a period of eighteen (18)
months following your Termination Date (the "Severance Period"), subject to
appropriate tax withholdings and authorized deductions, in accordance with the
Company's regular payroll practices and regular pay schedule. In the event that
there is a change in control of the Company, as such term is defined in Exhibit
A-1 to your Employment Agreement, at any time during the Severance Period, you
will be paid the remainder of the severance pay in a lump sum at the time of any
such change in control.

         3.       BENEFIT CONTINUATION.

                  (a) Death and Disability Insurance. The Company will continue
to pay the full premium cost of Company-sponsored death and/or disability
insurance coverage for you in effect as of your Termination Date, if any, for a
period of eighteen (18) months following your Termination Date. Your rights and
obligations under such insurance plans shall be governed by the specific terms
of the plans. In the event you obtain comparable death and/or disability
insurance coverage through other employment prior to the expiration of the
eighteen (18) month period of continuation coverage described herein, the
Company's obligation to continue to provide such coverage shall cease as of the
effective date of such comparable coverage. For purposes of this agreement,
comparable coverage shall be deemed to include, at a minimum, coverage at the
same benefit level at no cost to you. Should you obtain such comparable
coverage, you agree to promptly notify the Company's Chief Financial Officer in
writing at the Company's headquarters.

                  (b) Health and Dental Insurance. Upon the termination of your
employment, you and your dependents may be eligible to continue your health
and/or dental insurance coverage under Company-sponsored plans, if any, pursuant
to the federal law known as COBRA. In the event you elect COBRA continuation
coverage, the Company will pay the full premium cost and any administrative fee
for such continuation coverage for a period of eighteen (18) months following
your Termination Date. After that time, you will become responsible for the full


                                       1
<PAGE>
premium cost and any administrative fee for such continuation coverage. You
understand and acknowledge that it is solely your responsibility to elect COBRA
continuation coverage if you desire such coverage. Your rights and obligations
under such insurance plans shall be governed by the specific terms of the plans
and COBRA. Information concerning COBRA rights, coverage and election will be
sent to you under separate cover. In the event you and/or your dependent(s)
become ineligible for COBRA continuation coverage during the eighteen (18) month
period of premium payments described herein, the Company shall reimburse you for
the premium cost of health and/or dental insurance coverage at the same monthly
rate the Company would have paid for COBRA continuation coverage had you and/or
your dependents remained eligible for such coverage. In the event you obtain
comparable health and/or dental insurance coverage through other employment
prior to the expiration of the eighteen (18) month period of premium payments
described herein, the Company's obligation to continue to provide such premium
payments shall cease as of the effective date of such comparable coverage. For
purposes of this agreement, comparable coverage shall be deemed to include, at a
minimum, coverage at the same benefit level at no cost to you. Should you obtain
such comparable coverage, you agree to promptly notify the Company's Chief
Financial Officer in writing at the Company's headquarters.

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

         4.       STOCK OPTIONS; TAX DIFFERENCE PAYMENT.

         (a)      Except as provided in this paragraph 4, your interest in and
rights in your Vested Stock Options (as defined and set forth in the summary of
your current option holdings, attached hereto as Exhibit A) shall be governed by
and be subject to all conditions, terms and restrictions contained in the
Company's 1993 Stock Option Plan, as amended from time to time (the "Plan"), and
the option letter agreements dated April 25, 1997 (denoted as Exhibits A-1, A-2
and B to your Employment Agreement dated April 25, 1997, a copy of which is
attached hereto as Exhibit B (the "Employment Agreement")), the option letter
agreement dated August 28, 1998 (a copy of which is attached hereto as Exhibit
C) and the option letter agreement dated March 1, 2000 (a copy of which is
attached hereto as Exhibit D). Your rights with respect to your Stock Options
shall be fixed as of your Termination Date and pursuant to this Agreement. With
respect to the option letter agreements dated April 25, 1997 and denoted as
Exhibits A-1, A-2 and B to your Employment Agreement, all 400,000 of the options
issued thereunder will be vested as of your Termination Date and you shall be
entitled to exercise those options on or before April 25, 2007. With respect to
the option letter agreement dated August 28, 1998, you shall be entitled to
exercise, at your election, some or all of the 155,000 options that are vested
as of your Termination Date on or before August 28, 2008. With respect to the
option letter agreement dated March 1, 2000, you shall be entitled to exercise
the 100,000 options that are vested as of your Termination Date on or before
March 1, 2010. You acknowledge and agree that you shall forfeit any right to
those 50,000 unvested stock options under the option letter agreement dated
March 1, 2000, as shown in Exhibit A hereto. You acknowledge and agree that
there has been no change of control at any time up to and including your
Termination Date and that you shall have no rights to accelerated vesting or
otherwise upon any change of control occurring after your Termination Date
except as provided in paragraph 2 above. The Company agrees to take any action
necessary to effectuate the terms of this paragraph 4.

         (b)      In the event that you are required to pay any U.S. federal or
state income and withholding tax (collectively, "Income Taxes") on any income
recognized by you arising upon any exercise of the stock options set forth on
Exhibit A, the Company hereby agrees to reimburse you the difference between (A)
the amount of Income Taxes you would have been required to pay had the income
recognized on such exercise been treated as a long term capital gain and (B) the
amount of Income Taxes payable by you in respect of such exercise (the amount of
such difference being referred to as the "Tax Difference" in respect of such
exercise). In computing the Tax Difference, the amount of taxes payable by you
shall be determined by assuming that the income recognized as a result of such
exercise is taxed at the highest marginal federal and state income tax rates
applicable to ordinary income. In addition, the Company shall pay you an amount
equal to the Tax Difference arising in respect of such exercise multiplied by a
fraction, the numerator of which is 1 and the denominator of which is equal to 1
minus (i) the highest marginal federal income tax rate and (ii) the highest
marginal state income tax rate applicable to you, in each case in respect of
ordinary income, in effect at the time of such exercise. Such amount shall be
paid by the Company within


                                       2
<PAGE>
ninety (90) days after any such exercise. Notwithstanding anything to the
contrary in this Agreement or the Plan Option Letters, the Company shall have no
obligation to pay you any amount in excess of $175,000 in the aggregate in
respect of its obligations under this subparagraph.

         5.       STOCK PROXY. You agree that at the time you execute this
Agreement, you will execute a proxy for all of your shares of Company common
stock and any other shares of Company Common Stock over which you have voting
control, in favor of the Chairman of the Company, Thomas M. Fitzgerald, or his
designee, which proxy shall be in the form attached hereto as Exhibit E. The
proxy shall be granted for a term of one year and shall not be limited in scope
of authority.

         6.       RETURN OF COMPANY PROPERTY. You agree to return to the
Company: (a) all originals and copies of all proprietary and/or confidential
information and trade secrets of the Company; (b) all originals and copies of
customer files; (c) all identification cards, keys, or other means of access to
the Company; and (d) any other property of the Company in your possession,
custody or control except your office computer and two (2) office chairs, which
you will be allowed to retain and remove from the Company's premises. All
Company property must be returned no later than your Termination Date.

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

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

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

         10.      MUTUAL GENERAL RELEASES.

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


                                       3
<PAGE>
                  (b) Sheffield Pharmaceuticals, Inc. and its predecessors,
parents, subsidiaries, affiliates, divisions, successors and assigns, and all of
their current and former agents, officers, directors, employees, members,
trustees, fiduciaries, representatives and attorneys (the "Company Parties")
hereby irrevocably and unconditionally release, acquit, and forever discharge
you, your heirs, administrators, representatives, executors, successors and
assigns from any and all charges, complaints, claims, liabilities, obligations,
promises, agreements, damages, causes of action, suits, demands, losses, debts,
and expenses of any nature whatsoever, known or unknown ("Claims") which the
Company Parties have, had or claim to have against you up to and including the
date you sign this Agreement. This General Release of Claims does not apply to
any Claims concerning a breach of this Agreement, criminal fraudulent acts or
other criminal conduct negatively affecting the Company, or any claims arising
after the date you sign this Agreement. This General Release of Claims is
attached hereto as Exhibit G.

         11.      NOTICE AND RIGHT TO CONSIDER. You are advised to consult with
an attorney before executing this Agreement. You acknowledge that you have
consulted with an attorney of your choosing in connection with your review of
this Agreement. In any event, you should thoroughly review and understand the
effect of this Agreement and its General Release before taking action upon them.
You may have up to twenty-one (21) days from April 26, 2002 (the date of this
letter) to complete your review and sign the Agreement. You acknowledge that if
you sign this Agreement prior to the expiration of the twenty-one (21) day
period that you did so voluntarily. You will also have seven (7) days following
your execution of this Agreement to revoke it (the "Revocation Period"). If you
wish to revoke the Agreement, you must do so in writing, addressed to the
Company's Chairman at the Company's headquarters, and such revocation must be
received by the Company prior to the expiration of the Revocation Period.

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

         12.      RESTRICTIVE COVENANT.

         (a)      In consideration of the Company entering into this Agreement,
you agree that for a period of twelve (12) months following the Termination Date
you will not (i) directly or indirectly own, manage, operate, join, control,
participate in, invest in, whether as an officer, director, employee, partner,
investor, consultant or otherwise, any business entity that is engaged in any
business related to pulmonary delivery systems or respiratory therapeutics, in
each case, which may be in any competitive business (as hereinafter defined) to
that of the Company or any of its subsidiaries, (ii) for yourself or on behalf
of any person, partnership, corporation or entity, call on any customer or
partner of the Company or any of its subsidiaries for purposes of soliciting
away, diverting or taking away any customer from the Customer or its
subsidiaries, or (iii) solicit any person then engaged as an employee,
representative, agent, independent contractor or otherwise by the Company or any
of its subsidiaries, to terminate his or her relationship with the Company or
any of its subsidiaries. Nothing contained in this paragraph shall be deemed to
prohibit you from investing your funds in securities of an issuer if the
securities of such issuer are listed for trading on a national securities
exchange or are traded in the over-the-counter market and your holdings therein
represent less than 5% of the total number of shares or principal amount of the
securities of such issuer then outstanding. For purposes of this Agreement, the
term competitive business shall mean any business that is then involved in the
research, development, manufacturing or commercialization in any way of any
product, compound, device or method which delivers therapeutics to human beings
via the respiratory tract for the treatment of any disease. Should you wish to
pursue an opportunity in the respiratory therapeutics area during the 12-month
period covered herein, the Company agrees to consider reasonably a written
request from you that the applicability of this Section 12(a) be waived as to
any such opportunity. It is assumed that in making any such request, you, in
good faith and based on your still current knowledge of the Company and its
operations and plans, will have concluded and be able to support a case that
such an opportunity is distinguishable enough from the current business and
objectives of the Company that such a waiver would be appropriate and should not
have any material negative impact on the Company and its business.

         (b)      From the Termination Date for a period of eighteen (18)
months, you shall hold in a fiduciary capacity for the benefit of the Company
and its subsidiaries all confidential information, knowledge and data relating
to or concerned with the Company, its operations, sales, business and affairs
and you shall not, at any time during such eighteen (18) month period, use,
disclose or divulge any such information, knowledge or data to any


                                       4
<PAGE>
person, firm or corporation other than to the Company or its subsidiaries or as
may otherwise be reasonably required in connection with the business and affairs
of the Company. Notwithstanding anything to the contrary contained herein, your
obligations under this paragraph 12(b) shall not apply to any information which
(i) becomes rightfully known to you subsequent to your employment by the Company
or was known to you prior to your employment with the Company; (ii) is or
becomes available to the public other than as a result of any wrongful
disclosure by you; or (iii) becomes available to you subsequent to your
employment by the Company on a non-confidential basis from a source other than
the Company or its agents which source has a right to disclose such information.
Notwithstanding anything to the contrary contained herein, in the event that you
become legally compelled to disclose any confidential information, you will
provide the Company with prompt notice so that the Company may seek a protective
order or other appropriate remedy. In the event that such protective order or
other remedy is not obtained, you shall furnish only such confidential
information that is legally required to be disclosed.

         (c)      You acknowledge that the provisions of this paragraph 12 are
reasonable and necessary for the protection of the Company and that each
provision, and the period of time, geographic area and scope of restrictions on
your activities set forth herein are and are intended to be divisible. In the
event that any provision of this paragraph 12 shall be deemed contrary to law or
invalid or unenforceable in any respect by a court of competent jurisdiction,
the remaining provisions shall not be affected but shall, subject to the
discretion of such court, remain in full force and effect.

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

         The Company acknowledges that you are entitled to, and will continue to
be entitled to, the same rights of indemnification as current officers and
directors of the Company, to the fullest extent provided for under Delaware law
and as more particularly set forth in the Company's By-Laws and the
Indemnification Agreement dated January 23, 2002.

         You and the Company shall reasonably agree upon any language, relating
to your departure from the Company and the circumstances of such departure,
contained in any press releases or other announcements prior to or after the
execution of this Agreement.

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

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

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

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

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


                                       5
<PAGE>
         In the event of any conflict between this Agreement and the stock
option letter agreements referred to in paragraph 4, the provisions of this
Agreement shall control.

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

         We wish you every success for the future.

                                   Sincerely,

                                    /s/ Thomas M. Fitzgerald
                                   ------------------------------------
                                   Thomas M. Fitzgerald
                                   Chairman

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

 /s/ Loren G. Peterson
- -----------------------------
Loren G. Peterson

Date:    April 26, 2002


                                       6
<PAGE>
                                LOREN G. PETERSON

                                    EXHIBIT A

              STOCK OPTIONS AS OF TERMINATION DATE (APRIL 30, 2002)

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Grant Date         Total        Vested Stock Options    Unvested       Exercise Price          Exercise Period
- ----------         ------       --------------------    ---------      --------------          ---------------
                   Shares                               Shares                                 for Vested Stock
                   ------                               ------                                 ----------------
                                                                                               Options
                                                                                               -------
- -------------------------------------------------------------------------------------------------------------------
<S>                <C>          <C>                    <C>             <C>                     <C>
4/25/97            100,000      100,000                       0        $2.75                   To and including
(A-1 grant)                                                                                    4/25/07
- -------------------------------------------------------------------------------------------------------------------
4/25/97            150,000      150,000                       0        $2.75                   To and including
(A-2 grant)                                                                                    4/25/07
- -------------------------------------------------------------------------------------------------------------------
4/25/97            150,000      150,000                       0        $2.75                   To and including
(B grant)                                                                                      4/25/07
- -------------------------------------------------------------------------------------------------------------------
8/28/98            155,000      55,000 at $1.2375             0        55,000 at $1.2375       To and including
                                50,000 at $2.125                       50,000 at $2.125        8/28/08
                                50,000 at $3.125                       50,000 at $3.125
- -------------------------------------------------------------------------------------------------------------------
3/01/00            150,000      50,000 at $4.75         50,000 at      50,000 at $4.75         To and including
                                50,000 at $5.3125       $6.3125        50,000 at $5.3125       3/1/10
                                                                       50,000 at $6.3125
- -------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       7
<PAGE>
                                    EXHIBIT B

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

                              EMPLOYMENT AGREEMENT

         AGREEMENT made as of the 25th day of April, 1997, by and between
Sheffield Medical Technologies Inc., a Delaware corporation with its principal
offices at 30 Rockefeller Plaza, Suite 4515, New York, New York 10112 (the
"Corporation"), and Loren G. Peterson residing at 1776 Stifel Lane Drive, Town &
Country, Missiouri 63017 ("Executive").

                               W I T N E S S E T H

                           WHEREAS,  the Corporation desires to employ and
retain Executive as its Chief Executive Officer, upon the terms and subject to
the conditions of this Agreement; and

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

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

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

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

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

         3. Term. Except as otherwise provided herein, the term of Executive's
employment hereunder shall commence on the date of the consummation of the
merger of Camelot Pharmacal, L.L.C., a Missouri limited liability company, with
and into a subsidiary of the Company (the "Merger") and shall continue to and
including April 25, 2002. Notwithstanding anything to the contrary contained in
the Agreement, this Agreement shall


                                       8
<PAGE>
terminate and have no force and effect in the event that the Merger is not
consummated on or before June 6, 1997. Unless terminated earlier in accordance
with the terms hereof, this Agreement shall automatically be extended for one or
more additional consecutive one year terms unless either party notifies the
other party in writing at least six months before the end of the then current
term (including the initial term) of its or his desire to terminate this
Agreement. The last day of the term of this Agreement pursuant to this Paragraph
3 (including any early termination pursuant to the terms hereof) is referred to
herein as the "Termination Date".

         4. Compensation. (a) As compensation for his services hereunder, the
Corporation shall pay to Executive (i) a base annual salary at the rate of
$175,000, payable in equal installments in accordance with the normal payroll
practices of the Corporation but in no event less frequently than semi-monthly,
and (ii) such incentive compensation and bonuses, if any, as the Board of
Directors of the Corporation in its absolute discretion may determine to award
Executive (it being understood that this Agreement shall in no event be
construed to require the payment to Executive of any incentive compensation or
bonuses), it being understood that Executive shall be entitled to receive such
incentive compensation and bonuses determined on a basis comparable to the
incentive compensation and/or bonuses awarded to other executive officers of the
Corporation. All compensation paid to Executive shall be subject to withholding
and other employment taxes imposed by applicable law.

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

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

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

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

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

         (d) In the event that (i) the Corporation is required to amend the Plan
Option Letters pursuant to Paragraph 5(c) or (ii) Executive's employment by the
Corporation is terminated (x) by the Corporation for any reason other than for
Cause, (y) by Executive as a result of an Employer Breach or (z) by the
Corporation by reason of the Executive's disability or death prior to the
expiration of the options evidenced by the Plan Option Letters and Executive is
required after such event to pay any U.S. federal or state income and
withholding tax (collectively, "Income Taxes") on any income recognized by
Executive arising upon any exercise of options evidenced by the Plan Option
Letters, the Corporation agrees to reimburse Executive the difference between
(A) the amount of Income Taxes Executive would have been required to pay had the
income recognized on such exercise been treated


                                       9
<PAGE>
as a long term capital gain and (B) the amount of Income Taxes payable by
Executive in respect of such exercise (the amount of such difference being
referred to as the "Tax Difference" in respect of such exercise). In computing
the Tax Difference, the amount of taxes payable by Executive shall be determined
by assuming that the income recognized as a result of such exercise is taxed at
the highest marginal federal and state income tax rates applicable to ordinary
income. In addition, the Corporation shall pay Executive an amount equal to the
Tax Difference arising in respect of such exercise multiplied by a fraction, the
numerator of which is 1 and the denominator of which is equal to 1 minus (i) the
highest marginal federal income tax rate (currently 39.6%) and (ii) the highest
marginal state income tax rate applicable to Executive, in each case in respect
of ordinary income, in effect at the time of such exercise. Such amount shall be
paid by the Corporation within ninety (90) days after any such exercise.
Notwithstanding anything to the contrary in this Agreement or the Plan Option
Letters, the Corporation shall have no obligation to pay Executive any amount in
excess of $250,000 in the aggregate in respect of its obligations under this
subparagraph.

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

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

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

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

         8. Restrictive Covenant. (a) In consideration of the Corporation's
entering into this Agreement, Executive agrees that during the period of his
employment hereunder and, in the event of termination of this Agreement (i) by
the Corporation upon Executive becoming Disabled (as that term is defined in
Paragraph 13 hereof), (ii) by the Corporation for Cause (as that term, is
defined in Paragraph 14 hereof) or (iii) by Executive otherwise than for
Employer Breach (as that term is defined in Paragraph 15 hereof), for a further
period of six months thereafter, he will not (x) directly or indirectly own,
manage, operate, join, control, participate in, invest in, whether as an
officer, director, employee, partner, investor or otherwise, any business entity
that is engaged in a directly competitive business (as hereinafter defined) to
that of the Corporation or any of its subsidiaries within the United States of
America, (y) for himself or on behalf of any other person, partnership,
corporation or entity, call on any customer of the Corporation or any of its
subsidiaries for the purpose of soliciting away, diverting or taking away any
customer from the Corporation or its subsidiaries, or (z) solicit any person
then engaged as an employee, representative, agent, independent contractor or
otherwise by the Corporation or any of its subsidiaries, to terminate his or her
relationship with the Corporation or any of its subsidiaries. For purposes of
this Agreement, the term "directly competitive business" shall mean any business
that is then involved in the research, development, manufacturing or
commercialization in any way of any product, compound, device or method that
acts or functions by, through or on the same active, binding or receptor site,
mechanism of action, signaling pathway or channel as any product, compound,
device or method that is or becomes a part of the Corporation's business or the
business of any of its subsidiaries during Executive's employment by the
Corporation or any of its subsidiaries. Nothing contained in this Agreement
shall be deemed to prohibit Executive from investing his funds in securities of
an issuer if the securities of such issuer are listed for trading on a national
securities exchange or are traded in the over-the-counter market and Executive's
holdings therein represent less than 10% of the total number of shares or
principal amount of the securities of such issuer outstanding.

         (b) Executive acknowledges that the provisions of this Paragraph 8 are
reasonable and necessary for the protection of the Corporation, and that each
provision, and the period or periods of time, geographic areas and types and
scope of restrictions on the activities specified herein are, and are intended
to be, divisible. In the event that any provision of this Paragraph 8, including
any sentence, clause or part hereof, shall be deemed contrary to law or


                                       10
<PAGE>
invalid or unenforceable in any respect by a court of competent jurisdiction,
the remaining provisions shall not be affected, but shall, subject to the
discretion of such court, remain in full force and effect.

         9.  Confidential Information.

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

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

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

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

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

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

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

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

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


                                       11
<PAGE>
         12. Termination of Agreement; Termination of Employment; Severance;
Survival. (a) This Agreement and Executive's employment hereunder shall
terminate upon the first to occur of the following: (i) Executive becoming
Disabled (as that term is defined in Paragraph 13 hereof); (ii) Executive's
death; (iii) termination of Executive's employment by the Corporation for Cause
or pursuant to subparagraph (b) of this Paragraph 12; (iv) termination of
Executive's employment for Employer Breach and (v) the termination of this
Agreement at the end of the term of this Agreement on the Termination Date
pursuant to Paragraph 3.

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

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

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

         14. Termination for Cause. The Corporation may at any time upon written
notice to Executive terminate Executive's employment for Cause. For purposes of
this Agreement, the following shall constitute Cause: (i) the willful and
repeated failure of Executive to perform any material duties hereunder or gross
negligence of Executive in the performance of such duties, and if such failure
or gross negligence is susceptible to cure by Executive, the failure to effect
such cure within twenty (20) days after written notice of such failure or gross
negligence is given to Executive; (ii) except as permitted hereunder,
unexplained, willful and regular absences of Executive from the Corporation;
(iii) excessive use of alcohol or illegal drugs, interfering with the
performance of Executives duties hereunder; (iv) indictment for a crime of
theft, embezzlement, fraud, misappropriation of funds, other acts of dishonesty
or the violation of any law or ethical rule relating to Executive's employment;
(v) indicted for any other


                                       12
<PAGE>
felony or other crime involving moral turpitude by Executive; or (vi) the breach
by Executive of any of the provisions of paragraphs 8, 9 or 10 and if such
breach is susceptible of cure by Executive, the failure to effect such cure
within twenty (20) days after written notice of such breach is given to
Executive. For purposes of this Agreement, an action shall be considered
"willful" if it is done intentionally, purposely or knowingly, distinguished
from an act done carelessly, thoughtlessly or inadvertently. In any such event,
Executive shall be entitled to receive his base salary to and including the date
of termination.

         15. Termination for Employer Breach. Executive may upon written notice
to the Corporation terminate this Agreement (including paragraphs 8, 9, 10 and
11) in the event of the breach by the Corporation of any material provision of
this Agreement, and if such breach is susceptible of cure, the failure to effect
such cure within 20 days after written notice of such breach is given to the
Corporation (an "Employer Breach"). Executive's right to terminate this
Agreement under this Paragraph 15 shall be in addition to any other remedies
Executive may have under law or equity. Paragraphs 2(d), 7 and 12(b) of this
Agreement shall survive the termination of this Agreement by Executive pursuant
to this Paragraph 15.

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

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

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

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

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

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

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

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

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

         25. Publicity. The Corporation and Executive agree that they will not
make any press releases or other announcements prior to or at the time of
execution of this Agreement with respect to the terms contemplated hereby,


                                       13
<PAGE>
except as required by applicable law, without the prior approval of the other
party, which approval will not be unreasonably withheld.

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

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


                                       14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.

                                     SHEFFIELD MEDICAL TECHNOLOGIES INC.

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

                                       /s/ Loren G. Peterson
                                     -----------------------------------
                                     Loren G. Peterson


                                       15
<PAGE>
                                                                  EXHIBIT A-1 TO
                                                            EMPLOYMENT AGREEMENT


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


                                                                  April 25, 1997


Loren G. Peterson
1776 Stifel Lane Drive
Town & Country, Missouri 63017

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

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

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

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

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

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

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

                  (e) In the event of a Change of Control, the Option shall, at
         your option exercised by written notice delivered to the Company,
         become immediately exercisable for one year as to all Shares not
         previously purchased. The Option shall then expire to the extent not
         exercised within such one year period. As used in this paragraph,
         "Change of Control" shall mean (i) the merger, consolidation or other
         business combination of the Company with or into another corporation
         with the effect that the shareholders of the Company immediately
         following the merger, consolidation or other business combination, hold
         50% or less


                                       16
<PAGE>
         of the combined voting power of the then outstanding equity interests
         of the surviving corporation of such merger, consolidation or other
         business combination ordinarily (and apart from rights accruing under
         special circumstances) having the right to vote in the election of
         directors or (ii) the replacement of a majority of the Board of
         Directors of the Company in any given year as compared to the directors
         who constituted the Board at the beginning of such year, and such
         replacement shall not have been approved by the Board of Directors of
         the Company as constituted at the beginning of such year.

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

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

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

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

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

         7. The Option does not confer upon you any right whatsoever as a
stockholder of the Company. The Option is granted to you under the Company's
1993 Stock Option Plan, as amended, (the "Plan") and is intended to be an
incentive stock option. The terms of the Plan are incorporated by reference into
the Option, except as modified in


                                       17
<PAGE>
accordance with the Plan by the terms set forth herein. A copy of the Plan has
been delivered to you with this letter. The Option shall be binding upon any
successors or assigns of the Company.

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

                                     Very truly yours,

                                     SHEFFIELD MEDICAL TECHNOLOGIES INC.

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

AGREED TO AND ACCEPTED:

/s/ Loren G. Peterson
- ------------------------------
Loren G. Peterson


                                       18
<PAGE>
                                                                         Annex A


                             STOCK SUBSCRIPTION FORM

To:        Sheffield Medical Technologies Inc.

Gentlemen:

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

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

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

                                        Name:     ______________________

                                        Address:  ______________________

                                                  ______________________

                                                  ______________________

                                                       Very truly yours,

                                                       ________________________
                                                       Loren G. Peterson

                                       19
<PAGE>
                                                                  EXHIBIT A-2 TO
                                                            EMPLOYMENT AGREEMENT


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


                                                                  April 25, 1997

Loren G. Peterson
1776 Stifel Lane Drive
Town & Country, Missouri 63017

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

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

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

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

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

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

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

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


                                       20
<PAGE>
         Company immediately following the merger, consolidation or other
         business combination, hold 50% or less of the combined voting power of
         the then outstanding equity interests of the surviving corporation of
         such merger, consolidation or other business combination ordinarily
         (and apart from rights accruing under special circumstances) having the
         right to vote in the election of directors or (ii) the replacement of a
         majority of the Board of Directors of the Company in any given year as
         compared to the directors who constituted the Board at the beginning of
         such year, and such replacement shall not have been approved by the
         Board of Directors of the Company as constituted at the beginning of
         such year.

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

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

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

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

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

         7. The Option does not confer upon you any right whatsoever as a
stockholder of the Company. The Option is granted to you under the Company's
1993 Stock Option Plan, as amended, (the "Plan") and is intended to be an
incentive stock option. The terms of the Plan are incorporated by reference into
the Option, except as modified in


                                       21
<PAGE>
accordance with the Plan by the terms set forth herein. A copy of the Plan has
been delivered to you with this letter. The Option shall be binding upon any
successors or assigns of the Company.

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

                                     Very truly yours,

                                     SHEFFIELD MEDICAL TECHNOLOGIES INC.

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

AGREED TO AND ACCEPTED:

/s/ Loren G. Peterson
- ------------------------------
Loren G. Peterson

                                       22
<PAGE>
                                                                         Annex A


                             STOCK SUBSCRIPTION FORM


To:        Sheffield Medical Technologies Inc.

Gentlemen:

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

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

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

                                        Name:     ______________________

                                        Address:  ______________________

                                                  ______________________

                                                  ______________________

                                                       Very truly yours,

                                                       ________________________
                                                       Loren G. Peterson


                                       23
<PAGE>
                                                                    EXHIBIT B TO
                                                            EMPLOYMENT AGREEMENT


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


April 25, 1997

Loren G. Peterson
1776 Stifel Lane Drive
Town & Country, Missouri 63017

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

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

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

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

                  (b) In the event that your employment by the Company is
         terminated by the Company for any reason other than for Cause, by you
         as a result of an Employer Breach (as such term is defined in the
         Employment Agreement) or by the Company by reason of your disability or
         death prior to the expiration of the Option, the Option shall be
         exercisable for one year from the date of such termination, but only as
         to such Shares that had become exercisable pursuant to paragraph 1
         above (and not previously purchased) prior to such date; provided,
         however, that if such termination occurs after the fifth anniversary of
         the date of this letter, the Option shall become immediately
         exercisable for such one year period as to all Shares not previously
         purchased. The Option shall then expire to the extent not exercised
         within such one year period.

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

                  (d) In the event that your employment by the Company is
         terminated by the Company by reason of your death or disability, the
         Option shall be exercisable for one year from the date of such
         termination, but only as to such Shares that had become exercisable
         pursuant to paragraph 1 above (and not previously purchased) prior to
         such date; provided, however, that if such termination occurs after the
         fifth anniversary of the date of this letter, the Option shall become
         immediately exercisable for such one year period as to all Shares not
         previously purchased. The Option shall then expire to the extent not
         exercised within such one year period.


                                       24
<PAGE>
                  (e) in the event of a Change of Control, the Option shall, at
         your option exercised by written notice delivered to the Company, be
         exercisable for one year from the date of such termination, but only as
         to such Shares that had become exercisable pursuant to paragraph 1
         above (and not previously purchased) prior to such date; provided,
         however, that if such termination occurs after the fifth anniversary of
         the date of this letter, the Option shall become immediately
         exercisable for such one year period as to all Shares not previously
         purchased. The Option shall then expire to the extent not exercised
         within such one year period. As used in this paragraph, "Change of
         Control" shall mean (i) the merger, consolidation or other business
         combination of the Company with or into another corporation with the
         effect that the shareholders of the Company immediately following the
         merger, consolidation or other business combination, hold 50% or less
         of the combined voting power of the then outstanding equity interests
         of the surviving corporation of such merger, consolidation or other
         business combination ordinarily (and apart from rights accruing under
         special circumstances) having the right to vote in the election of
         directors or (ii) the replacement of a majority of the Board of
         Directors of the Company in any given year as compared to the directors
         who constituted the Board at the beginning of such year, and such
         replacement shall not have been approved by the Board of Directors of
         the Company as constituted at the beginning of such year.

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

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

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

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


                                       25
<PAGE>
of the Company, which you would have been entitled to receive had you exercised
the option prior to the happening of any of the foregoing events.

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

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

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

                                     Very truly yours,

                                     SHEFFIELD MEDICAL TECHNOLOGIES INC.

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

AGREED TO AND ACCEPTED:

 /s/ Loren G. Peterson
- ------------------------------
Loren G. Peterson


                                       26
<PAGE>
                                                                        Annex A


                             STOCK SUBSCRIPTION FORM


To:        Sheffield Medical Technologies Inc.

Gentlemen:

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

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

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

                                        Name:     ______________________

                                        Address:  ______________________

                                                  ______________________

                                                  ______________________

                                                       Very truly yours,

                                                       ________________________
                                                       Loren G. Peterson


                                       27
<PAGE>
                                    EXHIBIT C


                  OPTION LETTER AGREEMENT DATED AUGUST 28, 1998


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


                                                                 August 28, 1998

To:       Loren G. Peterson
          1776 Stifel Lane Drive
          Town & Country, Missouri 63017

         At a meeting of the Stock Option Committee of the Board of Directors of
Sheffield Pharmaceuticals, Inc. (the "Company") held on August 25, 1998, the
Company authorized the grant to you as of the date hereof of an option (the
"Option") to purchase one Hundred Fifty Five Thousand (155,000) shares (the
"Shares") of Common Stock, par value $.01 per share, of the Company (the "Common
Stock").

         No part of the option is currently exercisable. On or after August 28,
1999 and prior to August 28, 2008 (on which date the Option, to the extent it
has not previously been exercised or has not previously expired, will expire),
the Option may be exercised as follows: (i) as to 55,000 Shares, subsequent to
the time that the Fair Market Value (as hereinafter defined) of the Common Stock
equals or exceeds $1.2375 for 10 consecutive trading days (such Shares
constituting the "First Tranche" of the Option); (ii) as to 50,000 Shares,
subsequent to the time that the Fair Market Value of the Common Stock equals or
exceeds $2.125 for 10 consecutive trading days (such shares constituting the
"Second Tranche" of the Option) and (iii) as to the remaining 50,000 Shares,
subsequent to the time that the Fair Market Value of the Common Stock exceeds
$3.125 for 10 consecutive trading days (such Shares constituting the "Third
Tranche" of the Option). As used herein, "Fair Market Value" means the closing
price of the Common Stock on the principal U.S. national securities exchange on
which the Common Stock is listed for trading (if the shares are so listed) or on
the Nasdaq National Market or Small Cap Market (if the Common Shares are
regularly quoted on the Nasdaq National Market or Small Cap Market), or, if not
so listed or regularly quoted or if there is no such closing price, the mean
between the closing bid and asked prices of the Common Stock on such exchange or
on Nasdaq or in the over-the-counter market or, if such bid and asked prices
shall not be available, as reported by any nationally recognized quotation
service selected by the Company.

         Shares may be purchased by you upon exercise of the Option at the
following respective purchase prices: (i) Shares constituting the First Tranche
$1.2375 per Share; (ii) Shares constituting the Second Tranche $2.125 per Share;
and (iii) Shares constituting the Third Tranche - $3.125 per Share.

         This Option must be exercised as to any and all Shares on or prior to
August 28, 2008 (on which date the Option, to the extent it has not previously
been exercised or has not previously expired, will expire).

         Notwithstanding anything to the contrary contained in this letter
agreement, the following provisions shall apply:

         (a) In the event that Fair Market Value does not equal or exceed
         $1.2375 for 10 consecutive trading days prior to August 28, 2001 (the
         "Target Date"), the First Tranche of the Option may be exercised on the
         Target Date and for 60 days thereafter (after which 60th day the Option
         in respect of the First Tranche will, to the extent not previously
         exercised, expire);

         (b) In the event that Fair Market Value does not equal or exceed $2.125
         for 10 consecutive trading days prior to the Target Date, the Second
         Tranche of the Option may be exercised on the Target Date and for 60
         days thereafter (after which 60th day the Option in respect of the
         Second Tranche will, to the extent not previously exercised, expire);
         and


                                       28
<PAGE>
         (c) In the event that Fair Market Value does not equal or exceed $3.125
         for 10 consecutive trading days prior to the Target Date, the Third
         Tranche of the Option may be exercised on the Target Date and for 60
         days thereafter (after which 60th day the Option in respect of the
         Third Tranche will, to the extent not previously exercised, expire).

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

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

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

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

         The Option does not confer upon you any right whatsoever as a
stockholder of the Company.

         By accepting the Option, you acknowledge your agreement to advise the
Company in writing at least five trading days prior to selling, assigning or
otherwise transferring any of the Shares.

         The Option is granted to you under the Company's 1993 Stock Option
Plan, as amended, (the "Plan") and is not intended to be an incentive stock
option. The terms of the Plan are incorporated by reference into the Option,
except as modified by the terms set forth herein. A copy of the Plan has been
delivered to you with this letter.


                                       29
<PAGE>
         The Option shall be binding upon any successors or assigns of the
Company.

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

                                     Very truly yours,

                                     Sheffield Pharmaceuticals, Inc.

                                     By:   /s/ Thomas M. Fitzgerald
                                         -------------------------------
                                         Thomas M. Fitzgerald
                                         Chairman

AGREED TO AND ACCEPTED:

 /s/ Loren G. Peterson
- ------------------------------
Loren G. Peterson


                                       30
<PAGE>
                                                                         Annex A

                             STOCK SUBSCRIPTION FORM

To:       Sheffield Pharmaceuticals, Inc.

Gentlemen:

         I hereby exercise my option to purchase from Sheffield Pharmaceuticals,
Inc. (the "Company"), pursuant to the Stock Option Letter Agreement between us
dated August 28, 1998, ______ shares of the Company's Common Stock, $.01 par
value, and herewith tender payment therefore at the rate of $____ per share. The
option was originally granted pursuant to the terms of the Company's 1993 Stock
Option Plan, as amended.

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

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

                                        Name:     ______________________

                                        Address:  ______________________

                                                  ______________________

                                                  ______________________

                                                       Very truly yours,

                                                       ________________________
                                                       Loren G. Peterson


                                       31
<PAGE>
                                    EXHIBIT D


                   OPTION LETTER AGREEMENT DATED MARCH 1, 2000


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


                                            March 1, 2000

To:      Loren G. Peterson
         1776 Stifel Lane Drive
         Town & Country, MO 63017

         At a meeting of the Stock Option Committee of the Board of Directors of
Sheffield Pharmaceuticals, Inc. (the "Company") held on February 29, 2000, the
Company authorized the grant to you as of the date hereof of an option (the
"Option") to purchase One Hundred Fifty Thousand (150,000) shares (the "Shares")
of Common Stock, par value $.01 per share, of the Company (the "Common Stock").

         No part of the Option is currently exercisable. On or after March 1,
2001 and prior to March 1, 2010 (on which date the Option, to the extent it has
not previously been exercised or has not previously expired, will expire), the
Option may be exercised as follows: (i) as to 50,000 Shares, subsequent to the
time that the Fair Market Value (as hereinafter defined) of the Common Stock
equals or exceeds $4.75 for 10 consecutive trading days (such Shares
constituting the "First Tranche" of the Option); (ii) as to 50,000 Shares,
subsequent to the time that the Fair Market Value of the Common Stock equals or
exceeds $5.3125 for 10 consecutive trading days (such shares constituting the
"Second Tranche" of the Option) and (iii) as to the remaining 50,000 Shares,
subsequent to the time that the Fair Market Value of the Common Stock exceeds
$6.3125 for 10 consecutive trading days (such Shares constituting the "Third
Tranche" of the Option). As used herein, "Fair Market Value" means the closing
price of the Common Stock on the principal U.S. national securities exchange on
which the Common Stock is listed for trading (if the shares are so listed) or on
the Nasdaq National Market or Small Cap Market (if the Common Shares are
regularly quoted on the Nasdaq National Market or Small Cap Market), or, if not
so listed or regularly quoted or if there is no such closing price, the mean
between the closing bid and asked prices of the Common Stock on such exchange or
on Nasdaq or in the over-the-counter market or, if such bid and asked prices
shall not be available, as reported by any nationally recognized quotation
service selected by the Company.

         Shares may be purchased by you upon exercise of the Option at the
following respective purchase prices: (i) Shares constituting the First Tranche
- - $4.75 per Share; (ii) Shares constituting the Second Tranche - $5.3125 per
Share; and (iii) Shares constituting the Third Tranche - $6.3125 per Share.

         This Option must be exercised as to any and all Shares on or prior to
March 1, 2010 (on which date the Option, to the extent it has not previously
been exercised or has not previously expired, will expire).

         Notwithstanding anything to the contrary contained in this letter
agreement, the following provisions shall apply:

                  (a) In the event that Fair Market Value does not equal or
         exceed $4.75 for 10 consecutive trading days prior to March 1, 2003
         (the "Target Date"), the First Tranche of the Option may be exercised
         on the Target Date and for 60 days thereafter (after which 60th day the
         Option in respect of the First Tranche will, to the extent not
         previously exercised, expire);

                  (b) In the event that Fair Market Value does not equal or
         exceed $5.3125 for 10 consecutive trading days prior to the Target
         Date, the Second Tranche of the Option may be exercised on the Target


                                       32
<PAGE>
         Date and for 60 days thereafter (after which 60th day the Option in
         respect of the Second Tranche will, to the extent not previously
         exercised, expire); and

                  (c) In the event that Fair Market Value does not equal or
         exceed $6.3125 for 10 consecutive trading days prior to the Target
         Date, the Third Tranche of the Option may be exercised on the Target
         Date and for 60 days thereafter (after which 60th day the Option in
         respect of the Third Tranche will, to the extent not previously
         exercised, expire).

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

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

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

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

         The Option does not confer upon you any right whatsoever as a
stockholder of the Company.

         By accepting the Option, you acknowledge your agreement to advise the
Company in writing at least five trading days prior to selling, assigning or
otherwise transferring any of the Shares.


                                       33
<PAGE>
         The Option is granted to you under the Company's 1993 Stock Option
Plan, as amended, (the "Plan") and is not intended to be an incentive stock
option. The terms of the Plan are incorporated by reference into the Option,
except as modified by the terms set forth herein. A copy of the Plan has been
delivered to you with this letter.

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

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

                                     Very truly yours,

                                     Sheffield Pharmaceuticals, Inc.

                                     By:   /s/ Thomas M. Fitzgerald
                                         -------------------------------
                                         Thomas M. Fitzgerald
                                         Chairman

AGREED TO AND ACCEPTED:

 /s/ Loren G. Peterson
- ------------------------------
Loren G. Peterson


                                       34
<PAGE>
                                                                         Annex A


                             STOCK SUBSCRIPTION FORM


To:       Sheffield Pharmaceuticals, Inc.

Gentlemen:

         I hereby exercise my option to purchase from Sheffield Pharmaceuticals,
Inc. (the "Company"), pursuant to the Stock Option Letter Agreement between us
dated March 1, 2000, _______ shares of the Company's Common Stock, $.01 par
value, and herewith tender payment therefor at the rate of $____ per share. The
option was originally granted pursuant to the terms of the Company's 1993 Stock
Option Plan, as amended.

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

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

                                        Name:     ______________________

                                        Address:  ______________________

                                                  ______________________

                                                  ______________________

                                                       Very truly yours,

                                                       ________________________
                                                       Loren G. Peterson


                                       35
<PAGE>
                                    EXHIBIT E


                                IRREVOCABLE PROXY


         The undersigned, Loren G. Peterson ("Holder"), an individual with a
residential address of 1776 Stifel Lane Drive, Town and Country, Missouri,
63017, hereby revokes any and all proxies heretofore granted with respect to any
shares of common stock, $.01 par value (the "Stock"), of Sheffield
Pharmaceuticals, Inc. ("Sheffield") held by Holder and, hereby irrevocably
appoints the Chairman of Sheffield, Thomas M. Fitzgerald, or his designee, and
each of them, as attorney-in-fact and proxy of Holder to attend any and all
meetings of the stockholders of Sheffield and to vote such Holder's Stock, to
represent and otherwise to act for Holder in the same manner and with the same
effect as if such Holder were personally present and to act by consent in the
same manner and with the same effect as if Holder were executing such consent,
with respect to any matter.

         Holder agrees that, so long as this Irrevocable Proxy remains in
effect, Holder will not execute or deliver to any persons, any proxy forms
relating to any meeting, or written consent in lieu of a meeting, of
stockholders of Sheffield, will promptly provide Sheffield with copies of any
communications related to Sheffield received by Holder and will not take any
action inconsistent with this Irrevocable Proxy.

         The foregoing appointment shall be (a) absolute and irrevocable and (b)
deemed coupled with an interest.

         This Irrevocable Proxy shall be effective for a period of one (1) year
in accordance with Delaware law and may be relied upon by any third party.

         IN WITNESS WHEREOF, the undersigned Holder has executed this
Irrevocable Proxy as of April 26, 2002.

Witness:
                                             LOREN G. PETERSON

 /s/ Sally Reiter                            /s/ Loren G. Peterson
- -------------------------                   ----------------------------

Witness print name: Sally Reiter


                                       36
<PAGE>
                                    EXHIBIT F


                                 GENERAL RELEASE


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

         IN WITNESS WHEREOF, the undersigned Loren G. Peterson has executed this
General Release as of April 26, 2002.

Witness:
                                             LOREN G. PETERSON

 /s/ Sally Reiter                            /s/ Loren G. Peterson
- -------------------------                   ----------------------------

Witness print name: Sally Reiter


                                       37
<PAGE>
                                    EXHIBIT G


                                 GENERAL RELEASE


         Sheffield Pharmaceuticals, Inc. and its predecessors (including without
limitation Sheffield Medical Technologies, Inc.), parents, subsidiaries,
affiliates, divisions, successors and assigns, and all of their current and
former agents, officers, directors, employees, members, trustees, fiduciaries,
representatives and attorneys (the "Company Parties"), in consideration of the
good and valuable consideration contained in the attached Agreement (the
"Agreement"), the receipt and sufficiency of which is hereby acknowledged,
hereby irrevocably and unconditionally release, acquit, and forever discharge
Loren G. Peterson, his heirs, administrators, representatives, executors,
successors and assigns from any and all charges, complaints, claims,
liabilities, obligations, promises, agreements, damages, causes of action,
suits, demands, losses, debts, and expenses of any nature whatsoever, known or
unknown ("Claims") which the Company Parties have, had or claim to have against
Peterson up to and including the date Peterson signs this Agreement. This
General Release of Claims does not apply to any Claims concerning a breach of
this Agreement, criminal fraudulent acts or other criminal conduct negatively
affecting the Company, or any claims arising after the date Peterson signs this
Agreement.

         IN WITNESS WHEREOF, the undersigned Thomas M. Fitzgerald, on behalf of
the Company Parties, has executed this General Release as of ______________,
2002.

Witness:                                       THOMAS M. FITZGERALD

 /s/ Deborah H. Wood                           /s/ Thomas M. Fitzgerald
- ------------------------------                --------------------------------

Witness print name: Deborah H. Wood


                                       38




</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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