<PAGE>

                                                                     EXHIBIT 4.2

                         REGISTRATION RIGHTS AGREEMENT
                         -----------------------------

          This Registration Rights Agreement (the "Agreement") is made and
entered into as of this 29th day of December, 2000 by and between Sheffield
Pharmaceuticals, Inc., a Delaware corporation (the "Company"), and the
"Investors" named in that Purchase Agreement of even date herewith by and
between the Company and the Investors (the "Purchase Agreement").

    The parties hereby agree as follows:

    1.  Certain Definitions.
        -------------------

          As used in this Agreement, the following terms shall have the
following meanings:

          "Additional Registrable Securities" shall mean the shares of Common
           ---------------------------------
Stock, if any, issued to the Investors pursuant to Section 7.1 of the Purchase
Agreement.

          "Common Stock" shall mean the Company's Common Stock, par value $0.01
           ------------
per share.

          "Investors" shall mean the purchasers identified in the Purchase
           ---------
Agreement and any affiliate or permitted transferee of any Investor who is a
subsequent holder of any Warrants, Registrable Securities or Additional
Registrable Securities.

          "Prospectus" shall mean the prospectus included in any Registration
           ----------
Statement, as amended or supplemented by any prospectus supplement, with respect
to the terms of the offering of any portion of the Registrable Securities or
Additional Registrable Securities covered by such Registration Statement and by
all other amendments and supplements to the prospectus, including post-effective
amendments and all material incorporated by reference in such prospectus.

          "Register," "registered" and "registration" refer to a registration
           --------    ----------       ------------
made by preparing and filing a registration statement or similar document in
compliance with the 1933 Act (as defined below), and the declaration or ordering
of effectiveness of such registration statement or document.

          "Registrable Securities" shall mean the shares of Common Stock issued
           ----------------------
and issuable to the Investors pursuant to the Purchase Agreement (other than
additional shares of Common Stock issuable pursuant to Section 7.1 of the
Purchase Agreement) and issuable upon the exercise of the Warrants, and any
other securities issued or issuable with respect to or in exchange for
Registrable Securities.

          "Registration Statement" shall mean any registration statement of the
           ----------------------
Company filed under the 1933 Act that covers the resale of any of the
Registrable Securities or Additional Registrable Securities pursuant to the
provisions of this Agreement, amendments and
<PAGE>

supplements to such Registration Statement, including post-effective amendments,
all exhibits and all material incorporated by reference in such Registration
Statement.

          "SEC" means the U.S. Securities and Exchange Commission.
           ---

          "1933 Act" means the Securities Act of 1933, as amended, and the rules
           --------
and regulations promulgated thereunder.

          "1934 Act" means the Securities Exchange Act of 1934, as amended, and
           --------
the rules and regulations promulgated thereunder.

          "Warrants" mean warrants to purchase shares of Common Stock issued to
           --------
the Investors pursuant to the Purchase Agreement, the form of which Warrants is
attached to the Purchase Agreement as Exhibit A.

     2.  Registration.
         ------------

               (a)  Registration Statements.
                    -----------------------

               (i)  Registrable Securities. Promptly following the closing of
                    ----------------------
the purchase and sale of Common Stock and Warrants contemplated by Section 2 of
the Purchase Agreement (the "Closing Date") (but no later than thirty (30) days
after the Closing Date), the Company shall prepare and file with the SEC one
Registration Statement on Form S-3 (or, if Form S-3 is not then available to the
Company, on such form of registration statement as is then available to effect a
registration for resale of the Registrable Securities, subject to the Investors'
consent), covering the resale of the Registrable Securities in an amount equal
to the number of shares of Common Stock issued to the Investors on the Closing
Date plus the number of shares of Common Stock necessary to permit the exercise
in full of the Warrants. Such Registration Statement also shall cover, to the
extent allowable under the 1933 Act and the Rules promulgated thereunder
(including Rule 416), such indeterminate number of additional shares of Common
Stock resulting from stock splits, stock dividends or similar transactions with
respect to the Registrable Securities. The Company shall use its reasonable
efforts to obtain from each person who now has piggyback registration rights a
waiver of those rights with respect to the Registration Statement. The
Registration Statement (and each amendment or supplement thereto, and each
request for acceleration of effectiveness thereof) shall be provided in
accordance with Section 3(c) to the Investors and their counsel prior to its
filing or other submission.

               (ii) Additional Registrable Securities. Upon the written demand
                    ---------------------------------
of any Investor following the issuance of any additional shares of Common Stock
to such Investor pursuant to Section 7.1, of the Purchase Agreement, the Company
shall prepare and file with the SEC one Registration Statement on Form S-3 (or,
if Form S-3 is not then available to the Company, on such form of registration
statement as is then available to effect a registration for resale of the
Additional Registrable Securities, subject to the Investor's consent) covering
the resale of the Additional Registrable Securities issued to all Investors and,
at the option of the Company, any additional amounts of Additional Registrable
Securities that the Company reasonably anticipates it could be required to
register. Such Registration Statement also shall cover, to the extent allowable
under the 1933 Act and the Rules promulgated thereunder

                                       2
<PAGE>

(including Rule 416), such indeterminate number of additional shares of Common
Stock resulting from stock splits, stock dividends or similar transactions with
respect to the Additional Registrable Securities. The Company shall use its
reasonable efforts to obtain from each person who now has piggyback registration
rights a waiver of those rights with respect to the Registration Statement. The
Registration Statement (and each amendment or supplement thereto, and each
request for acceleration of effectiveness thereof) shall be provided in
accordance with Section 3(c) to the Investor and its counsel prior to its filing
or other submission.

          (iii)  Notwithstanding anything to the contrary contained herein, the
Company shall have the option to consolidate two or more of the registrations
required by sections (i) and (ii) above into a single Registration Statement
provided that any such consolidating Registration Statement otherwise complies
with and is subject to the provisions of this Agreement.

          (b) Expenses.  The Company will pay all expenses associated with each
              --------
registration, including the Investors' reasonable expenses in connection with
the registration but excluding discounts, commissions, fees of underwriters,
selling brokers, dealer managers or similar securities industry professionals.

          (c) Effectiveness.
              -------------

          (i) The Company shall use its best efforts to have each Registration
Statement declared effective as soon as practicable. If (A) the Registration
Statement covering Registrable Securities is not declared effective by the SEC
within three (3) months following the Closing Date or the Registration Statement
covering Additional Registrable Securities is not declared effective by the SEC
within three (3) months following the demand of an Investor relating to the
Additional Registrable Securities covered thereby, or with respect to any of the
foregoing a Registration Statement which is subject to full review by the SEC
staff (which shall not include a mere "plain English" review), within four (4)
months following the Closing Date or demand, as the case may be (each, a
"Registration Date"), (B) after a Registration Statement has been declared
effective by the SEC, sales cannot be made pursuant to such Registration
Statement for any reason (including without limitation by reason of a stop
order, or the Company's failure to update the Registration Statement) but except
as excused pursuant to subparagraph (ii) below, or (C) the Common Stock
generally or the Registrable Securities specifically are not listed or included
for quotation on the American Stock Exchange, the Nasdaq National Market System,
the Nasdaq Small Cap Market, or the New York Stock Exchange then the Company
will make pro rata payments to each Investor, as liquidated damages (the
"Liquidated Damages Payments") and not as a penalty, in an amount equal to 2% of
the aggregate amount paid by such Investor on the Closing Date to the Company
for shares of Common Stock still held by such Investor for any month or pro rata
for any portion thereof following the Registration Date during which any of the
events described in (A) or (B) or (C) above occurs and is continuing (the
"Blackout Period"), provided, however, that in the case of the events described
in (A) or (B) above with respect only to the Additional Registrable Securities,
such penalty shall equal 2% of the aggregate market value of such Additional
Registrable Securities for the duration of the Blackout Period. Each such
payment shall be due and payable within five (5) days of the end of each month
(or ending portion thereof) of the

                                       3
<PAGE>

Blackout Period. Such payments shall be in partial compensation to the
Investors, and shall not constitute the Investors' exclusive remedy for such
events. The Blackout Period shall terminate upon (x) the effectiveness of the
applicable Registration Statement in the case of (A) and (B) above; (y) listing
or inclusion of the Common Stock on the American Stock Exchange, the Nasdaq
National Market System, the Nasdaq Small Cap Market or the New York Stock
Exchange in the case of (C) above; and (z) in the case of the events described
in (A) or (B) above, the earlier termination of the Registration Period (as
defined in Section 3(a) below). The amounts payable as liquidated damages
pursuant to this paragraph shall be payable, at the option of the Investors, in
lawful money of the United States or in shares of Common Stock at the Market
Price (as defined in the Purchase Agreement), and amounts payable as liquidated
damages shall be paid monthly within two (2) business days of the last day of
each month following the commencement of the Blackout Period until the
termination of the Blackout Period. Amounts payable as liquidated damages
hereunder shall cease when an Investor no longer holds Warrants or Registrable
Securities or Additional Registrable Securities, as applicable.

          (ii) For not more than ten (10) consecutive trading days or for a
total of not more than forty (40) trading days in any twelve (12) month period,
the Company may suspend sales under any Registration Statement contemplated by
this Agreement in the event it desires in good faith and in the best interests
of the Company to delay the disclosure of material non-public information
concerning the Company (an "Allowed Delay"); provided that the Company shall
promptly (a) notify the Investors in writing of the existence of (but in no
event, without the prior written consent of an Investor, shall the Company
disclose to such Investor any of the facts or circumstances regarding) material
non-public information giving rise to an Allowed Delay, and (b) advise the
Investors in writing to cease all sales under the Registration Statement until
the end of the Allowed Delay (upon receipt of which advisory the Investors shall
cease all such sales until the Registration Statement and related Prospectus
have been amended or supplemented as appropriate, which the Company agrees to do
as promptly as practicable).  The duration of the MFN Period provided for in the
Purchase Agreement will be extended by the number of days of any and all Allowed
Delays.

          (d) Underwritten Offering.  If any offering pursuant to a Registration
              ---------------------
Statement pursuant to Section 2(a) hereof involves an underwritten offering, the
Company shall have the right to select an investment banker and manager to
administer the offering, which investment banker or manager shall be reasonably
satisfactory to the Investors.

  3.  Company Obligations. The Company will use its best efforts to effect the
      -------------------
registration of the Registrable Securities and the Additional Registrable
Securities in accordance with the terms hereof, and pursuant thereto the Company
will, as expeditiously as possible:

          (a) use its best efforts to cause such Registration Statement to
become effective and to remain continuously effective for a period that will
terminate upon the earlier of (i) the date on which all Registrable Securities
or Additional Registrable Securities, as the case may be, covered by such
Registration Statement, as amended from time to time, have been sold, and (ii)
the date on which all Registrable Securities or Additional Registrable
Securities, as the case may be, may be sold pursuant to Rule 144(k) (the
"Registration Period");

                                       4
<PAGE>

          (b) prepare and file with the SEC such amendments and post-effective
amendments to the Registration Statement and the Prospectus as may be necessary
to keep the Registration Statement effective for the period specified in Section
3(a) and to comply with the provisions of the 1933 Act and the 1934 Act with
respect to the distribution of all Registrable Securities and Additional
Registrable Securities; provided that, at least five (5) business days prior to
the filing of a Registration Statement or Prospectus, or, at least two (2)
business days prior to filing any amendments or supplements thereto, the Company
will furnish to the Investors copies of all documents proposed to be filed,
which documents will be subject to the comments of the Investors and their
counsel, which must be received within such five (5) or two (2) business day
period, as applicable.

          (c) not file any Registration Statement or amendment or supplement
thereto to which Investor's counsel reasonably objects except such filings as
are required to be made pursuant to law or the rules and regulations of the
American Stock Exchange, or other securities exchange, interdealer quotation
system or market on which the Company's securities are then listed;

          (d) furnish to the Investors and their legal counsel (i) promptly
after the same is prepared and publicly distributed, filed with the SEC, or
received by the Company, one copy of any Registration Statement and any
amendment thereto, each preliminary prospectus and Prospectus and each amendment
or supplement thereto, and each letter written by or on behalf of the Company to
the SEC or the staff of the SEC, and each item of correspondence from the SEC or
the staff of the SEC, in each case relating to such Registration Statement
(other than any portion of any thereof which contains information for which the
Company has sought confidential treatment), and (ii) such number of copies of a
Prospectus, including a preliminary prospectus, and all amendments and
supplements thereto and such other documents as each Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities,
and Additional Registrable Securities owned by such Investor;

          (e) in the event the Company selects an underwriter for the offering,
the Company shall enter into and perform its reasonable obligations under an
underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
underwriter of such offering;

          (f) if required by the underwriter, or if any Investor is described in
the Registration Statement as an underwriter, the Company shall furnish, on the
effective date of the Registration Statement, on the date that Registrable
Securities or Additional Registrable Securities, as applicable, are delivered to
an underwriter, if any, for sale in connection with the Registration Statement
and at periodic intervals thereafter from time to time on request, (i) an
opinion, dated as of such date, from independent legal counsel representing the
Company for purposes of such Registration Statement, in form, scope and
substance as is customarily given in an underwritten public offering, addressed
to the underwriter and the Investors and (ii) a letter, dated such date, from
the Company's independent certified public accountants in form and substance as
is customarily given by independent certified public accountants to underwriters
in an underwritten public offering, addressed to the underwriter and the
Investors;

                                       5
<PAGE>

          (g) make reasonable efforts to prevent the issuance of any stop order
or other suspension of effectiveness and, if such order is issued, obtain the
withdrawal of any such order at the earliest possible moment;

          (h) furnish to each Investor at least five copies of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules by air mail within two business days of the effective
date thereof;

          (i) prior to any public offering of Registrable Securities or
Additional Registrable Securities, use its reasonable best efforts to register
or qualify or cooperate with the Investors and their counsel in connection with
the registration or qualification of such Registrable Securities or Additional
Registrable Securities, as applicable, for offer and sale under the securities
or blue sky laws of such jurisdictions requested by the Investor and do any and
all other reasonable acts or things necessary or advisable to enable the
distribution in such jurisdictions of the Registrable Securities or Additional
Registrable Securities covered by the Registration Statement;

          (j) cause all Registrable Securities or Additional Registrable
Securities covered by a Registration Statement to be listed on each securities
exchange, interdealer quotation system or other market on which similar
securities issued by the Company are then listed;

          (k) immediately notify the Investors, at any time when a Prospectus
relating to the Registrable Securities or Additional Registrable Securities is
required to be delivered under the Securities Act, upon discovery that, or upon
the happening of any event as a result of which, the Prospectus included in such
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of the
circumstances then existing, and at the request of any such holder, promptly
prepare (subject to any Allowed Delay) and furnish to such holder a reasonable
number of copies of a supplement to or an amendment of such Prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such Registrable
Securities or Additional Registrable Securities, as applicable, such Prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing; and

          (l) otherwise use its best efforts to comply with all applicable rules
and regulations of the SEC under the 1933 Act and the 1934 Act, take such other
actions as may be reasonably necessary to facilitate the registration of the
Registrable Securities and Additional Registrable Securities, if applicable,
hereunder; and make available to its security holders, as soon as reasonably
practicable, but not later than the Availability Date (as defined below), an
earnings statement covering a period of at least twelve months, beginning after
the effective date of each Registration Statement, which earnings statement
shall satisfy the provisions of Section 11(a) of the 1933 Act (for the purpose
of this subsection 3(l), "Availability Date" means the 45th day following the
end of the fourth fiscal quarter that includes the effective date of such
Registration Statement, except that, if such fourth fiscal quarter is the last
quarter of the

                                       6
<PAGE>

Company's fiscal year, "Availability Date" means the 90th day after the end of
such fourth fiscal quarter).

          4.  Due Diligence Review; Information.   The Company shall make
              ---------------------------------
available, during normal business hours, for inspection and review by the
Investors, advisors to and representatives of the Investors (who may or may not
be affiliated with the Investors and who are reasonably acceptable to the
Company), any underwriter participating in any disposition of Common Stock on
behalf of the Investors pursuant to the Registration Statement or amendments or
supplements thereto or any blue sky, NASD or other filing, all financial and
other records, all SEC Documents and other filings with the SEC, and all other
corporate documents and properties of the Company as may be reasonably necessary
for the purpose of such review, and cause the Company's officers, directors and
employees, within a reasonable time period, to supply all such information
reasonably requested by the Investors or any such representative, advisor or
underwriter in connection with such Registration Statement (including, without
limitation, in response to all questions and other inquiries reasonably made or
submitted by any of them), prior to and from time to time after the filing and
effectiveness of the Registration Statement for the sole purpose of enabling the
Investors and such representatives, advisors and underwriters and their
respective accountants and attorneys to conduct initial and ongoing due
diligence with respect to the Company and the accuracy of the Registration
Statement.

              The Company shall not disclose material nonpublic information to
the Investors, or to advisors to or representatives of the Investors, unless
prior to disclosure of such information the Company identifies such information
as being material nonpublic information and provides the Investors, such
advisors and representatives with the opportunity to accept or refuse to accept
such material nonpublic information for review. The Company may, as a condition
to disclosing any material nonpublic information hereunder, require the
Investors' advisors and representatives to enter into a confidentiality
agreement (including an agreement with such advisors and representatives
prohibiting them from trading in Common Stock during such period of time as they
are in possession of material nonpublic information) in form reasonably
satisfactory to the Company and the Investors. Nothing herein shall require the
Company to disclose material nonpublic information to the Investors or their
advisors or representatives.

          5.  Obligations of the Investors.
              ----------------------------

                    (a) Each Investor shall furnish in writing to the Company
such information regarding itself, the Registrable Securities or Additional
Registrable Securities, as applicable, held by it and the intended method of
disposition of the Registrable Securities or Additional Registrable Securities,
as applicable, held by it, as shall be reasonably required to effect the
registration of such Registrable Securities or Additional Registrable
Securities, as applicable, and shall execute such documents in connection with
such registration as the Company may reasonably request. At least fifteen (15)
calendar days prior to the first anticipated filing date of any Registration
Statement, the Company shall notify each Investor of the information the Company
requires from such Investor if such Investor elects to have any of the
Registrable Securities or Additional Registrable Securities included in the
Registration Statement. An Investor shall provide such information to the
Company at least five (5) calendar days prior to the first anticipated filing
date of such Registration Statement if such Investor elects

                                       7
<PAGE>

to have any of the Registrable Securities or Additional Registrable Securities
included in the Registration Statement.

                  (b) Each Investor, by its acceptance of the Registrable
Securities and Additional Registrable Securities, if any, agrees to cooperate
with the Company in connection with the preparation and filing of Registration
Statement hereunder, unless such Investor has notified the Company in writing of
its election to exclude all of its Registrable Securities or Additional
Registrable Securities, as applicable, from the Registration Statement.

                  (c) In the event the Company, at the request of the Investors,
determines to engage the services of an underwriter, such Investor agrees to
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, including, without limitation, customary indemnification and
contribution obligations, with the managing underwriter of such offering and
take such other actions as are reasonably required in order to expedite or
facilitate the dispositions of the Registrable Securities or Additional
Registrable Securities, as applicable.

                  (d) Each Investor agrees that, upon receipt of any notice from
the Company of the happening of any event rendering a Registration Statement no
longer effective, such Investor will immediately discontinue disposition of
Registrable Securities or Additional Registrable Securities pursuant to the
Registration Statement covering such Registrable Securities or Additional
Registrable Securities, until the Investor's receipt of the copies of the
supplemented or amended prospectus filed with the SEC and declared effective
and, if so directed by the Company, the Investor shall deliver to the Company
(at the expense of the Company) or destroy (and deliver to the Company a
certificate of destruction) all copies in the Investor's possession of the
prospectus covering the Registrable Securities or Additional Registrable
Securities, as applicable, current at the time of receipt of such notice.

                  (e) No Investor may participate in any third party
underwritten registration hereunder unless it (i) agrees to sell the Registrable
Securities or Additional Registrable Securities, as applicable, on the basis
provided in any underwriting arrangements in usual and customary form entered
into by the Company, (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements, and (iii) agrees to
pay its pro rata share of all underwriting discounts and commissions and any
expenses in excess of those payable by the Company pursuant to the terms of this
Agreement.

     6.  Indemnification.
         ---------------

                 (a) Indemnification by Company. The Company agrees to indemnify
                     --------------------------
and hold harmless, to the fullest extent permitted by law the Investors, each of
their officers, directors, partners and employees and each person who controls
the Investors (within the meaning of the 1933 Act) against all losses, claims,
damages, liabilities, costs (including, without limitation, reasonable
attorney's fees) and expenses imposed on such person caused by (i) any untrue or
alleged untrue statement of a material fact contained in any Registration
Statement, Prospectus or any preliminary prospectus or any amendment or
supplement thereto or any

                                       8
<PAGE>

omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as the same are based upon any information furnished in writing
to the Company by such Investors, expressly for use therein, or (ii) any
violation by the Company of any federal, state or common law, rule or regulation
applicable to the Company in connection with any Registration Statement,
Prospectus or any preliminary prospectus, or any amendment or supplement
thereto, and shall reimburse in accordance with subparagraph (c) below, each of
the foregoing persons for any legal and any other expenses reasonably incurred
in connection with investigating or defending any such claims. The foregoing is
subject to the condition that, insofar as the foregoing indemnities relate to
any untrue statement, alleged untrue statement, omission or alleged omission
made in any preliminary prospectus or Prospectus that is eliminated or remedied
in any Prospectus or amendment or supplement thereto, the above indemnity
obligations of the Company shall not inure to the benefit of any indemnified
party if a copy of such corrected Prospectus or amendment or supplement thereto
had been made available to such indemnified party and was not sent or given by
such indemnified party at or prior to the time such action was required of such
indemnified party by the 1933 Act and if delivery of such Prospectus or
amendment or supplement thereto would have eliminated (or been a sufficient
defense to) any liability of such indemnified party with respect to such
statement or omission. Indemnity under this Section 5(a) shall remain in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the permitted transfer of the Registrable
Securities and Additional Registrable Securities.

          (b) Indemnification by Holder.  In connection with any registration
              -------------------------
pursuant to the terms of this Agreement, each Investor will furnish to the
Company in writing such information as the Company reasonably requests
concerning the holders of Registrable Securities and Additional Registrable
Securities or the proposed manner of distribution for use in connection with any
Registration Statement or Prospectus and agrees, severally but not jointly, to
indemnify and hold harmless, to the fullest extent permitted by law, the
Company, its directors, officers, employees, stockholders and each person who
controls the Company (within the meaning of the 1933 Act) against any losses,
claims, damages, liabilities and expense (including reasonable attorney's fees)
resulting from any untrue statement of a material fact or any omission of a
material fact required to be stated in the Registration Statement or Prospectus
or preliminary prospectus or amendment or supplement thereto or necessary to
make the statements therein not misleading, to the extent, but only to the
extent that such untrue statement or omission is contained in any information
furnished in writing by such Investor to the Company specifically for inclusion
in such Registration Statement or Prospectus or amendment or supplement thereto
and that such information was substantially relied upon by the Company in
preparation of the Registration Statement or Prospectus or any amendment or
supplement thereto.  In no event shall the liability of an Investor be greater
in amount than the dollar amount of the proceeds (net of all expense paid by
such Investor and the amount of any damages such holder has otherwise been
required to pay by reason of such untrue statement or omission) received by such
Investor upon the sale of the Registrable Securities or Additional Registrable
Securities included in the Registration Statement giving rise to such
indemnification obligation.

          (c) Conduct of Indemnification Proceedings.  Any person entitled to
              --------------------------------------
indemnification hereunder shall (i) give prompt notice to the indemnifying party
of any claim with respect to which it seeks indemnification and (ii) permit such
indemnifying party to assume

                                       9
<PAGE>

the defense of such claim with counsel reasonably satisfactory to the
indemnified party; provided that any person entitled to indemnification
                   --------
hereunder shall have the right to employ separate counsel and to participate in
the defense of such claim, but the fees and expenses of such counsel shall be at
the expense of such person unless (a) the indemnifying party has agreed to pay
such fees or expenses, or (b) the indemnifying party shall have failed to assume
the defense of such claim and employ counsel reasonably satisfactory to such
person or (c) in the reasonable judgment of any such person, based upon written
advice of its counsel, a conflict of interest exists between such person and the
indemnifying party with respect to such claims (in which case, if the person
notifies the indemnifying party in writing that such person elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such claim on behalf of
such person); and provided, further, that the failure of any indemnified party
                  --------  -------
to give notice as provided herein shall not relieve the indemnifying party of
its obligations hereunder, except to the extent that such failure to give notice
shall materially adversely affect the indemnifying party in the defense of any
such claim or litigation. It is understood that the indemnifying party shall
not, in connection with any proceeding in the same jurisdiction, be liable for
fees or expenses of more than one separate firm of attorneys at any time for all
such indemnified parties. No indemnifying party will, except with the consent of
the indemnified party, consent to entry of any judgment or enter into any
settlement that does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such indemnified party of a release from all
liability in respect of such claim or litigation.

               (d) Contribution. If for any reason the indemnification provided
                   ------------
for in the preceding paragraphs (a) and (b) is unavailable to an indemnified
party or insufficient to hold it harmless, other than as expressly specified
therein, then the indemnifying party shall contribute to the amount paid or
payable by the indemnified party as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect the relative fault of
the indemnified party and the indemnifying party, as well as any other relevant
equitable considerations. No person guilty of fraudulent misrepresentation
within the meaning of Section 11(f) of the 1933 Act shall be entitled to
contribution from any person not guilty of such fraudulent misrepresentation. In
no event shall the contribution obligation of a holder of Registrable Securities
or Additional Registrable Securities be greater in amount than the dollar amount
of the proceeds (net of all expenses paid by such holder and the amount of any
damages such holder has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission) received by it upon
the sale of the Registrable Securities or Additional Registrable Securities
giving rise to such contribution obligation.

     7.  Miscellaneous.
         -------------

               (a) Amendments and Waivers. This Agreement may be amended only by
                   ----------------------
a writing signed by the parties hereto. The Company may take any action herein
prohibited, or omit to perform any act herein required to be performed by it,
only if the Company shall have obtained the written consent to such amendment,
action or omission to act, of each Investor.

               (b) Notices. All notices and other communications provided for or
                   -------
permitted hereunder shall be made as set forth in Section 9.4 of the Purchase
Agreement.

                                       10
<PAGE>

          (c) Assignments and Transfers by Investors.  This Agreement and all
              --------------------------------------
the rights and obligations of the Investors hereunder may not be assigned or
transferred to any transferee or assignee except to an affiliate or permitted
transferee of an Investor who is a subsequent holder of any Warrants,
Registrable Securities or Additional Registrable Securities.

          (d) Assignments and Transfers by the Company.  This Agreement may not
              ----------------------------------------
be assigned by the Company without the prior written consent of each Investor,
except that without the prior written consent of the Investors, but after notice
duly given, the Company shall assign its rights and delegate its duties
hereunder to any successor-in-interest corporation, and such successor-in-
interest shall assume such rights and duties, in the event of a merger or
consolidation of the Company with or into another corporation or the sale of all
or substantially all of the Company's assets.

          (e) Benefits of the Agreement.  The terms and conditions of this
              -------------------------
Agreement shall inure to the benefit of and be binding upon the respective
permitted successors and assigns of the parties.  Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.

          (f) Counterparts.  This Agreement may be executed in two or more
              ------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

          (g) Titles and Subtitles.  The titles and subtitles used in this
              --------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

          (h) Severability.  If one or more provisions of this Agreement are
              ------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of this Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms to the fullest extent permitted by law.

          (i) Further Assurances.  The parties shall execute and deliver all
              ------------------
such further instruments and documents and take all such other actions as may
reasonably be required to carry out the transactions contemplated hereby and to
evidence the fulfillment of the agreements herein contained.

          (j) Entire Agreement.  This Agreement is intended by the parties as a
              ----------------
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein.  This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.

          (k) Applicable Law.  This Agreement shall be governed by, and
              --------------
construed in accordance with, the laws of the State of New York without regard
to principles of conflicts of law.

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<PAGE>

          IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.

The Company:                            SHEFFIELD PHARMACEUTICALS, INC.


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


The Investors:                          THE TAIL WIND FUND LTD.

                                        By: /s/ The Tail Wind Fund Ltd.
                                            ------------------------------------

                                       12