<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